Bank of Queensland Limited
Annual Report 2015

Plain-text annual report

2015 ANNUAL REPORT YEAR ENDED 31 AUGUST 2015 CONTENTS CHAIRMAN AND CEO’S LETTER DIRECTORS’ REPORT Directors’ details Operating and financial review REMUNERATION REPORT Introductory message Remuneration report LEAD AUDITOR’S INDEPENDENCE DECLARATION FINANCIAL REPORT Income statements Statements of comprehensive income Balance sheets Statements of changes in equity Statements of cash flows Notes to the financial statements OTHER INFORMATION Directors’ declaration Independent auditor’s report to the members Shareholding details Shareholder information 5 6 9 44 45 69 70 71 72 73 77 78 137 138 140 143 FIND OUT MORE ABOUT HOW WE’RE DELIVERING OUR STRATEGY AT WWW.BOQ.COM.AU/ANNUAL_REPORTS/2015 2 ANNUAL REPORT 2015 BOQ DELIVERS RECORD FY15 RESULTS STATUTORY NET PROFIT AFTER TAX CASH EARNINGS $318M 22% UP NET INTEREST MARGIN $357M 19% UP COST TO INCOME 1.97% 15BPS CONSISTENT RETURNS TO SHAREHOLDERS UP UP 46% 210BPS EARNINGS & DIVIDENDS (PER SHARE) COMBINED DIVIDEND PER SHARE AND EARNINGS PER SHARE CASH BASIC EARNINGS PER SHARE DIVIDEND PER SHARE S T N E C 60 50 40 30 20 10 0 46 46 43 32 34 52 36 38 41 38 28 30 1H13 2H13 1H14 2H14 1H15 2H15 CASH BASIC EARNINGS (PER SHARE) DIVIDENDS (PER SHARE) 97C UP9% SINCE FY14 74C UP12% SINCE FY14 RETURN ON EQUITY RETURN ON TANGIBLE EQUITY 10.7% 14.4% 3 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616BOQ DELIVERS RECORD FY15 RESULTS RECORD CASH EARNINGS... RECORD CASH EARNINGS... ...UNDERPINNED BY STRONG MARGIN MANAGEMENT... ...UNDERPINNED BY STRONG MARGIN MANAGEMENT... 357 318 301 261 251 186 177 159 31 -17 ) % ( N I G R A M T S E R E T N I T E N 2.00 1.90 1.80 1.70 1.60 1.50 1.97 1.82 1.67 1.69 1.65 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 CASH EARNINGS AFTER TAX STATUTORY NET PROFIT ...FOCUS ON COST MANAGEMENT... ...TIGHT UNDERLYING COST CONTROL... ...AND IMPROVED ASSET QUALITY ...IMPROVED ASSET QUALITY 44.5 45.7 44.3 43.9 46.0 401 201 ) S N O I L L I M $ ( E S N E P X E T N E M R I A P M I N A O L 400 300 200 100 0 115 86 74 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 ) L I M $ ( 350 300 250 200 150 100 50 0 -20 ) % ( O I T A R E M O C N I O T T S O C 50 40 30 20 10 0 4 ANNUAL REPORT 2015 CHAIRMAN & CEO’S LETTER Dear Shareholder, We are pleased to report that our strategy is delivering strong, sustainable growth for our business and shareholders. Over the last 12 months, we have made significant strategic progress towards transforming our business so we can take advantage of future opportunities and respond to any challenges. Our results for FY15 demonstrate we are on the right path. For the fifth successive half, we achieved a record financial result. Net profit after tax was up 19% to $357 million while statutory profit after tax increased 22% to $318 million. Our strategy is also driving improved business performance with key metrics such as growth, margins and asset quality showing improvement. Our strong financial performance has enabled the Board to set a final dividend of 38 cents per share, taking full year dividends to 74 cents per share. This means we have delivered a total return to shareholders of 6.3% during the financial year, the highest return of any listed Australian bank during this period. During the year we refreshed our strategy to focus on niche segments where customers value a more intimate banking relationship. We are delivering this strategy through four execution pillars: ‘Customer in charge; ‘Grow the right way’; ‘There’s always a better way’; and ‘Loved like no other’. Our progress in these areas over FY15 is detailed in this report. Our culture and success are crucial to the success of our strategy – we strive to be a company that our employees love working for and our customers love dealing with and we are happy to say our employee engagement scores are heading in the right direction. Not surprisingly, this is also contributing to high levels of customer satisfaction. Independent Roy Morgan research comparing customer satisfaction and advocacy among Australia’s top banks shows our Main Financial Institution Net Promoter Score has increased by 36.7 points over the last 2.5 years. This is by far the biggest