Annual
Financial
Report
2018
Annual Financial Report 2018 A
Contact us
Bendigo and Adelaide Bank Limited
ABN 11 068 049 178
Registered head office
The Bendigo Centre
Bendigo VIC Australia 3550
Telephone: 1300 236 344
+61 3 5445 0666 (if calling from overseas)
Shareholder enquiries
Share Registry
1800 646 042
Email: share.register@bendigoadelaide.com.au
B Annual Financial Report 2018
Table of
contents
Section 1
Message from the Chairman
Message from the Managing Director
Directors’ Report
Operating and Financial Report
Remuneration Report
Section 2
Financial Statements
Directors’ Declaration
Independent Auditor’s Report
Section 3
Key Performance Indicators
Additional Information
2
3
4
12
28
51
123
124
132
133
Annual Financial Report 2018 1
Message
from the
Chairman
This year we announced a solid full year result.
Total cash earnings were $445.1 million, up
6.4%, cash earnings per share were 92 cents
per share, up by 4.1%, and dividends totalled
70 cents, up by 2 cents. In a very difficult
year for the banking industry, it was a strong
performance by your Bank.
There have been a number of significant milestones
celebrated this year.
On 9 July, we celebrated the 160th anniversary of the
founding of the first Bendigo Building Society. In a year
when the Royal Commission into misconduct in the financial
services industry has revealed some appalling behaviours,
it has been useful to remind ourselves why the business
was founded and what is its purpose. Bendigo and Adelaide
Bank exists to help our customers and their communities
prosper. And if they prosper, so will we.
The Royal Commission has been a very demanding and
rigorous process and a timely reminder of the need always
to act with integrity and fairness and in the interests of
our customers.
The report by the Productivity Commission into competition
in financial services has not attracted the same headlines
as the Royal Commission, but its analysis of the harm
to the Australian economy as a result of the competitive
disadvantage suffered by non-major banks and service
providers is, we think, very important. If trust in banking is
to be restored, it is crucial that organisations with different
objectives and standards are able to compete on a level
playing field and customers can choose accordingly.
Another milestone we celebrated was the 20th anniversary
of the opening of the first Community Bank®. Rupanyup
and Minyip, small towns in the farming area of the
Wimmera in Victoria, had lost their banks and their
economies suffered. We partnered with those communities
to restore banking there. Now more than 320 communities
from all over Australia have joined forces with us. $200
million in surpluses has been reinvested in supporting
community activities and infrastructure which has in turn,
generated other investment and activities and so supported
their economic prosperity. That is, after all, our purpose.
We appointed a new Managing Director in the year. Marnie
Baker took over on 2 July. She is a life time employee
with deep experience in most parts of the organisation.
Her task is to build on the great strengths and values of
the company and to equip it to thrive amidst the deep
changes that new digital technologies are bringing and
that customers are demanding.
2 Annual Financial Report 2018
If trust in banking is to
be restored, it is crucial
that organisations with
different objectives
and standards are
able to compete on a
level playing field and
customers can choose
accordingly.
Robert Johanson
Chairman
We farewelled Mike Hirst after 9 years as
Managing Director and 17 years with the group.
Mike took over amidst the depths of the Global
Financial Crisis when the financial world was in turmoil,
and soon after the merger with Adelaide Bank, when parts
of the business were under stress. He was an outstanding
chief executive and made a great contribution to the
industry through his involvement with the ABA and other
advisory bodies. The Bank is now stronger and more
capable, and everyone thanks him for his great service.
Deb Radford will be standing down as a non-executive
director at the annual general meeting after 12 years. She
has made a huge contribution in that time, in particular
as chair of the Credit Committee, and we will miss her
counsel and support.
We are delighted to welcome Vicki Carter to the Board.
She has deep experience in banking and communications,
which will be valuable as we work towards our vision of
becoming Australia’s bank of choice.
There has been a huge amount of change in our industry
and in our bank over the past 10 years, but I think there
will be more change over the next 10 years than ever
before. Customers now expect to be able to transact with
us instantly, from wherever in the world they are, with trust
and confidence. We need to invest in our capacity and
provide fair and growing returns to all our stakeholders.
Thank you to all our shareholders, employees, partners
and customers for your work and support, and for your
commitment for the future. There is a lot to do.
Message from
the Managing
Director
The business has performed well over the
year in a very competitive and challenging
environment.
Margin performance was strong, up 14 basis points for the
financial year, with a margin of 2.36%, driven in part by a
disciplined approach to asset and liability pricing.
We continue to consistently lead the industry with a strong
funding position which provides flexibility to fund organic and
inorganic asset growth. With 80.2% of funding sourced from
retail customers, this further indicates the strength of our
business in an environment where volatility and disruption will
continue.
Our current capital position, with Common Equity Tier 1
Capital growing 35 basis points since June 2017, has us
well placed to meet APRA’s unquestionably strong capital
benchmarks. Our organic capital growth reflects strong
profitability, stable balance sheet and a move to lower risk
exposures.
Although the second half was influenced by negative income
growth, our continued focus on prudent cost management
has seen our cost to income ratio continue to decrease
to 55.6% for the financial year. Looking forward, we don’t
anticipate a material change in our cost to income ratio, as
we focus on accelerating revenue growth.
So although there is no doubt Australian banks are faced with
a challenging environment, it’s in this environment that we
find ourselves well positioned.
Strategic partnering is a strength of ours, allowing us the
capability to increase distribution, product manufacturing and
technology. The success of many partnerships to date has
given us access to new markets and financial innovation.
Partnerships with fintech companies on initiatives such as
Up, our new digital bank, TIC:TOC, the world’s first instant
home loan, and Bcause, a digital platform supporting
participants of the NDIS, are setting us up for long term
success.
We have made some recent changes to our Executive
structure, welcoming Travis Crouch and Louise Tebbutt
to the team. The new structure is organised around our
three customer groups who present significant opportunity
for growth: consumer, business and agribusiness. These
divisions are underpinned by business support areas
designed to optimise performance, reduce complexity, and
deliver on our shared customer focus.
So although there is no
doubt Australian banks are
faced with a challenging
environment, it’s in this
environment that we
find ourselves well
positioned.
Marnie Baker
Managing Director
The future is an exciting time for an organisation like ours.
Our proven business model is resonating with our customers
and this is strongly reflected in the awards and recognition we
receive not only for our products and services, but for how we
conduct ourselves and for our unique style of banking.
For 160 years, we have focused on feeding into the prosperity
of our customers and their communities, not off it – and
it is this focus that will help us succeed in our future. Our
business is ready to take advantage of the opportunities
ahead, and our customer focus, high trust ratings, and
customer advocacy provides the perfect platform for business
growth.
This year’s results are a testament to the hard work and
dedication of our staff, and the commitment and support of
our customers, partners, communities and shareholders. For
this, I thank you all.
The time for us is now – Australia’s bank of choice.
Annual Financial Report 2018 3
Directors’
Report
The Directors of Bendigo and Adelaide Bank Limited present their report together
with the financial report of Bendigo and Adelaide Bank Limited (the “Bank”) and
the Consolidated Entity (the “Group”) for the year ended 30 June 2018.
Directors’ information
The names and details of the Directors in office during the financial year and as at the date of this report are as follows.
Robert Johanson
Chair, Independent
BA, LLM, MBA
(Harvard), 67 years
Marnie Baker
Managing Director,
Non-independent
BCom, CPA, MAICD
and SFFin, 50 years
Term of office: Robert has been a Director
of the Bank for 30 years. He was appointed
Chairman in 2006.
Group and joint venture directorships:
Rural Bank Limited and Homesafe Solutions
Pty Limited (Chair).
Skills, experience and expertise:
Robert has experience in banking and
financial services and expertise in
corporate strategy, capital management,
finance and risk management and mergers
and acquisitions. He has over 35 years’
experience in providing corporate advice on
capital market transactions to a wide range
of public and private companies.
Board committees: Governance & HR and
Technology & Change.
Term of office: Marnie was appointed
Managing Director and Chief Executive
Officer commencing 2 July 2018.
Skills, experience and expertise:
Marnie has 29 years of experience in the
banking and financial services sector. This
includes experience in retail and wholesale
banking, treasury and financial markets
(including securitisation), trustee services
and funds management. She has been a
member of the executive team for nearly
two decades and held senior leadership
positions including Chief Customer Officer,
Executive Customer Voice, Executive Banking
and Wealth and Chief General Manager
Products and Solutions. Her experience also
includes senior roles in treasury, capital
markets, technology, digital banking and
funds management.
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Chairman, Australia India Institute
Director, Robert Salzer Foundation Limited,
NeuClone Limited, Melbourne Business
School and Grant Samuel Group Pty Limited.
Board committees: Marnie is not a member
of any Board committees.
Group and joint venture directorships:
Rural Bank Limited, Community Sector
Enterprises Pty Ltd and Community Sector
Banking Pty Ltd.
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Member of the Advisory Board of the
Australian Centre for Financial Studies,
Australian Banking Association, Business
Council of Australia, Mastercard Asia Pacific
Advisory Board, NPP Australia Limited and
Deputy Chair of the Loddon Campaspe
Regional Partnership.
4 Annual Financial Report 2018
Directors’ information continued
Vicki Carter
Independent
BA (Science), Dip Mgt,
Certificate in Executive
Coaching, GAICD,
54 years
Jan Harris
Independent
BEc (Hons), 59 years
Jim Hazel
Independent
BEc, SFFin, FAICD,
67 years
Jacqueline Hey,
Independent
BCom, Graduate
Certificate
in Management,
GAICD,
52 years
Term of office: Vicki joined the Board on 4
September 2018.
Vicki has also held various senior leadership
roles at MLC, ING and Prudential.
Skills, experience and expertise:
Vicki has over 30 years’ experience in the
financial services sector including retail
banking and more recently in business
technology. Vicki is currently employed as
Executive Director, Strategy and Business
Services at Telstra. Prior to this Vicki held a
number of executive roles at NAB including
Executive General Manager - Retail Bank,
Executive General Manager - Business
Operations and General Manager - People
and Organisational Development.
Board committees: Member of Credit,
Technology and Governance & HR.
Group and joint venture directorships:
Rural Bank Limited.
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Nil
Term of office: Jan joined the Board in
February 2016.
Group and joint venture directorships:
Rural Bank Limited
Skills, experience and expertise:
Jan has had a distinguished career in
the Australian public service with broad
experience in public and regulatory policy
development, economics and governance.
Jan has had senior roles in the Department
of the Treasury and the Department of the
Prime Minister and Cabinet, including as
Deputy Secretary of the Treasury.
Other director and memberships
(including directorships of other listed
companies for the previous three years):
External Member, Audit and Risk Committee
of the Australian Security Intelligence
Organisation, Member, Australian Office of
Financial Management Audit Committee
and Member (part time) International Air
Services Commission.
Board committees:
Member of Risk and Audit.
Term of office: Jim joined the Board in
March 2010.
Skills, experience and expertise:
Jim is a professional public company
director who has had an extensive career
in banking, finance and risk management,
including in the regional banking industry.
Board committees: Chair of Risk and
member of Credit and Technology.
Group and joint venture directorships:
Rural Bank Limited
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Chairman, Ingenia Communities Group Limited
(ASX listed, period: March 2012 to present)
Director, Centrex Metals Limited (ASX listed,
period: July 2010 to present), Impedimed
Limited (ASX listed, period November 2006
to March 2016), Adelaide Football Club
Limited, Coopers Brewery Limited, Trustee
for Adelaide Festival Centre Trust and
Council Member of the University of South
Australia.
Term of office: Jacquie joined the Board in
July 2011.
Group and joint venture directorships:
Rural Bank Limited
Skills, experience and expertise:
Jacquie has experience in information
technology, telecommunications, finance and
risk management, and marketing, including
as CEO/Managing Director of Ericsson in
the UK and in Australia. Jacquie worked
with Ericsson for more than 20 years and in
leadership roles in Australia, Sweden, the
UK and the Middle East.
Board committees: Chair of Technology and
member of Governance & HR and Credit.
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Director, Qantas Airways Limited (ASX
listed, period: August 2013 to present),
Australian Foundation Investment Company
Limited (ASX listed, period: July 2013 to
present), AGL Energy Limited (ASX listed,
period, March 2016 to present) and Cricket
Australia.
Annual Financial Report 2018 5
Directors’ information continued
Robert Hubbard,
Independent
BA (Hons) Accy, FCA,
59 years
David Matthews
Independent
Dip BIT, GAICD,
60 years
Deb Radford
Independent
BEc, Graduate Diploma
Finance & Investment,
62 years
Tony Robinson
Independent
BCom, ASA, MBA (Melb),
60 years
Term of office: Rob joined the Board in April
2013.
Group and joint venture directorships:
Rural Bank Limited
Skills, experience and expertise:
Rob is an accountant with finance, audit
and risk management experience and is
based in Queensland. He was as a partner
of PricewaterhouseCoopers for 22 years
practising in the areas of corporate advice
and audit. Rob is now a professional Non-
executive Director.
Board committees: Chair of Audit and
member of Risk.
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Chairman, Orocobre Limited (ASX and TSX
listed, period: November 2012 to present),
Chairman, Primary Health Care Limited (ASX
listed, period: December 2014 to present)
and former Chairman, Central Petroleum
Limited (ASX listed, period: December 2013
to May 2018).
Term of office: David joined the Board in
March 2010.
Skills, experience and expertise:
David operates a farm and grain export
business based in the Wimmera region
of Victoria and is involved in a number of
agricultural industry bodies. David also
chaired the first Community Bank® company
in Rupanyup and Minyip.
Board committees: Member of Credit and
Audit
Group and joint venture directorships:
Rural Bank Limited and Member of the
Community Bank® National Council.
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Director, Pulse Australia, Australian Grain
Technologies Pty Limited, Farm Trade
Australia Pty limited and Rupanyup/Minyip
Finance Group Limited.
Term of office: Deb joined the Board in
February 2006.
Group and joint venture directorships:
Rural Bank Limited
Skills, experience and expertise: Deb has
over 25 years’ experience in the banking
industry with both international and local
banks. Deb also worked in the Victorian
State Treasury, and ran her own consulting
business advising the government on
commercial transactions.
Board committees: Chair of Credit and
member of Technology and Governance &
HR.
Term of office: Tony joined the Board in April
2006.
Skills, experience and expertise:
Tony has many years’ experience in financial
services, particularly wealth management
and insurance. Tony’s previous roles include
CEO of Centrepoint Alliance Limited, IOOF
Holdings Limited and OAMPS Limited.
Board committees: Chair of Governance &
HR and member of Risk and Audit
Group and joint venture directorships:
Rural Bank Limited and Sandhurst Trustees
Limited.
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Director, SMS Management & Technology
Limited (ASX listed, period: September 2013
to November 2016)
Deputy Chancellor of La Trobe University.
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Chairman, Longtable Group Limited (ASX
listed, period: November 2015 to present)
and former Chairman, Tasfoods limited (ASX
listed, period: June 2014 to March 2018.
Director, Pacific Current Group Limited (ASX
listed, period: August 2015 to present) and
PSC Insurance Group Limited (ASX listed,
period: September 2015 to present).
6 Annual Financial Report 2018
Former Managing Director and Chief Executive Officer
Mike Hirst
Managing Director,
non-independent
BCom, SFFin, MAICD,
60 years
Term of office: Mike was appointed as
Managing Director of the Bank in 2009 and
retired from the role effective 1 July 2018.
Skills, experience and expertise:
Mike joined the Group in 2001. Mike has
extensive experience in banking, treasury,
funds management and financial markets,
including previous senior executive and
management positions with Colonial Limited,
Chase AMP Bank Limited and Westpac
Banking Corporation Limited.
Board committees: Mike was not a member
of any Board committees.
Group and joint venture directorships:
Rural Bank Limited
Other director and memberships
(including directorships of other listed
companies for the previous three years):
Former member, Business Council of
Australia and Financial Sector Advisory
Council, former Deputy Chairman, Australian
Bankers’ Association Council, Deputy
Chairman, Racing Victoria Limited and
former Member, MasterCard (Asia Pacific)
Advisory Board.
Principal activities
State of affairs
The principal activities of the Group during the financial year
were the provision of a broad range of banking and other
financial services including consumer, residential, business,
rural and commercial lending, deposit-taking, payments
services, wealth management and superannuation, treasury
and foreign exchange services. There were no significant
changes in the nature of the activities during the year.
In the opinion of the Directors there have been no significant
changes in the state of affairs of the Group during the
financial year. Information on events and matters that affected
the Group’s state of affairs is presented in the Chairman’s
and Managing Director’s Messages and the Operating and
Financial Review section of this report.
Operating results
Information on the Group’s operating results for the financial
year are contained in the Operating and Financial Review
section of this report.
Dividends
The Directors announced on 13 August 2018 a fully franked
final dividend of 35 cents per fully paid ordinary share. The
final dividend is payable on 28 September 2018. The proposed
payment is expected to amount to $166 million.
After balance date events
The Bank declared a final dividend of 35 cents per ordinary
share on 13 August 2018.
The Directors are not aware of any other matter or
circumstance which arose since the end of the financial year
to the date of this report that has significantly affected or may
significantly affect the operations of the Group, the results
of those operations, or the state of affairs of the Group in
subsequent financial years.
Future developments
The following fully franked dividends were paid by the Bank during
the year on fully paid ordinary shares:
• A final dividend for the 2017 financial year of 34 cents per
share, paid on 29 September 2017 (amount paid: $159.9
million); and
• An interim dividend for the 2018 financial year of 35 cents per
share, paid on 29 March 2018 (amount paid: $165.1 million).
Disclosure of information relating to major developments in
the operations of the Group and the expected results of those
operations in future financial years, which, in the opinion of the
Directors, will not unreasonably prejudice the interests of the
Group, is included in the Chairman’s and Managing Director’s
Messages and the Operating and Financial Review section of
this report.
Further details on dividends provided for or paid during the 2018
financial year on the Bank’s ordinary and preference shares are
provided at Note 7 Dividends of the Financial Statements.
Rounding of amounts
Review of operations
An analysis of the Group’s operations for the financial year
and the results of those operations, including the financial
position, business priorities and prospects, is presented in the
Operating and Financial Review section of this report.
The Bank is a company of a kind referred to in ASIC
Corporations (Rounding in Financial/Directors’ Reports)
Instrument 2016/191 and in accordance with that Instrument,
amounts in this report have been rounded to the nearest
million dollars, unless otherwise stated.
Annual Financial Report 2018 7
Meetings of Directors
Information on Board and committee meeting attendance for the year is presented in the following table:
Director
Board
Audit
Committee
Credit
Committee
Risk
Committee
Governance
& HR
Committee
Technology &
Change
Committee
Meetings during the year
Robert Johanson
Jan Harris
Jim Hazel
Jacquie Hey
Mike Hirst
Robert Hubbard
David Matthews
Deb Radford
Tony Robinson
A
14
14
14
14
14
14
14
14
14
B
12
13
14
14
14
13
14
14
14
A
7
7
7
7
B
7
7
7
7
A
4
4
4
4
B
4
4
4
4
A
9
9
9
9
B
8
9
9
9
A
5
5
5
5
B
3
5
5
5
A
5
5
5
B
3
4
5
5
5
A = Number eligible to attend B = Number attended
Directors’ interests in Equity
The relevant interest of each Director in shares in the Bank and in units of registered schemes made available by a related body
corporate at the date of this report are as follows:
Director
Robert Johanson
Marnie Baker
Vicki Carter
Jan Harris
Jim Hazel
Jacquie Hey
Robert Hubbard
David Matthews
Deb Radford
Tony Robinson
Ordinary
Shares No.
230,679
339,676
504
1,000
27,470
15,199
16,655
32,244
1,900
33,140
Preference
Shares No.
Performance
Rights No.
Sandhurst Cash
Common Fund $ 1
-
-
-
-
-
250
-
-
3,190
-
-
69,704
481
151,022
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1 Being a relevant interest in a managed investment scheme made available by Sandhurst Trustees Limited, a subsidiary of the Bank.
8 Annual Financial Report 2018
Share Options and Rights
There were no options over unissued ordinary shares at the
start of the financial year and no options to acquire ordinary
shares in the Bank were issued during or since the end of the
financial year.
Performance rights (“rights”) to ordinary shares in the Bank
are issued by the Bank under the Employee Salary Sacrifice,
Deferred Share and Performance Share Plan (“Plan”). Each
right represents an entitlement to one fully paid ordinary share
in the Bank, subject to certain conditions.
During or since the end of the financial year the Bank granted
309,349 rights (2017: 378,759). This included 190,057
rights granted to key management personnel.
As at the date of this report there are 833,725 rights that are
exercisable or may become exercisable at a future date under
the Plan. The last date for the exercise of the rights ranges
between 30 June 2019 and 30 June 2021.
During or since the end of the financial year no rights vested
(2017: nil), and no new fully paid ordinary shares have been
issued by the Bank during or since the end of the financial
year as a result of rights being exercised.
For the period 1 July 2018 to the date of this report, no rights
have lapsed.
Further details of Key Management Personnel equity
holdings during the financial year are detailed in the 2018
Remuneration Report.
Corporate Governance
An overview of the Bank’s corporate governance structures
and practices is presented in the 2018 Corporate Governance
Statement available from the Bank’s website at
www.bendigoadelaide.com.au/public/
corporate_governance/index.asp
The Bank confirms it has followed the ASX Corporate
Governance Council’s Principles and Recommendations (3rd
edition) during the 2018 financial year.
Environmental Regulation
The Group endeavours to conduct its operations in a manner
that minimises its impact on the environment. Information
on the Group’s environmental performance and activities to
manage the Group’s environmental impact are provided in
the 2018 Annual Review which is available from the Group’s
website.
The Group’s operations are not subject to any significant
environmental regulations under either Commonwealth or
State legislation. However, the Board believes that the Group
has adequate systems in place for the management of its
environmental requirements and is not aware of any breach of
any environmental requirement.
The Group is not subject to the Federal Government’s
National Greenhouse and Energy Reporting (NGER) Scheme
which requires controlling corporations to report annually on
greenhouse gas emissions, energy production and energy
consumption, if they exceed certain threshold levels. Whilst
not required to report under the Scheme, the Group does
measure and monitor its greenhouse gas emissions and has
voluntarily reported these emissions since 2011 to the Carbon
Disclosure Project.
Indemnification of Officers
The Bank’s Constitution provides that the Bank is to indemnify,
to the extent permitted by law, each officer of the Bank
against liabilities (including costs, charges, losses, damages,
expenses, penalties and liabilities of any kind including, in
particular, legal costs incurred in defending any proceedings
or appearing before any court, tribunal, government authority
or other body) incurred by an officer in or arising out of the
conduct of the business of the Bank or arising out of the
discharge of the officer’s duties.
A similar indemnity is also provided to the officers of Rural
Bank Limited.
As provided under the Bank’s Constitution, the Bank has
entered into deeds providing for indemnity, insurance and
access to documents for each of its Directors. The Bank has
also entered into deeds providing for indemnity and insurance
for each Executive Committee member and the Company
Secretary as well as deeds providing for indemnity, insurance
and access to documents for each Director of a subsidiary.
The deeds require the Bank to indemnify, to the extent
permitted by law, the officers for all liabilities (including costs,
charges, losses, damages, expenses, penalties and liabilities
of any kind) incurred in their capacity as an officer of the
relevant company.
Indemnification of Auditor
To the extent permitted by law and professional regulations,
the Bank has agreed to indemnify its auditors, Ernst & Young,
as part of the terms of its audit engagement agreement
against all claims by third parties and resulting liabilities,
losses, damages, costs and expenses (including reasonable
external legal costs) arising from the audit engagement
including any negligent, wrongful or wilful act or omission by
the Bank.
The indemnity does not apply to any loss resulting from Ernst
& Young’s negligent, wrongful or wilful acts or omissions. No
payment has been made under this indemnity to Ernst & Young
during or since the financial year end.
Annual Financial Report 2018 9
Insurance of Directors and Officers
Auditor Independence and Non-audit Services
During or since the financial year end, the Bank has paid
premiums to insure certain officers of the Bank and its related
bodies corporate. The officers of the Bank covered by the
insurance policy include the Directors, the Company Secretary
and Directors and Company Secretaries of controlled
entities who are not Directors or Company Secretaries of the
Bank. The policy also covers officers who accept external
directorships as part of their responsibilities with the Bank.
The insurance does not provide cover for the external
auditor of the Bank or related bodies corporate of the Bank.
Disclosure of the nature of the liability and the amount of
the premium is prohibited by the confidentiality clause of the
contract of insurance.
Company Secretary and General Counsel
William Conlan, LL.B (Melb), GradDip Applied Finance and
Investment
Mr Conlan was appointed as Company Secretary of the Bank
in 2011, having worked with the Bank for almost 10 years in
strategy, capital management and compliance. Mr Conlan is a
practising lawyer and prior to commencing employment with the
Bank, worked as a lawyer in Melbourne.
Declaration by Chief Executive Officer
and Chief Financial Officer
The Managing Director and Chief Financial Officer have provided
the required declarations to the Board in accordance with section
295A of the Corporations Act 2001 and recommendation 4.2 of
the ASX Corporate Governance Principles and Recommendations
in relation to the financial records and financial statements.
The Managing Director and Chief Financial Officer also provided
declarations to the Board, consistent with the declarations under
section 295A of the Corporations Act 2001 and recommendation
4.2 of the ASX Corporate Governance Principles and
Recommendations, in relation to the financial statements for the
half year ended 31 December 2017.
To support the declaration, formal risk management and financial
statement due diligence and verification processes, including
attestations from senior management, are conducted. This
assurance is provided each six months in conjunction with the
Bank’s half year and full year financial reporting obligations. The
statements are made on the basis that they provide a reasonable
but not absolute level of assurance and do not imply a guarantee
against adverse circumstances that may arise in future periods.
The Audit Committee has conducted an assessment of the
independence of the external auditor for the year ended 30 June
2018.
The assessment was conducted on the basis of the Bank’s audit
independence policy and the requirements of the Corporations
Act 2001. The assessment included a review of non-audit
services provided by the auditor and an assessment of the
independence declaration issued by the external auditor for the
year ended 30 June 2018. A copy of the auditor’s independence
declaration is presented at the end of this section.
Non-audit Services
Non-audit services are those services paid or payable to the
Group’s external auditor, Ernst & Young (Australia), which do not
relate to Group statutory audit engagements.
In its capacity as the Group’s external auditor, Ernst & Young is
periodically engaged to provide assurance services to the Group
in accordance with Australian Auditing Standards.
All assignments are subject to engagement letters in accordance
with Australian Auditing Standards. They include audit services
required for regulatory and prudential purposes and the amounts
shown are GST exclusive.
Details of all non-audit services for the year ended
30 June 2018:
(a) Assurance related fees (Regulatory)
Service Category
Fees $
Entity
AFSL audits
and APS 310 audit
273,940
Bendigo and Adelaide
Bank Limited
AFSL audits
and APS 310 audit
Euro Medium Term
Note Program
APS 117 review
(IRRBB)
30,437
Rural Bank Limited
31,110
85,000
Bendigo and Adelaide
Bank Limited
Bendigo and Adelaide
Bank Limited
Prudential Targeted
Review
317,000
Bendigo and Adelaide
Bank Limited
Sub-total: Assurance
related fees
(Regulatory)
737,487
10 Annual Financial Report 2018
(b) Assurance related fees (Non-regulatory)
In its capacity as the Group’s external auditor, Ernst & Young is
periodically engaged to provide assurance and related services
not required by statute or regulation but are reasonably related
to the performance of the audit or review of the Group’s
financial statements which are traditionally performed by the
external auditor. The amounts shown are GST exclusive.
Service Category
Fees $
Entity
Bendigo and
Adelaide Bank
Limited
Bendigo and
Adelaide Bank
Limited
Bendigo and
Adelaide Bank
Limited
Bendigo and
Adelaide Bank
Limited
Bendigo and
Adelaide Bank
Limited
Torrens Series
Securitisation
Trusts
Converting Preference
Share Offer (CPS4)
Alliance Bank Revenue
Share Model
Community Bank
Revenue Share Model
80,000
17,000
95,000
AASB 9 Model Validation
100,000
Sustainability reporting
7,500
Torrens Series
Securitisation Trust
Custody Audit
Sub-total:
Assurance related fees
(Non-regulatory)
65,400
364,900
Total: non-audit services
1,102,387
The Audit Committee has reviewed the nature and scope
of the above non-audit services provided by the external
auditor. In doing so, the Audit Committee has confirmed that
the provision of those services is consistent with the audit
independence policy and compatible with the general standard
of independence for auditors imposed by the Corporations Act
2001. This confirmation was provided to, and accepted by, the
full Board.
This assessment was made on the basis that the non-audit
services performed did not represent the performance
of management functions or the making of management
decisions, nor were the dollar amounts of the non-audit
fees considered sufficient to impair the external auditor’s
independence.
Ernst & Young
8 Exhibition Street
Melbourne VIC 3000 Australia
GPO Box 67 Melbourne VIC 3001
Tel: +61 3 9288 8000
Fax: +61 3 8650 7777
ey.com/au
Auditor’s Independence
Declaration to the
Directors of Bendigo and
Adelaide Bank Limited
As lead auditor for the audit of Bendigo and
Adelaide Bank Limited for the financial year
ended 30 June 2018, I declare to the best of my
knowledge and belief, there have been:
a)
no contraventions of the auditor
independence requirements of the
Corporations Act 2001 in relation to the
audit; and
b) no contraventions of any applicable code
of professional conduct in relation to the
audit.
This declaration is in respect of Bendigo and
Adelaide Bank Limited and the entities it
controlled during the financial year.
Ernst & Young
Graeme McKenzie
Partner
Melbourne
4 September 2018
Annual Financial Report 2018 11
Annual Financial Report 2018 11
Operating
and Financial
Review
Our Vision, Values and Point of Difference
Our Vision is to be Australia’s bank of choice.
Our strategy is to be Australia’s bank of choice by focussing
on the success of our customers, people, partners and
communities. We believe this sets us apart from other
financial institutions.
The key focus areas to support the strategy are depicted in
the following diagram.
y
r
o
t
Tell o u r s
Reduc
e c
o
More
Australians
choose to
bank with us
T
r
u
e
t
o
v
a
l
u
e
s
Aligned to risk a p p e t
e
t
i
m
p
l
e
x
i
t
y
y
t
i
l
i
b
a
p
a
Invest in c
Principal business divisions and activities
Local Connection
Local Connection incorporates retail and business banking
using the brands Bendigo Bank, Community Bank® and Delphi
Bank. The services are available from our national branch and
agency network, business bankers, call centres, on-line and
phone banking services and ATM network. Bendigo Bank is
one of the leading banking brands for customer and business
satisfaction and advocacy.
Partner Connection
Partner Connection incorporates Third Party Banking, Wealth
and Leveraged businesses. Third Party Banking comprises
commercial, residential and consumer finance which is
provided through intermediaries including mortgage managers
and brokers. It also includes our Portfolio Funding business
which provides funding to finance companies. Wealth is the
provider of superannuation, investment and financial planning
services and Leveraged is our margin lending business. The
Partner Connection division also includes Alliance Bank and
Homesafe.
Agribusiness
The division operates under the Rural Bank brand and provides
specialist financial products and services to primary producers
and agribusiness participants through a network of outlets and
agribusiness lending specialists throughout rural and regional
Australia.
The Group provides a broad range of banking and other financial
services primarily to retail customers and small to medium
sized businesses throughout Australia.
Organisational restructure
On 2 July 2018, Marnie Baker replaced Mike Hirst as
Group Managing Director. On 10 August 2018, Marnie
restructured the business around our Consumer, Business
and Agribusiness customer groups. Details on the business
structure are available at https://www.bendigoadelaide.com.
au/public/media_centre/index.asp#storyTitle1.
Our main business activity is raising funds through customer
deposits and wholesale funding markets and lending those
funds to our customers. The major lending activities are
consumer (especially residentially secured), business and
agribusiness. We generate the majority of our revenue from:
• Net interest income - which is the interest earned from our
lending activities and liquidity portfolio, less interest paid on
deposits and other funding sources; and
• Fee and commission revenue from the provision of banking,
investment, insurance and superannuation services.
For the financial year our business was structured and managed
around the three customer-facing divisions described below.
12 Annual Financial Report 2018
Summary of group performance
(statutory)
Net interest income
Other operating income
Total income
Credit expenses
Operating expenses
Total expenses
Full year ending
Six months ending
Jun 18
Jun 17
Change
Jun 18
Dec 17
Change
$m
$m
$m
%
$m
$m
$m
%
1,305.2
1,213.6
91.6
7.5
647.5
657.7
(10.2)
(1.6)
338.3
395.9
(57.6)
(14.5)
153.1
185.2
(32.1)
(17.3)
1,643.5
1,609.5
34.0
2.1
800.6
842.9
(42.3)
(5.0)
(70.6)
(71.8)
1.2
1.7
(24.3)
(46.3)
22.0
47.5
(938.4)
(909.4)
(29.0)
(3.2)
(480.9)
(457.5)
(23.4)
(5.1)
(1,009.0)
(981.2)
(27.8)
(2.8)
(505.2)
(503.8)
(1.4)
(0.3)
Profit before income tax expense
634.5
628.3
6.2
1.0
295.4
339.1
(43.7)
(12.9)
Income tax expense
(200.0)
(198.7)
(1.3)
(0.7)
(92.6)
(107.4)
14.8
13.8
Profit after income tax expense
434.5
429.6
4.9
1.1
202.8
231.7
(28.9)
(12.5)
Earnings per ordinary share
Statutory earning per ordinary share (weighted average)
Cash earnings per ordinary share (weighted average)
Diluted earnings per ordinary share (weighted average)
cents
89.9
92.1
81.2
cents
90.9
88.5
cents
(1.0)
%
cents
cents
cents
%
(1.1)
41.8
48.1
(6.3)
(13.1)
3.6
4.1
45.3
46.8
(1.5)
(3.2)
82.9
(1.7)
(2.1)
37.6
43.7
(6.1)
(14.0)
The Bank’s statutory net profit was $434.5 million, a 1.1 percent
increase on the prior year’s result. The statutory earnings per
ordinary share was 89.9 cents (FY2017: 90.9 cents).
Credit quality is sound with loan arrears substantially flat year
on year. The total bad and doubtful debt charges for the year
were marginally below the previous financial year.
Throughout the year, business conditions were characterised
by high levels of competition and relatively subdued asset
growth. Despite this, we recorded good levels of activity in the
second half of the financial year, especially in the home loan
market, which translated into loan growth only slightly below
system and solid earnings growth for the two largest divisions.
Our disciplined approach to asset and liability pricing resulted
in a strong lift in the net interest margin for the year.
The cost to income ratio fell to 55.6 percent (FY2017: 56.1
percent), notwithstanding increased compliance and regulatory
requirements and our continued investment in technology and
our staff.
Our ability to attract retail deposits is a real strength of the
business. The majority of our funding requirements is provided
by our retail customers which means we are well positioned to
withstand future wholesale funding market stresses.
Our capital position is strong, particularly given the relatively
low level of risk in the balance sheet. Importantly, we are
extremely well-placed to meet APRA’s new unquestionably
strong capital benchmarks well within the required timeframe.
This benchmark is explained in the Capital Adequacy section
of this report.
Dividends
Full year ending
Six months ending
Jun 18
Jun 17
Change
Jun 18
Dec 17
Change
%
%
Dividend per share - cents
70.0
68.0
2.0
2.9
35.0
35.0
-
-
Dividend amount payable/paid - $m
331.1
316.1
15.0
Payout ratio - earnings per ordinary share1
Payout ratio - cash basis per ordinary share1
77.9%
76.0%
74.8%
3.1%
4.7
4.1
166.0
165.1
0.9
0.5
83.7%
72.8%
10.9%
15.0
76.8%
(0.8%)
(1.0)
77.3%
74.8%
2.5%
3.3
The Bank declared a final fully franked dividend of 35 cents per share, taking the full-year dividend to 70 cents per share
(FY2017: 68 cents). The final dividend will be paid on 28 September 2018 and the dividend payout ratio was 77.9 percent
(FY2017: 83.7 percent).
Annual Financial Report 2018 13
Summary of cash earnings result
Cash earnings is a measure used across the banking industry to measure the maintainable level of earnings by excluding
specific items of revenue and expenditure that are non-recurring and therefore not representative of ongoing financial
performance. The cash earnings measure better enables comparison with the financial performance of other banking and
financial services institutions. The cash earnings adjustments are not subject to review or audit by the External Auditor.
Net interest income
Other operating income
Total income
Credit expenses
Operating expenses
Total expenses
Income tax expense
Full year ending
Six months ending
Jun 18
Jun 17
Change
Jun 18
Dec 17
Change
$m
$m
$m
%
$m
$m
$m
%
1,323.6
1,232.0
91.6
7.4
655.6
668.0
(12.4)
(1.9)
281.2
309.7
(28.5)
(9.2)
136.7
144.5
(7.8)
(5.4)
1,604.8
1,541.7
63.1
4.1
792.3
812.5
(20.2)
(2.5)
(70.6)
(71.8)
1.2
1.7
(24.3)
(46.3)
22.0
47.5
(900.9)
(873.0)
(27.9)
(3.2)
(455.4)
(445.5)
(9.9)
(2.2)
(971.5)
(944.8)
(26.7)
(2.8)
(479.7)
(491.8)
12.1
2.5
(199.5)
(189.7)
(9.8)
(5.2)
(97.8)
(101.7)
3.9
3.8
Cash earnings before Homesafe realised income
433.8
407.2
26.6
6.5
214.8
219.0
(4.2)
(1.9)
Net Homesafe realised income (after tax)
11.3
11.1
0.2
Cash earnings after income tax expense
445.1
418.3
26.8
1.8
6.4
5.0
6.3
(1.3)
(20.6)
219.8
225.3
(5.5)
(2.4)
The Bank’s annual cash earnings result was $445.1 million, a 6.4 percent improvement on the previous year’s result. Cash
earnings per ordinary share was 92.1 cents, a 3.6 cent increase on the previous year. The analysis of the Bank’s annual financial
result is presented in the following sections of this report.
Half year
Jun 18
Dec 17
Total
Half year
Jun 17
Dec 16
Total
Year on year
change
Financial position ratios (cash basis)
%
%
%
%
%
%
Return on average ordinary equity
8.13%
8.33%
8.23%
8.27%
7.94%
8.10%
Return on average tangible equity
11.33%
11.71%
11.52%
11.80%
11.43%
11.61%
Return on average assets
0.64%
0.65%
0.65%
0.63%
0.60%
0.61%
bps
13
(9)
4
The adjustments between the statutory profit and cash earnings result are summarised below.
Cash earnings adjustments
Statutory
profit
Fair
value
adjust-
ments
Home-
safe un-
realised
adjust-
ments
Hedging
income/
(costs)
(Profit)/
loss on
sale of
business
Inte-
gration
costs
Impair-
ment
change/
(rever-
sal)
Oper-
ating
expens-
es
Amorti-
sation
of intan-
gibles
Cash
earnings
sub-total
Home-
safe
realised
income
Cash
earnings
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
Net interest income
1,305.2
1.2
17.2
-
Other operating income
338.3
-
(55.4)
(1.7)
Total income
1,643.5
1.2
(38.2)
(1.7)
Credit expenses
(70.6)
Operating expenses
(938.4)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- 1,323.6
(7.5)
1,316.1
- 281.2
23.7
304.9
- 1,604.8
16.2
1,621.0
- (70.6)
-
-
(70.6)
(900.9)
1.6
7.6
0.4
19.7
8.2 (900.9)
Net profit after tax
634.5
1.2
(38.2)
(1.7)
1.6
7.6
0.4
19.7
8.2 633.3
16.2
649.5
Tax expense
(200.0)
(0.4)
11.4
0.5
(0.4)
(2.3)
-
(5.9)
(2.4) (199.5)
(4.9)
(204.4)
Net profit after tax
434.5
0.8
(26.8)
(1.2)
1.2
5.3
0.4
13.8
5.8 433.8
11.3
445.1
14 Annual Financial Report 2018
Fair value adjustments: The acquisition of Rural Finance
resulted in the recognition of fair value adjustments for
the loans acquired which are amortised over the life of the
underlying transaction.
Homesafe unrealised adjustments: Homesafe Trust revaluation
income ($55.4 million) represents the valuation movements
of the investment property held, and unrealised funding costs
($17.2 million) represents the interest expense incurred on
existing contracts for the year.
Hedging income / (costs): Hedge ineffectiveness
(ineffectiveness due to hedge accounting requirements).
Profit / (loss) on sale of business: The loss on the sale of a
Telco business.
Integration costs: Costs associated with the integration of
Alliance Partners and Rural Finance.
Impairment charge: Impairment for a small equity investment.
Operating expenses: Legal costs associated with the Royal
Commission, litigation and compensation costs.
Intangibles: Completion of the amortisation period for
business acquisitions and the associated intangible assets.
Homesafe realised income: Realised revaluation gains ($23.7
million) represents the net funds received on completion of
contracts (cash received on completion less the initial funds
advanced) and realised funding costs ($7.5 million) represents
the accumulated interest expense on completed contracts.
Analysis of financial performance
Income
Full year ending
Six months ending
Jun 18
Jun 17
Change
Jun 18
Dec 17
Change
$m
$m
$m
%
$m
$m
$m
%
Net interest income
1,323.6
1,232.0
91.6
7.4
655.6
668.0
(12.4)
(1.9)
Homesafe funding costs - unrealised
(17.2)
(15.8)
(1.4)
(8.9)
Fair value adjustments - interest expense
(1.2)
(2.6)
1.4
53.8
(7.6)
(0.5)
(9.6)
(0.7)
2.0
20.8
0.2
28.6
Total net interest income including specific items
1,305.2
1,213.6
91.6
7.5
647.5
657.7
(10.2)
(1.6)
Other income
Fee income
Commissions
Foreign exchange income
Trading book income
Other
Total other income
Specific other income items
Homesafe Trust - income
Other income
167.9
172.2
71.7
18.8
72.7
18.0
(4.3)
(1.0)
(2.5)
(1.4)
0.8
4.4
9.6
0.8
19.8
(19.0)
(96.0)
(2.4)
83.2
84.7
(1.5)
(1.8)
36.5
35.2
1.3
0.4
3.7
4.3
(5.6)
(175.0)
9.2
3.2
22.0
27.0
(5.0)
(18.5)
9.8
12.2
(2.4)
(19.7)
281.2
309.7
(28.5)
(9.2)
136.7
144.5
(7.8)
(5.4)
55.4
90.4
(35.0)
(38.7)
15.8
39.6
(23.8)
(60.1)
1.7
(4.2)
5.9
140.5
0.6
1.1
(0.5)
(45.5)
Total other specific income
57.1
86.2
(29.1)
(33.8)
16.4
40.7
(24.3)
(59.7)
Total other income including specific items
338.3
395.9
(57.6)
(14.5)
153.1
185.2
(32.1)
(17.3)
Total income
1,643.5
1,609.5
34.0
2.1
800.6
842.9
(42.3)
(5.0)
Half year
Jun 18
Dec 17
Total
Half year
Jun 17
Dec 16
Total
Year on year
change
Financial performance ratios
%
%
%
%
%
%
bps change
Net interest margin before revenue share
arrangements
Net interest margin after revenue share
arrangements
2.37%
2.36%
2.36%
2.26%
2.17%
2.22%
1.98%
1.98%
1.98%
1.89%
1.82%
1.86%
14
12
Specific analysis of the key income components for the year is presented in the following section.
Annual Financial Report 2018 15
Analysis of net interest income
Full year
Half year
Jun 18
Jun 17
Jun 18
Dec 17
$m
$m
$m
$m
Net interest income including specific items (statutory)
1,305.2
1,213.6
647.5
657.7
Fair value adjustments
1.2
2.6
0.5
0.7
Net interest income after fair value adjustments
1,306.4
1,216.2
648.0
658.4
Average interest earning assets
Average interest earning liabilities
Net interest margin
Net interest margin before revenue share arrangement
66,007.3
65,418.7
65,868.6
66,109.9
62,326.1
61,900.9
62,150.6
62,483.6
1.98%
2.36%
1.86%
2.22%
1.98%
2.37%
1.98%
2.36%
The increase in net interest income for the year was primarily
driven by the improved net interest margin, which increased by
14 basis points.
The margin increase was due to term deposit and mortgage
repricing, and to a lesser degree growth in lower cost at-call
deposits and lower liquidity requirements compared to the
previous year (when higher liquidity was maintained to fund the
Keystart loan portfolio acquisition).
These improvements were offset to a degree by higher
wholesale funding costs in the second half of the year, which
were attributable to an increase in BBSW rates, that eventually
flowed through to higher term deposit rates in the final quarter.
Analysis of other income
Other income decreased by $28.5 million, or 9.2 percent,
mostly due to a $19 million decrease in trading book income
caused by higher domestic funding costs and a deterioration
in credit spreads after stress in US funding markets in the
second half.
In addition, we continued to experience the impact of the
overall decline in banking transaction fees across the industry,
including the changes to ATM fees introduced during the year.
The ‘other income’ statutory result also included a contribution
from the Homesafe Trust of $55.4 million, which decreased
by $35.0 million compared to last year, reflecting the stronger
growth in residential real estate prices in Sydney and
Melbourne during FY2017.