improvement in our sector and puts us within striking distance of the top spot*. BOQ achieved much over the financial year and shareholders should take comfort from the fact that the Bank is extremely well placed for the future. Our strategy sets the Bank up for success in a market which continues to see significant regulatory and technology change. At a time when there is some uncertainty around the regulatory environment, we continue to maintain high levels of capital so we are well placed whatever global and local regulators decide to do. Results like these are achieved through a true team performance – from the executive team right the way through to our front line employees who help customers every day. Thank you to everyone at BOQ for their efforts. In January, we farewelled long-standing Director Steve Crane when he retired after six years on the Board. Steve’s expertise was invaluable and we thank him for his service and wish him the best for the future. We also thank shareholders for their ongoing support of our company. Roger Davis Chairman Jon Sutton Managing Director & CEO *Roy Morgan Research, MFI customers aged 14+, 6 month averages, competitors exclude mutual banks. Net Promoter® and NPS® are registered trademarks and Net Promoter Score and Net Promoter System are trademarks of Bain & Company, Satmetrix Systems and Fred Reichheld. Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 5 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 The Directors’ present their report together with the financial report of Bank of Queensland Limited (“the Bank”) and of the Consolidated Entity, being the Bank and its controlled entities for the year ended 31 August 2015 and the independent auditor’s report thereon. DIRECTORS’ DETAILS The Directors of the Bank at any time during or since the end of the financial year are: Name, qualifications and independence status Roger Davis B.Econ. (Hons), Master of Philosophy Chairman Non-Executive Independent Director Jon Sutton Managing Director and Chief Executive Officer Executive Non-Independent Director (Officially appointed 5 January 2015) Neil Berkett B Com and Admin Non-Executive Independent Director Bruce Carter B Econ, MBA, FAICD, FICA Non-Executive Independent Director Carmel Gray B Bus Non-Executive Independent Director 6 ANNUAL REPORT 2015 Age Experience, special responsibilities and other Directorships 63 52 59 57 66 Mr Davis was appointed Chairman on 28 May 2013 and served on the Board of BOQ since August 2008. He has 33 years’ experience in banking and investment banking in Australia, the US and Japan. He is currently a consulting Director at Rothschild Australia Limited. He was previously a Managing Director at Citigroup where he worked for over 20 years and more recently was a Group Managing Director at ANZ Bank. He is a Director of AIG Australia Ltd, Argo Investments Limited, Ardent Leisure Management Ltd, Ardent Leisure Ltd and Aristocrat Leisure Ltd. He was formerly Chairman of Charter Hall Office REIT and Esanda, and a Director of ANZ (New Zealand) Limited, CitiTrust in Japan and Citicorp Securities Inc. in the USA. He has a Bachelor of Economics (Hons) degree from the University of Sydney and a Master of Philosophy degree from Oxford. He is a qualified CPA. Mr Davis is Chair of the Nomination & Governance Committee, a member of the Audit and Risk Committees, and an attendee at all other Board Committees. Mr Sutton was appointed Managing Director and Chief Executive Officer on 5 January 2015 following four months as Acting Chief Executive Officer. Mr Sutton originally joined BOQ in July 2012 as Chief Operating Officer. Mr Sutton has more than 20 years’ experience in banking and prior to BOQ was the Managing Director of Bankwest. Before that, as Executive General Manager of Commonwealth Bank Agribusiness, he was central to the establishment of the bank’s agribusiness segment which grew strongly under his guidance and leadership. Prior to this, Mr Sutton was General Manager of Client Risk Solutions at CBA, responsible for marketing derivative products including interest rates, commodities and foreign exchange. He was also Head of Resources and Agribusiness and Head of Corporate Risk Management Commodities, charged