Analysis of operating expenses
Full year ending
Six months ending
Jun 18
Jun 17
Change
Jun 18
Dec 17
Change
$m
$m
$m
%
$m
$m
$m
%
Staff and related costs
Occupancy costs
Information technology costs
497.3
480.5
16.8
3.5
252.3
245.0
91.0
77.0
92.0
(1.0)
(1.1)
46.1
44.9
71.6
5.4
7.5
39.2
37.8
7.3
1.2
1.4
3.0
2.7
3.7
Amortisation of acquired intangibles
8.2
17.7
(9.5)
(53.7)
1.9
6.3
(4.4)
(69.8)
Amortisation of software intangibles
Property, plant and equipment costs
Fees and commissions
Communication, postage, stationery
Advertising and promotion
Other product and services delivery costs
Other administration expenses
Total operating expenses
28.0
11.5
35.2
29.8
28.0
30.2
72.9
33.6
33.0
28.3
33.0
68.5
(3.2)
(0.3)
(2.8)
4.4
909.1
890.7
18.4
20.8
7.2
34.6
14.5
13.5
1.0
7.4
11.7
(0.2)
(1.7)
5.7
5.8
(0.1)
(1.7)
1.6
4.8
17.6
17.6
-
-
(9.7)
(1.1)
(8.5)
6.4
2.1
14.2
15.6
(1.4)
(9.0)
14.0
14.0
-
-
14.2
16.0
(1.8)
(11.3)
37.6
35.3
457.3
451.8
2.3
5.5
6.5
1.2
Specific items
Total expenses
29.3
18.7
10.6
56.7
23.6
5.7
17.9
314.0
938.4
909.4
29.0
3.2
480.9
457.5
23.4
5.1
Cost to income
Expenses to average assets
Number of staff (full-time equivalent)
Staff and related costs to income
16 Annual Financial Report 2018
Change
Change
Jun 18
Jun 17
55.6%
1.31%
56.1%
1.28%
4,426
4,413
30.5%
30.6%
bps
(0.5)
0.03
13
(0.1)
%
Jun 18
Dec 17
(0.9)
57.0%
54.2%
bps
2.8
%
5.2
2.30
1.34%
1.28%
0.1
4.7
0.3
(0.3)
4,426
4,387
31.5%
29.6%
39
1.9
0.9
6.4
In a period where revenue growth was challenging, the
business carefully managed the cost base and continued to
drive savings and operational efficiencies. Total expenses
increased by $29 million or 3.2 percent year on year. This
resulted in the cost to income ratio of 55.6 percent, a 50
basis point improvement on the previous year.
The main movements for the year related to staff costs,
technology related costs and other administrative expenses.
The increase in staff costs was due to general wage and
salary increases implemented towards the end of the first
half along with lower capitalisation of project costs. The
increase in technology-related costs also included an increase
in amortisation costs as a number of larger technology
investments were implemented during the year.
The increase in other administration expenses of $4.4 million
was mainly due to an increase in external consultancy and
legal fees.
Bad and doubtful debt charges
and loan impairment provisions
Credit expense
Bad debts written off
Full year ending
Six months ending
Jun 18
Jun 17
Change
Jun 18
Dec 17
Change
$m
$m
$m
%
$m
$m
$m
3.6
15.2
(11.6)
(76.3)
1.8
1.8
-
%
-
Provision doubtful debts - expense
75.3
71.4
3.9
5.5
25.3
50.0
(24.7)
(49.4)
Less: Bad debts recovered
(8.3)
(14.8)
6.5
(43.9)
(2.8)
(5.5)
2.7
(49.1)
Credit expense
70.6
71.8
(1.2)
(1.7)
24.3
46.3
(22.0)
(47.5)
As at
Jun 18
As at
Jun 17
Change
As at
Jun 18
As at
Dec 17
Change
Provisions and reserves
$m
$m
$m
%
$m
$m
$m
%
Provision for doubtful debts - specific
119.3
89.5
29.8
33.3
119.3
113.2
6.1
5.4
Provision for doubtful debts - collective
48.2
52.7
(4.5)
(8.5)
48.2
52.7
(4.5)
(8.5)
General reserve for credit losses
140.3
140.3
-
-
140.3
140.3
-
-
Total provisions and reserve for doubtful debts
307.8
282.5
25.3
9.0
307.8
306.2
1.6
0.5
Ratios
%
%
bps
%
%
Credit expenses to gross loans
0.11%
0.12%
(1)
0.08%
0.15%
Credit expenses (excluding Great Southern)
to gross loans
Total provision/reserve for doubtful debts
to gross loans
Collective provision and GRCL
to risk-weighted assets
0.10%
0.08%
2
0.07%
0.13%
0.50%
0.46%
4
0.50%
0.51%
0.49%
0.51%
(2)
0.49%
0.51%
bps
(7)
(6)
(1)
(2)
The provisions and reserve for bad and doubtful debts
increased from $282.5 million to $307.8 million for the year.
This movement mainly relates to a specific provision for a
single commercial exposure that was raised in the first half.
The $4.5 million decrease in the collective provision primarily
relates to the $3 million reduction in the collective provision
for the Great Southern portfolio.
The overall credit expense for the year was $70.6 million, $1.2
million lower than last year. The credit expense represents 11
basis points of the gross loan portfolio and is consistent with
the average credit expense for the past four years.
The credit expense for the second half was 47.5 percent lower
than the first half for the reason discussed earlier.
The credit expense for the Great Southern portfolio continues
to decrease in line with the reduction in the loan portfolio. The
collective provision for the portfolio was $13.5 million and,
when combined with the specific provision balance of $9.9
million, represents 46.3 percent of all non-performing loans.
Annual Financial Report 2018 17
Analysis of financial position
Financial position metrics
Half year
Jun 18
Dec 17
$m
$m
Total
FY18
$m
Half year
Jun 17
Dec 16
$m
$m
Total
FY16
$m
Year on year change
$m
%
Ordinary equity
Retail deposits
5,505.8
5,444.9
5,505.8
5,321.3
5,206.4
5,321.3
184.5
50,614.5
50,308.9
50,614.5
50,743.1
50,579.9
50,743.1
(128.6)
Funds under management
5,833.2
5,630.3
5,833.2
5,322.5
4,979.7
5,322.5
510.7
Loans under management
62,926.9
61,614.8
62,926.9
61,924.1
60,975.7
61,924.1
1,002.8
3.5
(0.3)
9.6
1.6
New loan approvals
> Residential
> Non-residential
Total provisions and reserves for
doubtful debts
8,089.3
8,110.7 16,200.0
8,330.7 11,724.9 20,055.6
(3,855.6)
(19.2)
5,437.7
5,881.2
11,318.9
5,419.3
8,710.5
14,129.8
(2,810.9)
2,651.6
2,229.5
4,881.1
2,911.4
3,014.4
5,925.8
(1,044.7)
(19.9)
(17.6)
307.8
306.2
307.8
282.5
303.3
282.5
25.3
9.0
Total gross loan growth of 1.4 percent for the year was below
system, however this increased to 4.2 percent over the second
half.
Residential lending growth in the second half reached 4.7%,
with strong new lending flows through both the branch network
and third-party mortgage business.
Competition for owner-occupied, principal and interest
residential lending is extremely high, as the industry focussed
on this sector for growth in response to the APRA-imposed
limits on investor and interest-only lending.
Pleasingly, however, the business performed well in this market
during the second half with settlements in the third-party
mortgages business increasing for the third consecutive half
and settlements from the retail business also increasing
from where they were 12 months ago. We have also seen
improvements in the volume of residential investment lending
as we continued to refine our offering given the headroom we
have under the prudential cap.
Business lending for the second half comprised a combination
of strong seasonal growth in agribusiness lending offset by a
decline in the commercial lending portfolio. During the year we
reviewed our risk appetite in the commercial lending portfolio
using the risk-return modelling that we have developed
through our advanced accreditation project. This has seen us
reposition the commercial lending portfolio by reducing our
exposure to some segments within the commercial real estate
sector.
This year we maintained retail deposit funding in excess of
80 percent of our total funding requirements. We have been
able to manage our deposit growth in line with our funding
requirements, as demonstrated by the deposit growth in the
second half to support the lift in asset growth.
The capital position is also very strong. The ability to
organically generate capital along with a reduction in credit
risk weightings resulted in a 35 basis point increase to the
Common Equity Tier 1 ratio. Total capital increased by 39
basis points over the year.
Loan portfolio
Approvals by security
Residential
Non-residential
Total approvals
Gross loan balance - by purpose
Residential
Consumer
Margin lending
Commercial
Full year ending
Six months ending
Jun 18
Jun 17
Change
Jun 18
Dec 17
Change
$m
$m
$m
%
$m
$m
$m
%
11,318.9 14,129.8 (2,810.9)
(19.9)
5,437.7
5,881.2
(443.5)
4,881.1
5,925.8 (1,044.7)
(17.6)
2,651.6
2,229.5
422.1
(7.5)
18.9
16,200.0 20,055.6 (3,855.6)
(19.2)
8,089.3
8,110.7
(21.4)
(0.3)
42,365.9 41,261.8
1,104.1
2.7 42,365.9 41,421.2
944.7
2,559.8
2,571.4
(11.6)
(0.5)
2,559.8
2,451.4
108.4
1,694.7
1,726.1
(31.4)
(1.8)
1,694.7
1,684.0
10.7
15,173.1 15,368.8
(195.7)
(1.3) 15,173.1 15,022.5
150.6
Total gross loan balance
61,793.5 60,928.1
865.4
1.4 61,793.5 60,579.1
1,214.4
Loans under management (gross balance)
On-balance sheet
61,793.5 60,928.1
865.4
1.4 61,793.5 60,579.1
1,214.4
Off-balance sheet loans under management
1,133.4
996.0
137.4
13.8
1,133.4
1,035.7
97.7
Total Group loans under management
62,926.9 61,924.1
1,002.8
1.6 62,926.9 61,614.8
1,312.1
18 Annual Financial Report 2018
2.3
4.4
0.6
1.0
2.0
2.0
9.4
2.1
Total gross loans increased over the year by $865.4 million or
1.4 percent.
Housing loan growth in the second half was slightly under
system and business lending growth was in line with system.
This was driven by the strong seasonal growth in the
agribusiness portfolio, growing 11.3 percent for the second
half.
Residential loan approvals for the year amounted to $11.32
billion, representing a 19.9 percent decrease on the previous
year which was helped by the acquisition of the Keystart
portfolio in FY2017.
Non-residential loan approvals also reduced over the year
partly reflecting the decision to reposition the commercial
lending portfolio, discussed above.
The loan portfolio is very well secured. In total, 97.9 percent
is secured by real estate mortgages or listed securities. The
average loan to valuation ratio, based on the valuation at the
date of origination, for the residential mortgage portfolio is 59
percent and 63 percent of the residential mortgage portfolio is
secured by owner-occupied residences.
The proportion of the portfolio with an LVR greater than 80
percent is 23 percent.
Asset quality
Impaired loans
Full performing
Part performing
Non-performing
Restructured loans
Total impaired assets
As at
Jun 18
As at
Jun 17
Change
As at
Jun 18
As at
Dec 17
Change
$m
$m
$m
%
$m
$m
$m
%
13.9
0.3
13.6 4,533.3
13.9
0.1
13.8 13,800.0
56.6
33.5
23.1
261.3
201.6
59.7
69.0
29.6
56.6
33.3
23.3
261.3
250.9
10.4
70.0
4.1
4.0
47.2
(43.2)
(91.5)
4.0
4.5
(0.5)
(11.1)
335.8
282.6
53.2
18.8
335.8
288.8
47.0
16.3
Less: specific impairment provisions
(118.3)
(88.5)
(29.8)
33.7 (118.3)
(112.5)
(5.8)
5.2
Net impaired assets
217.5
194.1
23.4
12.1
217.5
176.3
41.2
23.4
Portfolio facilities - past due 90 days, not well secured
4.8
5.8
(1.0)
(17.2)
5.8
3.6
2.2
Less specific impairment provisions
(1.0)
(1.0)
-
0.0
(1.0)
(0.7)
(0.3)
61.1
42.9
Net portfolio facilities
3.8
4.8
(1.0)
(20.8)
4.8
2.9
1.9
65.5
Past due 90 days
Well secured
(excluding commercial arrangement loans)
414.0
431.6
(17.6)
(4.1)
414.0
414.4
(0.4)
(0.1)
Great southern portfolio
50.5
79.0
(28.5)
(36.1)
50.5
62.7
(12.2)
(19.5)
Ratios
%
%
%
%
%
%
Total impaired loans to gross loans
0.54%
0.46%
0.08%
0.54%
0.48%
0.06%
Total impaired loans to total assets
0.47%
0.40%
0.07%
0.47%
0.41%
0.06%
Net impaired loans to gross loans
0.35%
0.32%
0.03%
0.35%
0.29%
0.06%
Provision coverage
91.7% 100.0%
(8.3%)
91.7% 106.0% (14.3%)
Total impaired assets increased by $53.2 million for the year,
mostly due to a small number of commercial exposures in the
business lending portfolio.
The loan provisioning and reserve coverage was sitting at 91.7
percent of total impaired assets as at year end.
Past due 90 day accounts decreased by $17.6 million which
was mainly attributable to the business lending portfolio with
arrears for the residential and consumer portfolios remaining
relatively stable. On an absolute basis, our arrears as a
percentage of the lending portfolio remain low and compare
favourably with available industry data.
Consistent with the broader industry we experienced an
elevation in the level of arrears within the Western Australian
residential mortgage portfolio. The Bank’s exposure to Western
Australian real estate market represents less than 10% of our
total residential mortgage portfolio.
The arrears for the agribusiness portfolio were slightly elevated
when compared to the previous year. The business has
completed customer analysis and stress testing to assess
the likely impacts of the prevailing severe drought conditions,
particularly in New South Wales. The analysis revealed that
the percentage of impacted customers is relatively small and
there is a reasonable level of resilience with the customer
base given deposit holdings and undrawn loan capacity. The
business has a proven track record of working with customers
to help them manage through these difficult periods.
Great Southern past due 90 days has reduced to $50.5
million. This decrease is again in line with the overall run-off in
the portfolio.
Annual Financial Report 2018 19
Deposits and managed funds
As at
Jun 18
As at
Jun 17
Change
As at
Jun 18
As at
Dec 17
Change
$m
$m
$m
%
$m
$m
$m
%
Deposits and funds under management
Deposits
Securitisation
Managed funds
59,529.5 59,294.1
235.4
0.4 59,529.5 59,022.7
506.8
0.9
3,544.8
3,958.4
(413.6)
(10.4)
3,544.8
4,169.6
(624.8)
(15.0)
5,833.2
5,322.5
510.7
9.6
5,833.2
5,630.3
202.9
Total deposits and funds under management
68,907.5 68,575.0
332.5
0.5 68,907.5 68,822.6
84.9
Deposits dissection - $m
Retail
Wholesale
Securitisation
Total deposits
Deposits dissection - %
Retail
Wholesale
Securitisation
Total deposits
Managed funds dissection
Assets under management
Other managed funds
Total managed funds
50,614.5 50,743.1
(128.6)
(0.3) 50,614.5 50,308.9
305.6
8,915.0
8,551.0
364.0
4.3
8,915.0
8,713.8
201.2
3,544.8
3,958.4
(413.6)
(10.4)
3,544.8
4,169.6
(624.8)
(15.0)
63,074.3 63,252.5
(178.2)
(0.3) 63,074.3 63,192.3
(118.0)
(0.2)
80.2%
14.1%
5.7%
80.2%
13.5%
6.3%
100.0%
100.0%
80.2%
14.1%
5.7%
79.6%
13.8%
6.6%
100.0%
100.0%
2,200.0
2,152.1
47.9
2.2
2,200.0
2,153.4
46.6
3,633.2
3,170.4
462.8
14.6
3,633.2
3,476.9
156.3
5,833.2
5,322.5
510.7
9.6
5,833.2
5,630.3
202.9
2.2
4.5
3.6
The retail deposit base decreased slightly year on year in
line with the Bank’s funding requirements. As at year-end the
retail deposits comprised $24.58 billion of at-call deposits
and $26.03 billion of term deposits. The proportion of at-call
deposits to term deposits increased slightly over the year.
As at 30 June 2018, retail deposits, as a percentage of total
funding, was 80.2 percent. Wholesale funding represented
14.1 percent and securitisation represented 5.7 percent
of total funding at year end. Refer also to the Funding and
Liquidity section of this report. The majority (88 percent) of
wholesale funding is sourced from the domestic market.
Analysis of segment performance
Operating segments
Local
connection
Partner
connection
Agri-
business
Total
operating
segments
Central
functions
$m
$m
$m
$m
163.7
1,305.2
Net interest income
Other income
Total segment income
Operating expenses
Credit expenses
Segment result (before tax)
Tax expense
Segment result (statutory basis)
Cash basis adjustments
Specific income & expense items
Homesafe net realised income
Amortisation of intangibles
Segment result (cash basis)
20 Annual Financial Report 2018
823.9
172.4
996.3
317.6
144.8
462.4
(639.3)
(210.5)
(49.9)
307.1
(96.8)
210.3
1.2
-
2.0
(17.9)
234.0
(73.8)
160.2
(11.1)
11.3
2.6
213.5
163.0
$m
-
12.3
12.3
(12.5)
-
(0.2)
0.1
(0.1)
(0.1)
-
-
8.8
172.5
(76.1)
(2.8)
93.6
(29.5)
64.1
3.5
-
1.2
68.8
326.0
1,631.2
(925.9)
(70.6)
634.7
(200.1)
434.6
(6.4)
11.3
5.8
445.3
(0.2)
3.6
0.1
0.6
2.3
Total
$m
1,305.2
338.3
1,643.5
(938.4)
(70.6)
634.5
(200.0)
434.5
(6.5)
11.3
5.8
445.1
Both Local Connection and Partner Connection improved
their cash earnings contribution which was driven by strong
improvement in the net interest margin. The major difference
between the Local Connection and the Partner Connection
results were the different credit expense outcomes.
Local Connection recording additional provisions for some
commercial exposures during the first half whereas the Partner
Connection result benefited from a reduction in the credit
expense mainly relating to the Great Southern portfolio.
Local Connection
The cash earnings contribution from our largest business
segment, Local Connection, increased from $200.7 million to
$213.5 million.
The division’s margin was impacted by the full year impact of
the introduction of the new farm management deposit 100%
offset product.
Capital adequacy
Prudential requirements
The Bank is regulated by APRA due to its status as an
Authorised Deposit-taking Institution (“ADI”). APRA is the
prudential regulator of the Australian financial services
industry which includes ADIs. APRA’s Prudential Standards aim
to ensure that ADIs remain adequately capitalised to support
the risks associated with their activities and to generally
protect Australian depositors.
The improvement was mainly driven by an increase in net
interest income of $57.5 million. This reflects the growth in
residential loans of just over $900 million and active margin
management. In an extremely competitive environment, the
business continued its disciplined approach to pricing and
leveraging the strength of the customer value proposition.
Other income decreased by $8.3 million, with lower ATM and
transaction fee income being the main contributor.
The Bank currently remains on the Standardised approach for
calculating its regulatory capital requirements under Basel II
but is undertaking a project to become accredited by APRA to
use the Advanced Internal Ratings-based (“IRB”) approach.
Earlier in the year APRA announced proposed changes to the
risk weightings on assets for both standardised and advanced
banks and we await APRA’s release of the updated standards
given the significant nature of the proposed changes.
The result included an increase in operating expenses of
$13.5 million. This was mainly due to wage and salary
increases totalling $8.3 million and higher allocated costs of
$5.8 million.
APRA’s risk-based capital adequacy guidelines are generally
consistent with the Basel III standards issued by the Basel
Committee on Banking Supervision (“BCBS”), except where
APRA has exercised certain discretions.
The result was also impacted by a $16.9 million increase in
credit expenses, which was mainly due to a provision on a
single exposure in the commercial lending portfolio.
Partner Connection
The cash earnings contribution from the Partner Connection
division increased from $133.8 million to $163.0 million.
The improvement was mainly due to a 21.8 percent increase
in net interest income of $35.8 million. This was attributable
to a stronger net interest margin as a result of repricing
activity during the year. The result included an increase in
operating expenses of $12.8 million which was mainly due to
litigation costs and higher allocated costs.
Credit expenses decreased by $16.7 million. As mentioned
earlier, the reduction in credit expenses in the Great Southern
loan portfolio, which totalled $14.1 million, had the biggest
impact on the division’s improved credit performance.
The Wealth business increased its contribution for the year.
The Bendigo Smart Start Super product grew strongly again
this year and now represents in excess of $1.2 billion in funds
under administration.
The Leveraged margin lending business maintained its
contribution year on year in a market where demand is
subdued. The business continues to be recognised for its
market-leading customer service.
Agribusiness
The cash earnings contribution from our Agribusiness segment
decreased marginally from $69.7 million to $68.8 million for
the year. This was achieved in a market dominated by high
levels of pricing competition. Lending activity was solid with
the business achieving loan settlements ahead of the annual
target, however competition for new lending was fierce.
APRA applies a tiered approach to measuring the Bank’s
capital adequacy by assessing financial strength at two levels:
1. Level 1 includes the Bank and certain controlled entities
that meet the APRA definition of extended licensed
entities; and
2. Level 2 consists of the consolidated group, excluding
non-controlled subsidiaries and subsidiaries involved in
insurance, funds management, non-financial operations
and securitisation special purpose vehicles.
In 2016, APRA released the non-capital components of the
framework for the supervision of conglomerate groups (also
known as Level 3) which came into effect on 1 July 2017.
APRA has deferred the capital components of the Level 3
framework, with implementation of any new requirements
expected no earlier than 2019. The supervision of
conglomerate groups is unlikely to impact the Bank given its
current group structure and operations.
Prudential capital classification
APRA measures regulatory capital using three regulatory
measures, being Common Equity Tier 1 Capital, Tier 1 Capital
and Total Capital.
Common Equity Tier 1 Capital comprises the highest quality
components of capital that consist of paid-up share capital,
retained profits and certain reserves, less the deduction of
certain intangible assets, capitalised expenses and software,
and investments and retained profits in insurance and funds
management subsidiaries that are not consolidated for capital
adequacy purposes and certain other adjustments.
Tier 1 Capital is comprised of Common Equity Tier 1 Capital
and Additional Tier 1 Capital. Additional Tier 1 Capital
comprises high quality components of capital that consists
of certain securities not included in Common Equity Tier 1
Annual Financial Report 2018 21
Capital, but which include loss absorbing characteristics.
An example of such securities is the Converting Preference
Shares issued by the Bank.
Total Capital is comprised of Tier 1 Capital and Tier 2 Capital.
Tier 2 Capital includes other components of capital that, to
varying degrees, fall short of the quality of Tier 1 Capital, but
nonetheless contribute to the overall strength of an ADI and its
capacity to absorb losses.
The second discussion paper proposes to apply a differential
minimum leverage ratio requirement for ADIs which use the
standardised approach and those which use the internal
ratings-based approach in determining capital adequacy.
To recognise that measuring the leverage for IRB ADIs is
inherently more difficult, APRA is proposing a minimum
leverage ratio of 4 per cent for IRB ADIs and 3 per cent for
standardised ADIs. APRA has proposed that the minimum
leverage ratio requirement will be deferred until 1 July 2019.
APRA’s adoption of Basel III prudential capital standards
APRA’s Basel III prudential capital standards require Australian
banks to maintain minimum ratios of capital to risk weighted
assets of at least 4.5% Common Equity Tier 1 Capital, 6%
Tier 1 Capital and 8% Total Capital. APRA may also require
ADIs to maintain minimum prudential capital ratios above the
prescribed minimum ratios which may not be disclosed.
APRA also requires Australian banks to hold capital buffers
above minimum capital requirements for Common Equity Tier
1 Capital. The capital buffers include a capital conservation
buffer (“CCB”) of 2.5%, unless APRA determines otherwise,
and a higher loss absorbency requirement of 1% for Domestic
Systemically Important Banks (“D-SIB”). The Bank is not
designated as a D-SIB.
Restrictions on the distribution of earnings, including payment
of dividends, discretionary bonuses and Additional Tier 1
Capital distributions apply when capital ratios fall within the
CCB. The capital buffers also include a countercyclical buffer,
which must be calculated specific to each ADI and will depend
on the jurisdictions in which an ADI operates. APRA determines
the countercyclical buffer for the Australian jurisdiction, which
from 1 January 2016 was set at 0%, although it may vary up
to 2.5% depending on market conditions. As at 30 June 2018
the countercyclical buffer applicable to the Bank was 0%.
The BCBS also introduced a simple, non-risk based leverage
ratio requirement which would act as a supplementary
measure to risk-based capital requirements. From 1 July 2015,
APRA has required ADIs that use the IRB approach to credit
risk to disclose their leverage ratios (being the ratio of Tier 1
Capital to an exposure measure comprised of certain on and
off-balance sheet exposures) on a quarterly basis. The Bank is
not subject to these disclosure requirements.
Earlier in the year APRA released two discussion papers for
consultation with authorised deposit-taking institutions (ADIs)
on proposed revisions to the capital framework. The papers
include proposed revisions to the capital framework resulting
from the BCBS finalising the Basel III reforms in December
2017, as well as other changes to better align the framework
to risks, including in relation to housing lending. APRA noted
it is not seeking to increase capital requirements beyond the
‘unquestionable strong’ benchmarks announced last year,
which are discussed below.
APRA expects to release draft revised prudential standards
and IRB approaches to credit risk and operational risk
later this calendar year. Other draft prudential standards
incorporating the remaining Basel III revisions will be
released for consultation in mid-2019. APRA has proposed
an implementation date of 1 January 2021 for all revised
measures.
Financial System Inquiry and APRA announcement of
‘unquestionably strong’ capital benchmarks
In 2013 the Australian Federal Government commissioned an
inquiry into Australia’s financial system (“FSI” and “Inquiry”)
and on 7 December 2014, the final report of the FSI was
released. The report contained a number of recommendations
on a wide range of issues including recommendations relating
to increasing the capital levels for the Australian banking
sector so that ADI capital ratios are ‘unquestionably strong’,
raising internal ratings-based mortgage risk weights for
housing loans and implementing a framework for minimum
loss absorbing and recapitalisation capacity in line with
evolving global practice.
From 1 July 2016, banks accredited to use the IRB approach
were required to hold additional capital for their domestic
residential mortgage portfolios. Standardised banks, including
us, were already required to hold more capital against their
residential mortgage portfolios.
In July 2017 APRA released an Information Paper outlining
its assessment of the additional capital required for the
Australian banking sector to have capital ratios that are
considered ‘unquestionably strong’. The Information Paper
provides details of the quantum and timing of capital
increases that will be required on average for Australian ADIs
to achieve unquestionably strong capital ratios.
For the Bank, and other standardised ADIs, APRA has
concluded that an increase in CET1 capital of approximately
50 basis points would be required to produce capital
standards for standardised ADIs that are consistent with the
concept of ‘unquestionably strong’. APRA’s expectation is for
ADIs to meet these new capital benchmarks by no later than 1
January 2020.
With the Bank’s Common Equity Tier 1 up 35 basis points to
8.62 percent between June 2017 and June 2018, the Bank
is confident it will be able to meet the new ‘unquestionably
strong’ requirements within the required timeframe.
APRA recently announced proposed changes to the risk
weightings on assets although the proposals are not seeking
to increase capital requirements beyond what was already
announced in July 2017.
Capital management strategy
The last 12 months has seen very strong organic capital
generation supported by strong profitability and moves to lower
risk weighted exposures. We’ve also managed to maintain our
Common Equity Tier 1 ratio during the second half following
stronger asset growth and in the absence of any residential
mortgage backed securities (RMBS) transactions.
22 Annual Financial Report 2018
The Bank maintains a conservative and prudent capital base
that adequately supports our business, allows the business
to grow as well as providing an effective and efficient capital
buffer to protect depositors and investors.
Our capital management strategy also plans for changes in
business conditions, including economic cycles, regulatory
and legislative change and potential acquisition opportunities.
The capital management strategy is designed to ensure
that minimum capital standards are always met, and that
management is afforded the greatest flexibility to pursue its
business objectives.
The Bank maintained a strong capital position with the capital
levels being above APRA minimum requirements at all times
throughout the financial year. The Bank improved its capital
position with the Common Equity Tier 1 ratio increasing over
the year from 8.27 percent to 8.62 percent at 30 June 2018.
The Tier 1 and Total Capital ratios were 10.96 percent and
12.85 percent respectively at year end.
Assets and Capital
Assets and capital
As at
Jun 18
As at
Jun 17
Change
As at
Jun 18
As at
Dec 17
Change
Group assets
Capital adequacy
$m
$m
$m
%
$m
$m
$m
%
71,439.8
71,415.5
24.3
-
71,439.8
71,261.9
177.9
0.2
Total regulatory capital
4,916.0
4,743.4
172.6
3.6
4,916.0
4,891.7
24.3
Risk-weighted assets
38,256.4
38,062.3
194.1
0.5
38,256.4
37,689.6
566.8
%
%
%
%
%
%
%
Risk-weighted capital adequacy
12.85%
12.46%
- Tier 1
- Tier 2
- Common Equity Tier 1
10.96%
10.49%
1.89%
8.62%
1.97%
8.27%
0.39%
0.47%
(0.08%)
0.35%
3.1
4.5
(4.1)
4.2
12.85%
12.98%
(0.13%)
10.96%
10.98%
(0.02%)
1.89%
8.62%
2.00%
8.61%
(0.11%)
0.01%
Risk - weighted assets
$m
$m
$m
%
$m
$m
$m
0.5
1.5
%
(1.0)
(0.2)
(5.5)
0.1
%
1.0
1.5
Credit risk
Market risk
Operational risk
34,367.6
34,263.5
104.1
0.3
34,367.6
33,754.6
613.0
1.8
212.4
231.8
(19.4)
(8.4)
212.4
293.6
(81.2)
(27.7)
3,676.4
3,567.0
109.4
3.1
3,676.4
3,641.4
35.0
Total risk-weighted assets
38,256.4
38,062.3
194.1
0.5
38,256.4
37,689.6
566.8
The following are the more significant capital initiatives
undertaken during the year:
Funding and liquidity
a. During the year we successfully completed an issuance
of RMBS totalling $750 million under the Torrens Series
securitisation program which provided both funding and
capital benefits.
b. Shareholder participation in the dividend reinvestment
plan and bonus share scheme for the year contributed an
additional $73.2 million of capital.
c. The Bank successfully completed its Converting
Preference Share 4 Offer (CPS4) which raised
approximately $321.6 million of new capital. At the same
time the Bank successfully completed the redemption
of its Convertible Preference Shares (CPS). Pleasingly, a
large portion of the CPS shareholders elected to continue
their support by reinvesting in CPS4.
Our principal source of funding is the retail deposit base.
Management’s target for retail funding remains at 75% to
80% of total funding. These deposits are traditional term
and savings deposits and transaction accounts sourced
predominantly through the retail network. Retail deposits
provide a stable source of funding and the business is
committed to maintaining a strong retail liability base.
The funding strategy is to maintain the existing high levels of
retail funding on balance sheet. In addition, we have set the
following funding objectives:
1.
2. continuing to diversify our funding opportunities across a
lengthening the duration of our liabilities;
range of markets; and
3. being an active participant in markets where funding
opportunities exist, and pricing is appropriate.
Securitisation has also formed an important part of the
Group’s funding and capital management strategies and we
will continue to monitor this market and participate where
pricing and risk is appropriate.
Wholesale funding activities managed by Group Treasury
support the core retail deposit funding strategy and provide
additional diversification and benefits from longer term
borrowings.
Annual Financial Report 2018 23
Group Treasury aims to maintain a stable and prudent
maturity profile by regular benchmark issuances in markets
that are sustainable and viably priced. Whilst the majority of
our wholesale funding is sourced from the domestic financial
markets, we recognise that at times additional diversity can be
achieved by issuances in overseas markets and currencies.
Liquidity risk is the risk that the Bank will be unable to meet
its payment obligations when they fall due under normal and
stressed circumstances.
Group Treasury is responsible for implementing liquidity
risk management strategies in accordance with approved
policies and adherence is monitored by the Asset and Liability
Management Committee and the Board Risk Committee. This
includes maintaining prudent levels of liquid reserves and a
diverse range of funding options to meet daily, short-term and
long-term liquidity requirements.
Liquidity scenarios are calculated under stressed and normal
operating conditions to assist in anticipating cash flow needs
and providing adequate reserves.
The Bank maintains a diverse portfolio of marketable
securities that can be easily liquidated in the event of an
unforeseen interruption of cash flow. The liquidity position
is assessed and managed under a variety of scenarios,
giving due consideration to stress factors relating to both
the market in general and specifically to the Bank. Net liquid
assets consist of cash, Australian Commonwealth government
securities, State government securities, short term bank
bills and certificates of deposit, and other securities that are
highly rated, liquid and are repo-eligible as collateral with the
Reserve Bank.
The Bank is subject to Prudential Standard APS 210 which
sets out the regulatory requirements for prudent liquidity risk
management. From 1 January 2015, APRA adopted the Basel
III liquidity requirement of compliance with a liquidity coverage
ratio (“LCR”). The Bank is designated as a LCR scenario
bank and as with all such regulated banks in Australia, has
successfully made application to APRA for a Committed
Liquidity Facility (“CLF”), to ensure compliance with the LCR
requirement. The Bank applies annually to APRA for use of
the CLF and the amount applied for is likely to vary from year
to year. The Bank is also required to maintain a Net Stable
Funding Ratio (“NSFR”), which is designed to encourage
longer-term funding resilience, of at least 100%, which came
into effect on 1 January 2018.
The Group manages liquidity holdings in line with the Board
approved funding strategy and funding plan, ensuring adequate
levels of High Quality Liquid Assets (HQLA), other liquid assets
and diversified sources of funding. The Group also has a
significant amount of contingent liquidity in the form of internal
securitisation whereby the collateral can be presented to the
Reserve Bank of Australia (RBA) for cash in extraordinary
circumstances such as systemic liquidity issues.
Our funding position continues to be a strength for the
organisation. It provides flexibility to fund asset growth through
our retail customer base as well as being able to access
demand from wholesale markets to senior, unsecured or
securitisation transactions.
As at 30 June 2018 our Liquidity Coverage Ratio (LCR)
stood at 125.6 percent. The LCR was maintained within
internal targets throughout the year and exceeded the
minimum prudential requirement at all times. The NSFR was
approximately 109 percent at year end which exceeds the 100
percent prudential requirement.
Credit ratings
The Bank’s credit ratings at the date of this report are:
Short
Term
Long
Term
Outlook
Date last
affirmed
Standard
& Poor’s
Moody’s
Fitch
Ratings
A-2
P-2
F2
BBB+
Stable
December 2017
A3
A-
Stable
December 2017
Stable
November 2017
On 21 December 2017 Standard & Poor’s affirmed its long-
term counterparty credit rating at ‘BBB+’ and affirmed the
short-term rating at ‘A-2’, with a stable outlook. Standard and
Poor’s commented that the issuer credit ratings reflect the
high degree of business stability, as shown by its upward-
trending business growth in both lending and deposits. The
ratings also reflect the strong capitalisation and very low
credit losses, both of which benefit from the Bank’s focus on
relatively lower risk residential mortgage lending and a good
geographic spread of loans throughout Australia.
On 4 December 2017, Moody’s affirmed its long-term issuer
rating at ‘A3’ and short-term rating at ‘P-2’, with a stable
outlook. Moody’s commented that the ratings reflect the
well-developed franchise centred on community banking
that supports its deposit gathering abilities. The Bank has
conservative management that has historically focused on
low-risk lending, which has contributed to greater asset quality
stability over time.
On 1 November 2017, Fitch Ratings affirmed its long-term
rating at ‘A-’ and the short-term rating of ‘F2’, and its support
rating of ‘3’ and the viability rating of ‘A-’. The outlook remains
stable. Fitch commented that the ratings reflect the Bank’s
conservative risk appetite, which supports its consistently
strong asset quality, while maintaining solid profitability.
Looking forward
Australia’s bank of choice
The operating environment is extremely competitive, and we
expect this to continue. This means we need to maintain our
focus on achieving our vision to be Australia’s bank of choice.
Our customer focus, high trust ratings and customer advocacy
makes us well placed to generate sustainable returns for our
stakeholders.
Our aim is to grow the number of customers that choose to
bank with us as we look to focus on accelerating revenue
growth. Our ability to respond has improved by driving
simplicity and increasing productivity, along with our ability to
get to market faster. But in achieving this aim we’ll stay true to
our values and purpose.
24 Annual Financial Report 2018
Investing in our people has never been more important. We
have a responsibility to ensure they continue to upskill and
evolve and build the capability and resilience needed to
navigate the challenges of the financial services industry.
Our employees drive our customers’ success, and these
investments will invariably underpin our organisation’s success
into the future.
Our strategy, combined with our passionate culture and
innovative mindset, drives the highest trust and advocacy
in the industry. We’re Australia’s most trusted bank and
third most trusted brand according to the Roy Morgan Net
Trust Index. We are consistently ranked top 2 for customer
satisfaction and our customers are most likely to recommend
us to others. For the third year running we were rated number
one in the Forrester’s Australian Customer Experience Index
across all industries and our products are consistently
recognised for good value, features and benefits.
The proposition for communities also remains strong. Our
Community Bank® model is delivering tangible benefits for
many communities and our business, returning more than
$200 million in community contributions since inception,
and about $17 million in the last financial year. The impact
of this funding will support the sustainability of hundreds of
Australian communities for the long-term.
Advanced accreditation
Achieving advanced accreditation is one of the most significant
projects undertaken by the organisation. It has involved the
development and implementation of new and contemporary
risk management techniques and models, upgrades to
our technology capability including business systems and
platforms, policy improvements and staff training. Achieving
advanced accreditation is about improving the way we do
business.
This investment is now largely complete and in day-to-day use
across our various business divisions and providing us with
greater insights into our customers and the risks we manage.
In particular, the investments have provided us with a stronger
insight into the risks within our portfolios and how we price for
that risk.
The progress towards Advanced Accreditation is continuing,
however we await APRA’s release of the updated credit risk
capital proposals given the significant nature of the proposed
changes. We are, however, satisfied with our progress
towards Advanced Accreditation for both interest rate risk
in the banking book and credit risk and we have met APRA’s
expectations for an entity with an advanced approach to risk
and capital management for operational risk. Regardless,
this investment has vastly improved our risk management
capability and is an important step in ensuring we can operate
on a level playing field with the major banks.
Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry
In December 2017, the federal government established
the Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry. The former
High Court Judge, the Honourable Kenneth Hayne AC QC, was
appointed as the Commissioner. The purpose of the Royal
Commission is to inquire into the conduct of banks and other
financial services institutions, and to assess the effectiveness
of existing regulatory frameworks and mechanisms for
customer redress.
Throughout 2018 the Royal Commission has been conducting
rounds of public hearings, focusing on key elements of the
financial services industry, including consumer lending,
financial advice, lending to small and medium enterprises,
superannuation, general and life insurance, and experiences
with financial services entities in regional and remote
communities.
A final report is due by 1 February 2019, with an interim report
due by 30 September 2018. The Commissioner’s report is
expected to outline his findings and recommendations, which
may form the basis for regulatory changes. More information
on the Royal Commission is available at
https://financialservices.royalcommission.gov.au.
Risk Management Framework
and significant business risks
The Board is responsible for the risk management strategy
which includes establishing and overseeing the risk
management framework and risk appetite within which the
business is expected to operate. Information on our risk
management framework and approach to managing risk is
presented in the 2018 Corporate Governance Statement and
Note 29 to the 2018 Annual Financial Report.
Business risks and uncertainties
The financial prospects of any company are sensitive to the
underlying characteristics of its business and the nature
and extent of the commercial risks to which the company
is exposed. There are a number of risks faced by the Bank,
including those which encompass a broad range of economic
and commercial risks. However, the most common risks that
the Bank actively manages are credit risk, liquidity risk, market
risk (including interest rate and currency risk) and operational
risk.
The Directors have adopted policies and procedures to
control exposures to, and limit the extent of, these risks. In
addition, the Bank has an independent internal audit function
that oversees all functions across the Bank. Whilst there
are inherent limitations in any risk management control
system, including control breakdowns and system failures, the
development and maintenance of effective control systems
should provide a solid foundation for risk management. A
summary of the more significant uncertainties and risks is
presented below.
Dependence on prevailing macro-economic
and financial market conditions
The business is highly dependent on the general state of
the domestic economy and global financial markets. Our
performance can be significantly impacted by economic and
political events, both domestic and international, as well
as by natural disasters. This includes the level of economic
activity and demand for financial services by our customers.
In particular, lending is dependent on customer and investor
confidence, the overall state of the economy including
employment levels, the residential lending market and the
prevailing interest rate environment.
Annual Financial Report 2018 25
Environmental factors
Credit ratings
The Group and its customers are based in and operate
across a diverse range of domestic geographical locations.
A significant environmental change or external event (such
as a fire, storm, drought or flood) has the potential to disrupt
business activities, impact on our operations, damage property
and affect the value of assets held in affected locations
and our ability to recover amounts owing to us. Through our
agribusiness division we also have a large exposure to the
domestic rural sector. The performance of this sector is
impacted by national weather patterns and commodity price
movements which in-turn may impact our overall earnings
performance.
Market competition
The markets in which we operate are highly competitive
and may become even more so. Factors that contribute
to competition include mergers and acquisitions, changes
in customer behaviour, entry of new participants, the
development of new sales methods and regulatory change.
Increasing competition could potentially lead to reduced
business volumes and revenue, a compression in our
net interest margins as well as additional costs to retain
market share. The Group is also dependent on its ability to
offer products and services that meet changing customer
preferences.
A weakening in the Australian real estate market
Residential, commercial and rural lending, together with
property finance, constitute important businesses to us. A
significant slowdown in Australian property markets, including
a decrease in Australian property valuations, could decrease
the amount of new lending the Bank is able to write and/or
increase the amount of credit losses from existing loans, as
well as impact the valuation of the Homesafe portfolio.
Changes in monetary policy
The RBA sets official interest rates so as to affect the demand
for money and credit in Australia. The cash rate influences
other interest rates in the economy which then affects the
level of economic activity. Movements in the cash rate impact
our cost of funds for lending and investing and the return
earned on these loans and investments which can impact our
net interest margin.
Changes in monetary policy can also affect the behaviour of
borrowers and depositors, such as potentially increasing the
risk that borrowers may fail to repay their loans, or repay their
loans in advance, and in the case of depositors, potentially
increasing the risk that they may seek returns in other asset
classes.
Regulatory change
As a financial institution, we are subject to a range of laws,
regulations, policies, standards and industry codes. In
particular, our banking and wealth management activities are
subject to extensive regulation including in relation to liquidity,
capital, solvency, provisioning and licensing conditions.
Changes to laws, regulations, codes or standards could affect
the Bank in substantial and unpredictable ways including the
need to significantly increase our investment in staff, systems
and procedures to comply with the regulatory requirements.
External credit ratings have a significant impact on
both our access to, and the cost of, capital and wholesale
funding. Credit ratings may be withdrawn, made subject
to qualifications, revised, or suspended by a credit rating
agency at any time. Also, the methodologies by which they
are determined may be revised. A downgrade or potential
downgrade to our rating may reduce access to capital and
wholesale debt markets, potentially leading to an increase
in funding costs, as well as affecting the willingness of
counterparties to transact with the Bank.
Capital base
The capital base is critical to the management of our
businesses and our ability to access funding. We are
required to maintain a level of capital by APRA and other key
stakeholders to support our business operations and risk
appetite. There can be no certainty that additional capital
required in the future will be available or able to be raised on
acceptable terms.
Business risks
There are a number of business risks that we manage
including credit risk, market risk, liquidity risk and operational
risk. To manage these risks we have established a framework
of systems, policies, standards and procedures which are
overseen by the Board Risk Committee and Board Credit
Committee, with support from senior management committees
and our independent risk management functions.
Credit risk
Credit risk is the risk of loss of principal and/or interest
resulting from a borrower failing to meet a scheduled
repayment or otherwise failing to repay a loan. The majority of
our credit risk exposure arises from general lending activities
and the funding, trading and risk management activities of
Group Treasury.
Market risk
Market risk comprises Traded Market Risk and Non-Traded
Market Risk (Interest Rate Risk in the Banking Book (IRRBB)).
IRRBB is the risk of loss in earnings or in the economic value
in the banking book as a consequence of movements in
interest rates. Non-traded market risk arises predominantly
from the Group’s general lending activities as well as balance
sheet funding activities.
Traded Market Risk is defined as the risk of loss owing to
changes in the general level of market prices or interest
rates from trading positions in interest rates, equities, foreign
exchange and commodities. It arises from positions held in
the Trading Book which consists of securities held for both
trading and liquidity purposes.
Liquidity risk
Liquidity risk is defined as the inability to access funds, both
anticipated and unforeseen, which may lead to the Group
being unable to meet its obligations in an orderly manner
as they arise or forgoing investment opportunities. Liquidity
Risk is inherent in all banking operations due to the timing
mismatch between cash inflows and cash outflows.
26 Annual Financial Report 2018
Operational risk
Vendor failure or non-performance risk
Operational risk is defined as the risk of an adverse impact
on our objectives or the risk of loss resulting from inadequate
or failed internal processes, activities and systems or from
external events. Operational risk can directly impact our
reputation and result in financial losses which could adversely
affect our financial performance and/or financial condition.
The Group sources a number of key services from external
suppliers and service providers. The failure of a key service
provider, or the inability of a key service provider to meet their
contractual obligations, including key service standards, could
disrupt our operations and ability to comply with regulatory
requirements.
Strategic risk
Conduct risk
There is a risk that adverse business decisions, ineffective
or inappropriate business plans or a failure to respond to
changes in the operating environment will impact our ability to
deliver our strategy and business objectives. The Bank also
regularly examines new initiatives and market opportunities,
including acquisitions and disposals, with a view to growing
shareholder value.
Compliance risk
The Group’s operations are highly regulated. A failure to
comply with the laws, regulations, licence conditions, codes,
principles and industry standards applicable to our operations
could result in a range of actions against the Group including
sanctions being imposed by regulatory authorities, the
exercise of discretionary powers by regulatory authorities or
compensatory action by affected persons.
Fraud risk
The Group is exposed to the risk of fraud, both internal and
external. Financial crime is an inherent risk within financial
services, given the ability for employees and external parties
to obtain advantage for themselves or others. An inherent
risk also exists due to systems and internal controls failing to
prevent or detect all instances of fraud. We have established
robust techniques and capabilities to detect and prevent fraud.
All actual or alleged fraud is investigated under the authority of
our financial crimes unit.
Risk of disruption of information technology systems or failure
to successfully implement new technology
Most of our daily operations are highly dependent on
information technology and there is a risk that these systems
or technologies might fail or not be available. The exposure
to systems risks includes the complete or partial failure of
information technology or data centre infrastructure and using
internal or third-party information technology systems that do
not adequately support the requirements of the business.
The business is exposed to risks relating to product flaws,
processing errors and mis-selling. These risks can arise from
product design or disclosure flaws or errors in transaction
processing. It can also include mis-selling of products to our
customers in a manner that is not aligned to the customer’s
risk appetite, needs or objectives.
Litigation risk
From time to time, the Group may be subject to material
litigation, regulatory actions, legal or arbitration proceedings
and other contingent liabilities which, if they crystallise, may
adversely affect the Group’s results. There is a risk that these
contingent liabilities may be larger than anticipated or that
additional litigation or other contingent liabilities may arise.
Partner risk
We have Community Bank® branches operating in all States
and Territories, along with our Alliance Bank network. The
branches are operated by companies that have entered into
franchise and management agreements with the Bank to
manage and operate a Community Bank® or Alliance Bank
branch. We carefully assess and monitor the progress of the
franchisees but there can be no guarantee of the success
of a Community Bank® or Alliance Bank branch. Whilst this
network continues to mature, there are still risks that may
develop over time.
Additional risks associated with the organisations activities,
which are assessed as part of the internal capital adequacy
assessment process, include the following:
Reputation risk
Reputation risk is defined as the risk of potential loss to the
Group due to damage to the Group’s reputation. Reputation
risk may arise as a result of an external event, our own actions
or the actions of a partner, and adversely affect perceptions
about us held by the public including customers, shareholders,
investors, regulators or rating agencies.
Data and Information security risk
Contagion risk
The risk of security breaches, external attacks and
unauthorised access to our systems continues to increase
with the growing sophistication of fraud and other criminal
activities. We are conscious that threats to information
security are continuously evolving due to the increasing use of
the internet and other digital devices to communicate data and
conduct financial transactions.
The Group includes a number of subsidiaries that are trading
entities and holders of Australian Financial Services Licences
and/or Australian Credit Licences. Dealings and exposures
between the Bank and its subsidiaries principally arise from
the provision of administrative, corporate, distribution and
general banking services. The majority of subsidiary resourcing
and infrastructure is provided by the Bank’s centralised back
office functions. Other dealings arise from the provision of
funding and equity contributions.
Annual Financial Report 2018 27
Remuneration
Report
Contents
Section 1
Overview of remuneration outcomes
Section 6
Non-executive Director remuneration
Section 2
Key Management Personnel
Section 7
Remuneration governance
Section 3
Remuneration framework
Section 4
Linking remuneration to performance
Section 5
Remuneration arrangements for the new
Managing Director
Section 8
Regulatory and industry remuneration
developments
Section 9
KMP statutory remuneration,
equity and loan tables
This Remuneration Report is for the financial year ended 30 June 2018. The Report has been prepared in accordance with
section 300A of the Corporations Act 2001 and the Corporations Regulations 2001 and has been audited. The Remuneration
Report sets out our remuneration framework, the remuneration arrangements applicable to the Key Management Personnel
(KMP), and the link between performance and remuneration outcomes for the year.
Section 1: Overview of remuneration outcomes
The Bank was pleased to announce a positive earnings result
with the annual cash earnings increasing by 6.4 percent and
the statutory profit improving by 0.9 percent on the previous
year. The result was in line with targeted performance and
reflected a continued focus on customer outcomes and a
disciplined approach to net interest margin and expense
management. In this context the below remuneration
arrangements were approved for the year.
Remuneration
component
Remuneration
outcomes
Fixed base
remuneration
Mike Hirst received an increase to his fixed base of 2.5 percent effective from November 2017. The fixed remuneration
for other executives, excluding executives appointed during the year, increased on average by 2.1 percent effective from
November 2017. The increases were in line with increases awarded to salaried staff across the Group.
Deferred base
remuneration
Mike Hirst received a grant of deferred shares in accordance with the terms approved by shareholders at the 2016 AGM.
Grants of deferred shares were also made to the other executives in accordance with their target remuneration mix.
The vesting criteria for the deferred base pay grants made in 2016 were satisfied and the Board approved the vesting
of the shares without adjustment.
Details of the vested shares are provided at Section 4 of this report.
Short-term
incentive (STI)
A bonus pool was established for the year. The size of the pool reflects the overall quality of the result, the progress
made in respect to business objectives and the Group’s risk profile.
Mike Hirst received an STI award of $250,000 which represents 63 percent of the maximum opportunity. The other
executives also received partial STI awards which, on average, represented 62.5 percent of the maximum opportunity.
The awards to other executives were consistent with the relative size of the bonus pool and performance at a
divisional and individual level. A third of any bonus to an individual that exceeds $100,000 is deferred for two years.
Details of individual STI awards for the year are provided at Section 4 of this report.
28 Annual Financial Report 2018
Remuneration
component
Remuneration
outcomes
Long-term
incentive (LTI)
Mike Hirst received a grant of performance rights in December 2017 in accordance with the terms approved by share-
holders at the 2016 AGM. The grant is subject to a four year performance period.
Performance right grants were made to other executives in accordance with their remuneration mix. The grants are
subject to a three year performance period and the share allocations are determined using a market value.
The TSR performance measure for performance rights granted to other executives in 2014 was not satisfied and as a
result all the rights lapsed.
The results of performance right testing are provided at Section 4 of this report.
The Board has initiated a review of the LTI plan. Information on the review is presented at Section 3.
Non-executive
director fees
The annual fee payment for non-executive directors was increased by 2.5 percent for the 2018 year. The aggregate
non-executive director fees paid for the year was $1,951,310 which represents 78 percent of the $2.5 million fee cap
approved by shareholders. No additional fees were paid to the non-executive directors for their committee member-
ships. The annual base fee has been increased by 2.0 percent for the 2019 financial year.
Section 2: Key Management Personnel
KMPs are the persons with authority and responsibility for planning, directing and controlling the activities of the Group. The KMP
for the financial year comprise the Directors and Executives listed below.
On 26 March 2018 the Board announced the appointment of Marnie Baker as Managing Director commencing 2 July 2018. Mike
Hirst retired from the role of Managing Director on 1 July 2018. The new Managing Director’s remuneration arrangements are
presented at Section 5.
Name
Position
Term as KMP
Non-executive directors
Robert Johanson
Chairman
Jan Harris
Jim Hazel
Jacqueline Hey
Robert Hubbard
David Matthews
Deb Radford
Tony Robinson
Executives
Mike Hirst
Marnie Baker
Taso Corolis1
Non-executive Director
Non-executive Director
Non-executive Director
Non-executive Director
Non-executive Director
Non-executive Director
Non-executive Director
Managing Director & Chief Executive Officer
Chief Customer Officer (CCO)
Chief Risk Officer (CRO)
Richard Fennell
Corporate and Chief Financial Officer (CFO)
Alexandra Gartmann
Chief Executive Officer, Rural Bank
Robert Musgrove
Tim Piper2
Bruce Speirs
Stella Thredgold
Andrew Twaits1
Alexandra Tullio2
Andrew Watts
Engagement Innovation
Chief Risk Officer (CRO)
Partner Connection
Business Enablement
Chief Engagement Officer
Local Connection
Customer Service Improvement
1 Taso Corolis and Andrew Twaits commenced as KMP on 31 January 2018.
2 Tim Piper and Alexandra Tullio ceased as KMP on 31 January 2018.
3 Andrew Watts ceased as a KMP on 6 December 2017.
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Part Year
Full Year
Full Year
Full Year
Part Year
Full Year
Full Year
Part Year
Part Year
Part Year
Annual Financial Report 2018 29
Section 3: Remuneration framework
3.1 Remuneration principles
The remuneration framework is designed to support the
achievement of our financial and business objectives and ensure
remuneration outcomes are aligned with sustainable financial
performance, growth in shareholder value and the interests of
other stakeholders.
• Transparency and procedural fairness – The Bank commits to
providing employees with visibility wherever possible of the
considerations made in making reward decisions and fairly
undertaking all performance and reward processes to support
the objective of fair remuneration, including gender pay equity;
The framework is documented in our remuneration policy which
was reviewed during the year. The changes included extending
the bonus pool risk adjustment measures and amending the
threshold for deferral of one third of STI awards from $50,000
to $100,000. The remaining changes are considered to be not
material.
Our remuneration framework is based on the following principles:
• Simplicity – The link between performance, value created
and reward should be clear and the framework easy for
all employees to understand so that it effectively attracts,
retains and motivates the talent the organisation needs to
deliver long term sustainable success;
• Alignment with values – Remuneration should reinforce
the corporate values of teamwork, integrity, performance,
engagement, leadership and passion. Individual reward
outcomes are first dependent on the success of the Bank,
division and team;
• Appropriate risk behaviour – Remuneration should
encourage innovation and risk-taking that supports the
achievement of superior long-term results for shareholders
and customers within the parameters of the Bank’s risk
management framework; and
• Supports good customer outcomes – Reward structures
and practices will be designed to minimise the risk of
incentivising behaviours that may lead to poor customer
outcomes.
3.2 Remuneration components, approach and mix
The Executive remuneration arrangements are summarised below:
Fixed
Variable
Total Reward Framework
Base Remuneration
Short Term Incentive (STI)
Long Term Incentive (LTI)
Fixed Base - Cash
Deferred Base - Equity
Cash & Equity
Equity
• Comprise base salary and
• Annual grants of deferred
• Cash, or a combination of cash
superannuation contributions.
• Together with deferred base,
is set by reference to the size
and complexity of role and
individual responsibilities.
• Amount is determined in
the context of the external
market including comparable
roles in the banking sector
and companies of a similar
size and complexity, and the
performance outlook.
• Recognises an individual’s
experience, skills,
competencies and value.
shares.
and deferred equity.
• Deferred shares (fully paid
ordinary shares) issued at no
cost and beneficially owned by
the executives from grant date.
• Executives do not receive cash
if they decide not to accept the
grant offer, unless the Board
decides otherwise.
• Grants are subject to continued
employment (“service
condition”) over the deferral
period.
• Subject to risk adjustment at
Board discretion.
• Shares are held on trust for the
deferral period.
• The maximum STI opportunity
is set for individual executives
at the start of the year.
• The maximum STI opportunity
is a fixed dollar amount.
• STI awards are capped at 100%
of target with no opportunity
to increase the payments for
‘above target’ performance.
• Awards are subject to Group
and individual performance and
passing risk, compliance and
values gateways.
• If award exceeds $100,000,
one third is deferred into equity
(deferred shares), issued on
substantially the same terms
as deferred base remuneration.
• Annual grants of Performance
rights. Each right represents
an entitlement to one ordinary
share in the Bank.
• Rights are granted at no cost
and have no exercise price.
• Vesting is subject to Cash EPS,
Customer Advocacy and TSR
performance measures, and
service condition.
• Performance measures are
tested over four years for
Managing Director and three
years for other Executives.
• Vesting is also subject to
continued employment and
risk adjustment. There is no
retesting.
The total target reward for executives is set by the Board at
the start of each year. The arrangements are reviewed by the
Governance & HR Committee to ensure the mix and total target
reward continues to be fair and balancing the interests of
stakeholders.
The mix includes three equity components designed to build
executives’ personal exposure to the Bank’s share price
performance, with a link to risk management outcomes. The STI
component links a modest percentage of remuneration to annual
performance and is typically set substantially below industry
30 Annual Financial Report 2018
relativities. This reflects our long-held view that remuneration
which is highly leveraged towards short-term performance can
create a disconnect between executive reward and longer-
term shareholder interests, customer outcomes and broader
community and regulatory expectations.
Accordingly, Mike Hirst’s remuneration mix included a sizeable
deferred equity component that is subject to risk adjustment at
the discretion of the Board. The mix includes a relatively small
proportion of variable remuneration linked to annual performance
and a larger proportion linked to longer term performance and
shareholder outcomes. This structure recognises the unique
role of the Managing Director in driving the strategic direction
and delivering longer-term and sustainable improvement in
shareholder value. A similar remuneration mix applies to the new
Managing Director and is summarised at Section 5.
In relation to other Executives, excluding the Chief Risk Officer
(CR0), the mix is evenly split between fixed base and variable
remuneration linked to risk outcomes. The mix represents a
moderate, but still meaningful, percentage of equity-based
remuneration linked to shareholder interests. In addition, the
maximum STI opportunity is limited to 20 percent of the total mix.
The mix for the CRO includes a larger fixed base and lower
STI component when compared to the other executives. This
recognises the independence and critical nature of the role.
The below table sets out the target remuneration mix, and
split between cash and equity, for each executive. The actual
remuneration mix will vary depending on performance outcomes.
The percentages also represent the maximum opportunity for
each component.
KMP
Position
Fixed
base
Deferred
Base
Cash
STI
Deferred
STI
M Hirst
M Baker
T Corolis
R Fennell
Managing Director
Chief Customer Officer
Chief Risk Officer
Chief Financial Officer
A Gartmann
CEO Rural Bank
R Musgrove
Engagement Innovation
B Speirs
Partner Connection
S Thredgold
Business Enablement
A Twaits
Chief Engagement Officer
40%
50%
60%
50%
50%
50%
50%
50%
50%
25%
10%
10%
10%
10%
10%
10%
10%
10%
7%
12%
7%
12%
12%
12%
12%
12%
12%
3%
8%
3%
8%
8%
8%
8%
8%
8%
LTI
25%
20%
20%
20%
20%
20%
20%
20%
20%
Awarded
as Cash
Awarded
as Equity
47%
62%
67%
62%
62%
62%
62%
62%
62%
53%
38%
33%
38%
38%
38%
38%
38%
38%
1 The remuneration details for Mr Twaits presented at Section 4 vary to above. As Mr Twaits started midway through the year it was agreed
that he would remain on the previous base salary arrangement until 1 July 2018.
Remuneration settings FY2018
The total base remuneration (i.e. fixed and deferred base) for
Executives continues to sit at around the market median and
includes a component directly linked to shareholder interests
and the organisation’s risk profile. The portion of incentive-based
pay (STI and LTI) is conservative and markedly below other listed
companies in Australia, especially in the banking sector.
Mike Hirst’s remuneration was positioned slightly below the
median of ASX 51 to 100 companies in respect to fixed base
remuneration but slightly above in respect to aggregate reward.
Mike’s STI component was again set at $400,000 and has
remained unchanged since 2012. He received 76,219 deferred
shares and 76,219 performance rights on 12 December 2017.
Each grant had a face value of $844,507 based on the Bank’s
closing share price on 1 July 2017. Mike’s annual equity grants
have remained unchanged since his appointment in 2009, being
annual grants of 76,219 deferred shares and 76,219 rights.
Most of the other executives received modest increases to
their fixed base remuneration and a number of executives also
received small increases to their deferred base remuneration.
There were no increases to the STI and LTI components for the
individuals holding other executive roles at the start of the year.
The remuneration arrangements for Taso Corolis and Andrew
Twaits were set by the Board following their appointments on 31
January 2018. The mix and settings are consistent with the pay
arrangements for the other executives.
For many years the increases in executive aggregate reward have
been broadly in line with general increases across the Group.
Since 2012 the annual cost of executive remuneration, based on
statutory disclosures, has increased on average by 2.6 percent
per annum.
Annual Financial Report 2018 31
3.3 Remuneration components, terms and policies
Base remuneration
Base remuneration comprises the fixed base and deferred
base components.
Fixed base comprises cash salary, salary sacrifice and
employer superannuation contributions.
Deferred base is represented by annual grants of deferred
shares that are held on trust for a two-year deferral period.
Deferred shares are fully paid ordinary shares granted at no
cost and are beneficially owned by the recipient from grant
date. The grants are subject to a two-year service condition
and risk adjustment at the discretion of the Board. If the
service condition is not met the deferred shares will not vest
and are forfeited, unless the Board decides otherwise.
The remuneration value of deferred share grants is determined
by the individual’s targeted remuneration mix. The number
of deferred shares allocated to KMP is calculated by dividing
the face value of the deferred base component by the volume
weighted average closing price of the Bank’s shares for the
last five trading days of the financial year prior to the year of
grant.
The Governance & HR Committee assesses the Managing
Director’s performance after financial year-end and applies any
upward or downward adjustment based on the achievement of
the measures to determine the STI award for recommendation
to the Board. This approach was chosen to enable unforeseen
developments to be factored into the assessment and ensure
any necessary risk and compliance adjustments occur at the
Board’s discretion.
The Managing Director assesses the performance of the
other executives shortly after financial year-end based on the
achievement of the individual’s financial and non-financial
measures. The Managing Director then applies any upward or
downward adjustment to determine the proposed STI awards for
recommendation to the Governance & HR Committee and Board.
The Governance & HR Committee and Board then reviews the
Managing Director’s recommendations based on the observed
performance and contribution for the other executives and
makes any appropriate adjustment to ensure the awards
reflect performance at an organisational, divisional and
individual level. The Board considers the Managing Director is
best placed to assess the individual performance and overall
contribution of the other executives.
Short term incentive (STI)
STI deferral
The annual incentive component is designed to provide an
appropriate level of reward for the achievement of annual
financial targets and business objectives and is set based on
the executive’s responsibilities and target remuneration mix.
The performance measures for the Managing Director’s STI
component are set by the Board on recommendation from the
Governance & HR Committee and focus on the achievement
of the targeted annual financial performance and a range of
medium term targets and risk management outcomes. The
performance measures for other executives are set by the
Managing Director on a similar basis as well as the individual’s
responsibilities and expected contribution at a divisional and
individual level.
The establishment of an annual bonus pool is dependent upon
the organisation achieving a minimum annual result which is
approved by the Board at the start of the year. If the minimum
level of cash earnings is not achieved, a bonus pool will not be
established and no STI awards will be made.
The bonus pool will increase with cash earnings performance
above the threshold performance level, subject to the
achievement of key financial and risk adjustment measures
and is capped at 110 percent of the cash earnings target. The
Board also applies a discretionary overlay to take into account
the underlying quality of the result and shareholder outcomes.
The Board decides the bonus pool after financial year-end, on
recommendation from the Governance & HR Committee. If the
pool is less than the maximum potential pool, the maximum
STI opportunity for each executive is proportionately adjusted
downwards. This reflects the executive committee’s collective
responsibility for the annual financial performance.
32 Annual Financial Report 2018
Starting from 2018 financial year, if an STI award exceeds
$100,000 one third of the award is deferred into equity as
grants of deferred shares. The deferred shares are typically
acquired on-market and held by the Plan Trustee for a two-
year deferral period commencing from the end of the financial
year for which the STI was granted. They are also subject to a
two-year service condition and risk adjustment. For previous
financial years the deferral threshold was set at $50,000.
If the service condition is not met the deferred shares do not
vest and are forfeited, unless the Board decides otherwise.
The number of deferred shares is calculated by dividing the
face value of the deferred STI component by the volume
weighted average closing price of the Bank’s shares for the
five trading days prior to the grant date.
Long term incentive (LTI)
At the Board’s discretion, executives may be invited to
participate in annual grants of performance rights. The rights
are granted at no cost, have no exercise price and each right
represents an entitlement to one ordinary share.
The remuneration value of the grants is determined by the
individual’s targeted remuneration mix and the number of rights
granted is determined by dividing the face value of the LTI by the
volume weighted average closing price of the Bank’s shares for
the last five trading days of the financial year prior to the year of
the grant.
The performance right grants made during the year used a three ‘sleeve’ approach.
An overview of the grant design is presented below:
First Sleeve
Second Sleeve
Third Sleeve
Service Condition
Allocation and Measures
(all grants)
Performance period:
Mike Hirst 1
Performance period:
Other Executives
30% of performance
rights granted
Subject to a
‘Customer Hurdle’
Customer Hurdle
performance period:
1.7.17 to 30.6.21
Customer Hurdle
performance period:
1.7.17 to 30.6.20
35% of performance
rights granted
Subject to EPS and
TSR measures
EPS performance period:
1.7.17 to 30.6.18
TSR performance period:
1.7.17 to 30.6.21
EPS performance period:
1.7.17 to 30.6.18
TSR performance period:
1.7.17 to 30.6.20
35% of performance
rights granted
Subject to TSR measure
TSR performance period:
1.7.17 to 30.6.21
1.7.17 to
30.6.21
TSR performance period:
1.7.17 to 30.6.20
1.7.17 to
30.6.20
1 The performance period for the grant is four years. If Mike Hirst’s employment with the Bank ends prior to July 2019, the Board may
exercise a discretion to shorten the Customer Hurdle performance period, the TSR performance period and the service condition to a
period of three years.
First sleeve - customer hurdle
Third sleeve- TSR hurdle
To satisfy the Customer Hurdle, the Bank’s net promotor score
(NPS) over the performance period (measured using a six-
month rolling average) must be 20 percent greater than the
median performance of a peer group of Australian banks. If
the Customer Hurdle is met, all the rights under this sleeve will
vest. If the Customer Hurdle is not met, the rights will not vest
and lapse.
NPS was chosen as it represents a global industry standard
used to measure customer advocacy. The NPS hurdle is directly
linked to good customer outcomes and is a consistent response
to public concern about conduct and culture concerns in the
Australian banking sector.
The performance rights will vest subject to the Bank’s TSR
performance in accordance with the below vesting schedule.
Vesting schedule
The following vesting schedule applies to the TSR testing for
both the second sleeve and the third sleeve.
TSR performance
against peer Group
Percentage of performance rights
that vest
Second sleeve - EPS and TSR hurdle
For the rights to vest the Bank’s cash EPS performance for the EPS
performance period must be equal to or better than the cash EPS
performance for the financial year before the EPS performance
period. If the EPS performance measure is not met, the rights will
not vest and lapse. If the EPS performance measure is met, the
performance rights will vest subject to the Bank’s TSR performance
in accordance with the below vesting schedule.
The TSR hurdle measures the Bank’s shareholder return
performance relative to the TSR performance of other ASX 100
companies (excluding property trusts and resources stocks)
using the ASX 100 Accumulation Index. This comparator group
was chosen, in the absence of a sufficient number of comparable
institutions, as it is frequently used in the market and requires
the Bank to outperform the majority of companies in the peer
group before the individuals receive any value from the grants.
The EPS hurdle was chosen because it provides a direct link
between executive reward and shareholder interests and
is an important and well understood measure of financial
performance. The TSR measure was chosen as it is aligned
with shareholder interests and represents a widely used
and understood means of measuring performance linked
to shareholder value. The TSR measure is independently
calculated.
At or below the 50%
0%
At 50.1%
60%
Between the
50.1% and 75%
Straight-line vesting:
• starting at 60%; and
• reaching 100% at the
75th percentile.
Above the 75th
percentile
100%
Prior year grants
Grants of rights were made to executives (excluding Mike
Hirst) for the 2014, 2015 and 2016 financial years on
different terms to the grants made in the 2017 and 2018
financial years. The main distinction between the terms of
these grants are as follows.
The legacy grants have a four-year performance period
consisting of a twelve-month initial performance period for
cash EPS testing followed by a three-year performance period
for relative TSR testing. The grants are also subject to a four-
year continued service condition.
The number of performance rights that vest and convert into
ordinary shares at the end of the applicable performance
period is determined as follows:
Annual Financial Report 2018 33
a. EPS hurdle: The grant is reduced by 50 percent if the
Bank’s cash earnings per share for the applicable
financial year is less than the cash earnings per share for
the previous financial year.
b. TSR hurdle: The TSR performance period is three years.
Vesting of the performance rights (as adjusted for the EPS
performance outcome) will be conditional on achieving the
following TSR performance against the peer group. There is no
retesting and any rights that do not vest will lapse.
Company’s relative
TSR ranking
Percentage of performance
rights that vest
TSR below 50th percentile
Nil
TSR between 50th percentile
and 75th percentile
65%
TSR above 75th percentile
100%
Common equity grant terms
All deferred share and performance right grants are made
in accordance with the rules of the Bank’s Employee Salary
Sacrifice, Deferred Share and Performance Right Plan (“Plan”).
Deferred shares are beneficially owned by the executive from
grant date and the executive is entitled to vote, receive notices
issued to ordinary shareholders and receive dividends during
the deferral period. The recipients are not entitled to deal in
the deferred shares until they vest and the Board may treat
deferred shares as forfeited before vesting.
Performance rights do not carry any dividend or other
shareholder rights such as voting. The executives are
prohibited from dealing in the performance rights until they
have been advised that the performance rights have vested.
If an executive ends their employment or their employment
ends because of an act which constitutes serious misconduct,
the deferred shares or performance rights will be forfeited on
the executive’s last day of employment unless, in the case of
resignation, exceptional circumstances apply, and the Board
decides to vest some or all the shares or rights.
If an executive’s employment ends because of death, disability,
redundancy, or any other reason approved by the Board, the
deferred shares or performance rights will continue to be
held as if the executive’s employment has not ended, and the
service condition will be treated as waived, unless the Board
decides otherwise. If the Board does decide otherwise, it may
determine that some or all of the shares or rights are forfeited,
which would occur on the last day of employment.
The shares are typically acquired on-market.
Review of LTI plan
The Board has initiated a review of the LTI plan to ensure the
plan design remains contemporary and acts as an effective
incentive for executives. More specifically, the grants are
designed to reward executives for delivering shareholder
returns which are in line with, of ahead of, broader market
performance over the longer term.
The first grant of rights under the Employee Salary Sacrifice,
Deferred Share and Performance Right Plan was made to
executives in the 2013 financial year. There have been a
number of grants under the plan which have completed their
performance period, and in each case the TSR performance
measure was not met and the rights lapsed.
The number of rights that vest is largely determined by the
Bank’s TSR performance relative to the TSR performance
of other ASX 100 companies (excluding property trusts and
resources stocks). The Bank adopted a peer group of other
ASX 100 companies given the limited number of comparable
institutions.
An internal review of the Bank’s TSR performance over
previous periods confirmed that the Bank has generally
out-performed the ASX 100 Accumulation Index (which is a
weighted index) and Australian banks. The review highlights
the arbitrary nature of the measure.
TSR represents a relative outcome that can be impacted
by factors outside the control of management including
the choice of peer group which may include companies in
industries with different business cycles to banks. Other
factors that impact TSR which are not performance related
include movements in price-earnings ratios of peer group
companies due to developments such as changes to sector or
industry sentiment and outlook or market views on potential
corporate activities.
The outcomes of the review, including any changes to
the design of the LTI plan, will be disclosed in next year’s
Remuneration Report.
Risk adjustment
The Board may adjust the number of deferred shares
and performance rights that vest to take into account
any unforeseen or unexpected circumstances and risk
developments. The Board has absolute discretion to adjust
variable remuneration (Deferred base pay, Deferred STI and
LTI) to reflect the following:
a. The outcomes of business activities;
The Board has discretion under the Plan rules to vest all or
a specified number of deferred shares or performance rights
if there is a takeover, compromise, scheme of arrangement
or merger. Matters the Board may take into account include
the Group’s pro-rata performance against the performance
conditions and the individual’s performance.
b. The risks related to the business activities taking into
account, where relevant, the cost of the associated
capital; and
c. The time necessary for the outcome of those business
activities to be reliably measured.
Under the rules of the Plan the Board has discretion to satisfy
deferred share grants and vested performance right grants by
either issuing new shares or acquiring shares on-market.
This includes adjusting performance-based components of
remuneration downwards, to zero if appropriate.
On an annual basis the Governance & HR Committee reviews
34 Annual Financial Report 2018
the appropriateness of releasing deferred equity components
taking into account the Group’s performance outlook, risk
profile and any other matter that might impact the reputation
or financial soundness of the Group.
Hedging and margin loan restrictions
The remuneration policy mandates that executives, and their
closely related parties, may not enter into a transaction
designed to remove the at-risk element of equity-based
pay before it has vested, or while it is subject to a trading
restriction.
The restriction is contained in the Remuneration Policy. The
Bank treats compliance with the requirement as important
and at the end of each year requires the individuals to confirm
they have complied with the restriction. If the restriction
is breached the individual will forfeit all equity-based
remuneration that is subject to the prohibition at the time of
the breach.
The Bank’s Trading Policy also prohibits KMPs from using
the Bank’s securities as collateral in any margin loan
arrangements.
Section 4: Linking remuneration to performance
4.1 Overview of company performance
The following table provides an overview of the key performance indicators for the past five years.
Company performance measure
Financial year ending
Statutory net profit after tax ($m)
Statutory earnings per share (cents)
Cash earnings ($m)
Cash earnings per share (cents)
Dividends paid and payable (cents per share)
Share price at start of financial year
Share price at end of financial year
Total shareholder return
Relative TSR Performance (percentile)1
Average STI received as a % of maximum opportunity
Percentage of executive LTI which vested
2018
434.5
89.9
445.1
92.1
70.0
$11.08
$10.84
4.2%
41st
63%
0%
2017
429.6
90.9
418.3
88.5
68.0
2016
415.6
90.4
401.4
87.3
68.0
$9.60
$12.26
$11.08
$9.60
22.5%
41st
54.4%
0%
(16.2%)
28th
0%
0%
2015
423.9
92.5
402.8
88.6
66.0
$12.20
$12.26
5.9%
2
33.7%
0%
2014
372.3
87.7
359.5
86.0
64.0
$10.07
$12.20
28%
69th
61%
65% 3
1 The relative TSR performance (percentile) is included in line with the TSR performance hurdle period for the grant tested in that year.
2 The measure was not obtained as no performance right grants were due to be tested.
3 The vesting percentage relates to the testing of Mike Hirst’s performance right grant made on 11 December 2009. No other grants were
due to be tested.
4.2 Remuneration outcomes
STI outcomes - Bonus pool allocation
Following are the bonus pool measures and outcomes for the financial year. The Board determined that the criteria to establish a
performance bonus pool had been met and a bonus pool representing 62.5 percent of the maximum capped amount was established.
Primary Measure
Performance Outcomes
Achieve 95% of target cash earnings
(threshold hurdle)
The cash earnings threshold was achieved.
Annual Financial Report 2018 35
Secondary Measures
Risk and Performance Outcomes
Cash earnings per share
The Group outperformed the cash earnings per share target.
Return on Equity (cash basis)
The ROE exceeded targeted performance.
Return on Tangible Equity (cash basis)
The ROTE exceeded the targeted performance.
Common Equity Tier 1 Equity
The CET1 ratio was above targeted performance.
Cost to Income Ratio
The cost to income ratio was ahead of the targeted performance.
Liquidity Coverage Ratio (LCR)
The LCR was maintained within approved internal and regulatory limits for the year.
Risk Weight Assets / Total Assets
The risk weighted asset measure was achieved.
Risk Adjusted Return on Capital (RAROC)
The RAROC exceeded the targeted performance.
Mike Hirst’s STI award
Following are the performance measures for Mike Hirst’s STI component and the level of achievement as assessed by the Board.
Criteria
Measure
1. Medium term
targets
Significant progress is made towards achieving the following medium-term targets:
a.
b.
c.
d.
Improved and sustainable shareholder value;
Improved customer satisfaction, advocacy rankings and growth in the customer base;
Improved economic performance including balance sheet and earnings growth;
Improved performance of the partner network including community, Alliance Bank and partner
satisfaction rankings; and
e. Maintained strong employee advocacy, improved organisational effectiveness, increase in teams
operating in an agile manner and progress towards diversity and inclusion objectives.
2. Strategic
focus areas
Significant progress is made towards the Bank’s key strategic focus areas:
a. Strengthening and asserting the distinctiveness of the Bank and its objective to be the most customer
b.
connected bank;
Improving the competitiveness of the Bank by using and promoting the new risk management systems,
progressing towards Advanced Accreditation and pursuing other initiatives with regulators and markets;
c. Successfully delivering and maturing growth opportunities, including the Digital Bank, University model,
d.
e.
f.
a.
b.
Alliance Bank and the NDIS platform;
Identifying and incubating other customer and balance sheet growth opportunities;
Transitioning the Bank towards an agile way of working to ensure critical change is effectively and
efficiently delivered; and
Identifying and developing talented people in the Bank and facilitating succession at all levels.
The level of risk associated with the Group’s performance is within the Board approved risk appetite;
and
An effective risk culture is promoted and there is evidence of enhanced risk practice across the
organisation.
3. Risk and
compliance
4. Public
representation
The Group continues to be represented effectively to government (state and federal) and in industry and
public forums.
Assessment
Targets met
Material
progress was
made towards
the key
initiatives
Within
appetite
An effective
risk culture
was
maintained
Target met
The Board awarded an STI payment of $250,000 which
corresponds with the proportion of the maximum bonus
pool. The Board assessed that the Mike Hirst had achieved
his performance goals and decided not to make any further
adjustment to the STI award.
Other executive STI awards
The STI components for the other executives were subject to
the achievement of the following financial and non-financial
performance objectives:
a. Group financial and strategic performance goals including
achievement of targeted statutory and cash earnings
performance;
b. Business unit/divisional performance; and
c.
Individual performance, including alignment with the
Group’s corporate values and code of conduct.
36 Annual Financial Report 2018
Risk and compliance requirements represent a gateway for the
STI payments. If the individual, team or Group does not meet
or only partially meets risk and compliance requirements or
the individual does not demonstrate behaviour in-line with the
corporate values, no award or a reduced award will be made.
Mike Hirst assessed the performance of the other executives
against their goals set at the start of the year and determined
the proposed individual STI awards for consideration by the
Governance and HR Committee and Board. There were no
adjustments to individual STI awards for the risk, compliance
and values gateway.
The following short-term incentives were awarded for FY2018.
Executive
M Hirst
M Baker
T Corolis
R Fennell
A Gartmann
R Musgrove
T Piper
B Speirs
S Thredgold
A Tullio
A Twaits
A Watts
STI maximum
opportunity1
STI payment
Paid as cash
Deferred 2
STI payment as %
of STI maximum
opportunity
% of STI Award
forfeited
$400,000
$225,000
$100,000
$250,000
$100,000
$100,000
$100,000
$135,000
$200,000
$100,000
$100,000
$180,000
$166,667
$83,333
$93,750
$46,875
$62,500
-
$104,167
$52,083
$80,000
$50,000
-
$84,375
-
-
-
-
$73,333
$36,667
-
$62,500
-
-
-
-
63%
63%
63%
63%
80%
50%
0%
63%
55%
0%
63%
0%
37%
37%
37%
37%
20%
50%
100%
37%
45%
100%
37%
100%
1 The STI is subject to a financial gateway and the achievement of financial and non-financial measures. Accordingly, the minimum potential STI
award is nil.
2 One-third of STI awards that exceed the $100,000 threshold set by the Board are subject to deferral for two years into shares in the Bank. The
allocation of deferred shares for the deferred STI components is expected to be completed before the end of 2018.
Deferred base outcomes
LTI outcomes
The deferred base pay grant made on 16 December 2016
was scheduled to be tested and having regard to the financial
soundness and risk profile of the organisation, it was decided
by the Board to vest the deferred shares. The number of
deferred shares granted to each executive are presented
in the table headed ‘Executive equity instrument grants’ at
Section 9.
The following table summarises the current LTI performance
right grants and testing outcomes for the year.
Grant
Grant
Date
NPS Test
Date
EPS Test
Date
EPS Test
Met
TSR Test
Date
TSR Test
Met
NPS Test
Met
Vested for
2018
Lapsed
for 2018
Remaining
2015 LTI
Senior
Executives
2016 LTI
Senior
Executives
2017 LTI
Senior
Executives
2018 LTI
Senior
Executives
2017 LTI
Managing
Director
2018 LTI
Managing
Director
10.12.14
n/a
30.06.15
Met
30.06.18
Not met
n/a
0%
100%
0%
17.12.15
n/a
30.06.16
Met
30.06.19
Not yet
tested
n/a
0%
0%
100%
16.12.16
30.06.19
30.06.17
Met
30.06.19
Not yet
tested
Not yet
tested
0%
0%
100%
12.12.17
30.06.20
30.06.18
Met
30.06.20
Not yet
tested
Not yet
tested
0%
0%
100%
16.12.16
30.06.20
30.06.17
Met
30.06.20
Not yet
tested
Not yet
tested
0%
0%
100%
12.12.17
30.06.21
30.06.18
Met
30.06.21
Not yet
tested
Not yet
tested
0%
0%
100%
Annual Financial Report 2018 37
As shown above, the LTI grant made to other executives in 2015
reached the end of the four-year performance period and was
tested against the TSR performance measure. The relative TSR
performance was rated below the median of the peer group, and
as the measure was not met the performance rights did not vest.
In relation to the 2018 LTI grants, the EPS performance
hurdle relating to the second sleeve was tested and was met.
Accordingly, 100 percent of the performance rights have been
carried forward for testing over the TSR performance period.
Executive remuneration paid and vested (unaudited)
The following table is a voluntary non-statutory summary of the
actual remuneration paid or which vested to the executives for
the 2018 and 2017 financial years. The information differs to the
statutory remuneration disclosures presented at Section 9 which
has been prepared in accordance with Australian Accounting
Standards.
The disclosures include prior year equity grants that vested to
individual executives. The value for the vested grants has been
calculated by multiplying the number of equity instruments by
the closing share price at the end of the deferral or performance
period.
Name
Fixed Base1
Prior years’
deferred
base vested2
Cash STI3
Prior years’
deferred STI
vested4
Prior years’
deferred LTI
vested5
Total
remuneration
realised
2018
$1,483,439
$826,214
$166,667
-
2017
$1,407,124
-
$160,000
$48,885
2018
$565,360
$174,459
2017
$566,491
$133,702
T Corolis6
2018
$187,465
-
$93,750
$80,000
$62,500
2018
$620,432
$174,459
$104,167
2017
$609,201
$133,702
$100,000
$30,548
M Hirst
M Baker
R Fennell
A Gartmann
R Musgrove
T Piper6
B Speirs
S Thredgold
A Tullio6
A Watts6
2018
$329,374
$69,777
2017
$331,427
$53,483
2018
$327,758
$69,777
2017
$335,675
$53,483
$80,000
$40,000
$50,000
$40,000
2018
$367,580
$145,386
-
2017
$572,702
$111,420
2018
$385,735
$69,777
2017
$357,578
$53,483
2018
$379,559
$69,777
2017
$365,344
$53,483
$40,000
$84,375
$50,000
$73,333
$80,000
2018
$234,264
$81,408
-
2017
$384,706
$62,391
$50,000
$62,000
2018
$170,182
$58,146
-
A Twaits6
2018
$181,364
-
-
$24,442
-
-
-
-
-
-
--
-
-
-
-
-
-
$18,426
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$2,476,320
$1,616,009
$833,569
$804,635
$249,965
$899,058
$873,451
$479,151
$424,910
$447,535
$429,910
$512,966
$724,122
$539,887
$461,061
$522,669
$498,927
$315,672
$515,523
$243,864
$228,328
$519,794
2017
$421,632
$44,564
$33,333
$20,265
1 Fixed base includes cash salary, non-monetary benefits, superannuation and movements in accrued annual and long service leave consistent with
the statutory remuneration table presented at Section 9.
2 The prior years’ deferred base amounts represent the grants made on 17 December 2015 and 16 December 2016 which completed their two-year
deferral period and vested. The grant made for the 2018 financial year will be tested in a future period and has therefore been excluded from the
table.
3 The cash component of the 2018 STI is expected to be paid in October 2018. A third of STI awards which exceed $100,000 are deferred into
equity which will be tested in a future period and have therefore been excluded from the table.
4 No STI awards were made for the 2016 financial year and accordingly no deferred STI grants reached the end of their deferral period in 2018. The
comparative amounts represent the grant made in respect to the 2015 financial year which had completed the two-year deferral period and vested.
5 The prior years’ LTI amounts represent the grants made on 17 December 2013 and 10 December 2014. The grants did not meet their respective
performance measures and accordingly did not vest and were forfeited. The LTI grants made in subsequent financial years will be tested in future
periods and have therefore been excluded from the table.
6 Mr Corolis and Mr Twaits commenced as KMP on 31 January 2018 and Mr Piper and Ms Tullio ceased as KMP on 31 January 2018. Mr Watts
ceased as a KMP on 6 December 2017.
38 Annual Financial Report 2018
Section 5: Remuneration arrangements for the new Managing Director
Marnie Baker commenced as Group Managing Director effective
2 July 2018. The employment agreement is ongoing with no
fixed term. Marnie’s remuneration arrangements for the 2019
financial year are as follows:
a. Fixed base pay: $1,200,000 (including superannuation)
per annum;
b. Deferred base pay: an annual grant of 50,000 deferred
shares, subject to shareholder approval at the 2018
AGM. Vesting will be subject to satisfaction of the service
condition set by the Board and Board discretions.
c. Eligibility for a short-term incentive award of up to
$400,000 (awarded at the discretion of the Board and
subject to meeting performance targets).
If the STI award exceeds $100,000, one-third of the
award will be in the form of deferred shares, held on trust
for two years. Vesting will also be subject to satisfaction
of the service conditions set by the Board and Board
discretions.
d. Long term Incentive: an annual grant of 50,000
performance rights, subject to shareholder approval at
the 2018 AGM. Vesting will be subject to the satisfaction
of performance and service conditions to be set by the
Board and Board discretions.
Further information on the terms of the deferred base and
long-term incentive grants will be included in the 2018 Notice
of AGM.
Section 6: Non-executive Director remuneration
The remuneration of Non-executive Directors is based on the
following principles and arrangements. There is no direct link
between Non-executive Director fees and the annual results of
the Group. Non-executive Directors do not receive bonuses or
incentive payments, nor receive equity-based pay.
Shareholders approved an aggregate fee pool for Non-executive
Directors of $2,500,000 at the 2011 Annual General Meeting.
This fee pool covers payments (including superannuation) for the
main Board and payments to the Bank’s Non-executive Directors
appointed to subsidiary boards and the Community Bank®
National Council.
The Governance & HR Committee (the “Committee”)
recommends to the Board the remuneration arrangements for
Non-executive Directors. The base fee is reviewed annually by
the Committee and the following considerations are taken into
account in setting the base fee:
a. The scope of responsibilities of Non-executive Directors
and time commitments. This includes consideration
of significant changes to the Group’s operations and
industry developments which impact workloads and
responsibilities at the Board and committee level.
b. Fees paid by peer companies and companies of similar
market capitalisation and complexity, including survey
data and peer analysis to understand the level of Director
fees paid in the market, particularly in the banking and
finance sector.
Non-executive Directors receive a fixed annual fee inclusive of
superannuation contributions at 9.5 percent. In relation to the
superannuation contributions, Non-executive Directors can elect
to receive amounts above the maximum contributions limit as
cash. The Chairman receives a higher base fee in recognition of
the additional time commitment and responsibilities.
The base fee for Non-executive Directors increased by 2.5
percent for the year. The base fee in effect from 1 August 2017
for the remainder of FY2018 was:
a) $197,825 for Directors (inclusive of company
superannuation contributions); and
b) $494,550 for the Chairman (inclusive of company
superannuation contributions).
No additional fees are paid for serving on Board Committees.
Additional fees were paid to Non-executive Directors appointed
to the Boards of Sandhurst Trustees and the Community Bank®
National Council.
A review of the Non-executive Director fees has also been
completed since the end of the financial year. The Board has
approved a 2.0 percent increase to the annual base fee taking
the annual fee amount to $201,780 for the Directors and
$504,450 for the Chairman. The increase was effective from
August 2018. The annual fee paid to Tony Robinson as a Director
of Sandhurst Trustees was reduced from $60,000 to $40,000.
The Directors contribute $5,000 each to the Bank’s scholarship
program. The program was established to assist disadvantaged
students from regional areas meet tertiary education
accommodation and direct study costs. The contributions are
deducted from base fee payments.
Annual Financial Report 2018 39
Non-executive Director remuneration details
The following payments were made to Non-executive Directors in the 2018 and 2017 financial years.