with marketing and commodity hedging products to Australian institutions within the base metals, precious metals and energy sectors. Mr Berkett has served on the Board of BOQ since July 2013. His career spans a range of sectors and geographies in both the consumer and enterprise space with an emphasis on managing significant change. For six years finishing in mid-2013 he was the Chief Executive Officer of Virgin Media, a NASDAC listed company where he oversaw the successful turnaround, differentiation and growth of the UK cable company. Mr Berkett then led the sale of the company to Liberty Global in June 2013. His previous career included senior roles at Lloyds TSB, Prudential, St George Bank in Australia, Citibank and Eastwest Airlines. He is the Chairman of the Guardian Media Group, a Non-Executive Director with the Sage Group plc, and a Trustee for the National Society for the Prevention of Cruelty to Children. Mr Berkett is a member of each of the Human Resources & Remuneration and Information Technology Committees. Mr Carter has served on the BOQ Board since February 2014. Mr Carter was a founding Managing Partner of Ferrier Hodgson South Australia, a corporate advisory and restructuring business, and has worked across a number of industries and sectors in the public and private sectors. He has been involved with a number of state government-appointed restructures and reviews including chairing a task force to oversee the government’s involvement in major resource and mining infrastructure projects. Mr Carter had a central role in a number of key government economic papers including the Economic Statement on South Australian Prospects for Growth, the Sustainable Budget Commission, and the Prime Minister’s 2012 GST Distribution Review. Before Ferrier Hodgson, Mr Carter was at Ernst & Young for 14 years including four years as Partner in Adelaide. During his time at Ernst & Young he worked across the London, Hong Kong, Toronto and New York offices. Mr Carter is the Chair of Australian Submarine Corporation and a Non-Executive Director of SkyCity Entertainment Group Limited and Genesee & Wyoming Australia Pty Ltd. Mr Carter is Chair of the Risk Committee and a member of the Audit Committee. Ms Gray was appointed a Director of BOQ in April 2006. Ms Gray has had an extensive executive career in IT and Banking. She was Group Executive Information Technology at Suncorp from 1999 until 2004 and a member of Suncorp’s Group Executive committee during that period. Previously, she held a number of senior roles in the IT Services industry, including General Manager, Energy Information Solutions and Chief Executive, Logica Australia. Past memberships include the Board of the Australian Information Industry Association and the CSIRO Advisory Committee for the IT and Services Sectors. She is a past Chair of Information Technologies Australia and Director of BridgePoint Communications. Ms Gray continues to provide IT and business consultancy services to the SME sector. Ms Gray is a member of each of the Information Technology and Audit Committees. DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 Name, qualifications and independence status Richard Haire B.Ec, FAICD Non-Executive Independent Director Margaret Seale BA, FAICD Non-Executive Independent Director Michelle Tredenick B Sc, FAICD, F Fin Non-Executive Independent Director David Willis B Com, ACA, ICA Non-Executive Independent Director Age Experience, special responsibilities and other Directorships 56 55 54 59 Mr Haire was appointed a Director of the Bank on 18 April 2012. Mr Haire has more than 28 years’ experience in the international cotton and agribusiness industry, including 26 years in agricultural commodity trading and banking. He is the Executive Chairman of Webster Limited. He was also formerly a Director of Open Country Dairy (NZ) and New Zealand Farming Systems Uruguay. Mr Haire is Chair of the Audit Committee and a member of the Risk, Information Technology and Investment Committees. Margaret (Margie) Seale has served on the BOQ Board since January 2014. Ms Seale has more than 25 years’ experience in senior executive roles in Australia and overseas in the global publishing, health and consumer