Non-executive
Director
R Johanson (Chairman)
Short-term benefits
Post-employment benefits
Fees 1
Non-monetary benefits 2
Superannuation contributions 3
$469,033
$458,334
$180,739
$176,689
$180,739
$176,689
$180,739
$176,689
$180,739
$176,689
$189,636
$184,488
$180,739
$176,689
$237,405
$233,384
$4,550
$4,550
-
-
-
-
-
-
-
-
$5,674
$5,674
-
-
-
-
$20,049
$19,616
$16,715
$16,311
$16,715
$16,311
$16,715
$16,311
$16,715
$16,311
$17,644
$18,338
$16,715
$16,311
$20,049
$19,616
Total
$493,632
$482,500
$197,454
$193,000
$197,454
$193,000
$197,454
$193,000
$197,454
$193,000
$212,954
$208,500
$197,454
$193,000
$257,454
$253,000
2018
2017
J Harris
2018
2017
J Hazel
2018
2017
J Hey
2018
2017
R Hubbard
2018
2017
D Matthews 4
2018
2017
D Radford
2018
2017
T Robinson 5
2018
2017
Aggregate totals
2018
2017
$1,799,769
$1,759,651
$10,224
$10,224
$141,317
$139,125
$1,951,310
$1,909,000
1 Fee amounts include the $5,000 Director contribution to the Board scholarship program.
2 Represents fee sacrifice component of the base Director fee paid as superannuation.
3 Represents company superannuation contributions.
4 The fees paid to Mr Matthews include $15,500 inclusive of company superannuation as a member of the Community Bank® National Council.
5 The fees paid to Mr Robinson include a fee of $60,000 inclusive of company superannuation as a Director of Sandhurst Trustees Limited (FY2017:
$60,000).
40 Annual Financial Report 2018
Non-executive Director equity holdings
The following payments were made to Non-executive Directors in the 2018 and 2017 financial years.
Number at the start of year
Net Change 1
Number at end of year 2
Name
Ordinary shares
Preference shares
Ordinary shares
Preference shares
Ordinary shares
Preference shares
Non-executive Directors
R Johanson
255,815
J Harris
J Hazel
J Hey
R Hubbard
D Matthews
D Radford
T Robinson
1,000
26,128
11,378
11,775
30,959
1,900
33,140
-
-
-
250
-
-
3,190
-
12,510
-
1,342
3,821
4,880
1,285
-
-
-
-
-
-
-
-
-
-
268,325
1,000
27,470
15,199
16,655
32,244
1,900
33,140
-
-
-
250
-
-
3,190
-
1 No equity instruments were granted as compensation to Non-executive Directors during the reporting period.
2 None of the shares are held nominally.
Section 7: Remuneration governance
The Governance & HR Committee assists the Board in relation
to the Group’s remuneration arrangements. The Board makes
all final decisions in relation to those arrangements. The
current members of the Committee are all independent Non-
executive Directors:
a. Tony Robinson (Chairman)
b.
Jacquie Hey
c. Robert Johanson
d. Deb Radford
The Committee has responsibility for providing input into
the Group’s risk management framework in relation to
remuneration risk, in particular, recommending to the Board
the remuneration arrangements for the Executives.
A summary of the Committee’s remuneration responsibilities is
presented below and the Committee Charter is available from
the Corporate Governance section of the Bank’s website at
www.bendigoadelaide.com.au/public/corporate_governance/.
The Committee’s remuneration responsibilities include
conducting regular reviews of, and making recommendations
to the Board on the remuneration strategy and policy taking
into account the Group’s objectives, risk profile, shareholder
interests, regulatory requirements and market developments.
The Committee makes recommendations to the Board on
the exercise of the Board’s discretion to adjust incentive and
performance-based remuneration to reflect the outcomes of
business activities and the risks relating to those activities.
The Committee is also responsible for recommending to the
Board the remuneration matters specified by the Australian
Prudential Regulation Authority under Prudential Standard
CPS 510 Governance relating to other designated responsible
persons, risk and financial control personnel and material risk
takers.
The Committee may consult a professional adviser or
expert, at the cost of the Bank, if the Committee considers
it necessary to carry out its duties and responsibilities. No
remuneration recommendations were obtained from external
consultants in relation to any of the KMP during the reporting
period.
The Committee is also responsible for making
recommendations to the Board on:
a.
the remuneration arrangements for executives, including
the terms on which performance-based remuneration will
be provided;
the performance-based remuneration outcomes for the
executives; and
the annual bonus pool.
b.
c.
Annual Financial Report 2018 41
Section 8: Regulatory and industry remuneration developments
8.1 Sedgwick Report
An independent review was commissioned by the Australian
Bankers’ Association (“ABA”) to examine the way banks pay
staff or third parties for selling retail banking products like
mortgages, credit cards and deposits, including whether
commissions, bonuses or other incentives promoted behaviour
that aligned interests of bank staff with the interests of
their customers. The report was released last year and has
prompted broad scale changes to remuneration practices in
the industry.
The report outlined 21 recommendations designed to ensure
remuneration practices achieve better customer outcomes,
and in part, address community concerns about industry
conduct and culture.
Prior to the commissioning of the Sedgwick Report, the Bank
had already implemented many changes consistent with the
Sedgwick recommendations. For example, we had already;
• Removed incentives that are directly linked to products
•
and the achievement of sales targets in 2002.
Established a modest bonus scheme where payments
make up a relatively small proportion of total individual
employee pay. Satisfactory assessment of values-based
behaviour (including risk and compliance) has always
been a gateway to eligibility for any bonus payments.
In addition, the Bank does not operate variable reward
schemes that include “accelerators” i.e. significantly
increased incentive payments as certain sales or other
financial thresholds are achieved.
Our approach to reward and remuneration has traditionally
been different from the industry standard and pleasingly, the
changes required by the organisation were minimal, showing
we already broadly operated in a manner consistent with
driving the right outcomes for customers.
While we are confident that we are starting from a solid base,
there is always room for improvement and we’re committed to
fully implementing all recommendations as soon as possible.
The Bank has already achieved a high level of alignment with
most of the recommendations across the customer-facing
channels. We expect the remaining work will be completed well
in advance of the 2020 industry deadline.
8.2 Banking Executive Accountability Regime
The Government has introduced a new Banking Executive
Accountability Regime (BEAR) to make Authorised Deposit-
Taking Institutions (ADIs) and their most senior executives and
directors accountable for meeting heightened standards of
behaviour in line with community expectations. The legislation
was passed by the Senate early in the year and imposes
accountability, remuneration, key personnel and notification
obligations on ADIs and persons in director and senior
executive roles (Accountable Persons). The commencement
of the measures for small and medium-sized banks is 1 July
2019.
A key requirement is that all ADIs must have a remuneration
policy that complies with the BEAR’s requirements. The policy
must include the ability for the variable remuneration of an
Accountable Person to be reduced if the ADI determines that
an executive has not met their conduct-related obligations
under BEAR. The reduction must be proportionate to the
severity of the breach, and the ADI must notify APRA of the
reduction in variable remuneration.
Unless the variable remuneration is awarded under a contract
entered into before the BEAR legislation takes effect, a portion
of the variable remuneration paid to Accountable Persons
must be deferred for at least four years. In respect to the
Bank, the amount of variable remuneration which must be
deferred for four years is the lesser of 40 percent of variable
remuneration, or 20 percent of total remuneration.
The Bank will make any remuneration framework adjustments
required to comply with BEAR and the related implementation
timeframes. The Governance & HR Committee is overseeing
the implementation of the changes needed to comply with
these requirements.
8.3 APRA review of executive
remuneration practices
Earlier this year APRA released an information paper
documenting the results of a review of industry remuneration
practices. The review focussed on whether policies and
practices for a sample of large institutions across the
banking, insurance and superannuation sectors were meeting
prudential framework objectives of encouraging behaviour that
promotes sound risk management and the long-term financial
stability of the institution. We did not participate in the review.
The review found that remuneration frameworks and practices
across the sample did not consistently and effectively
meet the above objectives. Although the institutions had
remuneration structures that met minimum prudential
requirements, the frameworks and practices often fell short of
the sound practices set out in prudential guidance and there
is considerable room for improvement in both the design and
implementation of executive remuneration structures.
APRA encourages boards and senior executives to consider the
review findings and take action to better align their remuneration
arrangements with the above objectives. APRA has also advised
it intends to strengthen the prudential requirements relating to
remuneration taking into account the introduction of the BEAR
as well as insights from international practice.
The information paper outlined a range of findings across
three key themes, being the design of risk management
performance measures, remuneration outcomes and
remuneration committee oversight. The Bank is reviewing of
its remuneration framework to identify any required changes
needed to align with APRA’s requirements. The review will also
incorporate changes to the prudential requirements once they
have been published by APRA.
42 Annual Financial Report 2018
Pleasingly, our remuneration framework already meets
a number of the expectations published by APRA. Some
examples are:
and have now been expanded to explicitly consider
performance against risk, compliance and audit matters
and material adverse customer outcomes.
1. Past practice has shown that individual STI awards
have been adjusted to reflect divisional and individual
performance, along with risk outcomes.
2. The maximum STI opportunity for the CRO is very modest
when compared to industry practice. Also, the CRO’s STI
component stands at 10 percent of total remuneration
compared to 20 percent for other executives.
3. While executive scorecards have an element of collective
accountability for the achievement of key financial
measures, they also include individual accountability for
performance at a business unit and individual level, as
well as meeting risk and compliance gateways.
4. The Board has absolute discretion under the
remuneration policy and current incentive plan rules,
subject to compliance with the law, to adjust the number
of deferred shares and performance rights, to zero where
appropriate. This discretion can be exercised at any time
during the vesting period or at the time vesting is due to
occur.
5. Annual bonus pool allocations are determined on the
basis of annual financial performance and risk measures.
The risk measures include risk adjusted return on capital
6. The Group does not have a practice of providing sign-on
payments. If such payments were to be contemplated, the
remuneration policy requires the payment to be approved
by the Board on recommendation by the Governance &
HR Committee. Also, the remuneration policy does not
provide for guaranteed bonuses.
There are still aspects of the remuneration framework which
can be more closely aligned with APRA’s expectations. For
example, the framework will be reviewed to introduce LTI
performance measures linked to the long-term financial
soundness or risk adjusted performance and to formally
engage the risk and audit committees, and Chief Risk Officer,
as part of the executive performance assessment process.
The deferral periods of variable remuneration will be reviewed
having regard to the objectives of these remuneration
components and the time horizon of risk.
The progress of the review, including proposed amendments
to the current remuneration policy and practices, is being
overseen by the Governance & HR Committee. The outcomes
of the review along with any necessary changes to the
framework will be disclosed in next year’s remuneration report.
Section 9: KMP statutory remuneration, equity and loan tables
9.1 Senior Executive statutory remuneration details
The following table sets out the statutory executive remuneration disclosures which have been prepared in accordance with
the Corporations Act 2001 and Australian Accounting Standards. No termination benefits were paid during the 2017 or 2018
financial years.
Short-term employee benefits
Cash
Salary 1
STI 2
Non-
monetary 3
Superan-
nuation
benefits 4
Other
long-term
benefits 5
Share-based payments 6
Performance
rights 7
Deferred
shares 8
Total
Perfor-
mance
related 11
$1,433,284 $250,000
$285 $20,049 $29,821
$281,121 $948,877 $2,963,437
$1,395,084 $160,000
$520 $19,616
($8,096)
$150,559 $488,945 $2,206,628
$576,079 $140,625
$17,043 $20,049 ($47,811)
$180,863 $203,423 $1,090,271
$545,945 $80,000
$16,038 $19,652 ($15,144)
$146,572 $184,624
$977,687
19%
15%
31%
24%
Executive
M Hirst
2018
2017
M Baker
2018
2017
T Corolis
2018 (part year)10
$177,016 $62,500
-
$7,224
$3,225
$21,129
$19,428
$290,522
29%
R Fennell
2018
2017
A Gartmann
2018
2017
$586,197 $156,250
$34,020 $20,049 ($19,834)
$180,863 $208,560 $1,166,105
$570,558 $100,000
$4,500 $19,616 $14,527
$149,364 $187,385 $1,045,950
$303,641 $80,000
$111 $20,049
$5,573
$59,108
$86,580
$555,062
$306,332 $40,000
$720 $19,616
$4,759
$37,572
$69,426
$478,425
31%
25%
18%
16%
Annual Financial Report 2018 43
Short-term employee benefits
Cash
Salary 1
STI 2
Non-
monetary 3
Superan-
nuation
benefits 4
Other
long-term
benefits 5
Share-based payments 6
Performance
rights 7
Deferred
shares 8
Total
Perfor-
mance
related 11
$276,402 $50,000
$41,520 $30,865 ($21,029)
$72,345
$71,036
$521,139
$295,489 $40,000
$24,252 $29,722 ($13,788)
$59,185
$69,426
$504,286
Executive
R Musgrove
2018
2017
T Piper
2018 (part year)9
$339,182
-
$8,798 $11,567
$8,033
$59,277
$47,920
$474,777
2017
B Speirs
2018
2017
S Thredgold
2018
2017
A Tullio
$523,845 $40,000
$15,250 $19,616 $13,991
$118,372 $144,647
$875,721
$350,229 $84,375
$6,500 $20,049
$8,957
$66,715
$89,149
$625,974
$322,931 $50,000
$6,500 $19,652
$8,495
$50,764
$69,426
$527,768
$357,794 $110,000
$5,000 $20,049
($3,284)
$72,345 $102,124
$664,028
$347,509 $80,000
$5,000 $19,652
($6,817)
$61,978
$69,426
$576,748
2018 (part year)9
$202,664
-
$14,449 $13,081
$4,070
$29,638
$47,387
$311,289
2017
A Twaits
$340,228 $50,000
$18,939 $19,616
$5,923
$59,185
$89,327
$583,218
23%
20%
12%
18%
26%
19%
31%
25%
14%
20%
2018 (part year)10
$171,035 $ 62,500
-
$8,275
$2,054
$7,803
-
$251,667
28%
A Watts
2018 (part year)9
$151,454
-
$7,882
$7,711
$3,135
$21,170
$13,689
$205,041
2017
2018
2017
$363,348 $33,333
$31,828 $19,616
$6,840
$61,978
$67,015
$583,958
$4,924,977 $996,250 $135,608 $199,017 ($27,090) $1,052,377 $1,838,173 $9,119,312
$5,011,269 $673,333 $123,547 $206,374 $10,690
$895,529 $1,439,647 $8,360,389
10%
18%
1 Cash salary amounts include the net movement in the executive’s annual leave accrual for the year.
2 These amounts represent STI cash awards to Executives for the respective financial year. The cash component is expected to be paid in October
2018. Refer also to footnote 8 below for discussion on the deferral of STI components.
3 “Non-monetary” relates to sacrifice components of executive salary such as motor vehicle costs.
4 Company superannuation contributions form part of the executive’s fixed base remuneration and are paid up to the statutory maximum
contributions base. Mr Musgrove also receives an additional contribution as part of an arrangement with former members of a defined benefit fund
that was amalgamated with an accumulation fund in 1994.
5 The amounts disclosed relate to movements in long service leave accruals.
6 In accordance with the requirements of Australian Accounting Standards, remuneration includes a proportion of the fair value of equity
compensation granted or outstanding during the year. The fair value of equity instruments is calculated as at the grant date and is progressively
allocated over the vesting period. The amount included as remuneration is not related to or indicative of the benefit (if any) that individual
executives may ultimately realise should the equity instruments vest. The fair value of performance rights as at the grant date has been
calculated under AASB 2 Share-based Payments applying a Black-Scholes-Merton valuation method incorporating a Monte Carlo simulation option
pricing model to estimate the probability of achieving the Total Shareholder Return hurdle and the number of performance rights that vest. The
assumptions underpinning these valuations are set out in Section 9.4.
7 The amounts included in the performance rights column represent the fair value of performance right grants to executives amortised over the
applicable vesting period. The current year amount for Mike Hirst represents the amortised fair value allocation for the performance right grants
made during the 2017 and 2018 financial years. The comparative amount represents the final amortised fair value allocation for the previous
performance right grant made in the 2017 financial year. The current year amounts for other executives represent the amortised fair value
allocation for the 2015, 2016, 2017 and 2018 performance right grants. The comparative amounts represent the amortised fair value allocation
for the 2014, 2015, 2016 and 2017 performance right grants.
8 The amounts included in the deferred share column comprise:
a. The fair value of deferred STI is amortised over a two-year deferral period. The deferred STI amounts for the 2018 financial year represent the
amortised fair value of the deferred STI grant for the 2017 financial year. There was no deferred STI grant for the 2016 financial year. The deferred
STI amounts for the comparative period represent the amortised fair value of the deferred STI grant made for the 2015 financial year.
b. The fair value of the deferred base pay grants amortised over a two-year deferral period. The deferred base pay amounts for the 2018 financial
year comprise the amortised fair value of the deferred base pay grants made in the 2017 and 2018 financial years. The comparative amounts
represent the amortised fair value of the deferred base pay grants made in the 2016 and 2017 financial years.
9 Mr Tim Piper and Ms Alexandra Tullio ceased as a KMP on 31 January 2018 and Mr Andrew Watts ceased as a KMP on 6 December 2017. The
remuneration details for these KMP have been pro-rated for the period as a KMP during the year.
10 The remuneration details for Mr Taso Corolis and Mr Andrew Twaits, who commenced as a KMP on 31 January 2018, reflect the period as a KMP.
11 The performance related percentage comprises cash bonus (STI) payments, the amortised fair value of performance right grants and the
amortised fair value of deferred STI components (which form part of the amount disclosed under the ‘Deferred shares’ column).
44 Annual Financial Report 2018
9.2 Executive equity instrument grants
The following table sets out the number and value of deferred share and performance right grants to executives for the year. It also
includes details of grants made in prior years that vested or were forfeited or lapsed. The remuneration amounts presented in the
below table have been calculated using the fair value of the equity instruments.
Executive
Equity Instrument
Grant Date
Granted 1
Units
Granted 2
$
Prior years’
awards
vested 3
Units
Prior years’
awards
vested 4,7
$
Forfeited
/ Lapsed
2,6
Units
Forfeited
/Lapsed
5, 6
$
Deferred Shares Base Pay
16.12.2016
-
-
76,219
933,683
M Hirst
Deferred Shares STI
12.12.2017
7,106
82,216
Deferred Shares Base Pay
12.12.2017
76,219
881,854
Performance Rights
12.12.2017
76,219
522,250
Performance Rights
10.12.2014
Deferred Shares Base Pay
16.12.2016
-
-
-
-
M Baker
Deferred Shares STI
12.12.2017
3,553
41,108
Deferred Shares Base Pay
12.12.2017
14,571
168,586
Performance Rights
12.12.2017
22,768
161,515
T Corolis
Performance Rights
10.12.2014
-
-
Deferred Shares Base Pay
24.04.2018
9,107
93,256
Performance Rights
12.12.2017
4,553
32,295
Performance Rights
24.04.2018
9,107
43,629
Performance Rights
10.12.2014
Deferred Shares Base Pay
16.12.2016
-
-
-
-
R Fennell
Deferred Shares STI
12.12.2017
4,441
51,383
Deferred Shares Base Pay
12.12.2017
14,571
168,586
Performance Rights
12.12.2017
22,768
161,515
-
-
-
-
-
-
-
-
16,094
197,152
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
16,094
197,152
-
-
-
-
-
-
Deferred Shares Base Pay
16.12.2016
-
-
6,437
78,853
A Gartmann
Deferred Shares STI
12.12.2017
1,776
20,548
Deferred Shares Base Pay
12.12.2017
6,375
73,759
Performance Rights
12.12.2017
9,107
64,608
R Musgrove
Performance Rights
10.12.2014
Deferred Shares Base Pay
16.12.2016
-
-
-
-
Deferred Shares Base Pay
12.12.2017
5,464
63,218
Performance Rights
12.12.2017
9,107
64,608
T Piper
Performance Rights
10.12.2014
Deferred Shares Base Pay
16.12.2016
-
-
-
-
-
-
-
-
-
-
-
-
6,437
78,853
-
-
-
-
-
-
-
-
-
-
-
-
-
-
20,358
112,580
-
-
-
-
-
-
-
-
4,071
22,513
-
-
-
-
-
-
20,358
112,580
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
8,143
45,031
-
-
-
-
-
-
16,286
90,062
13,412
164,297
-
-
Annual Financial Report 2018 45
Executive
Equity Instrument
Grant Date
Granted 1
Units
Granted 2
$
Prior years’
awards
vested 3
Units
Prior years’
awards
vested 4,7
$
Forfeited
/ Lapsed
2,6
Units
Forfeited
/Lapsed
5, 6
$
Performance Rights
10.12.2014
Deferred Shares Base Pay
16.12.2016
-
-
-
-
B Speirs
Deferred Shares STI
12.12.2017
2,220
25,685
Deferred Shares Base Pay
12.12.2017
6,375
73,759
Performance Rights
12.12.2017
9,107
64,608
Performance Rights
10.12.2014
Deferred Shares Base Pay
16.12.2016
-
-
-
-
S Thredgold
Deferred Shares STI
12.12.2017
3,553
41,108
Deferred Shares Base Pay
12.12.2017
7,285
84,287
Performance Rights
12.12.2017
9,107
64,608
Performance Rights
10.12.2014
Performance Rights
12.12.2017
Deferred Shares Base Pay
16.12.2016
-
-
-
-
-
-
Deferred Shares STI
12.12.2017
2,220
25,685
Deferred Shares Base Pay
12.12.2017
7,741
89,563
Performance Rights
12.12.2017
9,107
64,608
A Tullio
A Twaits
Performance Rights
24.04.2018
9,107
43,629
A Watts
Performance Rights
10.12.2014
Deferred Shares Base Pay
16.12.2016
-
-
-
-
-
-
4,071
22,513
6,437
78,853
-
-
-
-
-
-
-
-
6,437
78,853
-
-
-
-
-
-
-
-
-
-
7,510
91,998
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
8,143
45,031
-
-
-
-
-
-
-
-
8,143
45,031
9,107
64,608
-
-
-
-
3,870
44,776
-
-
-
-
8,143
45,031
5,364
65,709
-
-
1 The grants to Executives in FY2018 constituted 100% of the grants available for the year and were made on the terms described at Section 3.
2 The value of the performance right grants and deferred share grants is the fair value (refer Table 5). The minimum total value of the grants, if
the applicable performance and service conditions are not met, is nil. The future value of the rights is dependent on the achievement of the
performance hurdles and the share price at the time the performance rights vest. An estimate of the maximum possible total value in future
financial years is the fair value shown above.
3 The percentage of performance rights that vested during the year was nil as the TSR measure for these performance rights was either not met or
will be tested over future periods. The percentage of base pay deferred share grants and STI deferred share grants made in FY2016 that vested
during the year was 100%. The percentage of the deferred share base pay grant made in FY2017 that vested during the year was nil as the grant
will be tested in a future period.
4 The value of vested deferred shares is measured using the fair values applicable to the grant of deferred shares that vested. The applicable fair
values are presented at Section 9.4. As each deferred share represents one ordinary share in the Bank, the number of ordinary shares that will be
allocated is the same as the number of deferred shares that were granted.
5 The value of each instrument on the date it lapses or is forfeited is calculated using the fair value of the instrument. Performance rights and
deferred shares lapse where the applicable performance and service conditions are not satisfied.
6 The performance rights vest subject to performance and continued service over the applicable performance period. The exercise price for the
performance rights and deferred shares is nil. If performance rights do not vest at the end of the performance period, they lapse.
7 The Bank acquired the following securities on-market for the purpose of, and to satisfy the entitlements of holders of rights to acquire securities
granted under, the Bank’s Employee Salary Sacrifice, Deferred Share and Performance Share Plan:
a. Total number of ordinary shares purchased during the financial year: 171,439 ordinary shares (FY2017: 163,659 ordinary shares); and
b. Average price per ordinary share at which the securities were purchased: $11.25 per security (FY2017: $12.25 per security).
46 Annual Financial Report 2018
9.3 Movements in Senior Executive equity holdings
The details of equity holdings in the Bank held by executives (including their close family members or any entity they, or their close
family members, control, jointly control or significantly influence) are set out below.
Executive
Equity
Instrument
Number at
start of year
Number grant-
ed during the
year as
remuneration
Vested or
released
Lapsed or
expired
Net change
other
Number at
end of year
1, 2
Deferred shares
M Hirst
Ordinary shares
M Baker
Performance rights
Deferred shares
Ordinary shares
Preference shares
Performance rights
Deferred shares
T Corolis
Ordinary shares
Performance rights
Deferred shares
R Fennell
Ordinary shares
Performance rights
Deferred shares
A Gartmann
Ordinary shares
Performance rights
Deferred shares
R Musgrove
Ordinary shares
Performance rights
Deferred shares
T Piper
Ordinary shares
Performance rights
Deferred shares
B Speirs
Ordinary shares
Performance rights
Deferred shares
S Thredgold
Ordinary shares
Performance rights
Deferred shares
A Tullio
Ordinary shares
Performance rights
Deferred shares
A Twaits
Ordinary shares
Performance rights
Deferred shares
A Watts
Ordinary shares
Performance rights
76,219
639,470
76,219
16,094
319,540
800
67,294
-
11,361
13,457
16,094
86,862
67,294
6,437
4,827
17,165
6,437
32,205
26,917
13,412
52,558
53,835
6,437
4,827
22,845
6,437
31,578
26,917
7,510
7,365
26,917
-
1,810
-
5,364
52,020
26,917
83,325
-
76,219
18,124
-
-
22,768
9,107
-
13,660
19,012
-
22,768
8,151
-
9,107
5,464
-
9,107
-
-
-
8,595
-
9,107
10,838
-
9,107
9,961
-
9,107
-
-
9,107
-
-
-
-76,219
76,219
-
-16,094
16,094
-
-
-
-
-
-16,094
16,094
-
-
-
-
-
-
-20,358
-
-
-4,071
-
-
-
-20,358
-6,437
6,437
-
-6,437
6,437
-
-13,412
13,412
-
-
-
-
-
-8,143
-
-
-
-16,286
-6,437
6,437
-
-6,437
6,437
-
-7,510
7,510
-
-
-
-
-5,364
5,364
-
-
-
-4,071
-
-
-8,143
-3,870
-
-7,365
-17,250
-
-
-
-
-
-8,143
-
-
-
-
-
-
-
-
-96,471
-
-
17,745
-
-
-
369
-
-
48
-
-
-
-
-
-2,300
-
-
-
-
-
-4,827
-
-
-12,000
-
-
83,325
619,218
152,438
18,124
353,379
800
69,704
9,107
11,730
23,046
19,012
103,004
69,704
8,151
11,264
26,272
5,464
36,342
27,881
-
63,970
37,549
8,595
6,437
27,881
10,838
26,015
27,881
6,091
7,510
18,774
-
1,810
9,107
-
57,384
18,774
1 None of the equity holdings are held nominally.
2 None of the deferred shares or performance rights had vested and were exercisable at year-end.
Annual Financial Report 2018 47
9.4 Equity plan valuation inputs
Performance rights
The assumptions underlying the fair value of current performance right grants are as follows.
Equity Instrument
Grant date
Fair
value 1
Share
price $
Terms & Conditions for each Grant
Exer-
cise
price
Risk
free
interest
rate
Dividend
yield
Expected
volatility
Expected
life
Performance
period end /
expiry date 2
Performance Rights
Performance Rights
10.12.2014
$5.53 $12.62
17.12.2015
$4.92 $11.24
Performance Rights – Sleeve 1
16.12.2016
$10.63 $12.25
Performance Rights – Sleeve 2
16.12.2016
$7.29 $12.25
Performance Rights – Sleeve 3
16.12.2016
$7.29 $12.25
Performance Rights – Sleeve 1 (MD) 16.12.2016
$10.05 $12.25
Performance Rights – Sleeve 2 (MD) 16.12.2016
$6.98 $12.25
Performance Rights – Sleeve 3 (MD) 16.12.2016
$6.98 $12.25
Performance Rights – Sleeve 1
12.12.2017
$10.09 $11.64
Performance Rights – Sleeve 2
12.12.2017
$5.81 $11.64
Performance Rights – Sleeve 3
12.12.2017
$5.81 $11.64
Performance Rights – Sleeve 1 (MD) 12.12.2017
$9.54 $11.64
Performance Rights – Sleeve 2 (MD) 12.12.2017
$5.70 $11.64
Performance Rights – Sleeve 3 (MD) 12.12.2017
$5.70 $11.64
Performance Rights – Sleeve 1
24.04.2018
$9.06 $10.59
Performance Rights – Sleeve 2
24.04.2018
$2.96 $10.59
Performance Rights – Sleeve 3
24.04.2018
$2.96 $10.59
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2.31%
6.00%
2.18%
6.00%
1.93%
5.75%
1.93%
5.75%
1.93%
5.75%
2.10%
5.75%
2.10%
5.75%
2.10%
5.75%
18%
20%
20%
20%
20%
20%
20%
20%
4 years
30.06.2018
4 years
30.06.2019
3 years
30.06.2019
3 years
30.06.2019
3 years
30.06.2019
4 years
30.06.2020
4 years
30.06.2020
4 years
30.06.2020
1.97%
5.75%
22.50%
3 years
30.06.2020
1.97%
5.75%
22.50%
3 years
30.06.2020
1.97%
5.75%
22.50%
3 years
30.06.2020
2.09%
5.75%
22.50%
4 years
30.06.2021
2.09%
5.75%
22.50%
4 years
30.06.2021
2.09%
5.75%
22.50%
4 years
30.06.2021
2.28%
6.42%
24.70%
3 years
30.06.2020
2.28%
6.42%
24.70%
3 years
30.06.2020
2.28%
6.42%
24.70%
3 years
30.06.2020
1 The fair value is calculated as at grant date in accordance with AASB 2 Share-based Payments using an independent valuation.
2 The Board will test the performance condition as soon as practical after year end. Any performance rights that do not vest will lapse at 5.00pm on
the date the Board makes its decision on what performance rights vest or lapse.
Deferred Shares
The assumptions underlying the fair value of current deferred share grants are as follows.
Equity Instrument
Grant date
Issue price / Fair
value 1
Share price at grant
date
Restriction period
end / test date
Vest / Expiry
date
Terms & Conditions for each Grant
Deferred Shares Base Pay
16.12.2016
Deferred Shares Base Pay
12.12.2017
Deferred Shares STI
12.12.2017
Deferred Shares Base Pay
24.04.2018
$12.25
$11.57
$11.57
$10.24
$12.25
$11.64
$11.64
$10.59
30.06.2018
30.06.2018
30.06.2019
30.06.2019
30.06.2019
30.06.2019
30.06.2019
30.06.2019
1 The fair value of deferred share grants (for STI deferral and deferred base pay) is calculated using the volume weighted average closing price of
the Bank’s shares for the five-day period ending on the grant date.
48 Annual Financial Report 2018
9.5 Senior Executive employment terms
The remuneration and other terms of employment for executives are contained in formal employment contracts. The material terms of
the executive contracts at the date of this report are set out below.
Issue
Description
Applies to
What is the duration of the contracts?
On-going until notice is given by either party.
All Executives
What notice must be provided by a
Executive to end the contract without
cause? 2
What notice must be provided by the
Bank to end the contract without cause? 1
Between 6 and 12 months’ notice. No notice period required if
material change in duties or responsibilities.
All Executives
6 months’ notice or payment in lieu.2
M Baker, T Corolis and A Twaits
12 months’ notice or payment in lieu.2
All other Executives
What payments must be made by the
Bank for ending the contract without
cause? 1
Payment of gross salary in lieu of period of notice (including
payment of accrued / unused leave entitlements calculated to
end of relevant notice period).
What are notice and payment
requirements if the Bank ends the
contract for cause?
Termination for cause does not require a notice period.
Payment of pro-rata gross salary and benefits (including
payment of accrued / unused leave entitlements) is required
to date of termination.
All Executives
All Executives
Are there any post-employment restraints?
12 month non-competition and non-solicitation (employees,
customers and suppliers) restriction.
Managing Director
12 month non-solicitation (employees, customers and
suppliers) restriction.
Other Executives
1 In certain circumstances, such as a material diminution of responsibility, the Bank may be deemed to have ended the employment of an
executive and will be liable to pay a termination benefit as outlined at the row titled “What payments must be made by the Bank for ending the
contract without cause”.
2 A review of the executive employment contract was completed during the year having regard to market practice. Changes to the contract included
reducing the relevant notice period from 12 months to 6 months. The 12 month notice period for existing KMP’s has been grandfathered.
9.6 KMP loans and other transactions
Details on the aggregate loans provided to KMP and their related parties are as follows. The loans occur within a normal employee,
customer or supplier relationship on terms and conditions no more favourable than those that it is reasonable to expect the Bank
would have adopted if dealing at arms-length with an unrelated person.
Balance at
beginning of year 1
$’000
6,589
3,867
Non-executive Directors
2018
Executives
2018
Total Directors and Executives
2018
10,456
Interest
charged
$’000
Interest not
charged
Write-off
Balance at end
of year
$’000
$’000
$’000
Number at
year end
318
182
500
-
-
-
-
-
-
6,447
5,728
5
9
12,174
14
Annual Financial Report 2018 49
Details of KMP (including their related parties) with an aggregate of loans above $100,000 in the reporting period are as follows:
2018
Non-executive Directors
R Johanson
D Matthews
T Robinson
Executives
M Hirst
R Fennell
A Gartmann
R Musgrove
T Piper
S Thredgold
A Tullio
A Twaits
Balance at
beginning of year
Interest
charged
Interest not
charged
Write-off
Balance at end
of year
Highest owing
in period 2
$’000
$’000
$’000
$’000
$’000
$’000
1,227
4,313
1,000
993
566
-
334
485
745
694
-
58
215
44
31
29
16
14
24
17
27
18
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,179
4,247
1,009
94
595
1,506
279
475
709
706
1,286
4,392
1,005
1,402
595
1,519
357
485
754
738
1,324
1,305
1 Represents aggregate highest indebtedness of the KMP during the financial year. All other items in this table relate to the KMP and their related
parties.
This Directors’ Report is signed in accordance with a resolution of the Board of Directors.
Robert Johanson
Chairman
4 September 2018
Marnie Baker
Managing Director
50 Annual Financial Report 2018
Financial Statements
Treasury and Investments
18
19
20
21
22
23
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Derivative financial instruments
Financial instruments
Investment property
Operating Assets and Liabilities
24
25
26
27
28
Cash flow statement reconciliation
Cash and cash equivalents
Goodwill and other intangible assets
Other assets
Other payables
Other Disclosure Matters
29
30
31
32
33
34
35
36
37
38
Risk management
Subsidiaries and other controlled entities
Related party disclosures
Involvement with unconsolidated entities
Fiduciary activities
Provisions
Share based payment plans
Commitments and contingencies
Auditors’ remuneration
Events after balance sheet date
Primary Statements
Income statement
Statement of comprehensive income
Balance sheet
Statement of changes in equity
Cash flow statement
Basis of Preparation
1
2
Corporate information
Summary of significant accounting policies
Results for the Year
3
4
5
6
7
Profit
Income tax expense
Segment results
Earnings per ordinary share
Dividends
Lending
8
9
Loans and other receivables
Impairment of loans and advances
Funding and Capital Management
Deposits and notes payable
Preference shares
Subordinated debt
Securitisation and transferred assets
10
11
12
13
14
15
16
17
Standby arrangements & uncommitted credit facilities
Directors’ declaration
Capital management
Share capital
Independent Audit Report
Key Performance Indicators
Retained earnings and reserves
Additional information
Annual Financial Report 2018 51
Annual Financial Report 2018 51
Primary statements
Income statement
for the year ended 30 June 2018
Group
Bank
Note
2018
$m
2017
$m
2018
$m
2017
$m
Net interest income
Interest income
Interest expense
2,659.6
2,645.8
2,327.6
2,325.4
(1,354.4)
(1,432.2)
(1,149.9)
(1,241.6)
Total net interest income
3
1,305.2
1,213.6
1,177.7
1,083.8
Other revenue
Fees
Commissions
Other revenue
167.9
71.7
98.7
Total other revenue
3
338.3
172.2
72.7
151.0
395.9
152.7
157.1
18.4
47.8
21.4
59.1
218.9
237.6
Total income
Expenses
Credit expenses
Bad and doubtful debts recovered
1,643.5
1,609.5
1,396.6
1,321.4
(78.9)
8.3
(86.6)
14.8
(72.5)
(68.5)
6.4
6.0
Total credit expenses
3
(70.6)
(71.8)
(66.1)
(62.5)
Operating expenses
Staff and related costs
Occupancy costs
Amortisation and depreciation costs
Fees and commissions
Other operating expenses
Total other expenses
Profit before income tax expense
Income tax expense
Net profit for the year
Earnings per share (cents)
Basic
Diluted
52 Annual Financial Report 2018
(497.3)
(480.5)
(446.4)
(428.7)
(91.0)
(47.7)
(35.2)
(92.0)
(50.2)
(33.6)
(90.1)
(42.5)
(8.2)
(91.2)
(39.2)
(7.8)
(267.2)
(253.1)
(230.7)
(231.6)
(938.4)
(909.4)
(817.9)
(798.5)
634.5
628.3
512.6
460.4
(200.0)
(198.7)
(162.9)
(148.0)
434.5
429.6
349.7
312.4
89.9
81.2
90.9
82.9
3
4
6
6
Statement of comprehensive income
for the year ended 30 June 2018
Group
Bank
Note
2018
$m
2017
$m
2018
$m
2017
$m
Profit for the year
434.5
429.6
349.7
312.4
Items which may be reclassified subsequently to the profit
& loss:
Net gain/(loss) on available for sale - equity securities
Net gain on cash flow hedges taken to equity
Net unrealised (loss)/gain on available for sale -
debt securities
Transfer loss on sale of available for sale debt securities
Tax effect on items taken directly to or transferred from equity
Total items that may be reclassified to profit & loss
Items which will not be reclassified subsequently to the
profit & loss:
Actuarial gain on superannuation defined benefits plan
Revaluation of land and buildings
Tax effect on items taken directly to or transferred from equity
Total items that will not be reclassified to profit & loss
17
17
17
17
17
17
17
17
0.2
10.9
(0.1)
-
(3.3)
7.7
0.4
-
(0.1)
0.3
(1.6)
45.6
0.9
0.3
(13.6)
31.6
0.3
0.3
(0.2)
0.4
-
10.0
7.9
-
(5.4)
12.5
0.4
-
(0.1)
0.3
(1.7)
44.3
62.4
0.3
(31.6)
73.7
0.3
0.1
(0.1)
0.3
Total comprehensive income for the year
442.5
461.6
362.5
386.4
Total comprehensive income for the year attributable to:
Owners of the Company
442.5
461.6
362.5
386.4
Annual Financial Report 2018 53
Balance sheet
as at 30 June 2018
Assets
Cash and cash equivalents
Due from other financial institutions
Amounts receivable from controlled entities
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Derivatives
Net loans and other receivables
Investments accounted for using the equity method
Shares in controlled entities
Property, plant & equipment
Deferred tax assets
Investment property
Goodwill and other intangible assets
Other assets
Total Assets
Liabilities
Due to other financial institutions
Deposits
Notes payable
Derivatives
Loans payable to securitisation trusts
Income tax payable
Provisions
Deferred tax liabilities
Other payables
Preference shares
Subordinated debt
Total Liabilities
Net Assets
Equity
Share capital
Reserves
Retained earnings
Total Equity
54 Annual Financial Report 2018
Note
25
25
18
19
20
21
8
4
23
26
27
25
10
10
21
4
34
4
28
11
12
16
17
17
Group
Bank
2018
$m
1,137.4
283.0
-
2017
$m
996.6
277.8
-
4,499.5
5,657.6
469.0
413.2
29.7
382.0
378.7
37.8
2018
$m
836.8
295.8
21.1
4,499.5
5,490.6
49.5
220.2
2017
$m
822.2
278.1
5.8
5,657.9
5,178.4
65.8
142.0
61,601.8
60,776.6
56,148.7
55,611.2
8.9
-
69.9
117.0
735.7
8.5
-
77.8
110.8
666.3
7.8
585.2
65.8
112.4
7.5
570.2
73.0
108.0
-
-
1,650.0
1,663.8
424.7
381.2
1,558.3
1,481.1
1,567.4
1,329.5
71,439.8
71,415.5
71,372.8
71,417.0
352.5
328.4
346.7
328.0
59,529.5
59,294.1
55,528.9
55,738.6
3,544.8
3,958.4
59.0
-
54.1
-
77.6
34.8
-
51.5
136.6
130.9
448.8
880.9
709.2
-
8,097.9
8,134.5
21.5
130.8
126.6
532.3
830.1
708.7
51.5
132.1
90.3
563.6
880.9
699.2
21.5
127.2
65.9
582.1
830.1
698.7
65,819.5
65,989.9
66,445.2
66,604.2
5,620.3
5,425.6
4,927.6
4,812.8
4,523.3
4,448.7
4,523.3
4,448.7
121.1
975.9
112.3
864.6
122.2
282.1
110.1
254.0
5,620.3
5,425.6
4,927.6
4,812.8
Statement of changes in equity
for the year ended 30 June 2018
At 1 July 2017
Opening balance b/fwd
Comprehensive income
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Transactions with owners in their capacity as owners
Shares issued
Reduction in employee share ownership plan (ESOP) shares
Movement in operational risk reserve
Share based payment
Transfer from asset revaluation reserve
Equity dividends
At 30 June 2018
1 Refer to note 16 Share capital for further details
2 Refer to note 17 Retained earnings and reserves for further details
For the year ended 30 June 2017
At 1 July 2016
Opening balance b/fwd
Comprehensive income
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Transactions with owners in their capacity as owners
Shares issued
Share issue expenses
Reduction in employee share ownership plan (ESOP) shares
Movement in general reserve for credit losses (GRCL)
Share based payment
Equity dividends
At 30 June 2017
1 Refer to note 16 Share capital for further details
2 Refer to note 17 Retained earnings and reserves for further details
Group
Attributable to owners of Bendigo and Adelaide Bank Limited
Issued
ordinary
capital
$m
Other
issued
capital1
$m
Retained
earnings
$m
Reserves2
$m
Total
equity
$m
4,456.7
(8.0)
864.6
112.3
5,425.6
-
-
-
73.2
-
-
-
-
-
-
-
-
-
1.4
-
-
-
-
434.5
0.3
434.8
-
-
(1.5)
2.6
0.4
-
7.7
7.7
-
-
1.4
0.1
(0.4)
434.5
8.0
442.5
73.2
1.4
(0.1)
2.7
-
(325.0)
-
(325.0)
4,529.9
(6.6)
975.9
121.1
5,620.3
Group
Attributable to owners of Bendigo and Adelaide Bank Limited
Issued
ordinary
capital
$m
Other
issued
capital1
$m
Retained
earnings
$m
Reserves2
$m
Total
equity
$m
4,298.4
(10.2)
739.2
87.9
5,115.3
-
-
-
158.6
(0.3)
-
-
-
-
-
-
-
-
-
2.2
-
-
-
429.6
0.2
429.8
-
-
-
6.6
0.4
-
31.8
31.8
-
-
-
(6.6)
(0.8)
429.6
32.0
461.6
158.6
(0.3)
2.2
-
(0.4)
(311.4)
-
(311.4)
4,456.7
(8.0)
864.6
112.3
5,425.6
Annual Financial Report 2018 55
Statement of changes in equity (continued)
for the year ended 30 June 2018
At 1 July 2017
Opening balance b/fwd
Comprehensive income
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Transactions with owners in their capacity as owners
Shares issued
Reduction in employee share ownership plan (ESOP) shares
Share based payment
Transfer from asset revaluation reserve
Equity dividends
At 30 June 2018
1 Refer to note 16 Share capital for further details
2 Refer to note 17 Retained earnings and reserves for further details
For the year ended 30 June 2017
At 1 July 2016
Opening balance b/fwd
De-registered subsidiary company
Comprehensive income
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Transactions with owners in their capacity as owners
Shares issued
Reduction in employee share ownership plan (ESOP) shares
Reduction in employee share ownership plan (ESOP) shares
Movement in general reserve for credit losses (GRCL)
Share based payment
Equity dividends
At 30 June 2017
1 Refer to note 16 Share capital for further details
2 Refer to note 17 Retained earnings and reserves for further details
56 Annual Financial Report 2018
Bank
Attributable to owners of Bendigo and Adelaide Bank Limited
Issued
ordinary
capital
$m
Other
issued
capital1
$m
Retained
earnings
$m
Reserves2
$m
Total
equity
$m
4,456.7
(8.0)
254.0
110.1
4,812.8
-
-
-
73.2
-
-
-
-
-
-
-
-
1.4
-
-
-
349.7
0.3
350.0
-
-
2.6
0.5
-
12.5
12.5
-
-
0.1
(0.5)
349.7
12.8
362.5
73.2
1.4
2.7
-
(325.0)
-
(325.0)
4,529.9
(6.6)
282.1
122.2
4,927.6
Bank
Attributable to owners of Bendigo and Adelaide Bank Limited
Issued
ordinary
capital
$m
Other
issued
capital1
$m
Retained
earnings
$m
Reserves2
$m
Total
equity
$m
4,298.4
(10.2)
240.8
43.7
4,572.7
-
-
-
-
158.6
(0.3)
-
-
-
-
-
-
-
-
-
-
2.2
-
-
-
5.0
312.4
0.2
312.6
-
-
-
6.6
0.4
-
-
73.8
73.8
-
-
-
(6.6)
(0.8)
5.0
312.4
74.0
386.4
158.6
(0.3)
2.2
-
(0.4)
(311.4)
-
(311.4)
4,456.7
(8.0)
254.0
110.1
4,812.8
Cash flow statement
for the year ended 30 June 2018
Cash flows from operating activities
Group
Bank
Note
2018
$m
2017
$m
2018
$m
2017
$m
Interest and other items of a similar nature received
2,661.9
2,722.9
2,294.4
2,405.2
Interest and other costs of finance paid
(1,379.9)
(1,444.8)
(1,173.4)
(1,252.1)
Receipts from customers (excluding effective interest)
284.8
305.9
232.5
242.7
Payments to suppliers and employees
(998.4)
(841.2)
(1,023.9)
(610.4)
Dividends received
Income taxes paid
Cash flows from operating activities before changes in
operating assets and liabilities
(Increase)/decrease in operating assets
1.3
2.0
1.0
1.7
(175.2)
(196.4)
(192.9)
(155.4)
394.5
548.4
137.7
631.7
Net increase in balance of loans and other receivables
(904.1)
(3,606.4)
(549.8)
(4,609.0)
Net decrease in balance of investment securities
1,039.4
680.4
865.3
2,462.1
Increase/(decrease) in operating liabilities
Net increase/(decrease) in balance of deposits
235.4
1,719.2
(209.8)
1,450.1
Net (decrease)/increase in balance of notes payable
(413.6)
Net cash flows from/(used in) operating activities
24
351.6
Cash flows related to investing activities
Cash paid for purchases of property, plant and equipment
Cash proceeds from sale of property, plant and equipment
Cash paid for purchases of investment property
Cash proceeds from sale of investment property
Cash paid for purchases of intangible assets
Cash proceeds from sale of equity investments
Cash paid for purchases of equity investments
Proceeds from return of capital/dividend from JV partners
(15.4)
1.3
(59.0)
45.0
(2.9)
-
(0.1)
2.0
656.1
(2.3)
(11.6)
0.9
(50.2)
47.7
(1.3)
0.5
(4.4)
0.1
Net cash flows used in investing activities
(29.1)
(18.3)
-
-
243.4
(65.1)
(14.6)
1.3
-
-
(2.9)
-
(15.0)
2.0
(29.2)
(9.9)
1.8
-
-
-
-
(2.4)
0.5
(10.0)
Cash flows from financing activities
Proceeds from issue of ordinary/preference shares
Proceeds from issue of subordinated debt
Dividends paid
Repayment of ESOP shares
Payment of share issue costs
55.8
0.5
64.4
125.3
55.8
0.5
64.4
125.3
(251.8)
(217.2)
(251.8)
(217.2)
1.4
(6.5)
2.2
(0.3)
1.4
(6.5)
2.2
(0.3)
Net cash flows used in financing activities
(200.6)
(25.6)
(200.6)
(25.6)
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of period
121.9
946.0
Cash and cash equivalents at the end of period
25
1,067.9
(46.2)
992.2
946.0
13.6
772.3
785.9
(100.7)
873.0
772.3
Annual Financial Report 2018 57
Basis of preparation
This section describes the Group’s significant accounting policies that relate to the financial statements and notes of the
accounts. If an accounting policy relates to a particular note, the applicable policy is contained within the relevant note.
This section also shows new accounting standards, amendments and interpretations, and whether they are effective in 2018 or
later years. We explain how these changes are expected to impact the financial position and performance of the Group.
1 Corporate information
The financial report of Bendigo and Adelaide Bank Limited (the
Bank) and its controlled entities (the Group) for the year ended
30 June 2018 was authorised for issue in accordance with a
resolution of the directors on 4 September 2018.
Bendigo and Adelaide Bank Limited is a company limited by
shares incorporated in Australia whose shares are publicly
traded on the Australian Securities Exchange.
The domicile of the company is Australia.
The registered office of the company is:
The Bendigo Centre, 22 – 44 Bath Lane Bendigo, Victoria
2 Summary of significant accounting policies
Basis of preparation
Bendigo and Adelaide Bank Limited is a prescribed corporation
in terms of the Corporations Act 2001. Financial reports
prepared in compliance with the Banking Act are deemed to
comply with the accounts provisions of the Corporations Act
2001.
The financial report is a general purpose financial report
which has been prepared in accordance with the Banking
Act, Australian Accounting Standards, Corporations Act 2001
and the requirements of law so far as they are applicable to
Australian banking corporations, including the application of
ASIC Class Order 10/654 allowing the disclosure of parent
entity financial statements due to Australian Financial Services
Licensing obligations.
The financial report has been prepared in accordance with
the historical cost convention, except for certain assets and
liabilities where the application of fair value measurement is
required or allowed by relevant accounting standards.
Significant accounting policies
The Group’s significant accounting policies that relate to a
specific note are summarised within that note. Accounting
policies that affect the financial statements as a whole are set
out below.
Significant judgements and estimates
In the process of applying the Group’s accounting policies,
management has made a number of judgements, apart from
those involving estimations, which have significant effect on
the amounts recognised in the financial statements. These
judgements and estimates that affect the financial statements
are within the relevant note.
Basis of consolidation
The consolidated financial statements comprise the financial
statements of Bendigo and Adelaide Bank Limited and all
of its controlled entities (‘the Group’). Interests in joint
arrangements and associates are equity accounted and are
not part of the consolidated Group.
A controlled entity is any entity (including special purpose
entities) over which Bendigo and Adelaide Bank Limited has
the power to govern, directly or indirectly, decision-making in
relation to financial and operating policies, so as to obtain
benefits from their activities. The existence and effect of
potential voting rights that are currently exercisable or
convertible are considered when assessing whether the Group
controls another entity.
Controlled entities prepare financial reports for consolidation
in accordance with Group accounting policies. Adjustments are
made to bring into line any dissimilar accounting policies that
may exist. The financial statements of controlled entities are
prepared for the same reporting period as the parent company.
The amounts contained in the financial statements have been
rounded off under the option available to the Company under
ASIC Class Order 98/0100. The Company is an entity to which
the Class Order applies. The Class Order allows for rounding
to the nearest one hundred thousand dollars ($00,000).
All inter-company balances and transactions between entities
in the Group have been eliminated on consolidation. Where
a controlled entity has been sold or acquired during the year
its operating results have been included to the date control
ceased or from the date control was obtained.
Compliance with IFRS
The financial report complies with Australian Accounting
Standards and International Financial Reporting Standards
(IFRS).
Comparatives
Where necessary, comparatives have been reclassified and
repositioned for consistency with current year disclosures.
58 Annual Financial Report 2018
2 Summary of significant accounting policies (continued)
Foreign currency transactions and balances
Both the functional and presentation currency of Bendigo
and Adelaide Bank Limited and each of its subsidiaries is
Australian dollars (AUD). Transactions in foreign currencies are
initially recorded in the functional currency at the exchange
rates ruling on the date of the transaction.
All amounts are expressed in Australian currency and all
references to “$” are to Australian dollars unless otherwise
stated. Amounts receivable and payable in foreign currencies
at balance date are converted at the rates of exchange ruling
at that date. Exchange differences relating to amounts payable
and receivable in foreign currencies are brought to account
as exchange gains or losses in the income statement in the
financial year in which the exchange rates change.
Changes in accounting policies
The accounting policies are consistent with those applied in
the previous financial year.
Recently issued or amended standards not yet effective
Australian Accounting Standards that have recently been
issued or amended but are not yet effective have not been
adopted for the annual reporting period ended 30 June 2018.
In December 2014, the AASB issued the final version of
AASB 9 Financial Instruments that replaces AASB 139
Financial Instruments: Recognition and Measurement and all
previous versions of AASB 9. AASB 9 brings together all three
aspects of the accounting for financial instruments project:
classification and measurement, impairment and hedge
accounting. AASB 9 is effective from 1 July 2018. Except
for hedge accounting, retrospective application is required
but providing comparative information is not compulsory. For
hedge accounting, the requirements are generally applied
prospectively, with some limited exceptions.
The Group adopts the new standard from 1 July 2018 and will
not restate comparative information. Any financial impacts as
a result of adopting AASB 9 will be recognised in the opening
1 July 2018 retained earnings balance.
During 2017, the Group has managed an AASB 9 program that
brings together the subject matter experts on methodology,
data, modelling, risk and reporting. The Group has performed
an assessment of all financial instruments impacted by the
standard and developed appropriate impairment models to
support the calculation of the expected credit loss allowance.
Classification and Measurement
AASB 9 introduces a principles-based approach to the
classification of financial assets which is based on the Group’s
business model for managing the assets and the contractual
cash flow characteristics of the asset. Investments in debt
securities are measured at fair value through profit and loss
(FVTPL) unless certain conditions are met, and if met will then
be recorded at fair value through other comprehensive income
(FVOCI) or amortised cost. Gains and losses recorded in other
comprehensive income in relation to investments in debt
securities will be recognised.
In the profit and loss statement on disposal or reclassification.
The Group classifies its financial assets into the following
categories:
•
Those to be measured at fair value (either through other
comprehensive income, or through profit and loss); and
Those to be measured at amortised cost.
•
The classification depends on the Group’s business model
for managing the assets and the contractual cash flows
associated with the asset. All equity instruments are required
to be measured at FVTPL unless an election is made to
measure them at FVOCI. The Group has elected to measure
equity instruments which are not held for trading at FVOCI
and as such any gains and losses will be recognised through
OCI and there will be no recycling through the profit and loss
statement.
The classification and measurement of financial liabilities is
unchanged from the current treatment under AASB 139.
As a result of the application of the classification and
measurement requirements of AASB 9, we expect to make the
following reclassifications:
• Debt securities in the current available for sale (AFS)
portfolio of $203.0m will be reclassified to FVOCI and
$239.0m will be reclassified as amortised cost,
Equity securities in the current AFS portfolio of $28.0m
will be reclassified to FVOCI,
•
• Debt securities in the current held to maturity (HTM)
portfolio of $358.0m will be reclassified to FVOCI and
$55.0m will be reclassified as amortised cost.
Impairment
AASB 9 introduces an expected credit loss (ECL) impairment
model that differs significantly from the incurred loss
model under AASB 139 and is expected to result in earlier
recognition of credit losses.
Expected credit loss impairment model
All financial assets, except for financial assets classified or
designated as FVTPL and equity securities designated as
FVOCI are assessed for impairment using the credit loss
models.
Under AASB 9, the ECL allowance will be measured on each
reporting date according to a three stage expected credit loss
impairment model.
• Stage 1: 12 month ECL, if the credit risk of the asset at
the reporting date has not increased significantly since
initial recognition;
• Stage 2: lifetime ECL of assets which are considered
to have experienced a significant increase in credit risk.
Interest is accrued on the gross carrying value;
• Stage 3: lifetime ECL of assets which are considered
impaired. Interest is calculated on the net carrying value
which takes into account any impairment.
The determination of a significant increase in credit risk takes
into account many different factors and will vary by product
and business segment. The main factors considered in
making this determination are relative and absolute changes
in the 12-month probability of default since origination and
other criteria such as 30 days past due, hardship and watch-
Annual Financial Report 2018 59
2 Summary of significant accounting policies (continued)
list status. The Group uses reasonable and supportable
information that is relevant and available without undue cost.
•
The general reserve for credit losses will decrease to
$57.3m with a corresponding entry to retained earnings.
Model concepts applied by the Group in measuring ECL
ECL is a function of the probability of default (PD), exposure
at default (EAD), and loss given default (LGD), with the timing
of the loss also considered, and is estimated by incorporating
forward looking economic information and experienced credit
judgement to reflect factors not captured in the models.
PD – represents the likelihood that a loan will not be repaid
and will go into default either in a 12 month horizon for stage
1 or lifetime for stage 2 and stage 3.
EAD – based on historical data and represents an estimate of
the outstanding credit exposure at the time when default may
occur.
LGD – the amount that may not be recovered in the event of
default and is modelled using historic data and reasonable
and supportable information on future economic conditions,
where appropriate. LGD takes into account the amount of
collateral held and the probability of a cure.
For a small percentage of our portfolio that lacks detailed
historical information and/or loss experience, a simplified
measurement approach will be used that may differ to what
is described above. These approaches have been designed
to maximise the available information that is reliable and
supportable for each portfolio.
Forward looking information
AASB 9 requires the consideration of past events, current
market conditions and reasonable forward–looking information
about future economic conditions in calculating the ECL.
In assessing information about possible future economic
conditions the Group utilises multiple economic scenarios
representing a base case; mild deterioration, harsh, benign
and improved. The scenarios will be probability weighted
according to a best estimate of their relative likelihood based
on historical frequency and current trends and conditions. The
various economic scenarios and the modelled output will be
reviewed by management and assessed for completeness.
Management adjustments may be required where known or
expected risks and information have not been considered
within the models.
The impact of moving between 12 month and lifetime ECL and
the application of forward looking information has the potential
for provisions to be more volatile under AASB 9 than AASB
139.
Changes in the required ECL allowance, including the
movements between Stage 1, Stage 2 and Stage 3, will be
recorded in the profit or loss.
As a result of the application of the new ECL approach under
AASB 9, the following impacts are expected to the Group’s
provisions and retained earnings:
•
The collective provision will increase by $112.8m with a
corresponding entry to retained earnings. As a result of
this impact an associated deferred tax adjustment will
be made for $33.8m along with a corresponding entry to
retained earnings.
• Common Tier 1 Equity will reduce by 8bps, given the
movement in retained earnings associated with the above
changes.
Hedge Accounting
The Group determined that all existing hedge relationships
that are currently designated in effective hedging relationships
will continue to qualify for hedge accounting under AASB 9.
As AASB 9 does not change the general principles of how
an entity accounts for effective hedges, applying the hedging
requirements of AASB 9 will not have a significant impact on
the Group’s financial statements.
AASB 15 Revenue from Contracts with Customers replaces
AASB 118 Revenue and is effective for annual reporting
periods beginning on or after 1 January 2018. The core
principle of AASB 15 is that revenue is recognised in line with
the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.
The Group will adopt the standard on its mandatory effective
date, being 1 July 2018. The impacts of AASB 15 have been
assessed and it is not expected that the standard will have a
significant impact to the Group’s recognition of revenue.
AASB 16 Leases replaces AASB 117 Leases and is effective
for annual reporting periods beginning on or after 1 January
2019, hence the Group will adopt the standard from 1
July 2019. The new standard requires all leases to be
recognised on-balance sheet, except for leases with a term
of less than 12 months and leases of low-value assets.
Under the requirements of the new standard, a lessee is
required to recognise a right-of-use asset representing its
right to use the underlying leased asset along with a lease
liability representing its obligation to make lease payments.
The Group can choose either a full retrospective or a
modified retrospective transition approach with the standard
providing practical options and exemptions to ease the
costs of transition. Lessor accounting remains substantially
unchanged. The Group is currently assessing the impacts of
the adoption of this standard, however, the main impacts are
expected to be in relation to the properties the Group currently
accounts for as operating leases.
The following amendments to existing standards are not
expected to result in significant changes to the Group’s
accounting policies:
• 2016-5 Amendments to Australian Accounting Standards
– Classification and Measurement of Share-based Payment
Transactions [AASB 2];
• 2016-6 Amendments to Australian Accounting Standards
- Applying AASB 9 Financial Instruments with AASB 4
Insurance Contracts;
• 2017-1 Amendments to Australian Accounting Standards
– Transfers of Investment Property, Annual Improvements
2014-2016 Cycle and Other Amendments [AASB 1, AASB
12, AASB 128 and AASB 140];
60 Annual Financial Report 2018
2 Summary of significant accounting policies (continued)
• 2017-2 Amendments to Australian Accounting Standards –
Further Annual Improvements 2014-2016 Cycle [AASB 12
and AASB 5];
• 2017-3 Amendments to Australian Accounting Standards -
Clarifications to AASB 4;
• 2017-6 Amendments to Australian Accounting Standards -
Prepayment Features of Negative Compensation;
• 2017-7 Amendments to Australia Accounting Standards -
long term interests in Associates and Joint Ventures;
• 2018-1 Annual improvements to IFRS Standards 2015-
2017 Cycle;
• 2018-2 Amendments to Australian Accounting Standards -
Plan amendment, Curtailment or Settlement; and
• AASB Interpretation 23, and relevant amending standards -
Uncertainty over Income Tax Treatments.
Annual Financial Report 2018 61
Results for the year
This section outlines the results and performance of the Group in more detail. Further analysis has been provided for the
following key areas: revenue and expenses, income tax, segment results, earnings per share and dividends.
3 Profit
Net interest income
Interest income
Cash and cash equivalents
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Reverse repurchase agreements
Loans and other receivables
Total interest income
Interest expense
Deposits
Retail
Wholesale - domestic
Wholesale - offshore
Other borrowings
Notes payable
Repurchase agreements
Preference shares
Subordinated debt
Total interest expense
Total net interest income
Other revenue
Fees
Assets
Liabilities & other products
Trustee, management & other services
Total fee income
Commissions
Wealth solutions
Total commissions
Other
Foreign exchange income
Factoring products income
Trading book revaluation income
Homesafe Trust income
Other
Total other income
Total other revenue
62 Annual Financial Report 2018
Group
2018
$m
1.1
122.6
4.9
9.6
0.2
2017
$m
2.1
127.5
4.5
9.6
-
Bank
2018
$m
0.9
122.6
150.0
1.3
0.2
2017
$m
2.0
127.5
170.3
0.8
-
2,521.2
2,659.6
2,502.1
2,645.8
2,052.6
2,327.6
2,024.8
2,325.4
(951.7)
(191.8)
(10.5)
(1,032.0)
(204.3)
(10.1)
(122.4)
(109.1)
(7.9)
(34.9)
(35.2)
(7.9)
(36.0)
(32.8)
(870.6)
(191.8)
(10.5)
-
(7.5)
(34.9)
(34.6)
(950.9)
(204.7)
(10.1)
-
(7.7)
(36.0)
(32.2)
(1,354.4)
(1,432.2)
(1,149.9)
(1,241.6)
1,305.2
1,213.6
1,177.7
1,083.8
79.8
85.1
3.0
80.4
88.1
3.7
69.8
82.3
0.6
70.6
86.1
0.4
167.9
172.2
152.7
157.1
71.7
71.7
18.8
5.9
0.8
55.4
17.8
98.7
338.3
72.7
72.7
18.0
6.4
19.8
90.4
16.4
151.0
395.9
18.4
18.4
18.8
5.9
0.9
-
22.2
47.8
21.4
21.4
18.0
6.4
19.8
-
14.9
59.1
218.9
237.6
3 Profit (continued)
Recognition and measurement
Revenue is recognised at the fair value of the consideration
received or receivable, and meets the criteria below:
• it is probable that the economic benefits will flow to the
entity and
• the revenue can be reliably measured.
Loan origination and application fees are recognised as
components of the calculation of the effective interest method
and affect the interest recognised in relation to the originated
loans. The average life of originated loans is reviewed annually
to ensure the amortisation methodology for loan origination
fees is appropriate.
Dividend income is recognised by the Group when the right to
receive a payment is established.
Interest income and expense is calculated on an accruals
basis using the effective interest method. The effective
interest rate is the interest rate that exactly discounts
estimated future cash receipts through the expected life of the
financial instrument.
Fees and commissions charged for services provided or
received by the Group are recognised as they are provided.
Homesafe Trust income reflects the gains or losses arising
from changes in the fair value of investment property and are
recognised in the year in which they arise.
Expenses
Credit expenses
Specific provision
Collective provision
Bad debts written off
Bad debts recovered
Total credit expenses
Operating expenses
Staff and related costs
Salaries, wages and incentives
Superannuation contributions
Payroll tax
Other
Total staff and related costs
Occupancy costs
Operating lease rentals
Depreciation of leasehold improvements
Other
Total occupancy costs
Amortisation and depreciation
Amortisation of acquired intangibles
Amortisation of software intangibles
Depreciation of property, plant & equipment
Total amortisation and depreciation costs
Fees and commissions
Other operating expenses
Communications, postage and stationery
Computer systems and software costs
Advertising and promotion
Other product and services delivery costs
Other expenses
Total other operating expenses
Total other expenses
Group
2018
$m
(79.8)
4.5
(3.6)
8.3
(70.6)
2017
$m
(72.1)
0.7
(15.2)
14.8
(71.8)
Bank
2018
$m
2017
$m
(74.1)
(64.6)
3.3
(1.7)
6.4
0.4
(4.3)
6.0
(66.1)
(62.5)
(427.1)
(411.8)
(383.7)
(367.6)
(39.5)
(25.8)
(4.9)
(37.4)
(26.4)
(4.9)
(35.5)
(23.0)
(4.2)
(33.3)
(23.3)
(4.5)
(497.3)
(480.5)
(446.4)
(428.7)
(55.8)
(8.9)
(26.3)
(91.0)
(8.2)
(28.0)
(11.5)
(47.7)
(35.2)
(29.8)
(77.0)
(28.0)
(30.2)
(102.2)
(267.2)
(57.2)
(10.1)
(24.7)
(92.0)
(17.7)
(20.8)
(11.7)
(50.2)
(33.6)
(33.0)
(71.6)
(28.3)
(33.0)
(87.2)
(55.6)
(8.7)
(25.8)
(90.1)
(4.6)
(26.9)
(11.0)
(42.5)
(8.2)
(29.4)
(73.9)
(25.5)
(30.0)
(71.9)
(57.0)
(10.0)
(24.2)
(91.2)
(8.5)
(19.4)
(11.3)
(39.2)
(7.8)
(33.0)
(68.2)
(25.5)
(32.8)
(72.1)
(253.1)
(230.7)
(231.6)
(938.4)
(909.4)
(817.9)
(798.5)
Annual Financial Report 2018 63
3 Profit (continued)
Recognition and measurement
Occupancy costs
Operating expenses are recognised as the relevant service is
rendered, or once a liability is incurred.
Operating lease payments are recognised as an expense on a
straight line basis over the lease term.
Credit expenses are measured as the difference between the
carrying amount and the value of the estimated future cash
flows, discounted at the financial instruments original effective
interest rate. Refer to Note 9 Impairment of loans and
advances for more information on loan impairment.
Staff and related costs
Wage and salary costs are recognised over the period in
which the employees provide the service. Refer to Note 34
Provisions for more information relating to staff provisions.
Incentive payments are recognised to the extent that the Group
has a present obligation over the period that the employees
are required to work to qualify for the scheme. Refer to Note
35 Share based payment plans for further information on
share based payments.
Superannuation contributions are made to an employee
accumulation fund and expensed when they become payable.
The Group also operates a defined benefits scheme, the
membership of which is now closed.
Amortisation - refer to Note 26 Goodwill and other intangibles
for information on the amortisation of intangibles.
Goods and services tax (GST)
Revenues, expenses and assets are recognised net of the
amount of GST except:
• where the GST incurred on a purchase of goods and
services is not recoverable from the taxation authority, in
which case the GST is recognised as part of the cost of
acquisition of the asset or as part of the expense item as
applicable; and
receivables and payables are stated with the amount of
GST included.
•
The net amount of GST recoverable from or payable to
the taxation authority is included as part of receivables or
payables in the balance sheet. Cash flows are included in the
cash flow statement on a gross basis. The GST component of
cash flows arising from investing and financing activities, which
are recoverable from or payable to the taxation authority, are
classified as operating cash flows.
64 Annual Financial Report 2018
4 Income tax expense
Major components of income tax expense are:
Income statement
Current income tax
Current income tax charge
Franking credits
Adjustments in respect of current income tax of previous years
Deferred income tax
De-recognition of temporary differences
Adjustments in respect of deferred income tax of previous years
Relating to origination and reversal of temporary differences
Group
2018
$m
2017
$m
Bank
2018
$m
2017
$m
(217.6)
(182.3)
(161.0)
(195.6)
1.2
11.3
-
(10.0)
15.1
1.2
1.5
(0.1)
(1.8)
(17.2)
1.2
11.4
-
(10.1)
(4.4)
1.2
1.5
(0.1)
(1.7)
46.7
Income tax expense reported in the income statement
(200.0)
(198.7)
(162.9)
(148.0)
Statement of changes in equity
Deferred income tax related to items charged
or credited directly in equity
Net gain on cash flow hedge
Net loss/(gain) on available for sale investments
Net gain on revaluation of land and buildings
Actuarial gain on superannuation defined benefits plan
Income tax charged or credited in equity
(3.3)
(13.7)
-
-
(0.1)
(3.4)
0.1
(0.1)
(0.1)
(13.8)
(3.0)
(2.4)
-
(0.1)
(5.5)
(13.3)
(18.3)
-
(0.1)
(31.7)
A reconciliation between tax expense and the product of accounting profit before income tax
multiplied by the Group’s applicable income tax rate is as follows:
Accounting profit before income tax
634.5
628.3
512.6
460.4
income tax expense comprises amounts set aside as:
Provision attributable to current year at statutory rate, being:
Prima facie tax on accounting profit before tax
(190.3)
(188.5)
(153.8)
(138.1)
Under/(over) provision in prior years
Tax credits and adjustments
Expenditure not allowable for income tax purposes
Other non assessable income
Tax effect of tax credits and adjustments
De-recognition of temporary differences
Other
1.3
1.2
(11.3)
0.1
(0.4)
-
(0.6)
(0.3)
1.2
(11.6)
1.1
(0.4)
(0.1)
(0.1)
1.3
1.2
(10.8)
0.2
(0.4)
-
(0.6)
(0.2)
1.2
(11.1)
1.0
(0.4)
(0.1)
(0.3)
Income tax expense reported in the income statement
(200.0)
(198.7)
(162.9)
(148.0)
Deferred income tax
Deferred income tax at 30 June relates to the following:
Group
Bank
2018
2017
2018
2017
Gross deferred tax liabilities
Available for sale financial assets
Deferred expenses
Derivatives
Intangible assets on acquisition
Investment property
Other
$m
0.2
4.2
8.6
2.7
98.2
17.0
130.9
$m
0.2
2.4
11.0
5.1
88.7
19.2
126.6
$m
1.7
4.2
65.7
2.0
-
16.7
90.3
$m
(0.6)
2.4
42.3
3.4
-
18.4
65.9
Annual Financial Report 2018 65
4 Income tax expense (continued)
Deferred income tax (continued)
Gross deferred tax assets
Derivatives
Employee benefits
Provisions
Other
Tax payable attributable to members of
the tax consolidated group
Group
Bank
2018
2017
2018
2017
$m
9.5
33.2
57.1
17.2
$m
15.4
32.6
48.2
14.6
$m
15.3
32.2
53.8
11.1
$m
21.0
31.6
44.8
10.6
117.0
110.8
112.4
108.0
51.5
51.5
21.5
21.5
51.5
51.5
21.5
21.5
At 30 June 2018, there is no unrecognised deferred income
tax liability (2017: Nil) for taxes that would be payable on the
unremitted earnings of certain Group’s subsidiaries or joint
ventures, as the Group has no liability for additional taxation
should such amounts be remitted.
Deferred income tax assets and liabilities are measured at the
tax rates that are expected to apply to the year when the asset
is realised or the liability is settled, based on tax rates (and
tax laws) that have been enacted or substantively enacted at
the balance sheet date.
Recognition and measurement
Tax consolidation
Bendigo and Adelaide Bank Limited and its 100% owned
subsidiaries form the tax consolidated Group. Members of the
Group entered into a tax sharing agreement to allocate income
tax liabilities to the wholly-owned subsidiaries should the head
entity default on its tax payment obligations. At the balance
date, the possibility of default is remote. The head entity of
the tax consolidated Group is Bendigo and Adelaide Bank
Limited.
Members of the tax consolidated Group have entered into a
tax funding agreement. The tax funding agreement provides
for the allocation of current taxes to members of the tax
consolidated Group on a group allocation method based
on a notional stand alone calculation, while deferred taxes
are calculated by members of the tax consolidated Group in
accordance with AASB 112 Income Taxes.
Current taxes
The income tax for the period is the tax payable on the current
period’s taxable income based on the national income tax rate,
adjusted for changes in deferred tax assets and liabilities and
unused tax losses.
Deferred taxes
The Group has adopted the balance sheet liability method
of tax effect accounting, which focuses on the tax effects of
transactions and other events that affect amounts recognised
in either the balance sheet or a tax-based balance sheet.
Deferred tax assets and liabilities are recognised for
temporary differences, except where the deferred tax asset/
liability arises from the initial recognition of an asset or liability
in a transaction that is not a business combination and, at the
time of the transaction, affects neither the accounting profit
nor taxable profit or loss.
Current and deferred tax balances attributable to amounts
recognised directly in equity are also recognised directly in
equity.
Deferred income tax assets are recognised for all deductible
temporary differences, carry-forward of unused tax credits
and unused tax losses, to the extent that it is probable that
taxable profit will be available against which the deductible
temporary differences, and the carry-forward of unused tax
credits and unused tax losses can be utilised.
The carrying amount of deferred income tax assets is reviewed
at each balance sheet date and reduced to the extent that
it is no longer probable that sufficient taxable profit will
be available to allow all or part of the deferred income tax
asset to be utilised. Unrecognised deferred tax balances
are reviewed annually to determine whether they should be
recognised.
66 Annual Financial Report 2018
5 Segment results
An operating segment is a component of the Group that
engages in business activities from which it may earn revenues
and incur expenses. These operating results are regularly
reviewed by the Managing Director to make decisions about the
resourcing for each segment and to assess its performance.
The operating segments are identified according to the nature of
the products and services they provide. All reporting segments
represent an individual strategic business unit. Each unit offers
a different method of delivery, and/or different products and
services.
Segment assets and liabilities reflect the value of loans and
deposits directly managed by each operating segment. All other
assets and liabilities of the Group are managed centrally.
Segment reporting is consistent with the internal reporting
provided to the Managing Director and the executive
management team.
Changes to the internal organisational structure of the Group
can cause the Group’s operating segment results to change.
Where this occurs the corresponding segment information for
the previous financial year is restated. On 10 August 2018,
the Group announced an organisation restructure around our
Consumer, Business and Agribusiness customer groups. As
such during the 2019 financial year the operating segments will
be revised.
Types of products and services
Local connection
Contains all local distribution channels including branch &
community banking, business banking, Delphi Bank and
financial markets.
Partner connection
Contains all partner distribution channels including mortgage
brokers, mortgage managers, mortgage originators,
Alliance Partners, Homesafe, Leveraged, portfolio funding,
financial planning, wealth management, responsible entity
activities, other trustee and custodial services.
The partner connection segment is a combination of the third
party and wealth cash generating units.
Agribusiness
Includes the provision of banking services to agribusinesses in
rural and regional Australia. Rural Bank and Rural Finance are
included within the agribusiness segment.
Central functions
Functions not relating directly to a reportable operating
segment.
Accounting policies and inter-segment transactions
Measurement of segmental assets, liabilities, income and
expenses is in accordance with the Group’s accounting
policies. Segment results are determined by including all
revenue and expenses associated with each business.
Transactions between business segments are conducted at
arm’s length and are eliminated on consolidation.
Segment net interest income is recognised based on an
internally set funds transfer pricing policy, based on pre-
determined market rates of return on the assets and liabilities
of the segment.
Major customers
Revenues from no individual customer amount to greater than
10% of the Group’s revenue.
Geographic Information
The allocation of revenue and assets is based on the
geographic location of the customer. The Group operates in all
Australian states and territories, providing banking and other
financial services.
For the year ended 30 June 2018
Net interest income
Other income
Total segment income
Operating expenses
Credit expenses
Segment result (before tax expense)
Tax expense
Segment result (statutory basis)
Cash basis adjustments:
Specific income & expense items
Other specific items
Amortisation of intangibles
Segment result (cash basis)
Operating segments
Local
connection
Partner
connection
Agri-
business
Total
operating
segments
Central
functions
$m
823.9
172.4
996.3
$m
317.6
144.8
462.4
$m
$m
$m
163.7
1,305.2
-
1,305.2
8.8
326.0
172.5
1,631.2
12.3
12.3
338.3
1,643.5
Total
$m
(639.3)
(210.5)
(76.1)
(925.9)
(12.5)
(938.4)
(49.9)
307.1
(96.8)
210.3
1.2
-
2.0
(17.9)
234.0
(73.8)
160.2
(11.1)
11.3
2.6
213.5
163.0
(2.8)
93.6
(29.5)
64.1
3.5
-
1.2
68.8
(70.6)
634.7
(200.1)
434.6
(6.4)
11.3
5.8
-
(0.2)
0.1
(0.1)
(0.1)
-
-
(70.6)
634.5
(200.0)
434.5
(6.5)
11.3
5.8
445.3
(0.2)
445.1
Annual Financial Report 2018 67
5 Segment results (continued)
For the year ended 30 June 2017
Net interest income
Other income
Total segment income
Operating expenses
Credit expenses
Segment result (before tax expense)
Tax expense
Segment result (statutory basis)
Cash basis adjustments:
Specific income & expense items
Other specific items
Amortisation of intangibles
Operating segments
Local
connection
Partner
connection
Agri-
business
Total
operating
segments
Central
functions
Total
$m
$m
766.4
180.7
947.1
$m
283.2
182.7
465.9
$m
$m
$m
164.0
1,213.6
-
1,213.6
8.4
371.8
172.4
1,585.4
24.1
24.1
395.9
1,609.5
(628.7)
(190.8)
(79.1)
(898.6)
(10.8)
(909.4)
(33.0)
285.4
(90.0)
195.4
0.5
-
4.8
(34.6)
240.5
(75.8)
164.7
(45.0)
11.1
3.0
(4.2)
89.1
(28.1)
61.0
4.1
-
4.6
(71.8)
615.0
(193.9)
421.1
(40.4)
11.1
12.4
-
13.3
(4.8)
8.5
(71.8)
628.3
(198.7)
429.6
5.6
(34.8)
-
-
11.1
12.4
Segment result (cash basis)
200.7
133.8
69.7
404.2
14.1
418.3
Reportable segment assets
and liabilities
For the year ended 30 June 2018
Operating segments
Local
connection
Partner
connection
Agri-
business
Total
operating
segments
Central
functions
$m
$m
$m
$m
$m
Total
$m
Reportable segment assets
33,960.3
21,789.2
6,542.3
62,291.8
9,148.0
71,439.8
Reportable segment liabilities
43,041.7
5,025.9
4,235.5
52,303.1
9,971.6
62,274.7
For the year ended 30 June 2017
Reportable segment assets
33,433.5
21,526.4
6,295.4
61,255.3
10,160.2
71,415.5
Reportable segment liabilities
42,821.5
5,598.3
3,906.8
52,326.6
9,704.9
62,031.5
As at
June 2018
As at
June 2017
71,439.8
71,415.5
71,439.8
71,415.5
62,274.7
62,031.5
3,544.8
3,958.4
65,819.5
65,989.9
Total assets for operating segments
Total assets
Total liabilities for operating segments
Notes payable1
Total liabilities
1 Refer to Note 10 Deposits and notes payable for further details.
68 Annual Financial Report 2018
6 Earnings per ordinary share
Basic
Diluted
Cash basis
Group
2018
2017
Cents per share
Cents per share
89.9
81.2
92.1
The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:
Reconciliation of earnings used in the calculation of earnings per ordinary share
Net profit after tax
Total basic earnings
Earnings used in calculating basic earnings per ordinary share
Add back: dividends accrued and/or paid on dilutive preference shares
Total diluted earnings
Earnings used in calculating basic earnings per ordinary share
Add back: amortisation of acquired intangibles (after tax)
Add back: specific income and expense items (after tax)
Add back: Homesafe net realised income
Total cash earnings
Specific income and expense items after tax comprise:
Items included in interest income
Fair value adjustments - interest expense
Homesafe funding costs - unrealised
Total specific net interest income items
Items included in non interest income
Hedge ineffectiveness
Profit on sale of Estates business
Homesafe Trust - revaluation income
Total specific non interest income items
Items included in operating expenses
Integration costs
Loss on sale of Telco business
Impairment (charge)/reversal
Compensation costs
Legal costs
Litigation costs
Total specific operating expense items
Items included in income tax expense
Tax impacts relating to prior year impairment losses
Total specific income tax expense
Total specific items attributable to the Group
Homesafe realised income
Homesafe revaluation gain
Homesafe funding costs
Homesafe net realised income
$m
434.5
434.5
434.5
24.4
458.9
434.5
5.8
(6.5)
11.3
445.1
(0.8)
(12.0)
(12.8)
1.2
-
38.8
40.0
(5.3)
(1.2)
(0.4)
(0.9)
(1.1)
(11.8)
(20.7)
-
-
6.5
16.6
(5.3)
11.3
90.9
82.9
88.5
$m
429.6
429.6
429.6
25.2
454.8
429.6
12.4
(34.8)
11.1
418.3
(1.8)
(11.1)
(12.9)
(5.6)
2.7
63.3
60.4
(9.2)
-
1.0
-
-
(4.4)
(12.6)
(0.1)
(0.1)
34.8
16.8
(5.7)
11.1
Annual Financial Report 2018 69
6 Earnings per ordinary share (continued)
Weighted average number of ordinary shares
Weighted average number of ordinary shares (basic)
Effect of dilution - executive performance rights
Effect of dilution - preference shares
Weighted average number of ordinary shares (diluted)
Potentially dilutive instruments
The following instruments are potentially dilutive during the reporting period:
Preference shares
Executive performance rights
Subordinated Note (with non viability clause)
Group
2018
2017
No. of shares
No. of shares
483,352,983
472,415,559
1,202,975
841,381
80,399,710
75,639,421
564,955,668
548,896,361
Dilutive
2018
2017
Yes
Yes
No
Yes
Yes
No
Recognition and measurement
Basic EPS is calculated as net profit after tax, divided by the
weighted average number of ordinary shares.
Diluted EPS is calculated as net profit after tax, add back
dividends on dilutive preference shares, divided by the
weighted average number of ordinary shares and potential
dilutive ordinary shares.
Cash basis EPS is calculated as net profit after tax, adjusted
for acquired intangibles amortisation, specific income and
expense items and Homesafe net realised income, divided
by the weighted average number of ordinary shares. All
adjustments are net of tax.
Executive performance rights - classification of securities
Executive performance rights are treated as dilutive from the
date of issue and remain dilutive, so long as the performance
conditions are satisfied.
In the event of a performance condition not being satisfied, the
number of dilutive rights would be reduced to the number that
would have been issued if the end of the period was the end
of the contingency period.
Significant accounting judgments, estimates and
assumptions
Cash earnings
Cash earnings is an unaudited, non-IFRS financial measure.
It is considered by management to be a key indicator of the
underlying performance of the core business activities of the
Group. The basis for determining cash earnings is net profit
after tax, adjusted for specific items, acquired intangibles
amortisation and Homesafe net realised income. All
adjustments are net of tax.
Specific items
Specific items are those items that are deemed to be outside
of the Group’s core activities and hence these items are
not considered to be representative of the Group’s ongoing
financial performance.
70 Annual Financial Report 2018
7 Dividends
Dividends paid or proposed
Group
Bank
2018
2017
2018
2017
Ordinary shares
(ASX:BEN)
Date
paid
Cents
per
share
Total
amount
Date
paid
Cents
per
share
Total
amount
Date
paid
Cents
per
share
Total
amount
Date
paid
¢
$m
¢
$m
¢
$m
Cents
per
share
Total
amount
¢
$m
Dividends paid during the year:
Final dividend
Sept 2017
34.0 159.9 Sept 2016
34.0 155.1 Sept 2017
34.0 159.9 Sept 2016
34.0 155.1
Interim dividend Mar 2018
35.0 165.1 Mar 2017
34.0 156.3 Mar 2018
35.0 165.1 Mar 2017
34.0 156.3
69.0 325.0
68.0 311.4
69.0 325.0
68.0 311.4
Dividends proposed since the reporting date, but not recognised as a liability:
Final dividend
Sept 2018
35.0 166.0
Sept 2018
35.0 166.0
All dividends paid were fully franked at 30% (2017: 30%). Proposed dividends will be fully franked at 30% (2017: 30%) out of ex-
isting franking credits or out of franking credits arising from payment of income tax provided for in the financial statements for the
year ended 30 June 2018.
Group
Bank
2018
2017
2018
2017
Date
paid
Cents
per
share
Total
amount
Date
paid
Cents
per
share
Total
amount
Date
paid
Cents
per
share
Total
amount
Date
paid
¢
$m
¢
$m
¢
$m
Cents
per
share
Total
amount
¢
$m
Convertible preference shares (recorded as debt instruments) (ASX:BENPD) 1
Dividends paid during the year:
Dec 2017 240.41
6.5 Dec 2016 249.56
6.7 Dec 2017 240.41
6.5 Dec 2016 249.56
Jun 2017 244.33
6.6
Jun 2017 244.33
6.7
6.6
240.41
6.5
493.89
13.3
240.41
6.5
493.89
13.3
Convertible preference shares (CPS2) (recorded as debt instruments) (ASX:BENPE)
Dividends paid during the year:
Nov 2017 178.91
5.2 Nov 2016 187.73
5.5 Nov 2017 178.91
5.2 Nov 2016 187.73
May 2018 177.73
5.2 May 2017 180.85
5.3 May 2018 177.73
5.2 May 2017 180.85
5.5
5.3
356.64 10.4
368.58
10.8
356.64 10.4
368.58
10.8
Convertible preference shares (CPS3) (recorded as debt instruments) (ASX:BENPF)
Dividends paid during the year:
Dec 2017 205.31
5.8 Dec 2016 215.84
6.1 Dec 2017 205.31
5.8 Dec 2016 215.84
Jun 2018 207.68
5.9
Jun 2017 209.42
5.9
Jun 2018 207.68
5.9
Jun 2017 209.42
6.1
5.9
412.99 11.7
425.26
12.0
412.99 11.7
425.26
12.0
Converting preference shares (CPS4) (recorded as debt instruments) (ASX:BENPG) 2
Dividends paid during the year:
Mar 2018 95.10
Jun 2018 100.13
195.23
3.1
3.2
6.3
Mar 2018
95.10
Jun 2018 100.13
195.23
3.1
3.2
6.3
1 Convertible preference shares (CPS, ASX:BENPD) were redeemed in December 2017.
2 Converting preference shares (CPS 4, ASX:BENPG) were issued in December 2017. First dividend payment was made in March 2018.
Annual Financial Report 2018 71
7 Dividends (continued)
Dividend franking account
Balance of franking account as at the end of the financial year
Franking credits that will arise from the payment of income tax
provided for in the financial report
Impact of dividends proposed or declared before the financial report
was authorised for issue but not recognised as a distribution of
equity holders during the period
Closing balance
Group
June 2018
June 2017
$m
415.0
51.5
$m
392.7
18.8
(72.1)
(68.7)
394.4
342.8
Ordinary Share dividends paid
Dividends paid by cash or satisfied by the issue of shares under the dividend reinvestment plan during the year were as follows:
Paid in cash 1
Satisfied by issue of shares 2
Group
Bank
June 2018
June 2017
June 2018
June 2017
$m
251.8
73.2
325.0
$m
217.2
94.2
311.4
$m
251.8
73.2
325.0
$m
217.2
94.2
311.4
1 Refers to cash paid to shareholders who did not elect to participate in the dividend reinvestment plan.
2 Includes share issued to participating shareholders under the dividend reinvestment plan.
Dividend Reinvestment Plan
Bonus Share Scheme
The Dividend Reinvestment Plan provides shareholders with
the opportunity to convert their entitlement to a dividend to
new shares. The issue price of the shares is equal to the
volume weighted average share price of Bendigo and Adelaide
Bank shares traded on the Australian Securities Exchange
over the seven trading days commencing 6 September 2018.
Shares issued under this Plan rank equally with all other
ordinary shares.
The Bonus Share Scheme provides shareholders with the
opportunity to elect to receive a number of bonus shares
issued for no consideration instead of receiving a dividend.
The issue price of the shares is equal to the volume weighted
average share price of Bendigo and Adelaide Bank shares
traded on the Australian Securities Exchange over the seven
trading days commencing 6 September 2018. Shares issued
under this scheme rank equally with all other ordinary shares.
The last date for the receipt of an election notice for
participation in either the Dividend Reinvestment Plan
or Bonus Share Scheme for the 2018 final dividend is 5
September 2018.
72 Annual Financial Report 2018
Lending
In this section the focus is on the lending assets of the Group. Further information is provided on the loans and other
receivables and impairment relating to these financial assets.
8 Loans and other receivables
Loans and other receivables - investments
Note
Overdrafts
Credit cards
Term loans
Margin lending
Lease receivables
Factoring receivables
Other
Group
Bank
2018
$m
93.1
2017
$m
76.6
2018
$m
103.2
2017
$m
92.2
2,732.7
3,125.0
2,726.1
3,114.4
346.0
339.8
346.0
339.8
56,123.0
54,901.1
52,433.7
51,527.9
1,694.7
1,726.1
597.4
63.0
143.6
549.2
91.1
119.2
-
484.2
63.0
143.6
-
438.0
91.1
119.2
Gross loans and other receivables
61,793.5
60,928.1
56,299.8
55,722.6
Specific provision
Collective provision
Unearned income
9
9
(119.3)
(48.2)
(88.1)
(89.5)
(52.7)
(79.3)
(105.4)
(45.7)
(59.3)
(75.8)
(49.0)
(52.6)
Total provisions and unearned income
(255.6)
(221.5)
(210.4)
(177.4)
Deferred costs paid
63.9
70.0
59.3
66.0
Net loans and other receivables
61,601.8
60,776.6
56,148.7
55,611.2
Maturity analysis1
At call / overdrafts
Not longer than 3 months
Longer than 3 and not longer than 12 months
Longer than 1 and not longer than 5 years
Longer than 5 years
6,445.8
1,298.6
2,255.7
8,737.8
6,585.5
1,208.8
2,085.9
9,086.0
4,454.4
1,204.2
1,852.1
6,026.5
4,709.2
1,008.3
1,737.7
6,587.2
43,055.6
41,961.9
42,762.6
41,680.2
61,793.5
60,928.1
56,299.8
55,722.6
1 Balances exclude specific and collective provisions, unearned revenue, and deferred costs and are categorised by the contracted maturity date
of each loan facility.
Recognition and measurement
Loans and receivables are measured at amortised cost
using the effective interest method. The effective interest
rate calculation includes the contractual terms of the loan,
together with all fees, transaction costs and other premiums
or discounts.
Loans with renegotiated terms are accounted for in the same
manner taking account of any change to the terms of the loan.
Deferred costs include costs associated with the acquisition,
origination or securitisation of loan portfolios. These costs are
amortised through the income statement over the average life
of the loans in these portfolios.
All loans are subject to continuous management review to
assess whether there is any objective evidence that any loan
or group of loans is impaired.
Unearned income on the Group’s personal lending and leasing
portfolios is brought to account over the life of the contracts
on an actuarial basis.
Annual Financial Report 2018 73
9 Impairment of loans and advances
Summary of impaired financial assets
Impaired loans
Loans - without provisions
Loans - with provisions
Restructured loans
Less: specific provisions
Net impaired loans
Group
2018
$m
70.9
260.9
4.0
(118.3)
217.5
2017
$m
79.7
155.7
47.2
(88.5)
194.1
Bank
2018
$m
18.5
233.4
-
(104.4)
147.5
2017
$m
28.7
134.4
42.1
(74.8)
130.4
Net impaired loans % of net loans and other receivables
0.35%
0.32%
0.26%
0.23%
Portfolio facilities - past due 90 days, not well secured
Less: specific provisions
Net portfolio facilities
Loans past due 90 days
4.8
(1.0)
3.8
5.8
(1.0)
4.8
4.8
(1.0)
3.8
5.0
(1.0)
4.0
Accruing loans past due 90 days, with adequate security balance
493.0
519.0
387.8
439.6
Net fair value of properties acquired through the enforcement of
security
84.7
75.2
83.4
69.6
Group
Bank
Summary of provisions
Specific provision
Opening balance
Charged to income statement
Impaired debts written off applied to specific provision
Closing balance
Collective provision
Opening balance
Released to income statement
Closing balance
General reserve for credit losses (GRCL)
Opening balance
Released to equity
Closing balance
Total provisions and reserve
Ratios
Specific provision as % of gross loans
Total provisions and reserve as % of gross loans
Collective provision and general reserve for credit losses as a % of
risk-weighted assets
Provision coverage 1
2018
$m
89.5
79.8
(50.0)
119.3
52.7
(4.5)
48.2
140.3
-
140.3
307.8
0.19%
0.50%
0.49%
91.66%
2017
$m
125.3
72.1
(107.9)
89.5
53.4
(0.7)
52.7
146.9
(6.6)
140.3
282.5
0.15%
0.46%
0.51%
99.96%
1 Provision coverage is calculated as total provisions and reserve divided by total gross impaired assets.
2018
$m
75.8
74.2
(44.6)
105.4
49.0
(3.3)
45.7
121.7
-
121.7
272.8
2017
$m
87.0
64.6
(75.8)
75.8
49.4
(0.4)
49.0
128.3
(6.6)
121.7
246.5
74 Annual Financial Report 2018
9 Impairment of loans and advances (continued)
Recognition and measurement
A facility is classified as impaired regardless of whether it is
90 days or more past due (arrears) when there is doubt as to
whether the full amounts due (interest and principal) will be
achieved in a timely manner. This is the case even if the full
extent of the loss cannot be clearly determined.
Losses for impaired loans are recognised when there is
objective evidence that impairment of a loan, or portfolio of
loans, has occurred. Impairment losses that are calculated on
individual loans, or on groups of loans assessed collectively
are recorded in the income statement.
Impairment losses are calculated by discounting the expected
future cash flows of a loan, which includes expected future
receipts of contractual interest, at the loan’s original effective
interest rate, and comparing the resultant present value with
the loan’s current carrying amount.
Restructured loans
Restructured loans are facilities in which the original
contractual terms have been modified for reasons related to
thefinancial difficulties of the customer. Restructuring may
consist of reduction of interest, principal or other payments
legally due, or an extension in maturity.
Specific provision
A specific provision is recognised for all impaired loans when
there is reasonable doubt over the collectability of principal
and interest, in accordance with the loan agreement. All bad
debts are written off against the specific provision in the
period in which they are classified as unrecoverable.
The provision is determined by specific identification, or by
estimation of expected losses in relation to loan portfolios
where specific identification is impractical, based on historical
impairment experience for these portfolios. These portfolios
include unsecured credit cards, overdrawn accounts and
personal loans, where provisions are calculated based on
historical loss experience.
Collective provision
Individual loans which are not subject to specific provisioning
are grouped together according to their risk characteristics and
are then assessed for impairment. This assessment is based
on historical loss data and available information for assets
with similar credit risk characteristics (eg by industry sector,
loan grade or product). Adjustments to the collective provision
are recognised in the income statement.
General reserve for credit losses
The Australian Prudential Regulation Authority (APRA)
requires that banks maintain a general reserve for credit
losses to cover risks inherent in loan portfolios. In certain
circumstances the collective provision can be included in this
assessment. Movements in the general reserve for credit
losses are recognised as an appropriation from retained
earnings.
Annual Financial Report 2018 75
Funding and capital management
This section covers the funding and capital structure of the Group. Further information is provided for the following key areas:
Deposits and note payables, preference shares, subordinated debt, securitisation, share capital, retained earnings and reserves.
The Group’s capital management objectives are outlined in this section.
10 Deposits and notes payable
Group
Bank
Retail
At call
Term
Financial Markets
Total retail deposits
Wholesale
Domestic
Offshore
Total wholesale deposits
Total deposits
Deposits by geographic location
Victoria
New South Wales
Queensland
South Australia/Northern Territory
Western Australia
Australian Capital Territory
Tasmania
Overseas
Total deposits
2018
$m
2017
$m
2018
$m
2017
$m
24,050.7
23,100.6
22,372.2
21,595.1
20,066.9
20,441.3
19,390.9
19,884.2
6,496.9
7,201.2
4,868.7
5,727.9
50,614.5
50,743.1
46,631.8
47,207.2
8,696.7
7,968.6
8,678.8
7,949.0
218.3
582.4
218.3
582.4
8,915.0
8,551.0
8,897.1
8,531.4
59,529.5
59,294.1
55,528.9
55,738.6
26,478.3
25,724.7
25,499.0
25,032.9
15,191.3
15,252.4
13,867.6
13,963.3
5,449.1
5,361.6
3,696.0
1,790.4
1,179.6
383.2
5,425.8
5,940.5
3,552.9
1,810.6
1,080.9
506.3
5,028.8
4,777.2
3,218.0
1,728.0
1,029.1
381.2
5,088.7
5,286.9
3,124.0
1,745.6
994.3
502.9
59,529.5
59,294.1
55,528.9
55,738.6
Total notes payable
3,544.8
3,958.4
-
-
Recognition and measurement
Notes payable
Deposits
All deposits are initially recognised at cost, being the fair value
of the consideration received net of issue costs. Subsequent
to initial recognition, interest-bearing borrowings are measured
at amortised cost using the effective interest method.
Amortised cost includes any issue costs and any discount or
premium on settlement.
For liabilities carried at amortised cost, gains and losses are
recognised in the income statement when the liabilities are
de-recognised.
The Group conducts an asset securitisation program through
which it packages and sells asset-backed securities to
investors. Notes payable are predominately interest-bearing
financial instruments issued through these securitisation
programs. The notes are initially recognised at fair value
less directly attributable transaction costs and subsequently
measured at amortised cost using the effective interest
method. Interest is recognised in the income statement.
76 Annual Financial Report 2018
11 Preference shares
CPS (ASX Code:BENPD)1
Nov 2012: 2,688,703 fully paid $100 Convertible preference
shares
Unamortised issue costs
CPS2 (ASX Code:BENPE)
Oct 2014: 2,921,188 fully paid $100 Convertible preference
shares
Unamortised issue costs
CPS3 (ASX Code:BENPF)
June 2015: 2,822,108 fully paid $100 Convertible prefer-
ence shares
Unamortised issue costs
CPS4 (ASX Code:BENPB)2
December 2017: 3,216,145 fully paid $100 Converting
preference shares
Unamortised issue costs
Total preference shares
Group
2018
$m
-
-
-
2017
$m
268.9
(0.7)
268.2
Bank
2018
$m
-
-
-
2017
$m
268.9
(0.7)
268.2
292.1
292.1
292.1
292.1
(4.1)
288.0
(5.9)
286.2
(4.1)
288.0
(5.9)
286.2
282.2
282.2
282.2
282.2
(4.9)
277.3
(6.5)
275.7
(4.9)
277.3
(6.5)
275.7
321.6
(6.0)
315.6
880.9
-
-
-
830.1
321.6
(6.0)
315.6
880.9
-
-
-
830.1
1 BENPD - ASX code - Convertible Non-Cumulative Preference Shares (CPS). These shares were redeemed in December 2017.
2 Converting preference shares (CPS 4, ASX:BENPG) were issued in December 2017 and as such the first dividend payment occurred in March 2018.
Nature of shares
Recognition and measurement
Preference shares are long term in nature and are perpetual,
hence they do not have a fixed maturity date. However the
shares may be redeemed at the discretion of the Group for
a price per share on the redemption date. Any preference
shares not already converted will be converted into ordinary
shares on the mandatory conversion date specified in the
issue’s prospectus located at http://www.bendigoadelaide.
com.au/public/shareholders/prospectus.asp
If the Bank is unable to pay a dividend because of insufficient
profits, the dividend is non-cumulative. The preference shares
rank ahead of the ordinary shares in the event of liquidation.
Under certain circumstances ranking may be affected resulting
in shares being converted or written off.
In accordance with Australian Prudential Regulation Authority’s
Basel III capital adequacy framework, these preference shares
form part of the Group’s Additional Tier 1 capital.
These instruments are classified as debt within the balance
sheet and dividends to the holders are treated as interest
expense in the income statement.
Preference shares are initially recognised at cost, being
the fair value of the consideration received, less charges
associated with the issue of the instrument. They are
subsequently measured at amortised cost using the effective
interest method.
The shares carry a dividend which will be determined semi-
annually and payable half yearly in arrears. The dividend rate
will be the floating Bank Bill Rate plus the initial fixed margin,
adjusted for franking credits.
Annual Financial Report 2018 77
12 Subordinated debt
Subordinated debt
Maturity analysis
Longer than 1 and not longer than 5 years
Over 5 years
Recognition and measurement
Group
Bank
2018
$m
2017
$m
2018
$m
2017
$m
709.2
708.7
699.2
698.7
563.1
146.1
709.2
260.6
448.1
708.7
553.1
146.1
699.2
250.6
448.1
698.7
These instruments are classified as debt within the balance
sheet and the interest expense is recorded in the income
statement.
Subordinated debt instruments are initially recognised at cost,
being the fair value of the consideration received, less charges
associated with the issue of the instrument.
They are subsequently measured at amortised cost using the
effective interest method.
Amortised cost is calculated by taking into account any
discount or premium on acquisition over the period to maturity.
Gains and losses are recognised in profit or loss when the
liabilities are derecognised.
78 Annual Financial Report 2018
13 Securitisation and transferred assets
Repurchase agreements
Securitisation
Group
Carrying amount of transferred assets ¹
Carrying amount of associated liabilities 2
Fair value of transferred assets
Fair value of associated liabilities
Net Position
Bank
Carrying amount of transferred assets
Carrying amount of associated liabilities 3
Fair value of transferred assets
Fair value of associated liabilities
Net Position
2018
$m
523.1
523.1
2017
$m
521.8
521.8
2018
$m
3,493.2
3,521.3
3,488.0
3,537.9
2017
$m
3,902.1
3,934.5
3,896.4
3,946.9
(49.9)
(50.5)
Repurchase agreements
Securitisation
2018
$m
505.1
505.1
2017
$m
503.5
503.5
2018
$m
8,097.9
8,390.5
8,086.8
8,410.2
2017
$m
8,134.5
8,397.5
8,113.5
8,407.1
(323.4)
(293.6)
1 Represents the carrying value of the loans transferred to the trust.
2 Securitisation liabilities of the Group include RMBS notes issued by the SPEs and held by external parties.
3 Securitisation liabilities of the Bank include borrowings from SPEs including the SPEs that issue internally held notes for repurchase with central banks,
recognised on transfer of residential mortgages by the Bank.
Securitisation programs
Consolidation
The Group uses special purpose entities (SPEs) to securitise
customer loans and advances that it has originated, in order
to source funding, and/or for capital efficiency purposes.
The loans are transferred by the Group to the SPE’s, which in
turn issue debt to investors. This transfer does not give rise
to the de-recognition of those financial assets for the Group.
The Group holds income and capital units in the trusts which
entitle the Group to any residual income of the SPE after all
payments to investors and costs of the program have been
met. Trust investors have no recourse against the Group,
if cash flows from the securitised loans are inadequate to
service the trust obligations. Liabilities associated with the
SPE’s are accounted for on an amortised basis using the
effective interest method.
Repurchase agreements
Securities sold under agreement to repurchase are retained
on the balance sheet when the majority of the risks and
rewards of ownership remain with the Group. The counterparty
liability is included separately on the balance sheet when cash
consideration is received.
SPEs are consolidated by the Group where the Group has
the power to govern directly or indirectly decision making in
relation to financial and operational policies, and receives the
majority of the residual income or is exposed to the majority of
the residual risks associated with the SPEs.
The Group enters into interest rate swaps and liquidity
facilities with the trusts which are all at arm’s length to the
SPEs.
Securitised and sold loans
The Group securitised loans totalling $746.6 million (2017:
$1,939.4 million) during the financial year. The Group invests
in some of its own securitisation programs by holding A and
B class notes equivalent to $5,338.2 million as at 30 June
2018 (2017: $4,960.1 million).
Annual Financial Report 2018 79
14 Standby arrangements
and uncommitted credit facilities
Amount available:
Offshore borrowing facility
Domestic note program
Amount utilised:
Offshore borrowing facility
Domestic note program
Amount not utilised:
Offshore borrowing facility
Domestic note program
Nature and purpose
The Group utilises debt facilities which include both domestic
and offshore and both short and long term arrangements.
The domestic funding facilities include floating rate notes.
The notes are unsubordinated and unsecured. The coupon
payable on the notes are both fixed and floating. The floating
rate notes are issued at BBSW plus a margin with coupon
payments made quarterly.
The offshore funding facilities include Euro medium term
notes and Euro commercial paper. The Euro commercial
paper programmes are utilised to satisfy short term funding
requirements. They represent unsubordinated and unsecured
obligations.
15 Capital management
Bendigo and Adelaide Bank Limited’s key capital management
objectives are to:
• Maintain a sufficient level of capital above the regulatory
minimum to provide a buffer against loss arising from
unanticipated events, and allow the Group to continue as
a going concern;
• Optimise the level and use of capital resources to
enhance shareholder value through maximising financial
performance; and
Ensure that capital management is closely aligned with
the Group’s business and strategic objectives.
•
The Group manages capital adequacy according to the
framework provided by the Australian Prudential Regulation
Authority (APRA) Standards.
Capital adequacy is measured at two levels:
•
Level 1 includes Bendigo and Adelaide Bank Limited and
certain controlled entities that meet the APRA definition
of extended licensed entities; and
Level 2 consists of the consolidated Group, excluding
non-controlled subsidiaries and subsidiaries involved in
insurance, funds management, non-financial operations
and special purpose vehicles.
•
APRA determines minimum prudential capital ratios (eligible
capital as a percentage of total risk-weighted assets) that
must be held by all authorised deposit-taking institutions.
80 Annual Financial Report 2018
Group
Bank
2018
$m
2017
$m
2018
$m
2017
$m
10,887.5
10,866.2
10,887.5
10,866.2
6,000.0
6,000.0
5,000.0
5,000.0
216.2
583.2
216.2
583.2
3,795.0
3,416.4
3,785.0
3,405.0
10,671.3
10,283.0
10,671.3
10,283.0
2,205.0
2,583.6
1,215.0
1,595.0
The funding is issued in both Australian and foreign
denominations. The instruments may be issued at a discount,
or bear interest on a fixed or floating rate basis.
Recognition and measurement
Funding instruments that are issued in currencies other than
AUD are accounted for at amortised cost. These transactions
are restated to AUD equivalents each month with adjustments
taken directly to income. Funding instruments that have been
utilised appear in Note 10 Deposits and notes payable.
Accordingly, Bendigo and Adelaide Bank Limited is required to
maintain a minimum prudential capital ratio at both Level 1
and Level 2 as determined by APRA. As part of the Group’s
capital management process, the Board considers the Group’s
strategy, financial performance objectives, credit ratings and
other factors relating to the efficient management of capital
in setting target ratios of capital above the regulatory required
levels. These processes are formalised within the Group’s
Internal Capital Adequacy Assessment Process (ICAAP).
Regulatory capital is divided into Common Equity Tier 1, Tier 1
and Tier 2 capital.
Common Equity Tier 1 capital primarily consists of shareholders
equity less goodwill and other prescribed adjustments.
Tier 1 capital is comprised of Common Equity Tier 1 plus other
highly ranked capital instruments acceptable to APRA.
Tier 2 capital is comprised primarily of subordinated debt
instruments acceptable to APRA.
Total capital is the aggregate of Tier 1 and Tier 2 capital. The
Group has adopted the Standardised Approach to credit risk,
operational risk and market risk, which requires the Group to
determine capital requirements based on standards set by APRA.
The Group has satisfied the minimum capital requirements at
Levels 1 and 2 throughout the current financial year.
16 Share capital
Issued and paid up capital
Ordinary shares (ASX Code: BEN) fully paid - 486,418,481
(2017: 479,206,464)
Group
Bank
2018
$m
2017
$m
2018
$m
2017
$m
4,529.9
4,456.7
4,529.9
4,456.7
Employee Share Ownership Plan
(6.6)
(8.0)
(6.6)
(8.0)
4,523.3
4,448.7
4,523.3
4,448.7
Movements in ordinary shares on issue
Opening balance 1 July - 479,206,464 (2017: 463,762,656)
4,456.7
4,298.4
4,456.7
4,298.4
Shares issued under:
Bonus share scheme - 266,098 @ $11.39, 396,330 @ $10.70
(2017: 436,024 @ 11.46; 253,203 @ $10.04)
Dividend reinvestment plan - 4,390,045 @ $11.39;
2,159,544 @ $10.70
(2017: 4,212,626 @ $11.46; 4,568,195 @ $10.04)
Share purchase plan - Nil (2017: 5,769,074 @ $10.75)
Employee share plan - Nil (2017: 204,686 @ $11.94)
Share issue costs
-
-
-
-
73.2
-
-
-
94.2
62.0
2.4
(0.3)
73.2
-
-
-
94.2
62.0
2.4
(0.3)
Closing balance 30 June - 486,418,481 (2017: 479,206,464)
4,529.9
4,456.7
4,529.9
4,456.7
Movements in Employee Share Ownership Plan
Opening balance
Reduction in Employee Share Ownership Plan
Closing balance
(8.0)
1.4
(6.6)
(10.2)
2.2
(8.0)
(8.0)
1.4
(6.6)
(10.2)
2.2
(8.0)
Total issued and paid up capital
4,523.3
4,448.7
4,523.3
4,448.7
Nature of issued capital
Ordinary shares (ASX code: BEN)
Ordinary shares are fully-paid and have no par value. They
carry one vote per share and the right to dividends.
Recognition and measurement
Ordinary shares are classified as equity. Issued ordinary
capital is recognised at the fair value of the consideration
received net of transaction costs (net of any tax benefit).
Dividends are recognised as a distribution from equity in the
year that they are declared.
Employee Share Ownership Plan is the value of loans
outstanding in relation to shares issued to employees under
this plan and effectively represents the unpaid portion of the
issued shares.
Annual Financial Report 2018 81
17 Retained earning and reserves
Retained earnings
Movements
Opening balance
Profit for the year
Share based payment
Operational risk reserve
Movements in general reserve for credit losses
Transfer from asset revaluation reserve
Dividends
Deregistration of subsidiary company
Defined benefits actuarial adjustment
Tax effect of defined benefits actuarial adjustment
Closing balance
Reserve movements
Employee benefits reserve
Opening balance
Net decrease in reserve
Closing balance
Asset revaluation reserve - property
Opening balance
Transfer asset revaluation reserve to retained earnings
Tax effect of movement in asset revaluation reserve
Net revaluation increments
Tax effect of net revaluation increments
Closing balance
Asset revaluation reserve - available for sale equity securities
Opening balance
Revaluation increments/(decrements)
Tax effect of revaluation increments/(decrements)
Closing balance
Asset revaluation reserve - available for sale debt securities
Opening balance
Net unrealised gain/(loss)
Transfer to income on sale
Tax effect of net unrealised gains/(losses)
Closing balance
Operational risk reserve
Opening balance
Movement operational risk reserve
Operational risk event applied to reserve
Closing balance
82 Annual Financial Report 2018
Group
Bank
2018
$m
864.6
434.5
2.6
(1.5)
-
0.4
2017
$m
739.2
429.6
0.4
-
6.6
-
2018
$m
254.0
349.7
2.6
-
-
0.5
2017
$m
240.8
312.4
0.4
-
6.6
-
(325.0)
(311.4)
(325.0)
(311.4)
-
0.4
(0.1)
975.9
-
0.3
(0.1)
864.6
9.5
0.1
9.6
1.5
(0.6)
0.2
-
-
1.1
0.4
0.2
(0.1)
0.5
(0.1)
(0.1)
-
0.1
(0.1)
1.8
1.5
(0.1)
3.2
10.3
(0.8)
9.5
1.3
-
-
0.3
(0.1)
1.5
1.5
(1.6)
0.5
0.4
(0.9)
0.9
0.3
(0.4)
(0.1)
1.8
-
-
1.8
-
0.4
(0.1)
282.1
9.5
0.1
9.6
0.5
(0.6)
0.1
-
-
-
-
-
-
-
(1.5)
7.9
-
(2.4)
4.0
-
-
-
-
5.0
0.3
(0.1)
254.0
10.3
(0.8)
9.5
0.4
-
-
0.1
-
0.5
1.2
(1.7)
0.5
-
(45.4)
62.4
0.3
(18.8)
(1.5)
-
-
-
-
17 Retained earning and reserves (continued)
Reserve movements (continued)
Cash flow hedge reserve
Opening balance
Changes due to mark to market
Tax effect of changes due to mark to market
Closing balance
General reserve for credit losses (GRCL)
Opening balance
Increase/(decrease) in GRCL
Closing balance
Acquisition reserve
Opening balance
Closing balance
Total reserves
Group
Bank
2018
$m
(20.7)
10.9
(3.3)
(13.1)
140.3
-
140.3
(20.4)
(20.4)
2017
$m
(52.6)
45.6
(13.7)
(20.7)
146.9
(6.6)
140.3
(20.4)
(20.4)
2018
$m
(20.1)
10.0
(3.0)
(13.1)
121.7
-
121.7
-
-
2017
$m
(51.1)
44.3
(13.3)
(20.1)
128.3
(6.6)
121.7
-
-
121.1
112.3
122.2
110.1
Nature and purpose of reserves
Employee benefits reserve
The reserve records the value of equities issued to non-
executive employees under the Employee Share Ownership Plan
and the value of deferred shares and rights granted to Executive
employees under the Employee Salary Sacrifice, Deferred Share
and Performance Share Plan. Further details regarding these
employee equity plans are disclosed within Note 35 Share
based payment plans.
Asset revaluation reserve - property
The reserve records revaluation adjustments to the Group’s
property assets.
Asset revaluation reserve - available for sale - equity investments
and debt securities
The reserve records fair value changes on available for sale
assets.
Operational risk reserve
The reserve is required to meet Sandhurst Trustees Limited
licence requirements.
Cash flow hedge reserve
The reserve records the portion of gain or loss on the
derivatives that are determined to be in an effective cash flow
hedge relationship.
General reserve for credit losses
APRA Prudential standard, APS 220 Credit Quality, requires a
reserve to be held to recognise estimated future credit losses
which may arise over the life of the Group’s lending portfolio.
Acquisition reserve
The reserve records the difference between the carrying value
of the non-controlling interest and the consideration paid to
acquire the remaining interest of the non-controlling interest.
Annual Financial Report 2018 83
Treasury and investments
This section covers the financial instruments held by the Group including: financial instruments, derivatives, investments
accounted for using the equity method (joint arrangements and associates) and investment property. This section outlines how
the fair value of financial instruments is determined and the associated methodology.
Classification of financial instruments
Financial instruments are classified into one of five categories,
which determine the accounting treatment.
The classification depends on the purpose for which the
instruments were acquired. Designation is re-evaluated
at each financial year end but there are restrictions on
reclassifying to other categories.
18 Financial assets held for trading
Discount securities
Floating rate notes
Government securities
Total financial assets held for trading
Maturity analysis
Not longer than 3 months
Loans and receivables (refer Lending Section)
The classifications are:
•
• Held for trading
•
Available for sale
• Held to maturity
• Non-trading liabilities (refer Treasury and Funding Section)
Group
2018
$m
2017
$m
Bank
2018
$m
2017
$m
1,347.5
2,126.0
1,347.5
2,126.3
709.5
2,442.5
4,499.5
232.3
3,299.3
5,657.6
709.5
2,442.5
4,499.5
232.3
3,299.3
5,657.9
1,768.3
2,092.7
1,768.3
2,092.7
Longer than 3 and not longer than 12 months
545.8
496.7
545.8
496.7
Longer than 1 and not longer than 5 years
1,798.4
2,398.2
1,798.4
2,398.2
Over 5 years
387.0
670.0
387.0
670.3
4,499.5
5,657.6
4,499.5
5,657.9
Recognition and measurement
Financial instruments are classified as held for trading if
they are acquired for the purpose of selling or repurchasing
in the near term. These financial instruments are measured
at fair value with gains and losses recognised in the income
statement. Fair value measurement is outlined in Note 22
Financial instruments.
84 Annual Financial Report 2018
19 Financial assets available for sale
Debt securities
Negotiable certificates of deposit
Mortgage backed securities
Security deposits
Securitisation notes
Liquidity collateral
Total financial assets available for sale - debt
Equity investments
Listed share investments
Unlisted share investments
Total financial assets available for sale - equity
Group
2018
$m
159.5
43.2
67.0
-
171.6
441.3
0.1
27.6
27.7
2017
$m
151.1
60.6
120.3
Bank
2018
$m
-
43.2
67.0
2017
$m
-
60.6
120.3
-
5,343.9
4,957.9
18.0
350.0
17.7
16.5
5,471.8
5,155.3
0.1
31.9
32.0
0.1
18.7
18.8
0.1
23.0
23.1
Total financial assets available for sale
469.0
382.0
5,490.6
5,178.4
119.8
51.2
31.7
171.6
94.7
469.0
0.1
-
35.0
127.2
49.4
18.1
152.3
382.0
(0.7)
0.3
-
11.5
31.7
-
11.2
49.4
5,361.7
4,957.9
85.7
159.9
5,490.6
5,178.4
7.9
-
60.7
0.3
Maturity analysis
Not longer than 3 months
Longer than 3 and not longer than 12 months
Longer than 1 and not longer than 5 years
Over 5 years
Non-maturing
Recognised gains/(losses) before tax:
Gain/(loss) recognised directly in equity
Amount removed from equity and recognised in (profit)/loss
Recognition and measurement
Available for sale investments are non-derivative financial
assets that are designated as available for sale or are not
categorised into any of the categories under AASB 139
Financial Instruments: Recognition and Measurement.
Available for sale investments are measured at fair value with
gains and losses recorded in a reserve within equity. Upon
disposal or impairment, the accumulated gains or losses
recorded in equity are transferred to the income statement.
Fair value measurement is outlined in Note 22 Financial
instruments.
Annual Financial Report 2018 85
20 Financial assets held to maturity
Group
Bank
2018
$m
209.5
148.4
55.3
413.2
112.8
170.9
123.2
6.3
413.2
2017
$m
185.0
122.5
71.2
378.7
195.5
107.9
67.9
7.4
378.7
2018
$m
-
-
49.5
49.5
2017
$m
-
-
65.8
65.8
49.0
63.7
-
-
0.5
49.5
-
-
2.1
65.8
Negotiable certificates of deposit
Floating rate notes
Other deposits
Total financial assets held to maturity
Maturity analysis
Not longer than 3 months
Longer than 3 and not longer than 12 months
Longer than 1 and not longer than 5 years
Over 5 years
Classification and measurement
Non-derivative financial assets with fixed or determinable
payments and fixed maturities are classified as held to
maturity where the Group has the positive intention and ability
to hold to maturity.
Investments that are held to maturity are measured at
amortised cost using the effective interest method. Any
discount or premium on acquisition is taken over the period to
maturity.
Gains and losses are recognised in the income statement
when the investments are sold or impaired.
86 Annual Financial Report 2018
21 Derivative financial instruments
Group 2018
Group 2017
Notional
amount
Fair value
assets
Fair value
liabilities
Net fair
value
Notional
amount
Fair value
assets
Fair value
liabilities
Net fair
value
$m
$m
$m
$m
$m
$m
$m
$m
Included in derivatives category
Derivatives held for trading
Futures
2,128.5
-
-
-
3,334.7
-
-
Interest rate swaps
24,923.6
11.9
(10.1)
1.8
20,305.0
16.0
(17.1)
Foreign exchange
contracts
71.8
0.5
(0.3)
0.2
79.4
0.6
(0.4)
-
(1.1)
0.2
27,123.9
12.4
(10.4)
2.0
23,719.1
16.6
(17.5)
(0.9)
Derivatives held as fair value hedges
Interest rate swaps
Cross currency swaps
7.1
156.8
163.9
-
15.2
15.2
(0.5)
-
(0.5)
(0.5)
15.2
14.7
13.9
156.8
170.7
-
16.3
16.3
(0.9)
-
(0.9)
(0.9)
16.3
15.4
Derivatives held as cash flow hedges
Interest rate swaps
20,828.4
20,828.4
2.1
2.1
(23.9)
(23.9)
(21.8)
14,734.0
(21.8)
14,734.0
4.9
4.9
(40.6)
(40.6)
(35.7)
(35.7)
Total derivatives
48,116.2
29.7
(34.8)
(5.1)
38,623.8
37.8
(59.0)
(21.2)
Bank 2018
Bank 2017
Notional
amount
Fair value
assets
Fair value
liabilities
Net fair
value
Notional
amount
Fair value
assets
Fair value
liabilities
Net fair
value
$m
$m
$m
$m
$m
$m
$m
$m
Included in derivatives category
Derivatives held for trading
Futures
2,128.5
-
-
-
3,334.7
-
-
Interest rate swaps
37,209.2
202.4
(29.4)
173.0
29,943.0
120.2
(36.7)
Foreign exchange
contracts
71.8
0.5
(0.3)
0.2
79.4
0.6
(0.4)
-
83.5
0.2
39,409.5
202.9
(29.7)
173.2
33,357.1
120.8
(37.1)
83.7
Derivatives held as fair value hedges
Interest rate swaps
Cross currency swaps
7.1
156.8
163.9
-
15.2
15.2
(0.5)
-
(0.5)
(0.5)
15.2
14.7
13.9
156.8
170.7
-
16.3
16.3
(0.9)
-
(0.9)
(0.9)
16.3
15.4
Derivatives held as cash flow hedges
Interest rate swaps
20,781.9
20,781.9
2.1
2.1
(23.9)
(23.9)
(21.8)
13,402.1
(21.8)
13,402.1
4.9
4.9
(39.6)
(39.6)
(34.7)
(34.7)
Total derivatives
60,355.3
220.2
(54.1)
166.1
46,929.9
142.0
(77.6)
64.4
Annual Financial Report 2018 87
21 Derivative financial instruments (continued)
As at 30 June 2018 hedged cash flows are expected to occur
and affect the income statement as follows:
Group
2018
Forecast cash inflows
Forecast cash outflows
Forecast net cash outflows
2017
Forecast cash inflows
Forecast cash outflows
Forecast net cash outflows
Bank
2018
Forecast cash inflows
Forecast cash outflows
Forecast net cash outflows
2017
Forecast cash inflows
Forecast cash outflows
Forecast net cash outflows
Within 1
year
$m
1 to 2
years
$m
2 to 3
years
$m
3 to 4
years
$m
4 to 5
years
Greater than
5 years
$m
$m
571.6
100.9
33.9
14.3
(578.5)
(105.6)
(6.9)
(4.7)
(35.4)
(1.5)
(14.7)
(0.4)
388.1
229.5
33.9
16.8
(425.7)
(244.8)
(37.6)
(15.3)
(39.5)
(5.6)
(18.5)
(1.7)
594.5
102.5
33.9
14.3
(600.6)
(107.1)
(6.1)
(4.6)
(35.4)
(1.5)
(14.7)
(0.4)
359.3
227.7
33.2
16.6
(396.1)
(242.6)
(36.8)
(14.9)
(38.5)
(5.3)
(18.2)
(1.6)
9.4
(8.7)
0.7
7.5
(8.0)
(0.5)
9.4
(8.7)
0.7
7.5
(8.0)
(0.5)
16.7
(16.7)
-
21.4
(21.1)
0.3
16.7
(16.7)
-
21.4
(21.1)
0.3
Net gains /(losses) arising from hedge ineffectiveness
$m
$m
$m
$m
Group
Bank
2018
2017
2018
2017
Gains/ (losses) arising from fair value hedges
Losses on hedging instruments
Gains on the hedged items attributable to the hedged risk
Gains on hedges, (not in a hedge accounting relationship)
Gains/(losses) on hedges
(0.7)
0.9
1.5
1.7
(5.9)
3.8
(6.0)
(8.1)
(0.7)
0.9
2.1
2.3
(5.9)
3.8
(6.0)
(8.1)
Nature and purpose
Recognition and measurement
The Group uses derivative financial instruments primarily to
manage risk, including interest rate risk and foreign currency
rate risk.
Note 29 Risk management outlines the risk management
framework that the Group applies.
Derivative financial instruments are initially recognised at fair
value on the date on which a derivative contract is entered
into and are subsequently remeasured on a monthly basis.
Any gains and losses arising from a change in fair value of the
derivative, except for those that qualify as cash flow hedges,
are taken directly to the income statement. All derivatives
are classified as Level 2 Investments and the valuation
methodology is outlined in Note 22 Financial instruments.
88 Annual Financial Report 2018
21 Derivative financial instruments (continued)
Recognition and measurement (continued)
Hedge accounting
A hedge relationship is established whereby a hedging instrument
(derivative) is identified as offsetting changes in the fair value
or cash flows of a hedged item (asset or liability). The Group
formally designates and documents the hedge relationship,
including the risk management strategy for undertaking the
hedge. This includes the identification of the hedge instrument,
hedge item, the nature of the risk and how effectiveness
will be tested. Testing is completed on a monthly basis both
retrospectively and prospectively.
The effective portion of changes in the fair value of derivatives
that are designated and qualify as cash flow hedges are
recognised in equity in the cash flow hedge reserve. The
gain or loss relating to the ineffective portion is recognised
immediately in the income statement.
Amounts in the cash flow hedge reserve are recognised in
the income statement in the periods when the hedged item is
recognised in the profit or loss.
Offsetting financial assets and financial liabilities
Derivatives that meet the hedge accounting criteria are able to be
accounted for as either a fair value hedge or a cashflow hedge.
The Group presents its derivative assets and liabilities on a
gross basis.
Fair value hedges
Fair value hedges principally consist of interest rate swaps and
cross currency swaps that are used to protect against changes
in the fair value of fixed rate long term financial instruments due
to movements in interest rates and exchange rates. Changes
in the fair value of derivatives that are designated and qualify
as fair value hedging instruments are recorded in the income
statement, along with changes in the fair value of the hedged
item. If a hedge relationship no longer meets the criteria for
hedge accounting, then hedge accounting is discontinued. The
cumulative adjustment to the hedge item is amortised to the
income statement over the remaining period until maturity.
Cashflow hedges
Cashflow hedges consist principally of interest rate swaps
that are used to protect against exposures to movements in
future interest cash flows on assets and liabilities which bear
interest at variable rates.
Derivative financial instruments entered into by the Group are
subject to International Swaps and Derivatives Association
(ISDA) master netting agreements and other similar master
netting arrangements. These arrangements do not meet the
criteria for offsetting in the balance sheet. This is because
the right of set-off is only enforceable by the parties to
the agreement following an event of default, insolvency or
bankruptcy of the Group, or the counterparties, or following
other predetermined events. In addition, the Group and its
counterparties do not intend to settle on a net basis or to
realise the assets and settle the liabilities simultaneously.
The following table sets out the effect of netting arrangements
on derivative financial assets and derivative financial liabilities
if they were to be applied:
Amounts subject to enforceable master netting or similar agreements
Amounts of recognised financial assets/liabilities
reported on the balance sheet
Related amounts not set-off on the balance sheet
Financial collateral (received)/pledged
Net amount
Group
Derivative
assets
Derivative
liabilities
Derivative
assets
Derivative
liabilities
2018
$m
$m
2017
$m
$m
27.5
(34.2)
32.6
(58.6)
(10.7)
16.8
32.6
(1.6)
(15.5)
17.1
58.4
(0.2)
Financial assets/liabilities not subject to enforceable master netting
or similar agreements
2.2
(0.6)
5.2
(0.4)
Total financial assets/liabilities recognised on the balance sheet
29.7
(34.8)
37.8
(59.0)
Annual Financial Report 2018 89
21 Derivative financial instruments (continued)
Offsetting financial assets and financial liabilities (continued)
Amounts subject to enforceable master netting or similar agreements
Amounts of recognised financial assets/liabilities reported on the
balance sheet
Related amounts not set-off on the balance sheet
Financial collateral (received)/pledged
Net amount
Bank
Derivative
assets
Derivative
liabilities
Derivative
assets
Derivative
liabilities
2018
$m
$m
2017
$m
$m
218.0
(53.5)
136.8
(77.2)
(10.7)
207.3
32.6
(20.9)
(15.5)
121.3
58.4
(18.8)
Financial assets/liabilities not subject to enforceable master netting
or similar agreements
2.2
(0.6)
5.2
(0.4)
Total financial assets/liabilities recognised on the balance sheet
220.2
(54.1)
142.0
(77.6)
For the purpose of this disclosure, financial collateral not set off on the balance sheet have been capped by relevant netting
agreements so as not to exceed the net amounts of financial assets/(liabilities) reported on the balance sheet (ie over-
collateralisation, where it exists, is not reflected in the tables).
90 Annual Financial Report 2018
22 Financial instruments
All financial instruments are initially recognised at fair value on the date of initial recognition depending on the classification of
the asset and liability. Details of these classifications are included in the introduction to this section (Treasury and Investments).
a) Measurement basis of financial assets and liabilities
The following table details the carrying amount of the financial assets and liabilities by classification on the balance sheet.
Group
2018
Financial assets
Cash and cash equivalents
Due from other financial institutions
Financial assets held to maturity
Financial assets held for trading
Financial assets available for sale
Loans and other receivables
Derivatives
Total financial assets
Financial liabilities
Due to other financial institutions
Deposits
Notes payable
Derivatives
Preference shares
Subordinated debt
Total financial liabilities
2017
Financial assets
Cash and cash equivalents
Due from other financial institutions
Financial assets held to maturity
Financial assets held for trading
Financial assets available for sale
Loans and other receivables
Derivatives
Total financial assets
Financial liabilities
Due to other financial institutions
Deposits
Notes payable
Derivatives
Preference shares
Subordinated debt
Total financial liabilities
Held at
fair value
At fair value
through profit
and loss
At fair value
through
reserves
Held at
amortised cost
Derivatives
Held for
trading
Available
for sale
Loans and
receivables
Other financial
instruments
Total
$m
$m
$m
$m
$m
$m
-
-
-
-
-
-
29.7
29.7
-
-
-
34.8
-
-
34.8
-
-
-
-
-
-
37.8
37.8
-
-
-
59.0
-
-
59.0
-
-
-
4,499.5
-
-
-
-
-
-
-
469.0
-
-
-
-
-
-
-
61,601.8
-
1,137.4
1,137.4
283.0
413.2
-
-
-
-
283.0
413.2
4,499.5
469.0
61,601.8
29.7
4,499.5
469.0
61,601.8
1,833.6
68,433.6
-
-
-
-
-
-
-
-
-
-
5,657.6
-
-
-
-
-
-
-
-
-
-
-
-
-
-
382.0
-
-
-
-
-
-
-
-
-
-
-
-
-
-
60,776.6
-
352.5
352.5
59,529.5
59,529.5
3,544.8
3,544.8
-
880.9
709.2
34.8
880.9
709.2
65,016.9
65,051.7
996.6
277.8
378.7
996.6
277.8
378.7
-
-
-
-
5,657.6
382.0
60,776.6
37.8
5,657.6
382.0
60,776.6
1,653.1
68,507.1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
328.4
328.4
59,294.1
59,294.1
3,958.4
3,958.4
-
830.1
708.7
59.0
830.1
708.7
65,119.7
65,178.7
Annual Financial Report 2018 91
22 Financial instruments (continued)
a) Measurement basis of financial assets and liabilities (continued)
Bank
2018
Financial assets
Cash and cash equivalents
Due from other financial institutions
Financial assets held to maturity
Financial assets held for trading
Financial assets available for sale
Loans and other receivables
Derivatives
Total financial assets
Financial liabilities
Due to other financial institutions
Deposits
Derivatives
Preference shares
Subordinated debt
Total financial liabilities
2017
Financial assets
Cash and cash equivalents
Due from other financial institutions
Financial assets held to maturity
Financial assets held for trading
Financial assets available for sale
Loans and other receivables
Derivatives
Total financial assets
Financial liabilities
Due to other financial institutions
Deposits
Derivatives
Preference shares
Subordinated debt
Total financial liabilities
Held at
fair value
At fair value
through profit
and loss
At fair value
through
reserves
Held at
amortised cost
Derivatives
Held for
trading
Available
for sale
Loans and
receivables
Other financial
instruments
Total
$m
$m
$m
$m
$m
$m
-
-
-
-
-
-
220.2
220.2
-
-
54.1
-
-
54.1
-
-
-
-
-
-
142.0
142.0
-
-
77.6
-
-
77.6
-
-
-
4,499.5
-
-
-
-
-
-
-
5,490.6
-
-
-
-
-
-
-
56,148.7
-
836.8
295.8
49.5
836.8
295.8
49.5
-
-
-
-
4,499.5
5,490.6
56,148.7
220.2
4,499.5
5,490.6
56,148.7
1,182.1
67,541.1
-
-
-
-
-
-
-
-
-
5,657.9
-
-
-
-
-
-
-
-
-
-
-
-
-
5,178.4
-
-
-
-
-
-
-
-
-
-
-
-
-
55,611.2
-
346.7
346.7
55,528.9
55,528.9
-
880.9
699.2
54.1
880.9
699.2
57,455.7
57,509.8
822.2
278.1
65.8
822.2
278.1
65.8
-
-
-
-
5,657.9
5,178.4
55,611.2
142.0
5,657.9
5,178.4
55,611.2
1,166.1
67,755.6
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
328.0
328.0
55,738.6
55,738.6
-
830.1
698.7
77.6
830.1
698.7
57,595.4
57,673.0
the most reliable evidence of fair value. For all other financial
instruments, the fair value is determined by using other
valuation techniques.
b) Fair value measurement
Fair value 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.
Wherever possible, fair values have been calculated using
unadjusted quoted market prices in active markets for identical
instruments. A quoted market price in an active market provides
92 Annual Financial Report 2018
22 Financial instruments (continued)
b) Fair value measurement (continued)
Valuation of financial assets and liabilities
Various valuation techniques are used to measure the fair
value of financial instruments. The technique adopted is
dependent upon the inputs available.
As part of the fair value measurement, the Group classifies its
assets and liabilities according to a hierarchy that reflects the
observability of significant market inputs. The three levels of
the hierarchy are defined below:
Level 1 - Quoted market prices
The fair value is determined using unadjusted quoted prices in
active markets for identical assets or liabilities.
Level 2 - Valuation technique using observable inputs
The fair value is determined using models whose inputs are
observable in an active market.
Level 3 - Valuation technique using significant unobservable inputs
The fair value is calculated using significant inputs that are not
based on observable market data.
Financial assets and liabilities carried at fair value
The table below details financial instruments carried at fair
value, by balance sheet classification and hierarchy level:
Group
2018
Financial assets
Financial assets held for trading
Financial assets available for sale
Derivatives
Financial liabilities
Derivatives
2017
Financial assets
Financial assets held for trading
Financial assets available for sale
Derivatives
Financial liabilities
Derivatives
Bank
2018
Financial assets
Financial assets held for trading
Financial assets available for sale
Derivatives
Financial liabilities
Derivatives
2017
Financial assets
Financial assets held for trading
Financial assets available for sale
Derivatives
Financial liabilities
Derivatives
Level 1
Level 2
Level 3
Total
fair value
Total
carrying value
$m
-
0.1
-
-
-
0.1
-
-
$m
-
0.1
-
-
-
0.1
-
-
$m
$m
$m
$m
4,499.5
450.3
29.7
34.8
5,657.6
358.9
37.8
59.0
-
18.6
-
-
-
23.0
-
-
4,499.5
4,499.5
469.0
29.7
469.0
29.7
34.8
34.8
5,657.6
5,657.6
382.0
37.8
382.0
37.8
59.0
59.0
$m
$m
$m
$m
4,499.5
5,471.9
220.2
54.1
5,657.9
5,155.3
142.0
77.6
-
18.6
-
-
-
23.0
-
-
4,499.5
5,490.6
220.2
4,499.5
5,490.6
220.2
54.1
54.1
5,657.9
5,178.4
142.0
5,657.9
5,178.4
142.0
77.6
77.6
Transfers between levels are deemed to have occurred at the beginning of the reporting period in which instruments are transferred.
There were no transfers between levels during the year for the Group or Bank.
Annual Financial Report 2018 93
22 Financial instruments (continued)
Valuation methodology
Financial instruments - debt securities
Each month, independent valuations are determined by the
middle office department of the Group’s Risk Management
division. This involves an analysis of independently sourced
data that is deemed most representative of the market. From
this independent data which is made available by other financial
institutions, market average valuations are calculated, and the
value of debt securities are updated.
Financial instruments - equity investments
Level 1 - Listed investments relates to equities held that are on
listed exchanges.
Level 2 - Unlisted investments are equity holdings in unlisted
managed investment schemes. For managed scheme
investments the most recent prices provided by the fund
manager are used.
Level 3 - Unlisted investments are equity holdings in small
unlisted entities. Given there are no quoted market prices and
fair value cannot be reliably measured, investments are held at
cost less impairment.
Derivatives
Where the Group’s derivative assets and liabilities are not
traded on an exchange, they are valued using valuation
methodologies, including discounted cash flow and option
pricing models as appropriate. The most significant inputs into
the valuations are interest rate yields which are developed from
publicly quoted rates.
Movements in level 3 portfolio
The following table provides a reconciliation from the beginning
balances to the ending balances for financial instruments which
are classified as level 3:
Financial assets - equity investments
Opening balance
Impairment charge
Purchases
Sales
Transfers out
Closing balance
Group
Bank
2018
$m
23.0
(0.4)
-
-
(4.0)
18.6
2017
$m
21.2
(0.3)
2.4
(0.3)
-
23.0
2018
$m
23.0
(0.4)
-
-
(4.0)
18.6
2017
$m
21.2
(0.3)
2.4
(0.3)
-
23.0
Financial assets and liabilities carried at amortised cost
Valuation hierarchy
The table below details financial instruments carried at amortised cost, by balance sheet classification and hierarchy level:
Group
2018
Financial assets
Cash and cash equivalents
Due from other financial institutions
Financial assets held to maturity
Loans and other receivables
Financial liabilities
Due to other financial institutions
Deposits
Notes payable
Preference shares
Subordinated debt
94 Annual Financial Report 2018
Level 1
Level 2
Level 3
Total
fair value
Total carrying
amount
$m
$m
$m
$m
$m
154.1
283.0
413.2
-
-
-
1,137.4
1,137.4
283.0
413.2
283.0
413.2
-
61,664.6
61,664.6
61,601.8
352.5
59,594.9
3,560.1
882.2
-
-
704.2
-
-
-
-
-
352.5
352.5
59,594.9
59,529.5
3,560.1
3,544.8
882.2
704.2
880.9
709.2
983.3
-
-
-
-
-
-
22 Financial instruments (continued)
Financial assets and liabilities carried at amortised cost (continued)
Valuation hierarchy (continued)
Group
2017
Financial assets
Cash and cash equivalents
Due from other financial institutions
Financial assets held to maturity
Loans and other receivables
Financial liabilities
Due to other financial institutions
Deposits
Notes payable
Preference shares
Subordinated debt
Bank
2018
Financial assets
Cash and cash equivalents
Due from other financial institutions
Financial assets held to maturity
Loans and other receivables
Financial liabilities
Due to other financial institutions
Deposits
Preference shares
Subordinated debt
2017
Financial assets
Cash and cash equivalents
Due from other financial institutions
Financial assets held to maturity
Loans and other receivables
Financial liabilities
Due to other financial institutions
Deposits
Preference shares
Subordinated debt
Level 1
Level 2
Level 3
Total
fair value
Total carrying
amount
$m
$m
$m
$m
$m
177.6
277.8
378.7
-
-
-
996.6
277.8
378.7
996.6
277.8
378.7
-
60,880.0
60,880.0
60,776.6
819.0
-
-
-
-
-
-
682.7
-
-
-
-
-
644.6
-
-
-
-
-
328.4
59,362.1
3,970.4
838.0
-
-
701.9
346.7
55,586.2
882.2
-
-
694.2
154.1
295.8
49.5
177.6
278.1
65.8
-
56,207.7
56,207.7
56,148.7
-
-
-
-
-
-
-
-
328.4
328.4
59,362.1
59,294.1
3,970.4
3,958.4
838.0
701.9
830.1
708.7
836.8
295.8
49.5
836.8
295.8
49.5
-
-
-
-
-
-
-
346.7
346.7
55,586.2
55,528.9
882.2
694.2
880.9
699.2
822.2
278.1
65.8
822.2
278.1
65.8
-
55,701.7
55,701.7
55,611.2
328.0
55,799.0
838.0
-
-
691.9
-
-
-
-
328.0
328.0
55,799.0
55,738.6
838.0
691.9
830.1
698.7
Transfers between levels are deemed to have occurred at the beginning of the reporting period in which instruments are
transferred. There were no significant transfers between levels during the year for the Group or Bank.
Annual Financial Report 2018 95
22 Financial instruments (continued)
Valuation methodology
Cash and cash equivalents, due from/to other financial
institutions
The carrying value for these assets and liabilities are a
reasonable approximation of fair value.
Financial instruments - held to maturity
The fair values of financial assets held to maturity are measured
at amortised cost which approximates their fair value given they
are predominantly short-term in nature or have interest rates
which reprice frequently.
Loans and other receivables
The carrying value of loans and other receivables is net of
specific and collective provisions. For variable rate loans,
excluding impaired loans, the carrying amount is a reasonable
estimate of fair value.
The fair value for fixed loans is calculated by utilising discounted
cash flow models, based on the maturity of the loans. The
discount rates used represent the rate the market is willing to
offer at arm’s length for customers of similar credit quality. The
net fair value of impaired loans is calculated by discounting
expected cash flows using these rates.
Deposits
The carrying value of deposits at call is considered to represent
fair value given they are short term in nature. The fair value for
all term deposits is calculated using a discounted cash flow
model applying market rates, or current rates for deposits of
similar maturities.
Notes payable
The fair value for all notes payable is calculated using a
discounted cash flow model applying independent market rates
and margins for similar financial instruments.
Preference shares
The fair value for preference shares is based on quoted market
rates for the issue concerned as at 30 June.
Subordinated debt
The fair value of subordinated debt is calculated based on
quoted market prices. For those debt issues where quoted
market prices were not available, a discounted cash flow model
using a yield curve appropriate to the remaining maturity of the
instrument is used.
96 Annual Financial Report 2018
23 Investment property
Investment property values reflect the Group’s investment in residential real estate through the Homesafe Trust.
The investments represent shared equity interest alongside the original home owners in Sydney and Melbourne residential properties.
Opening balance
Additions
Disposals
Homesafe Trust income
Total investment property
Recognition and measurement
Group
2018
$m
666.3
59.0
(45.0)
55.4
735.7
2017
$m
573.4
50.2
(47.7)
90.4
666.3
Bank
2018
$m
-
-
-
-
-
2017
$m
-
-
-
-
-
Investment properties are measured initially at cost, including transaction costs and then stated at fair value. Gains or losses
arising from changes in the fair values of investment properties are recognised in the income statement in the year in which they
arise.
Valuation methodology
Subsequent to initial recognition, fair value is determined by discounting the expected future cash flows of the portfolio, taking into
account the restrictions on the ability to realise the investment property due to contractual obligations.
Assumptions used in the modelling of future cashflows are sourced from market indices of property values (Residex) and long term
growth/discount rates appropriate to residential property and historical experience of contracts that have been closed out. The
discounted cash flow model is prepared on a monthly basis. Inputs that form part of the discounted cash flow model include rates
of property appreciation, discount rates, selling costs, mortality rates and future CPI increases.
Fair value measurement
There are different levels of fair value measurement. When fair value is calculated using inputs that are not based on observable
market data, then assets will be considered as Level 3 fair value. Investment property has been categorised as a Level 3 fair value
based on the inputs outlined above.
Sensitivity of Level 3 fair value measurements to reasonably possible alternative assumptions
Valuation technique
Significant
unobservable inputs
Range of estimates
(weighted -average)
for unobservable inputs
Fair value measurement
sensitivity to
unobservable inputs
Discounted cash flow
Rates of property
appreciation - long term
growth rate 6%
735.7
5% - 7%
$m1
Discount rates - 7.75%
735.7
6.75% - 8.75%
Significant increases in
these inputs would result
in higher fair values.
Significant increases in
these inputs would result
in lower fair values.
Effect of reasonably
possible alternative
assumptions
Favourable
change
Unfavourable
change
$m
$m
89.9
(46.1)
90.4
(45.5)
1 This includes a fair value adjustment of $31.2m which reflects an assumed 3% increase in property prices for the next 18 months before returning to a
long term growth rate of 6%.
Where valuation techniques use non-observable inputs that are significant to a fair value measurement in its entirety, changing
these inputs will change the resultant fair value measurement.
The most significant inputs impacting the carrying value of the investment property are the long term growth rates and the discount
rates. There are interdependencies between a number of the assumptions made which mean that no single factor is likely to move
independent of others, however the sensitivities disclosed above assume all other assumptions remain unchanged.
Annual Financial Report 2018 97
Operating assets and liabilities
This section outlines the operating assets and liabilities of the Group and associated information. Included in this section is
information on the following: cash flow statement reconciliation, cash & cash equivalents, goodwill, other assets and other
payables.
24 Cash flow statement reconciliation
Profit after tax
Non-cash items
Bad debts expense
Amortisation
Depreciation (including leasehold improvements)
Revaluation increments
Equity settled transactions
Share of net (profit)/loss from joint arrangements and associates
Dividends received/(accrued) from joint ventures
Impairment write down/(reversal)
Fair value acquisition adjustments
Hedge (losses)/gains in relation to ineffectiveness
Changes in assets and liabilities
Increase/(decrease) in tax provision
(Decrease)/increase in deferred tax assets & liabilities
(Increase)/decrease in derivatives
Decrease in accrued interest
Decrease in accrued employee entitlements
Group
2018
$m
2017
$m
Bank
2018
$m
2017
$m
434.5
429.6
349.7
312.4
78.9
36.2
20.4
86.6
38.5
21.8
(27.5)
(88.1)
3.7
(2.3)
(1.3)
0.4
7.8
(1.7)
30.0
(1.9)
(16.1)
(26.4)
1.7
-
(1.1)
-
(0.8)
7.9
8.1
(13.0)
32.9
(11.6)
(1.2)
12.4
26.4
72.5
31.5
19.7
3.4
3.5
(2.4)
(1.0)
0.4
7.8
(2.3)
(45.7)
19.9
(101.7)
(22.1)
1.9
(197.4)
68.5
27.9
21.3
(22.4)
-
(1.3)
-
(1.5)
4.1
7.9
(13.0)
(13.6)
115.2
(1.5)
13.1
114.6
(Increase)/decrease in other accruals, receivables and provisions
(141.9)
Cash flows from operating activities before changes in operating
assets and liabilities
394.5
548.4
137.7
631.7
(904.1)
(3,606.5)
(549.8)
(4,609.0)
1,039.4
680.4
865.3
2,462.1
230.7
4.7
(413.6)
351.6
583.0
1,134.7
657.7
(61.1)
(148.7)
-
412.8
1,037.3
-
(2.3)
243.4
(65.1)
Net (Increase)/decrease in operating assets
Net increase of loans to other entities
Net decrease of investment securities
Net Increase/(decrease) in operating liabilities
Net increase/(decrease) in balance of retail deposits
Net increase/(decrease) in balance of wholesale deposits
Net (decrease)/increase in balance of notes payable
Net cash flows from/(used in) operating activities
Cash flows presented on a net basis
Cash flows arising from the following activities are presented
on a net basis in the cash flow statement: Loans and other
receivables, investment securities, retail deposits and
wholesale deposits.
98 Annual Financial Report 2018
25 Cash and cash equivalents
Group
Bank
Notes and coins and cash at bank
Cash at bank
Reverse repurchase agreements
Investments at call
Total cash and cash equivalents
2018
$m
154.1
766.8
100.0
116.5
1,137.4
2017
$m
177.6
731.4
-
87.6
996.6
2018
$m
154.1
466.2
100.0
116.5
836.8
2017
$m
177.6
594.1
-
50.5
822.2
Reconciliation of cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents includes:
Cash and cash equivalents
Due from other financial institutions
Due to other financial institutions
Recognition and measurement
1,137.4
283.0
(352.5)
1,067.9
996.6
277.8
836.8
295.8
822.2
278.1
(328.4)
(346.7)
(328.0)
946.0
785.9
772.3
Cash and cash equivalents include cash on hand, deposits held at call with banks, bank overdrafts, reverse repurchase
agreements and other short term investments that have an original maturity of three months or less. Cash at bank earns
interest at variable rates based on daily bank and short term deposit rates. Interest is recognised in the income statement using
the effective interest method.
Annual Financial Report 2018 99
26 Goodwill and other intangible assets
Group
Carrying amount as at 1 July 2017
Additions
Amortisation charge
Goodwill
$m
1,442.3
-
-
Closing balance as at 30 June 2018
1,442.3
Carrying amount as at 1 July 2016
1,442.3
Additions
Amortisation charge
Impairment of goodwill
-
-
-
$m
196.0
22.4
(28.0)
190.4
148.8
68.0
(20.8)
-
Closing balance as at 30 June 2017
1,442.3
196.0
Bank
Carrying amount as at 1 July 2017
1,362.8
Additions
Amortisation charge
-
-
Closing balance as at 30 June 2018
1,362.8
Carrying amount as at 1 July 2016
1,362.8
Additions
Amortisation charge
-
-
Closing balance as at 30 June 2017
1,362.8
193.4
22.4
(26.9)
188.9
146.2
66.6
(19.4)
193.4
1 These assets include customer lists, management rights and trade names.
Computer
software
Core
deposits
Customer
relationship
Other
acquired
intangibles1
Trustee
licence
$m
3.2
-
(3.2)
-
11.6
-
(8.4)
-
3.2
2.7
-
(2.7)
-
9.2
-
(6.5)
2.7
$m
4.4
-
(2.2)
2.2
9.9
-
(5.5)
-
4.4
1.0
-
(0.5)
0.5
1.5
-
(0.5)
1.0
$m
9.5
-
(2.8)
6.7
13.7
-
(3.8)
(0.4)
9.5
7.5
-
(1.4)
6.1
9.0
-
(1.5)
7.5
Total
$m
1,663.8
22.4
(36.2)
$m
8.4
-
-
8.4
1,650.0
8.4
1,634.7
-
-
-
68.0
(38.5)
(0.4)
8.4
1,663.8
-
-
-
-
-
-
-
-
1,567.4
22.4
(31.5)
1,558.3
1,528.7
66.6
(27.9)
1,567.4
Recognition and measurement
Intangible assets (other than goodwill)
Intangible assets acquired separately are measured at
cost on initial recognition. Intangible assets acquired in a
business combination are measured at fair value at the date
of acquisition.
Following initial recognition, intangible assets are carried at
cost less accumulated amortisation and impairment losses.
Intangible assets with a finite life are amortised over a straight
line basis over their useful life and tested at least annually
for impairment or when there is an indicator that impairment
may exist. Intangible assets with indefinite lives are tested for
impairment in the same way as goodwill.
The amortisation period and method are reviewed at each
financial year end for all intangible assets.
Computer software includes both purchased and internally
generated software. The cost of internally generated software
comprises all directly attributable costs necessary to create,
produce and prepare the software to be capable of operating
in the manner intended by management. Costs incurred in the
ongoing maintenance of software are expensed as incurred.
Gains or losses arising from the disposal of an intangible
asset are measured as the difference between the sale
proceeds and the carrying amount of the asset and are
included in the income statement in the year of disposal.
A summary of the policies applied to the Group’s intangible
assets (excluding goodwill) are as follows:
Useful lives
Method used
Trustee Licence
Indefinite
Not amortised or
revalued
Computer software/
development costs
Intangible assets acquired
in a business combination
Finite
Finite
Straight line over
2.5 to 10 years
Straight line over
life of asset (2 - 15yrs)
Internally generated/acquired
Acquired
Internally generated or acquired
Acquired
Impairment test/recoverable
amount testing
Annually and when an indicator
of impairment exists
Annually and when an indicator
of impairment exists
Annually and when an indicator
of impairment exists
100 Annual Financial Report 2018
26 Goodwill and other intangible assets (continued)
Recognition and measurement
Goodwill
Key assumptions used in value in use calculations
Goodwill acquired in a business combination is initially
measured at cost. Cost is measured as the cost of the
business combination minus the net fair value of the acquired
identifiable assets, liabilities and contingent liabilities.
Following initial recognition goodwill is measured at cost less
accumulated impairment losses.
In determining value in use the estimated future (pre-tax) cash
flows are discounted to their present value using a discount
rate. The estimated future cash flows are obtained from the
Group’s forecast which is developed annually and approved by
management and the board. Growth rates are applied to the
approved forecast data to extrapolate for a further four years.
Goodwill is allocated to cash generating units (CGU) for the
purposes of impairment testing, which is undertaken at
the lowest level at which Goodwill is monitored for internal
management purposes. Impairment testing is performed
at least annually, or whenever there is an indication of
impairment, by comparing the recoverable amount of a CGU
with its carrying amount. The carrying amount of a CGU is
based on its assets, liabilities and allocated goodwill. The
recoverable amount of a CGU is the higher of its fair value less
cost to sell and its value in use. If the recoverable amount is
less than the carrying value, an impairment loss is charged to
the income statement.
At the date of disposal of a business, attributable goodwill is
measured on the basis of the value of the operation disposed
of and the portion of the CGU retained.
Goodwill has been allocated to the following CGUs:
Local connection
Partner connection
Wealth
Agribusiness
2018
$m
677.5
464.4
209.7
90.7
2017
$m
677.5
464.4
209.7
90.7
1,442.3
1,442.3
The discount rate used is based on the weighted average
cost of capital for each CGU and reflects current market
assessments of the risks specific to the CGU for which future
estimates of cash flows have not been adjusted.
A terminal growth rate of 3.0% is representative of long term
growth rates, including inflation, in Australia. It is used to
extrapolate cash flows beyond the forecast period for each
CGU.
The table below contains discount rates used in the
calculation of the recoverable amount for each CGU:
Local connection
Partner connection
Wealth
Agribusiness
Discount rate
10.17%
10.47%
10.77%
11.07%
Sensitivity analysis
Whilst there was no impairment in any of the CGUs, changes
in the key assumptions would affect the recoverable amount of
the CGUs.
The table below discloses the possible changes to key
assumptions which would result in impairment first becoming
evident:
Increase/(decrease) in key assumptions
Other income growth rate
Expense growth rate
Discount rate
Wealth
(0.54%)
0.45%
0.29%
The sensitivities above assume that the specific assumption
moves in isolation, while all other assumptions are held
constant.
Annual Financial Report 2018 101
27 Other assets
Accrued income
Prepayments
Sundry debtors
Accrued interest
Deferred expenditure
Total other assets
Group
Bank
2018
$m
28.1
33.0
116.2
166.7
80.7
424.7
2017
$m
34.5
30.6
102.8
157.0
56.3
381.2
2018
$m
25.4
32.2
2017
$m
30.5
30.1
1,228.9
1,105.2
114.0
80.6
108.0
55.7
1,481.1
1,329.5
Recognition and measurement
Prepayments and sundry debtors
Prepayments and sundry debtors are recognised initially at
fair value and then subsequently measured at amortised cost
using the effective interest method. Collectability of sundry
debtors is reviewed on an ongoing basis. Debts that are known
to be uncollectable are written off when identified.
Accrued interest
Accrued interest is interest that has been recognised as
income on an accrual basis using the effective interest
method, but is yet to be charged to the loan or receivable.
Deferred expenditure
Deferred expenditure relating to projects is capitalised to
the balance sheet when it is probable the future economic
benefits attributable to the asset will flow to the Group. The
cost model is applied which requires the asset to be carried at
cost less any impairment losses. When the project has been
completed these items are transferred to capitalised software
(refer to Note 26 Goodwill and other intangible assets for
further information). The carrying value of deferred expenditure
is reviewed for impairment annually when the asset is not
yet available for use, or more frequently when an indicator of
impairment arises.
28 Other payables
Accrued expenses and outstanding claims
Accrued interest
Prepaid interest
Total other payables
Group
Bank
2018
$m
244.0
180.3
24.5
448.8
2017
$m
310.9
196.3
25.1
532.3
2018
$m
394.0
169.6
-
2017
$m
396.4
185.7
-
563.6
582.1
Recognition and measurement
Sundry creditors and accrued expenses
Prepaid interest
Sundry creditors and accrued expenses are carried at
amortised cost, which is the fair value of the consideration to
be paid in the future for goods and services received. Sundry
creditors are generally settled within 30 days.
Prepaid interest is the interest received from customers in
advance. This interest is recognised in the income statement
using the effective interest method.
Accrued interest
Accrued interest is the interest that is recognised as an
expense in the income statement but has yet to be paid to the
customers’ liability account. Interest is recognised using the
effective interest method.
102 Annual Financial Report 2018
Other disclosure matters
The following section outlines all other disclosure matters including: risk management, subsidiaries and controlled entities,
related party disclosures, provisions, commitments and contingencies and other required disclosures.
The risk management note outlines the key financial risks that the Group manages.
29 Risk management
Nature of risk
Financial risk management
The Group is exposed to a range of risks which have the
potential to adversely impact its financial performance and
financial position. The Group actively manages those risks it
assesses to be material including key financial risks (i.e. credit
risk, liquidity risk and market risk) and operational risks.
The Group’s exposure to financial risks are considered
significant given financial instruments held by the Group
constitute the core contributors of financial performance and
position. An overview of the Group’s key financial risks is
presented below.
The Board is ultimately responsible for the management of risk
which is achieved by establishing, reviewing and overseeing
the Group’s Risk Management Framework (the framework)
including its risk profile, risk appetite and risk strategy. The
framework provides a high level description of the material risks
faced by the Group together with the policies and procedures
implemented to measure, monitor and manage those risks.
The Board’s role is supported by committees namely the Asset
and Liability Management Committee (ALMAC), Management
and Board Credit committees, Operational Risk committee and
the Board Risk committee who monitor adherence to policies,
limits and procedures.
Further details regarding the Group’s material risks including
our strategic approach to their management is contained within
the Directors’ Report and the Corporate Governance statement.
Our committee charters are available on our website.
Credit risk
Credit risk is risk of the Group suffering a financial loss if any
of its customers or counterparties fail to fulfil their contractual
obligations.
The Group is predominantly exposed to credit risk as a result
of its lending activities as well as counterparty exposures
arising from the funding activities of Group Treasury and the
use of derivative contracts.
The table below presents the maximum exposure to credit
risk arising from balance sheet and off-balance sheet financial
instruments. The exposure is shown gross before taking into
account any master netting, collateral agreements or other
credit enhancements.
Gross maximum exposure
Cash and cash equivalents
Due from other financial institutions
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Other assets
Derivatives
Shares in controlled entities
Amounts receivable from controlled entities
Gross loans and other receivables
Contingent liabilities
Commitments
Total credit risk exposure
Group
Bank
2018
$m
983.3
283.0
2017
$m
819.0
277.8
4,499.5
5,657.6
469.0
413.2
282.9
29.7
-
-
382.0
378.7
259.7
37.8
-
-
2018
$m
682.7
295.8
4,499.5
5,490.6
49.5
2017
$m
644.6
278.1
5,657.9
5,178.4
65.8
1,343.0
1,213.2
220.2
585.2
21.1
142.0
570.2
5.8
61,793.5
60,928.1
56,299.8
55,722.6
68,754.1
68,740.7
69,487.4
69,478.6
247.1
6,122.8
6,369.9
253.8
6,206.7
6,460.5
239.8
5,623.4
5,863.2
249.1
5,677.3
5,926.4
75,124.0
75,201.2
75,350.6
75,405.0
Where financial instruments are recorded at fair value the
amounts shown above represent the current credit risk
exposure but not the maximum risk exposure that could arise
in the future as a result of changes in values.
For financial assets recognised on the balance sheet, the
maximum exposure to credit risk equals their carrying amount.
For contingent liabilities including financial guarantees granted,
it is the maximum amount that the Group would have to pay
if the guarantees were called upon. For loan commitments
and other credit-related commitments, it is generally the full
amount of the committed facilities.
Annual Financial Report 2018 103
29 Risk management (continued)
Credit risk (continued)
Concentrations of the maximum exposure to credit risk
Geographic - based on the location of the counterparty or customer.
Concentration risk is managed by client or counterparty,
by geographical region and by industry sector. The Group
implements certain exposure and concentration limits in order
to mitigate the risk.
The maximum credit exposure to any client or counterparty as
at 30 June 2018 was $830.5 million (2017: $939.2 million)
before taking account collateral or other credit enhancements
and $830.5 million (2017: $939.2 million) net of such
protection.
Geographic concentration
Victoria
New South Wales
Australian Capital Territory
Queensland
South Australia/Northern Territory
Western Australia
Tasmania
Overseas/other
The table below presents the maximum exposure to credit risk
categorised by geographical region.
The exposures are shown gross before taking into account any
collateral held or other credit enhancements.
Group
2018
$m
2017
$m
Bank
2018
$m
2017
$m
31,106.0
30,255.9
30,781.3
30,083.3
16,306.1
17,346.3
20,124.5
20,801.2
1,760.0
9,265.8
7,242.7
7,573.4
1,566.6
303.4
1,185.5
9,273.8
7,713.7
7,545.5
1,500.6
379.9
1,731.1
8,259.0
6,632.6
6,194.0
1,360.2
267.9
1,178.3
8,322.7
7,148.7
6,194.6
1,317.2
359.0
Total credit risk exposure
75,124.0
75,201.2
75,350.6
75,405.0
Industry Sector - is based on the industry in which the customer or counterparty are engaged. The table below presents the
maximum exposure to credit risk categorised by industry sector. The exposures are shown gross before taking into account any
collateral held or other credit enhancements.
Industry concentration
Accommodation and food services
Administrative and support services
Agriculture, forestry and fishing
Arts and recreation services
Construction
Education and training
Electricity, gas, water and waste services
Financial and insurance services
Financial services
Health care and social assistance
Information media and telecommunications
Manufacturing
Margin lending
Mining
Other
Other services
Professional, scientific and technical services
Public administration and safety
Rental, hiring and real estate services
Residential/consumer
Retail trade
Transport, postal and warehousing
Wholesale trade
Total credit risk exposure
104 Annual Financial Report 2018
Group
2018
$m
652.5
237.1
2017
$m
710.3
252.2
Bank
2018
$m
651.0
237.1
2017
$m
708.8
252.2
6,724.7
6,538.1
2,415.3
2,625.0
198.1
219.5
198.0
219.4
2,432.1
2,706.7
2,400.6
2,676.4
319.5
162.2
1,200.8
6,970.4
988.8
147.6
829.0
357.7
169.4
1,121.0
7,849.6
980.5
157.4
863.6
1,694.7
1,726.1
159.1
358.1
616.2
814.0
355.1
176.1
304.9
645.2
852.1
403.4
319.5
162.2
357.7
169.4
1,200.1
1,120.1
13,238.0
13,834.4
988.8
147.6
827.8
-
159.1
317.3
615.9
813.9
354.7
980.5
157.4
858.0
-
176.0
263.3
644.9
851.9
402.3
5,145.8
5,526.5
5,138.7
5,514.8
43,025.8
41,414.8
43,079.5
41,372.3
1,129.6
1,206.3
1,129.5
1,202.1
576.7
386.1
603.7
416.1
570.1
385.9
602.1
416.0
75,124.0
75,201.2
75,350.6
75,405.0
29 Risk management (continued)
Credit quality
The credit quality of financial assets is managed by the Group using internal credit ratings. The table below presents the credit
quality of financial assets, based on the Group’s credit rating system and are gross of any impairment allowances.
Neither past due or impaired
Standard
grade
Sub-
standard
grade
Unrated
Consumer
loans 1
Past
due or
impaired
Total
$m
$m
$m
$m
$m
$m
-
-
-
-
-
-
-
8,888.4
-
-
-
-
-
-
-
1,061.9
-
-
-
27.7
-
282.9
-
1,560.4
-
-
-
-
-
-
-
41,692.8
-
-
-
-
-
-
-
3,479.1
983.3
283.0
4,499.5
469.0
413.2
282.9
29.7
61,793.5
High
grade
$m
983.3
283.0
4,499.5
441.3
413.2
-
29.7
5,110.9
11,760.9
8,888.4
1,061.9
1,871.0
41,692.8
3,479.1
68,754.1
819.0
277.8
5,657.6
350.0
378.7
-
37.8
4,361.3
-
-
-
-
-
-
-
10,449.5
-
-
-
-
-
-
-
1,430.3
-
-
-
32.0
-
259.7
-
669.6
-
-
-
-
-
-
-
41,599.8
-
-
-
-
-
-
-
2,417.6
819.0
277.8
5,657.6
382.0
378.7
259.7
37.8
60,928.1
11,882.2
10,449.5
1,430.3
961.3
41,599.8
2,417.6
68,740.7
Group
2018
Cash and cash equivalents
Due from other financial institutions
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Other assets
Derivatives
Loans and other receivables
2017
Cash and cash equivalents
Due from other financial institutions
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Other assets
Derivatives
Loans and other receivables
Bank
2018
Cash and cash equivalents
Due from other financial institutions
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Other assets
Derivatives
Loans and other receivables
Amounts receivable from controlled entities
Shares in controlled entities
682.7
295.8
4,499.5
5,471.8
49.5
-
220.2
888.8
-
-
-
-
-
-
-
-
-
7,401.3
-
-
-
-
-
-
-
-
-
961.6
-
-
-
-
-
18.8
-
1,343.0
-
1,535.6
21.1
585.2
-
-
-
-
-
-
-
42,323.1
-
-
-
-
-
-
-
-
-
3,189.4
-
-
682.7
295.8
4,499.5
5,490.6
49.5
1,343.0
220.2
56,299.8
21.1
585.2
12,108.3
7,401.3
961.6
3,503.7
42,323.1
3,189.4
69,487.4
2017
Cash and cash equivalents
Due from other financial institutions
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Other assets
Derivatives
Loans and other receivables
Amounts receivable from controlled entities
Shares in controlled entities
644.6
278.1
5,657.9
5,155.2
65.8
-
142.0
537.3
-
-
-
-
-
-
-
-
-
8,909.8
-
-
-
-
-
-
-
-
-
1,292.6
-
-
-
-
-
23.2
-
1,213.2
-
660.6
5.8
570.2
-
-
-
-
-
-
-
42,157.6
-
-
-
-
-
-
-
-
-
2,164.7
-
-
644.6
278.1
5,657.9
5,178.4
65.8
1,213.2
142.0
55,722.6
5.8
570.2
12,480.9
8,909.8
1,292.6
2,473.0
42,157.6
2,164.7
69,478.6
1 Consumer loans are predominantly mortgage secured residential loans not rated on an individual basis.
Annual Financial Report 2018 105
29 Risk management (continued)
Credit Quality (continued)
The credit ratings range from high grade where there is a very high likelihood of the asset being recovered in full to sub-standard
grade where there is concern over the obligor’s ability to make payments when due.
Credit risk stress testing is regularly performed to assess the likelihood of loan default, to examine the financial strength of
borrowers and counterparties including their ability to meet commitments under changing scenarios and to assess the exposure
and extent of loss should default actually occur.
Ageing
The following table presents the ageing analysis of past due but not impaired loans and other receivables.
Loans and receivables which are 90 or more days past due are not classified as impaired assets where the estimated net
realisable value of the collateral/security is sufficient to cover the repayment of all principal and interest amounts due.
The exposures are shown net after taking into account any collateral held or other credit enhancements.
Less than
30 days
31 to
60 days
61 to
90 days
More than
91 days
$m
$m
$m
$m
Total
$m
Fair value of
collateral
$m
2018
2017
2018
2017
1,821.9
1,254.4
1,761.9
1,218.7
384.0
257.0
355.4
211.8
233.9
109.3
219.4
91.4
703.5
516.1
3,143.3
2,136.8
8,855.9
6,052.4
599.2
436.7
2,935.9
1,958.6
7,582.6
5,025.6
Group
Bank
Liquidity risk
Liquidity risk is defined as the risk that the Group is unable to meet its payment obligations as they fall due. The principal
objectives are to ensure that all cash flow commitments are met in a timely manner and prudential requirements are satisfied.
In accordance with APS210, APRA Prudential Standard the Group needs to maintain a ratio of High Quality Liquid Assets (HQLA)
to cover defined projected cash outflows over a 30 day period, using the scenario based Liquidity Coverage Ratio (LCR).
The Group continues to manage the liquidity holdings in line with the Board approved funding strategy and funding plan, ensuring
adequate levels of HQLA, other liquid assets and diversified sources of funding. In meeting our liquidity requirement the Group
makes use of the Reserve Bank of Australia provided Committed Liquidity Facility.
The Group also maintains a significant amount of contingent liquidity in the form of internal securitisation whereby the collateral
can be presented to the Reserve Bank of Australia for cash in extraordinary circumstances such as systemic liquidity issues.
Liquidity risk is managed in line with the Board approved Risk Appetite, Framework and Policy. The framework incorporates limits,
monitoring and escalation processes to ensure sufficient liquidity is maintained.
The Group has established a set of early warning indicators to support the liquidity risk management process, in particular, to
alert management of emerging or increased risk or vulnerability in its liquidity position. The liquidity risk management framework
is also supported by liquidity standards and policies which are regularly reviewed and updated to reflect prevailing market
conditions, changes in operational requirements and regulatory obligations.
106 Annual Financial Report 2018
29 Risk management (continued)
Analysis of financial liabilities by remaining contractual maturities
The table below analyses the Group’s financial liabilities into relevant maturity periods based on the remaining period at the
reporting date to the contractual maturity date. The amounts disclosed in the table represent all cash flows, on an undiscounted
basis, including all future coupon payments, both principal and interest, and therefore may not reconcile with the amounts
disclosed on the balance sheet.
For foreign exchange derivatives and cross currency interest rate swaps, the amounts disclosed are the gross contractual cash
flows to be paid. For interest rate swaps, the cash flows are the net amounts to be paid, and have been estimated using forward
interest rates applicable at the reporting date.
Group
2018
Due to other financial institutions
Deposits
Notes payable
Derivatives - net settled
Other payables
Preference shares
Subordinated debt
At call
Not longer
than 3
months
3 to 12
months
1 to 5
years
Longer than
5 years
Total
$m
$m
$m
$m
$m
$m
352.5
23,574.5
4.8
-
536.0
-
-
-
16,075.5
279.1
9.5
-
-
9.4
-
16,166.9
213.2
11.2
-
36.4
27.7
-
3,956.9
720.7
9.6
-
705.6
367.5
-
1.6
2,329.4
0.2
-
355.2
478.4
352.5
59,775.4
3,547.2
30.5
536.0
1,097.2
883.0
Total financial liabilities
24,467.8
16,373.5
16,455.4
5,760.3
3,164.8
66,221.8
Contingent liabilities
Commitments
Total contingent liabilities and commitments
247.1
6,122.8
6,369.9
-
18.9
18.9
-
56.7
56.7
-
191.7
191.7
-
72.4
247.1
6,462.5
72.4
6,709.6
2017
Due to other financial institutions
Deposits
Notes payable
Derivatives - net settled
Other payables
Preference shares
Subordinated debt
328.4
22,612.8
5.0
-
593.4
-
-
-
17,106.6
19.3
13.5
-
-
8.3
-
15,451.1
411.4
26.6
-
35.0
25.6
-
4,300.8
1,271.3
21.0
-
375.7
374.7
-
0.7
2,269.7
0.1
-
578.8
495.7
328.4
59,472.0
3,976.7
61.2
593.4
989.5
904.3
Total financial liabilities
23,539.6
17,147.7
15,949.7
6,343.5
3,345.0
66,325.5
Contingent liabilities
Commitments
Total contingent liabilities and commitments
253.8
6,206.7
6,460.5
-
21.2
21.2
-
63.6
63.6
-
222.1
222.1
-
101.7
253.8
6,615.3
101.7
6,869.1
Annual Financial Report 2018 107
29 Risk management (continued)
Liquidity risk (continued)
Analysis of financial liabilities by remaining contractual maturities (continued)
Bank
2018
Due to other financial institutions
Deposits
Derivatives - net settled
Other payables
Loans payable to securitisation trusts
Preference shares
Subordinated debt
At call
Not longer
than 3
months
3 to 12
months
1 to 5
years
Longer than
5 years
Total
$m
$m
$m
$m
$m
$m
346.7
22,921.3
-
616.6
-
-
-
-
14,654.5
9.5
-
-
-
9.2
-
14,319.5
11.0
-
-
36.4
27.2
-
3,801.7
9.6
-
-
705.6
356.9
-
1.6
0.2
-
8,097.9
355.2
478.4
346.7
55,698.6
30.3
616.6
8,097.9
1,097.2
871.7
Total financial liabilities
23,884.6
14,673.2
14,394.1
4,873.8
8,933.3
66,759.0
Contingent liabilities
Commitments
Total contingent liabilities and commitments
239.8
5,623.4
5,863.2
-
18.9
18.9
-
56.6
56.6
-
191.5
191.5
-
72.4
239.8
5,962.8
72.4
6,202.6
2017
Due to other financial institutions
Deposits
Derivatives - net settled
Other payables
Loans payable to securitisation trusts
Preference shares
Subordinated debt
328.0
22,175.8
-
589.6
-
-
-
-
15,702.3
13.2
-
-
-
8.3
-
13,853.3
26.0
-
-
35.0
25.6
-
4,192.1
20.4
-
-
375.7
364.7
-
0.7
0.1
-
8,134.5
578.8
495.7
328.0
55,924.2
59.7
589.7
8,134.5
989.5
894.3
23,093.4
15,723.8
13,939.9
4,952.9
9,209.8
66,919.8
Contingent liabilities
Commitments
Total contingent liabilities and commitments
249.1
5,677.3
5,926.4
-
21.2
21.2
-
63.6
63.6
-
222.1
222.1
-
101.7
249.1
6,085.9
101.7
6,335.0
Market risk (including interest rate and currency risk)
Market risk is the risk that changes in market rates and prices including: interest rates, foreign currency exchange rates and
equity prices which will affect the Group’s financial performance and financial position. Market risk is referred to as either traded
or non-traded risk.
Traded market risk primarily represents interest rate risk in the trading book which operates as an integral part of the liquidity
risk management function. The trading book portfolio consists of securities held for trading and liquidity purposes. This risk is
represented by the potential adverse impact to net interest income (NII) and other income resulting from positions held in traded
interest rate securities such as government bonds and traded interest rate swaps.
Non-traded market risk primarily represents interest rate risk in the banking book (IRRBB). This risk is represented by the
potential adverse impact to NII resulting from a mismatch between the maturity and repricing dates of its assets and liabilities
that arises in the normal course of its business activities. The banking book activities that give rise to market risk include
general lending activities, balance sheet funding and capital management.
The Group currently uses both a static and dynamic approach to model the effect of interest rate movements on NII and market
value of equity (MVE). The primary interest rate monitoring tools used are simulation models and gap analysis. The interest rate
simulation model is a dynamic technique that allows the performance of risk management strategies to be tested under a variety
of rate environments over a range of timeframes extending out to five years. The results of this testing are then compared to the
risk appetite limits for NII.
108 Annual Financial Report 2018
29 Risk management (continued)
Interest Rate risk (continued)
Group
2018
Assets
Cash & cash equivalents
Due from other financial institutions
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Loans & other receivables
Derivatives
Fixed interest rate repricing
Floating
interest
rate
Less
than 3
months
Between
3 and 6
months
Between
6 and 12
months
Between
1 and 5
years
After
5 years
Non-
interest
earning/
bearing
Total
carrying
value per
Balance
sheet
Weighted
average
effective
interest
rate
$m
$m
$m
$m
$m
$m
$m
$m
%
-
983.3
-
-
- 2,396.3
162.3
211.4
-
-
-
-
- 1,595.2
-
-
-
-
43,342.9 7,287.2 1,497.0 2,797.5 6,639.7
-
-
-
149.0
39.6
145.2
53.7
5.8
-
-
-
-
-
-
289.1
-
-
37.5
-
154.1 1,137.4
283.0
283.0
69.9 4,499.5
469.0
413.2
- 61,601.8
29.7
213.4
50.8
29.7
Total financial assets
44,385.7 10,057.2 1,830.8 2,797.5 8,234.9
326.6
800.9 68,433.6
Liabilities
Due to other financial institutions
Deposits
Notes payable
Derivatives
Preference shares
Subordinated debt
-
-
-
-
-
18,809.6 19,197.6 9,888.1 7,549.4 4,083.2
-
-
-
-
- 3,544.8
-
-
316.2
-
706.1
-
-
-
564.7
-
-
-
-
-
Total financial liabilities
18,809.6 23,764.7 10,452.8 7,549.4 4,083.2
2017
Assets
Cash & cash equivalents
Due from other financial institutions
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Loans & other receivables
Derivatives
-
819.0
-
-
- 2,065.4
95.4
208.9
-
-
-
-
- 2,451.4
-
-
-
-
39,390.5 7,911.0 2,227.9 3,831.5 7,374.0
-
-
-
481.4
115.9
98.0
63.0
71.8
-
-
-
-
-
1.6
-
-
-
-
1.6
-
-
659.0
-
-
41.7
-
352.5
352.5
- 59,529.5
- 3,544.8
34.8
880.9
709.2
34.8
-
3.1
390.4 65,051.7
177.6
277.8
996.6
277.8
0.4 5,657.6
350.0
75.7
-
378.7
- 60,776.6
37.8
37.8
Total financial assets
40,344.3 10,280.7 2,923.2 3,831.5 9,825.4
700.7
569.3 68,475.1
Liabilities
Due to other financial institutions
Deposits
Notes payable
Derivatives
Preference shares
Subordinated debt
-
-
-
-
-
18,393.2 19,881.8 9,793.0 7,292.0 3,933.4
-
-
-
-
29.8 3,928.6
-
-
708.7
-
-
830.1
-
-
-
-
-
-
-
-
Total financial liabilities
18,423.0 24,519.1 10,623.1 7,292.0 3,933.4
-
0.7
-
-
-
-
0.7
328.4
328.4
- 59,294.1
- 3,958.4
59.0
830.1
708.7
59.0
-
-
387.4 65,178.7
0.97
-
2.17
1.06
2.29
4.52
-
-
1.91
3.36
-
5.85
5.21
1.48
-
2.04
2.12
2.17
4.81
-
-
1.97
2.72
-
5.02
4.91
Annual Financial Report 2018 109
29 Risk management (continued)
Interest Rate risk (continued)
Bank
2018
Assets
Cash & cash equivalents
Due from other financial institutions
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Loans & other receivables
Derivatives
Fixed interest rate repricing
Floating
interest
rate
Less
than 3
months
Between
3 and 6
months
Between
6 and 12
months
Between
1 and 5
years
After
5 years
Non-
interest
earning/
bearing
Total
carrying
value per
Balance
sheet
Weighted
average
effective
interest
rate
$m
$m
$m
$m
$m
$m
$m
$m
%
682.7
-
-
-
69.9 2,396.3
43.1
0.5
-
-
-
-
- 1,595.2
-
-
-
-
36,289.4 7,488.6 1,688.7 3,094.1 7,552.8
-
-
-
149.0
-
-
5,428.7
49.0
-
-
-
-
-
-
289.1
-
-
35.1
-
154.1
295.8
836.8
295.8
- 4,499.5
- 5,471.8
-
49.5
- 56,148.7
220.2
220.2
Total financial assets
42,519.7 9,928.5 1,837.7 3,094.1 9,148.0
324.2
670.1 67,522.3
Liabilities
Due to other financial institutions
Deposits
Loans payable - securitisation trusts
Derivatives
Preference shares
Subordinated debt
-
-
18,456.5 17,724.3 9,044.5 6,463.0 3,839.0
406.5 1,196.9
6,010.1
239.7
244.7
-
-
-
-
-
3.1
-
316.2
696.1
-
564.7
-
-
-
-
-
-
-
-
1.6
-
-
-
-
346.7
346.7
- 55,528.9
- 8,097.9
54.1
-
-
54.1
880.9
699.2
Total financial liabilities
24,469.7 18,976.3 9,853.9 6,869.5 5,035.9
1.6
400.8 65,607.7
2017
Assets
Cash & cash equivalents
Due from other financial institutions
Financial assets held for trading
Financial assets available for sale
Financial assets held to maturity
Loans & other receivables
Derivatives
-
644.7
-
-
- 2,066.1
- 5,155.3
-
-
-
-
-
- 2,451.4
-
-
-
-
35,205.2 7,964.9 1,974.3 3,576.8 6,848.2
-
-
-
481.4
-
-
65.8
-
-
-
-
-
-
659.0
-
-
41.8
-
177.5
278.1
822.2
278.1
- 5,657.9
- 5,155.3
-
65.8
- 55,611.2
142.0
142.0
Total financial assets
35,915.7 15,186.3 2,455.7 3,576.8 9,299.6
700.8
597.6 67,732.5
-
-
-
-
-
-
-
328.0
328.0
- 55,738.6
- 8,134.5
77.6
-
-
77.6
830.1
698.7
405.6 65,807.5
Liabilities
Due to other financial institutions
Deposits
Loans payable - securitisation trusts
Derivatives
Preference shares
Subordinated debt
-
-
17,918.8 18,632.1 8,991.7 6,441.8 3,754.2
592.7 1,101.5
5,827.6
376.1
236.6
-
-
-
-
-
-
-
-
698.7
-
830.1
-
-
-
-
-
-
-
Total financial liabilities
23,746.4 19,567.4 10,197.9 7,034.5 4,855.7
110 Annual Financial Report 2018
1.14
-
2.17
1.73
3.50
4.64
-
-
1.88
4.64
-
5.85
5.21
1.49
-
2.04
2.58
1.54
4.77
-
-
1.95
4.77
-
5.02
4.91
29 Risk management (continued)
Interest Rate risk (continued)
The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables
held constant, on the Group’s income statement and equity.
The sensitivity of the income statement is the effect of assumed changes in interest rates on the net interest for one year,
based on the floating rate financial assets and financial liabilities held at 30 June 2018, including the effect of hedging
instruments. The sensitivity of equity is calculated by revaluing fixed rate available for sale financial assets (including the ef-
fect of any associated hedges), and swaps designated as cash flow hedges, at 30 June 2018 for the effects of the assumed
changes in interest rates. The sensitivity of equity is analysed by the maturity of the asset or swap, with sensitivity based on
the assumption that there are parallel shifts in the yield curve.
+100 basis
points
-100 basis
points
+100 basis
points
-100 basis
points
Group
Net interest income
Ineffectiveness in derivatives
Income tax effect at 30%
Effect on profit
Effect on profit (per above)
Cash flow hedge reserve
Income tax effect on reserves at 30%
Effect on equity
Bank
Net interest income
Ineffectiveness in derivatives
Income tax effect at 30%
Effect on profit
Effect on profit (per above)
Cash flow hedge reserve
Income tax effect on reserves at 30%
Effect on equity
2018
$m
55.4
(49.4)
(1.8)
2018
$m
(68.7)
49.4
5.8
4.2
(13.5)
4.2
(58.2)
17.5
(36.5)
45.8
(48.7)
0.9
(2.0)
(2.0)
(58.7)
17.6
(43.1)
(13.5)
58.2
(17.5)
27.2
(58.3)
48.7
2.9
(6.7)
(6.7)
58.7
(17.6)
34.4
2017
$m
53.1
(64.0)
3.3
(7.6)
(7.6)
3.8
(1.1)
(4.9)
47.0
(60.1)
3.9
(9.2)
(9.2)
12.0
(3.6)
(0.8)
2017
$m
(64.8)
64.0
0.2
(0.6)
(0.6)
(3.8)
1.1
(3.3)
(58.1)
60.1
(0.6)
1.4
1.4
(12.0)
3.6
(7.0)
The movements in profit are due to higher/lower interest costs from variable rate debt and cash balances. The movement in
equity is also affected by the increase/decrease in the fair value of derivative instruments designated as cash flow hedges,
where these derivatives are deemed effective.
This analysis reflects a scenario where no management actions are taken to counter movements in rates.
Foreign currency risk
The Group does not have any significant exposure to foreign currency risk, as all borrowings through the Company’s Euro Me-
dium Term Note program (EMTN) and Euro Commercial Paper program (ECP) are fully hedged. At balance date the principal
of foreign currency denominated borrowings under these programs was AUD $216.2m (2017: AUD $583.2m) with all bor-
rowings fully hedged by cross currency swaps, and foreign exchange swaps. Retail and business banking FX transactions are
managed by the Group’s Financial Markets unit, with resulting risk constrained by Board approved spot and forward limits.
Adherence to limits is independently monitored by the Middle Office function.
The Group conducts discretionary interest rate and foreign exchange trading. This trading forms part of the trading book
activity within the liquidity management function. The trading book positions include approved financial instruments, both
physical and derivative.
Annual Financial Report 2018 111
30 Subsidiaries and other controlled entities
Subsidiaries
The following table presents the material subsidiaries of the Group. A subsidiary has been considered to be material if it has
more than 0.5% of the total Group assets.
Chief entity and Ultimate parent
Bendigo and Adelaide Bank Limited
Other entities
Homesafe Trust
Leveraged Equities Ltd
Rural Bank Ltd
Principal activities
Banking
Principal activities
Homesafe product financier
Margin lending
Banking
All entities are 100% owned and incorporated in Australia.
Investments in controlled entities
Group
Bank
At cost
Significant restrictions
2018
$m
-
-
2017
$m
-
-
2018
$m
585.2
585.2
2017
$m
570.2
570.2
The Group does not have any significant restrictions on its ability to access or use its assets and settle its liabilities
other than those resulting from the supervisory frameworks within which banking subsidiaries operate. The supervisory
framework requires banking subsidiaries to keep certain levels of regulatory capital and liquid assets, limit their exposure to
other parts of the Group and comply with other ratios. The carrying amounts of banking subsidiaries’ assets and liabilities
are $4.9 billion and $4.1 billion, respectively (2017: $4.5 billion and $3.8 billion, respectively).
Recognition and measurement
The Group classify all entities where it owns 100% of the shares and in which it controls as subsidiaries. The basis of
consolidation is presented in Note 2 Summary of significant accounting policies. Investments in subsidiaries are stated at
cost.
Special Purpose Vehicles (SPE’s)
The following table presents a list of the material SPEs. A SPE has been considered to be material where the assets are
more than 0.5% of total group assets. For further information relating to SPEs refer to Note 13 Securitisation and transferred
assets.
Entity
Principal activities
Entity
Principal activities
Leveraged Equities 2009 Trust
Securitisation
Torrens Trust 2016-1 Trust
Securitisation
Torrens Series 2008-1 Trust
Securitisation
Torrens Trust 2017-1 Trust
Securitisation
Torrens Series 2008-4 Trust
Securitisation
Torrens Trust 2017-3 Trust
Securitisation
112 Annual Financial Report 2018
31 Related party disclosures
Subsidiary transactions
Transactions undertaken with subsidiaries are eliminated in the Group’s financial reports. Transactions between the parent
and the subsidiary are funded through intercompany loans with no fixed repayment date and are repayable upon demand.
A summary of material transactions excluding dividends between the Bank and its subsidiaries during the period were:
Opening balance at beginning of financial year
Net receipts and fees received from subsidiaries
Supplies, fixed assets and services charged to subsidiaries
Net amount owing from subsidiaries
Bendigo and Adelaide Bank provides funding and guarantee facilities to several subsidiary
companies. These facilities are provided on normal commercial terms and conditions.
Subsidiary
Sandhurst Trustees Limited
Facility
Guarantee
Other related party transactions
Joint arrangement entities and associates
2018
$m
(49.2)
159.7
(103.1)
7.4
2017
$m
(71.8)
131.8
(109.2)
(49.2)
Limit
$m
0.5
Drawn/issued
at 30 June
2018
$m
-
Bendigo and Adelaide Bank Limited has investments in joint arrangement entities and associates which are investments
accounted for using the equity method.
Transactions entered into with these related entities principally include commissions received and paid, services and sup-
plies procured and fees charged in relation to the provision of banking, administrative and corporate services. These reve-
nue and expense items are included in the Group’s income statement. The transactions are conducted on the same terms
as other third party transactions.
A summary of material transactions excluding dividends between the Bank and joint arrangements and associates during the
period were:
Commissions and fees paid to joint arrangements and associates
Supplies and services provided to joint arrangements and associates
Amount owing from joint arrangements and associates
2018
$m
35.5
8.3
(2.1)
2017
$m
31.7
8.8
(1.1)
Bendigo and Adelaide Bank Limited provides loans, guarantees and/or overdraft facilities to joint arrangements and
associates. The loans have agreed repayment terms which vary according to the nature of the facility. These loans are
included in the net amount owing from joint arrangements and associates in the above table.
Other related party transactions
Key management personnel
Key management personnel (KMP) are those persons with authority and responsibility for planning, directing and controlling
the activities of the Group, directly or indirectly.
The Group’s KMP are those members of the Bendigo and Adelaide Bank Group Executive Committee together with its Non-
executive Directors. Further details relating to KMP are located in the Remuneration Report.
The table below details, on an aggregated basis, KMP compensation:
Compensation
Salaries and other short term benefits
Post-employment benefits
Other long term benefits
Share based payments
Total
30 June 2018
30 June 2017
$'000's
8,066.0
340.3
(27.1)
$'000's
7,578.0
345.5
10.6
2,890.6
2,335.2
11,269.8
10,269.3
Annual Financial Report 2018 113
31 Related party disclosures (continued)
Other related party transactions (continued)
Key management personnel (continued)
The table below details, on an aggregate basis, KMP equity holdings. The holdings comprise ordinary shares, preference shares,
performance shares and deferred shares:
Equity holdings
Ordinary shares (includes deferred shares)
Preference shares
Performance shares
Closing balance
30 June 2018
30 June 2017
No.
No.
1,826,703
1,763,788
4,240
4,240
509,011
412,320
2,339,954
2,180,348
The table below details, on an aggregated basis, loan balances outstanding at the end of the year between the Group and its KMP:
Loans 1,2,3
Loans outstanding at the beginning of the year 2
Loans outstanding at the end of the year
Interest paid or payable
Interest not charged
30 June 2018
30 June 2017
$'000's
$'000's
10,456.1
7,668.6
12,174.4
10,455.7
496.1
358.0
-
-
1. The balance of loans outstanding includes the provision of a guarantee to the value of $20,000 which was provided to a KMP in the ordinary course of
the Group’s business and on an arm’s length basis.
2. The balance of loans outstanding excludes the value of loans provided to Executives under the Employee Share Ownership Plan.
3. The balance of loans outstanding relate to KMP who were in office at the start of, or appointed during, the financial year.
Loans to directors and senior executives are made in the ordinary course of the Group’s business and on an arm’s length basis.
The loans are processed and approved in accordance with the Bank’s standard lending terms and conditions.
32 Involvement with unconsolidated structured entities
The table below describes the types of structured entities that the Group does not consolidate but in which it holds an interest.
Type of structured entity
Nature and purpose
Interest held by the Group
Securitisation vehicles -
for loans and advances
originated by third parties
To generate:
• external funding for third parties; and
• investment opportunities for the Group.
These vehicles are financed through the issue of notes to investors.
• Investments in notes
issued by the vehicles
Managed investment funds
To generate:
• a range of investment opportunities for external investors; and
• fees from managing assets on behalf of third party investors for the Group.
• Investment in units
issued by the funds
• Management fees
Risks associated with unconsolidated structured entities
The following table summarises the carrying values recognised in the balance sheet in relation to unconsolidated structured entities:
Balance sheet
Cash and cash equivalents
Loans and other receivables
Financial assets available for sale
114 Annual Financial Report 2018
2018
$m
0.1
93.0
8.9
102.0
2017
$m
0.1
76.5
8.8
85.4
32 Involvement with unconsolidated structured entities (continued)
Maximum exposure to loss
For loans and other receivables, the maximum exposure
to loss is the current carrying value of these interests
representing the amortised cost at reporting date. The
maximum loss exposure for the interest rate swaps is
Cash and cash equivalents
Senior notes
Investment
Interest rate swap
unquantifiable as these swaps pay a floating rate of interest
which is uncapped, however is expected to be immaterial.
The following table summarises the Group’s maximum
exposure to loss from its involvement with structured entities.
Carrying
amount
Maximum
loss exposure
Carrying
amount
Maximum
loss exposure
2018
$m
0.1
93.0
8.9
-
2018
$m
0.1
93.0
8.9
**
2017
$m
0.1
76.5
8.8
-
2017
$m
0.1
76.5
8.8
**
** Maximum loss exposure is not disclosed as it is expected to be immaterial and is not quantifiable.
Significant restrictions
Community Banks
Community Banks are not consolidated by the Group as the
Group does not have power to govern decision making.
While the Group’s returns are variable they are calculated as a
percentage of the gross margin. In some cases the Group holds
shares in Community Bank branches and has representation
on the Board. These shares are held as investments and are
accounted for using the equity method. Consolidation of a
Community Bank Branch would occur when the Group has
power to affect returns through the majority representation on
the Board.
Alliance partners
Alliance partners are not consolidated by the Group as the
Group does not have power to govern decision making.
While the Group’s returns are variable they are calculated
as a percentage of the gross margin. The Group has no
representation on the Board of these entities.
There are no significant restrictions imposed by any
unconsolidated structured entity on the Group’s ability to access
or use its assets or settle its liabilities.
Recognition and measurement
A structured entity is an entity that has been designed so that
voting or similar rights are not the dominant factor in deciding
who controls the entity. Involvement with structured entities
varies and includes debt financing of these entities as well as
other relationships. A review is undertaken to determine the
involvement the Group has and whether the involvement with
these entities results in significant influence, joint control or
control over the structured entity. The structured entities over
which control can be exercised are consolidated. These entities
are outlined in Note 30 Subsidiaries and other controlled
entities.
The Group has no contractual arrangements that would require
it to provide financial or other support to a consolidated or
unconsolidated entity. The Group has not previously provided
financial support, and has no intention to provide such support
to these entities.
Managed Investment funds
Sandhurst Trustees Limited (STL), a subsidiary of the Group,
acts as a responsible entity for certain managed investment
funds.
The decision-making rights of the fund are restricted to the
Product Disclosure Statements. The fees received by STL are
not variable, are commensurate with the services provided
and are consistent with similar funds in the market. Where
STL holds investments in the funds, an assessment of the
Group’s power over the relevant activities of the Fund and the
significance of its exposure to variable returns is completed to
determine whether the Fund should be consolidated.
Annual Financial Report 2018 115
33 Fiduciary activities
The Group conducts investment management and other
fiduciary activities as responsible entity, trustee, custodian
or manager for a number of funds and trusts, including
superannuation, unit trusts and mortgage pools.
The amounts of the funds concerned are:
Funds under trusteeship
Assets under management
Funds under management
Group
2018
$m
5,924.6
2,200.0
3,633.2
2017
$m
5,393.9
2,152.1
3,170.4
Recognition and measurement
The assets and liabilities of these trusts and funds are not
included in the consolidated financial statements as the Group
does not have direct or indirect control of the trusts and funds.
Commissions and fees earned in respect of the activities are
included in the income statement of the Group.
As an obligation arises under each type of duty, the amount
of funds has been included where that duty arises. This may
lead to the same funds being shown more than once where
the Group acts in more than one capacity in relation to those
funds (e.g. manager and trustee). Where controlled entities, as
trustees, custodian or manager incur liabilities in the normal
course of their duties, a right of indemnity exists against the
assets of the applicable trusts. As these assets are sufficient
to cover liabilities, and it is therefore not probable that the
Group will be required to settle them, the liabilities are not
included in the financial statements.
2017
$m
105.3
15.4
6.5
127.2
2017
$m
20.3
318.8
(317.2)
21.9
34 Provisions
Employee entitlements
Property rent
Other 1
Closing balance
Group
Bank
2018
$m
110.5
19.8
6.3
136.6
2017
$m
108.9
15.4
6.5
130.8
2018
$m
107.2
19.8
5.1
132.1
1 Other provisions comprise various other provisions including reward programs and dividends.
Movements in provisions (excluding employee entitlements)
Property Rent
Other
Total
Group
Opening balance
Additional provision recognised
Amounts utilised during the year
Closing balance
Bank
Opening balance
Additional provision recognised
Amounts utilised during the year
Closing balance
2018
$m
15.4
7.2
(2.8)
19.8
15.4
7.2
(2.8)
19.8
2017
$m
14.1
2.6
(1.3)
15.4
14.1
2.6
(1.3)
15.4
Employee benefits
The table below shows the individual balances for
employee benefits:
Annual leave
Other employee payments
Long service leave
Sick leave bonus
Closing balance
116 Annual Financial Report 2018
2018
$m
6.5
327.5
(327.7)
6.3
2017
$m
6.2
316.2
(315.9)
6.5
2018
$m
21.9
334.7
(330.5)
26.1
6.5
326.3
6.2
316.2
21.9
333.5
20.3
318.8
(327.7)
(315.9)
(330.5)
(317.2)
5.1
6.5
24.9
21.9
Group
Bank
2018
$m
31.3
12.3
59.8
7.1
2017
$m
29.8
12.0
59.8
7.3
2018
$m
30.4
12.3
57.5
7.0
2017
$m
28.6
12.0
57.4
7.3
110.5
108.9
107.2
105.3
34 Provisions (continued)
Recognition and measurement
Annual leave and long service leave are measured as the
present value of expected future payments for the services
provided by employees up to the reporting date. The provision
is measured at the amounts that are expected to be paid
when the liabilities are settled. Expected future payments are
discounted using corporate bond rates.
Annual leave is accrued on the basis of full pro-rata
entitlement and amounts are estimated to apply when the
leave is paid. It is anticipated that annual leave will be paid in
the ensuing twelve months.
Long service leave has been assessed at full pro-rata
entitlement in respect of all employees with more than one
year’s service. The assessment considers the likely number of
employees that will ultimately be entitled to long service leave,
estimated future salary rates and on-costs.
Sick leave bonus provides an entitlement dependent on an
employee’s years of service and unused sick leave and is paid
on termination.
Other employee payments include short term incentives and
are expected to be paid in the ensuing twelve months.
Property rent
The provision for property rent is to recognise the difference
between actual property rent paid and the property rent
expense recognised in the income statement. The lease
expense is recognised on a straight line basis over the period
of the lease. The provision is expected to be utilised over the
period of the respective leases, typically a period between
three and ten years. However, it is expected that a balance will
continue as old leases expire and are replaced by new leases.
Other
The provision for dividends represents the residual carried
forward balance in relation to ordinary shareholders that
participate in the dividend reinvestment plan. It is expected
that the current balance will be utilised within a twelve
month period. However, an ongoing balance will continue
unless all outstanding balances are paid to shareholders
upon ceasingparticipation in the dividend reinvestment plan.
The provision also includes accrued dividends relating to
preference shares. The provision of rewards program is to
recognise the liability to customers in relation to points earned
by them under the program. Reward points expire after three
years. The balance will be utilised or forfeited during that
period.
Recognition and measurement
Provisions are recognised when the Group has a legal,
equitable or constructive obligation to make a future sacrifice
of economic benefits to other entities as a result of past
transactions or other past events, and it is probable that a
future sacrifice of economic benefits will be required and a
reliable estimate can be made of the amount of the obligation.
If the effect of the time value of money is material, provisions
are determined by discounting the expected cash flows at a
pre-tax rate that reflects current market assessments of the
time value of money and, where appropriate, the risks specific
to the liability.
Where discounting is used the increase in the provision due to
the passage of time is recognised as a finance cost.
A provision for dividend is not recognised as a liability unless
the dividend is declared, determined or publicly recommended
on or before the reporting date.
Annual Financial Report 2018 117
Deferred shares
Under the Plan, Participants are granted deferred shares
as part of their base remuneration and short term incentive
payments. The deferred shares are beneficially owned by the
Participant from the grant date and are held on trust for a two
year period.
The deferred shares are fully-paid ordinary shares in the
Company and are granted subject to certain Board imposed
conditions being satisfied:
•
•
two year continued service condition; and
risk conditions
If the service condition is satisfied, the deferred shares will
vest subject to any risk conditions.
The number of shares awarded as part of the plan are
calculated by dividing the deferred remuneration value by
the volume weighted average closing price of the Company’s
shares for the last five trading days of the financial year prior
to the year of grant. The Participants are entitled to vote
and to receive any dividend, bonus issue, return of capital or
distribution made in respect of shares they are allocated on
vesting and exercise of their deferred shares.
Employee Share Grant Scheme (ESGS)
The Company has established a share based incentive plan
for full time and permanent part time employees of the Group
(excluding Directors and Senior Executives).
The shares will be held in trust for a period of three years after
which time they will be transferred to the employee. During
the restricted period employees will be entitled to receive
dividends and to vote at general meetings.
Employee Share Plan
The Company established a loan based limited recourse
Employee Share plan in 2006. The Plan is only available to full
time and part time employees of the Group (excluding Senior
Executives and the Managing Director).
The Plan provides employees with a limited recourse interest
free loan for the sole purpose of acquiring fully paid ordinary
shares in the Company. The shares must be paid for by the
employee with cash dividends after personal income tax
being applied to repay the loans. Employees cannot exercise,
dispose or transfer the shares until the loan has been fully
repaid.
The first issue to staff under this Plan was completed in
September 2006 with a further grant made in December
2007. There have been no further issues under this Plan.
35 Share based payment plans
The Group provides benefits to employees by offering share
based compensation whereby employees render services in
exchange for shares or rights over shares.
These share based incentive plans form an integral part of the
Group’s remuneration framework with the objective of aligning
the interests of executives and general employees to the
interests of shareholders.
Further detailed information including terms and conditions
associated with each plan is included in the Remuneration
Report.
Details of current plans
Performance rights
The Plan provides for grants of performance rights to
the Managing Director, Senior Executives and key senior
management (the Participants) as determined by the Board.
Participants are invited to receive grants of performance rights
that are subject to performance conditions set by the Board.
The performance right grant made during FY2018 is subject to
the following performance conditions:
•
a ‘customer hurdle’ that requires the Bank’s Net Promoter
Score over the performance period to be better than the
performance of a peer group of Australian banks.
increase in cash earnings per share from previous
financial year, followed by a total shareholder return (TSR)
performance hurdle; and
•
•
continuing service with the Group.
The previous performance right grants are subject to the
following performance conditions:
•
increase in cash earnings per share from previous
financial year, followed by a total shareholder return (TSR)
performance hurdle; and
•
continuing service with the Group.
The number of performance rights granted to Participants is
determined by dividing the remuneration value of the proposed
grant by the volume weighted average closing price of the
Company’s shares for the last five trading days of the financial
year prior to the year of grant.
The Participants are entitled to vote and to receive any
dividend, bonus issue, return of capital or distribution made in
respect of shares they are allocated on vesting and exercise of
their performance rights.
118 Annual Financial Report 2018
35 Share based payment plans (continued)
Employee Share Ownership Plan (discontinued)
In 2006 the Company discontinued the existing loan based Employee Share Ownership Plan that was open to all employees of
the Group. Refer to the June 2015 annual financial report or prior years for more detailed information regarding this Plan.
Summary of details under the various plans
The following table details the number (No.) and movements in the various plans during the year. The rights and share are
granted at no cost and have no exercise price.
Performance rights
Deferred shares
Share Grant Scheme
Employee Share Plan
2018
2017
2018
2017
2018
2017
2018
2018
2017
2017
No. 1
No. 1
No. 1
No. 1
No. 1
No. 1
No. 2 WAEP ($)
No. WAEP ($)
Outstanding at
beginning of year
688,585
454,024
163,659
94,186
199,524
228,038 1,593,277
5.03
1,858,178
5.45
Granted
309,349
378,759
175,309
163,659
- 204,686
Forfeited/lapsed
(164,209)
(144,198)
(3,870)
-
-
-
-
-
-
-
-
-
-
-
Vested/
exercised
Outstanding at
year end
Exercisable at
year end
-
- (163,659)
(94,186)
(16,098)
(233,200)
(128,447)
4.90
(264,901)
4.62
833,725
688,585
171,439
163,659
183,426
199,524 1,464,830
4.49
1,593,277
5.03
-
-
-
-
-
-
-
-
-
-
1. Closing balance of deferred shares and performance rights are exercisable upon meeting the required conditions and until 30 June 2019 and 30 June
2021 respectively.
2. The outstanding balance as at 30 June 2018 is represented by 1,464,830 (2017: 1,593,277) ordinary shares with a market value of $15,878,757
(2017: $17,653,509), exercisable upon repayment of the employee loan.
Recognition and measurement
The cost of the employee services received in respect of shares or rights granted is recognised in the income statement over
the period the employee provides the services, generally the period between the grant date and the vesting date of the shares or
rights. The overall cost of the award is calculated using the number of shares or rights expected to vest and the fair value of the
shares or rights at the grant date.
Fair value methodology - The fair value of shares or rights granted under the various Plans takes into account the terms and
conditions upon which the shares or rights were granted.
Performance rights - The fair value is determined using a Black Scholes Merton valuation method incorporating a Monte Carlo
Simulation option pricing model taking into account the terms and conditions upon which the rights were granted.
The following inputs are used in the models:
Dividend yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life of performance rights (years)
Exercise price ($)
Managing Director
Other executives
Other executives
12 Dec 2017
24 Apr 2018
12 Dec 2017
5.75%
22.50%
2.09%
4 years
nil
6.42%
24.67%
2.28%
3 years
nil
5.75%
22.50%
1.97%
3 years
nil
The expected life of the performance rights are based on historical data, and are not necessarily indicative of exercise patterns
that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which
may also not necessarily be the actual outcome. No other features of shares granted were incorporated into the measurement of
fair value. The fair value is determined by an independent valuation.
Deferred shares - The fair value is measured as at the date of the grant using the volume weighted average closing price of the
Company’s shares traded on the ASX for five trading days ending on the grant date.
Annual Financial Report 2018 119
36 Commitments and contingencies
a) Commitments
The following are outstanding expenditure and credit related commitments as at 30 June 2018. Except where specified, all
commitments are payable within one year.
Operating lease commitments (as lessee)
Not later than 1 year
Later than 1 year but not later than 5 years
Later than 5 years
Operating lease commitments (as lessor)
Not later than 1 year
Later than 1 year but not later than 5 years
Later than 5 years
Credit related commitments
Group
Bank
2018
$m
71.6
177.6
65.3
314.5
4.0
14.1
7.1
25.2
2017
$m
81.1
208.4
91.2
380.7
3.7
13.7
10.5
27.9
2018
$m
71.5
177.4
65.3
314.2
4.0
14.1
7.1
25.2
2017
$m
81.1
208.4
91.2
380.7
3.7
13.7
10.5
27.9
Gross loans approved, but not advanced to borrowers
2,106.4
2,001.1
2,061.0
1,935.4
Credit limits granted to clients for overdrafts and credit cards 1
Total amount of facilities provided
Amount undrawn at balance date
9,181.7
4,016.4
10,110.3
4,205.6
8,068.9
3,562.4
9,047.4
3,741.9
1. Normal commercial restrictions apply as to use and withdrawal of the facilities.
Recognition and measurement
Operating leases
An operating lease is a lease where substantially all of the risks and rewards of the leased assets remain with the lessor.
The Group has entered into commercial property leases and commercial leases on certain motor vehicles and items of office
equipment. The leases have various terms and some property leases include optional renewal periods in the contracts.
There are no restrictions placed upon the lessee by entering these leases. Payments made under operating leases are
recognised in the income statement on a straight line basis over the term of the lease. Lease incentives received are recognised
as an integral part of the lease expense, over the term of the lease.
The Group has entered into commercial property leases on the Group’s surplus office space. These non-cancellable leases have
various terms. All leases have a clause to enable upward revision of the rental charge on a regular basis according to prevailing
market conditions. Rentals received are recognised in the income statement on a straight line basis over the lease term.
Future minimum rentals payable and receivable under non-cancellable operating leases as at 30 June 2018 are outlined in the
table above.
120 Annual Financial Report 2018
36 Commitments and contingencies (continued)
b) Contingent liabilities and contingent assets
Contingent liabilities
Guarantees
Group
2018
$m
2017
$m
Bank
2018
$m
2017
$m
The economic entity has issued guarantees on behalf of clients
245.4
251.6
238.3
247.2
Other
Documentary letters of credit & performance related obligations
1.7
2.2
1.5
1.9
As the probability and value of guarantees, letters of credit and performance related obligations that may be called on is
unpredictable, it is not practical to state the timing of any potential payment.
Recognition and measurement
Financial guarantees
Bank guarantees have been issued by the Group on behalf of customers whereby the Group is required to make specified
payments to reimburse the holders for a loss they may incur because the customer fails to make a payment.
Contingent liabilities are not recognised on the balance sheet. The contractual term of the guarantee matches the underlying
obligations to which it relates. The fair value of financial guarantee contracts has been assessed using a probability weighted
discounted cash flow approach. The guarantees issued by the Bank are fully secured and the bank has never incurred a loss in
relation to the financial guarantees it has provided.
Legal claims
The Group is engaged in a range of litigation and court proceedings at any point in time. However, no current proceedings
or claims are expected to have a material effect on the business, financial condition or operating results of the Group. For all
litigation exposures where loss is probable and can be reliably estimated an appropriate provision is made. The Group recorded
provisions for the existing Sandhurst Trustees Ltd legal proceedings.
Compensation claims
On the 7th August 2018, ASIC announced an update to the program of work that they are overseeing in relation to “Fee for No
Service” (FFNS) remediation programs. A number of Australian Financial services (AFS) licensees have been identified, who have
potential FFNS failings. This included Bendigo Financial Planning, a subsidiary of the Bendigo and Adelaide Bank Group.
The Group did raise a provision for $1.2m for compensation costs, relating to customers acquired through the business
acquisition of Wheelers Financial Services in relation to FFNS failings. However, work is continuing on other remediation
programs impacting Bendigo Financial Planning, and as such is not in a position to reliably estimate the impact of any resolution
and therefore a provision has yet to be raised for any compensation costs.
Contingent assets
As at 30 June 2018, the economic entity does not have any contingent assets.
Annual Financial Report 2018 121
37 Auditors’ remuneration
Group
2018
$
2017
$
Bank
2018
$
2017
$
Total fees paid or due and payable to Ernst & Young (Australia) 1
Audit and review of financial statements 2
1,680,870
1,771,965
1,330,730
1,399,280
Audit related fees
Regulatory 3
Non-regulatory 4
Total audit related fees
737,487
364,900
353,522
233,065
707,050
299,500
321,260
63,260
1,102,387
586,587
1,006,550
384,520
Total remuneration of Ernst & Young (Australia)
2,783,257
2,358,552
2,337,280
1,783,800
1 Fees exclude goods and services tax.
2 Audit and review of financial statements includes payments for the audit of the financial statements of the Group and Bank, including controlled entities
that are required to prepare financial statements.
3 Audit related fees (Regulatory) consist of fees for services required by statute or regulation that are reasonably related to the performance of the audit of
the Group’s financial statements and are traditionally performed by the external auditor. These services include assurance of the Group’s compliance with
APRA and Australian Financial Services Licensing reporting and compliance requirements.
4 Audit related fees (Non-regulatory) consist of fees for assurance and related services not required by statute or regulation but are reasonably related to
the performance of the audit or review of the Group’s financial statements which are traditionally performed by the external auditor. These services include
assurance of funding and capital raising and data and model validation for Basel II advanced accreditation.
38 Events after balance sheet date
No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly
affect the operations of the economic entity, the results of those operations, or the state of affairs of the economic entity in
subsequent financial years.
122 Annual Financial Report 2018
Directors’ Declaration
In accordance with a resolution of the directors of Bendigo and Adelaide Bank Limited, we state that:
In the opinion of the directors:
a.
the financial statements and notes of the Company and the Bendigo and Adelaide Bank Group are in accordance with the
Corporations Act 2001, including:
i.
ii.
giving a true and fair view of the Company’s and the Bendigo and Adelaide Bank Group’s financial position as at 30
June 2018 and of its performance for the year ended on that date; and
complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and Corporations
Regulations 2001;
b.
the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 2;
c.
d.
there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and
payable; and
this declaration has been made after receiving the declarations required to be made to the directors in accordance with
section 295A of the Corporations Act 2001 for the financial year ending 30 June 2018.
On behalf of the Board
Robert Johanson
Chairman
4 September 2018
Marnie Baker
Managing Director
Annual Financial Report 2018 123
124 Annual Financial Report 2018
Annual Financial Report 2018 125
126 Annual Financial Report 2018
Annual Financial Report 2018 127
128 Annual Financial Report 2018
Annual Financial Report 2018 129
130 Annual Financial Report 2018
Annual Financial Report 2018 131
Key performance indicators
The following tables provide a summary of the last five years key metrics.
Bendigo and Adelaide Bank Group
Five year history
For the year ended 30 June
Financial Performance
Net interest income
Credit expenses
Profit after income tax attributable to Owners of the Company
Cash earnings after income tax
Financial Position
Total assets
Net loans and other receivables
Total equity
Deposits and notes payable
Risk weighted assets
Additional tier 1 capital ratio
Common equity tier 1 capital ratio
Tier 2 capital ratio
Share information (per ordinary share)
Net tangible assets
Earnings (statutory basis)
Earnings (cash basis)
Dividends - fully franked
Interim
Final
Total
Shareholder ratios
Return on average tangible equity (cash basis)
Return on average assets (cash basis)
Return on average ordinary equity (cash basis)
Return on average ordinary equity after tax (statutory basis)
Key Trading Indicators
Number of staff (excluding Community Banks)
Assets per staff member
Asset Quality
Impaired loans
Specific provisions
Net impaired loans
Net impaired loans % of gross loans
Specific provision for impairment
Specific provision % of gross loans
Collective provision
General reserve for credit losses (GRCL) (general provision)
Collective provision & GRCL as a % of risk-weighted assets
1 Figures for 2015 includes Rural Finance from 1 July 2014.
132 Annual Financial Report 2018
2018
2017
2016
20151
2014
1,305.2
1,213.6
1,164.1
1,177.6
1,118.2
70.6
434.5
445.1
71.8
429.6
418.3
44.1
415.6
401.4
68.3
423.9
402.8
81.9
372.3
359.4
71,439.8
71,415.5
68,572.7
66,028.8
65,062.9
61,601.8
60,776.6
57,256.8
55,531.6
52,932.8
5,620.3
5,425.6
5,115.3
4,941.7
4,966.5
63,074.3
63,252.5
60,877.2
58,431.2
57,615.8
($m)
($m)
($m)
($m)
($m)
($m)
($m)
($m)
($m)
38,256.4
38,062.3
36,485.5
34,712.9
32,618.4
(%)
(%)
(%)
($)
(¢)
(¢)
(¢)
(¢)
(¢)
(%)
(%)
(%)
(%)
(FTE)
($m)
($m)
($m)
(%)
($m)
(%)
($m)
($m)
(%)
2.34
8.62
1.89
8.16
89.9
92.1
35.0
35.0
70.0
2.22
8.27
1.97
7.85
90.9
88.5
34.0
34.0
68.0
2.31
8.09
1.81
7.51
90.4
87.3
34.0
34.0
68.0
2.43
8.17
1.97
7.36
92.5
88.6
33.0
33.0
66.0
1.26
8.73
2.26
7.24
87.7
86.0
31.0
33.0
64.0
11.52
11.61
11.83
12.37
12.54
0.65
8.23
8.03
4,426
16.1
335.8
(118.3)
217.5
0.35
119.3
0.19
48.2
140.3
0.52
0.61
8.10
8.32
4,413
16.2
282.6
(88.5)
194.1
0.32
89.5
0.15
52.7
140.3
0.56
0.62
8.17
8.46
0.61
8.47
8.84
0.59
8.42
8.59
4,531
15.1
4,628
14.3
4,387
14.8
350.2
325.6
411.8
(124.4)
(116.1)
(113.6)
225.8
209.5
298.2
0.39
125.3
0.22
53.4
146.9
0.55
0.38
116.8
0.21
59.0
146.9
0.59
0.56
114.4
0.22
42.8
138.3
0.56
Additional information
1 Material differences
There are no material differences between the information supplied in this report and the information in the preliminary final
report supplied by Bendigo and Adelaide Bank Limited to the Australian Securities Exchange on 13 August 2018.
2 Audit Committee
As at the date of the Directors’ Report the Group had an Audit Committee of the Board of Directors.
3 Corporate governance practices
The corporate governance practices adopted by Bendigo and Adelaide Bank Limited are as detailed in the Corporate Governance
statement. Please refer to www.bendigoadelaide.com.au/public/corporate_governance for further details.
4 Substantial shareholders
As at 15 August 2018 there were two substantial shareholders in Bendigo and Adelaide Bank Limited as detailed in substantial
holdings notices given to the Company - BlackRock Group and Vanguard Group.
5 Distribution of shareholders
Range of Securities as at 15 August 2018 in the following categories:
Category
1 - 1,000
1,001 - 5,000
5,001 - 10,000
10,001 - 100,000
100,001 and over
Number of Holders
Securities on Issue
6 Marketable parcel
Fully Paid
Ordinary
Shares
Fully Paid
Employee
Shares
Convertible
Preference
Shares 2
Convertible
Preference
Shares 3
Converting
Preference
Shares 4
36,157
38,841
8,955
5,020
107
4,150
449
14
4
-
4,476
423
29
13
1
5,062
378
9
14
1
5,571
411
30
15
1
89,080
4,617
4,942
5,464
6,028
484,790,721
1,627,760
2,921,188
2,822,108
3,216,145
Based on a closing price of $11.51 on 15 August 2018 the number of holders with less than a marketable parcel of the
Company’s main class of securities (Ordinary Shares), as at 15 August 2018 was 3,549.
7 Unquoted securities
The number of unquoted equity securities that are on issue and the number of holders of those securities are shown in the
above table under the heading of Fully Paid Employee shares.
Annual Financial Report 2018 133
Additional information (continued)
8 Major shareholders
Names of the 20 largest holders of Fully Paid Ordinary shares, including the number of shares each holds and the percentage of
capital that number represents as at 15 August 2018 are:
Fully paid ordinary shares
Rank
Name
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
J P MORGAN NOMINEES AUSTRALIA LIMITED
CITICORP NOMINEES PTY LIMITED
NATIONAL NOMINEES LIMITED
MILTON CORPORATION LIMITED
BNP PARIBAS NOMS PTY LTD
CITICORP NOMINEES PTY LIMITED
BNP PARIBAS NOMINEES PTY LTD
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA
CARLTON HOTEL LIMITED
NAVIGATOR AUSTRALIA LTD
WARBONT NOMINEES PTY LTD
NATIONAL NOMINEES LIMITED
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
DIESEL COOLING PTY LTD
AMP LIFE LIMITED
LEESVILLE EQUITY PTY LTD
NULIS NOMINEES (AUSTRALIA) LIMITED
YARABIE ESTATES PTY LTD
Number of shares
% of shares
92,580,411
38,403,497
27,658,675
9,348,506
5,709,708
3,505,167
2,898,218
2,174,681
1,970,992
1,201,201
1,117,147
911,685
877,777
794,937
750,270
700,000
695,081
679,455
586,688
510,000
193,074,096
19.03%
7.90%
5.69%
1.92%
1.17%
0.72%
0.60%
0.45%
0.41%
0.25%
0.23%
0.19%
0.18%
0.16%
0.15%
0.14%
0.14%
0.14%
0.12%
0.10%
39.69%
BBS Nominees Pty Ltd, trustee for the Bendigo and Adelaide Employee Share Plan and Pacific Custodians Pty Limited, trustee for the Employee Share Grant
Scheme, held a combined total of 1,627,760 unquoted shares as at the date of this report. These shares have not been included in the above table, but are
included in total of issued ordinary share capital.
Names of the 20 largest holders of Bendigo and Adelaide Convertible Preference shares 2, including the number of shares each
holds and the percentage of convertible preference share 2 capital that number represents as at 15 August 2018 are:
Fully paid Convertible Preference Shares 2 (CPS2)
Rank
Name
Number of shares
% of shares
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
BNP PARIBAS NOMS PTY LTD
NATIONAL NOMINEES LIMITED
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2
BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP
TGB HOLDINGS PTY LTD
J P MORGAN NOMINEES AUSTRALIA LIMITED
CITICORP NOMINEES PTY LIMITED
JOHN E GILL TRADING PTY LTD
MERCHANT FOUNDATION PTY LTD
UNIVERSITY OF TASMANIA
THE TRUST COMPANY (AUSTRALIA) LIMITED
NAVIGATOR AUSTRALIA LTD
MRS MAXINE FRANCES ELLIS
INVIA CUSTODIAN PTY LIMITED
C ROBERTSON PTY LTD
TRISTAR METALS PTY LTD
GORDON MERCHANT NO 2 PTY LTD
CITICORP NOMINEES PTY LIMITED
AVANTEOS INVESTMENTS LIMITED <3311559 HANSPETER A/C>
134 Annual Financial Report 2018
129,436
59,192
40,219
32,303
27,513
26,610
23,199
18,934
16,579
14,792
14,685
14,670
11,418
10,100
10,000
10,000
10,000
9,900
9,737
9,689
498,976
4.43%
2.03%
1.38%
1.11%
0.94%
0.91%
0.79%
0.65%
0.57%
0.51%
0.50%
0.50%
0.39%
0.35%
0.34%
0.34%
0.34%
0.34%
0.33%
0.33%
17.08%
Additional information (continued)
8 Major shareholders (continued)
Names of the 20 largest holders of Bendigo and Adelaide Convertible Preference shares 3, including the number of shares each
holds and the percentage of convertible preference share 3 capital that number represents as at 15 August 2018 are:
Fully paid Convertible Preference Shares 3 (CPS3)
Rank Name
Number of shares
% of shares
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP
GAEA GROUP PTY LTD
NAVIGATOR AUSTRALIA LTD
BNP PARIBAS NOMS PTY LTD
TRUSTEES OF CHURCH PROPERTY FOR THE DIOCESE OF NEWCASTLE
NULIS NOMINEES (AUSTRALIA) LIMITED
NETWEALTH INVESTMENTS LIMITED
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2
JANMEL INVESTMENTS PTY LTD
G C F INVESTMENTS PTY LTD
J P MORGAN NOMINEES AUSTRALIA LIMITED
CITICORP NOMINEES PTY LIMITED
NATIONAL NOMINEES LIMITED
IOOF INVESTMENT MANAGEMENT LIMITED
BAPTIST FINANCIAL SERVICES AUSTRALIA LIMITED
TGB HOLDINGS PTY LTD
JDB SERVICES PTY LTD
AUSTRALIAN EXECUTOR TRUSTEES LIMITED
MR STEPHEN PHILIP GOLDBERG & MRS JANINE HEATHER GOLDBERG
111,058
72,806
37,906
35,517
30,974
28,200
23,369
22,082
19,600
15,650
15,000
14,398
14,315
13,661
11,639
10,000
9,800
7,800
6,945
6,500
3.94%
2.58%
1.34%
1.26%
1.10%
1.00%
0.83%
0.78%
0.69%
0.55%
0.53%
0.51%
0.51%
0.48%
0.41%
0.35%
0.35%
0.28%
0.25%
0.23%
507,220
17.97%
Names of the 20 largest holders of Bendigo and Adelaide Converting Preference shares 4, including the number of shares each
holds and the percentage of converting preference share 4 capital that number represents as at 15 August 2018 are:
Fully paid Converting Preference Shares 4 (CPS4)
Rank
Name
Number of shares
% of shares
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
J P MORGAN NOMINEES AUSTRALIA LIMITED
BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP
CITICORP NOMINEES PTY LIMITED
NATIONAL NOMINEES LIMITED
IOOF INVESTMENT MANAGEMENT LIMITED
SOUTH HONG NOMINEES PTY LTD
SOUTH BAY NOMINEES PTY LTD
PCI PTY LTD
NETWEALTH INVESTMENTS LIMITED
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2
TRUSTEES OF CHURCH PROPERTY FOR THE DIOCESE OF NEWCASTLE
NETWEALTH INVESTMENTS LIMITED
T & A CAPITAL MANAGEMENT PTY LTD
NAVIGATOR AUSTRALIA LTD
NULIS NOMINEES (AUSTRALIA) LIMITED
WALMSLEY DEVELOPMENTS PTY LTD
BAPTIST FINANCIAL SERVICES AUSTRALIA LIMITED
MARENTO PTY LTD
TRISTAR METALS PTY LTD
181,822
45,807
43,828
43,562
38,363
26,540
19,372
18,224
17,715
17,377
14,595
13,605
11,373
11,100
10,973
10,357
10,000
10,000
10,000
10,000
5.65%
1.42%
1.36%
1.35%
1.19%
0.83%
0.60%
0.57%
0.55%
0.54%
0.45%
0.42%
0.35%
0.35%
0.34%
0.32%
0.31%
0.31%
0.31%
0.31%
564,613
17.53%
Annual Financial Report 2018 135
Additional information (continued)
9 Voting rights
Under the Bank’s Constitution, each person who is a voting Shareholder and who is present at a general meeting of the Bank in
person or by proxy, attorney or official representative is entitled to one vote on a show of hands or, on a poll, one vote for each
fully paid ordinary share held.
In the case of an equality of votes the Chairman has, on both a show of hands and at a poll, a casting vote in addition to the
vote to which the Chairman may be entitled as a shareholder, proxy, attorney or duly appointed representative of a shareholder.
136 Annual Financial Report 2018
Annual Financial Report 2018 137
Bendigo and Adelaide Bank Limited. ABN 11 068 049 178
138 Annual Financial Report 2018