goods industries, and in the transition of traditional business models to adapt and thrive in a digital environment. Most recently she was Managing Director of Random House Australia (with managerial responsibility for Random House New Zealand) and President, Asia Development for Random House Inc., the global company. Amongst other roles prior to that she held national sales and national marketing roles for Oroton and Pan Macmillan respectively. She is a Non-Executive Director of Telstra and member of the Audit & Risk Committee, and a Non-Executive Director of Ramsay Health Care and member of the Risk Committee. She has also served on the boards of the Australian Publishers’ Association and the Powerhouse Museum, and on the Council of Chief Executive Women, chairing its Scholarship Committee from 2011 to 2012. She remains a Non-Executive Director of Random House Australia and New Zealand. Ms Seale is a member of the Information Technology and Human Resources & Remuneration Committees. Ms Tredenick has served on the Board of BOQ since February 2011. Michelle is an experienced company director and corporate advisor with over 30 years’ experience in leading Australian businesses. She is currently a Director of Vocation Limited, Canstar Pty Ltd, and is Chairman of IAG NRMA Corporate Superannuation Trustee Board. She is a member of the Senate of the University of Queensland as well as sitting on the board of the Ethics Centre. She also has her own consulting business advising Boards and CEOs on strategy and technology and the successful management of large investment and transformation programs. Her Executive career included roles on the group executive teams of a number of Australia’s largest companies including NAB, MLC and Suncorp. Her experience spans time as CIO with all of these companies as well as Head of Strategy and Marketing and divisional profit and loss roles in Corporate Superannuation, Insurance and Funds Management. Ms Tredenick is Chair of the Information Technology Committee and a member of each of the Human Resources & Remuneration and Risk Committees. Mr Willis has served on the Board of BOQ since February 2010. He has over 33 years’ experience in financial services in the Asia Pacific, the UK and the US. He is a qualified Accountant in Australia and New Zealand and has had 17 years’ experience working with Australian and foreign banks. Mr Willis is a Director of New Zealand Post, CBH (A Grain Cooperative in Western Australia) and Interflour Holdings, a Singapore based flour milling company. He is also a director of Converga Pty Ltd (a digital solutions company) based in Sydney. Mr Willis founded and chairs a Sydney based Charity “The Horizons Program”. With BOQ Mr Willis is Chair of the Human Resources & Remuneration Committee and is a member of the Risk Committee and the Nomination & Governance Committee. He is also a Non-Executive Director of the Bank’s insurance subsidiary, St Andrew’s. Steve Crane Retired as a Director on 22 January 2015. COMPANY SECRETARY Michelle Thomsen - Appointed 13 July 2015 LLB/ B Comm Michelle Thomsen was appointed Company Secretary on 13 July 2015. Prior to this, Ms Thomsen was EGM Associate General Counsel at Suncorp Group Limited and has held a number of in house and private practice roles, including General Counsel positions for two funds listed on the Australian Securities Exchange and she was a partner at SJ Berwin LLP in London (now King & Wood Mallesons), prior to returning to Australia in 2012. Melissa Grundy - Resigned 13 March 2015 Stacey Hester was acting Company Secretary during the interim period between the resignation of Ms Grundy and the appointment of Ms Thomsen. Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 7 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 DIRECTORS’ MEETINGS The number of meetings of the Bank’s Directors (including meetings of Committees of Directors) and the number of meetings attended by each Director during the financial year were: Board of Directors Board of Directors - St Andrews Risk Committee Audit Committee Nomination & Governance Committee Human Resources & Remuneration Committee - BOQ & St Andrews Investment Committee (1) Information Technology Committee Due Diligence Committee A 13 12 9 13 4 13 13 12 12 12 B 13 13 13 13 4 13 13 13 13 13 A B - - - - - - - - - - - - - - - - - - 4 5 A 7 - - 6 3 - 7 - 7 5 B A 7 - - 7 3 - 7 - 7 7 6 - - 6 - 6 6 - - - B 6 - - 6 - 6 6 - - - A 2 - - - 1 1 - - 1 1 B 2 - - - 1 1 - - 1 1 A 5 - 4 - - - - 5 5 5 B 5 - 5 - - - - 5 5 5 A 1 - - 1 - - 1 - 1 1 B 1 - - 1 - - 1 - 1 1 A 5 - 3 - - 5 5 5 4 - B 5 - 5 - - 5 5 5 5 - A B - - - - - - - - - - - - - - - - - - - - Roger Davis (2) Jon Sutton (3) Neil Berkett Bruce Carter Steve Crane (4) Carmel Gray Richard Haire Margaret Seale Michelle Tredenick David Willis (5) Total number of meetings held 13 5 7 6 2 5 1 5 - A - Number of meetings attended B - Number of meetings held during the time the Director was a member of the Board / Committee during the year (1) The composition of the Investment Committee is not fixed. Composition and meetings held are set by the Board on an as required basis. (2) Roger Davis attends the meetings of a number of the Board’s sub-committee’s, however he is not considered a formal member of these. (3) Jon Sutton also attended Board meetings before he was officially appoointed as Managing Director and CEO on 5 January 2015. (4) Steve Crane retired as a Director on 22 January 2015 and as such the details of meetings held and attended are for the period of time in which he was a Director during the financial year. (5) David Willis is also a member of the Audit & Risk Committee for St Andrew’s. During the year he attended all three meetings held. 2015 CORPORATE GOVERNANCE STATEMENT IS ONLINE BOQ complies with its Constitution, the Corporations Act 2001 (Cth), the ASX Listing Rules, and the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (Third Edition) (ASX Principles), which is reflected in our Corporate Governance Statement. As an APRA-regulated entity, BOQ also complies with the governance requirements prescribed by APRA under Prudential Standard CPS 510 Governance. Information about BOQ’s Board and management, corporate governance policies and practices and Enterprise Risk Management Framework can be found in the 2015 Corporate Governance Statement available at http://www.boq.com.au/uploadedFiles/AboutUs/Corporate_information/BOQ-Corporate-Governance-2015.pdf. 8 ANNUAL REPORT 2015 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 OPERATING AND FINANCIAL REVIEW 1. HIGHLIGHTS & STRATEGY 1.1 DISCLOSURE CONSIDERATIONS Changes to Financial Reporting This reporting period reflects the first full year contribution for BOQ Specialist since acquisition in July 2014. Section 2.2 provides further details of the contribution for the year. Future performance This document contains certain ‘forward looking statements’. Forward looking statements can generally be identified by the use of forward looking words such as ‘anticipate’, ‘believe’, ‘expect’, ‘project’, ‘forecast’, ‘estimate’, ‘likely’, ‘intend’, ‘should’, ‘will’, ‘could’, ‘may’, ‘target’, ‘plan’ and other similar expressions within the meaning of securities laws of applicable jurisdictions. The forward looking statements contained in this document involve known and unknown risks and uncertainties and other factors, many of which are beyond the control of BOQ, and may involve significant elements of subjective judgement as to future events which may or may not be correct. There can be no assurance that actual outcomes will not differ materially from these forward looking statements. Rounding In accordance with applicable financial reporting regulations and current industry practices all amounts in this report have been rounded off to the nearest one million dollars, unless otherwise stated. Note on Statutory Profit and Cash Earnings Statutory Profit is prepared in accordance with the Corporations Act 2001 and the Australian Accounting Standards, which comply with International Financial Reporting Standards (‘IFRS’). Cash Earnings is a non-Accounting Standards measure commonly used in the banking industry to assist in presenting a clear view of the Bank’s underlying earnings. Refer to Section 4.1 for the reconciliation of Statutory Profit to Cash Earnings. The items excluded from Cash Earnings are consistent with the prior period. Integration/Due Diligence costs relate to the acquisition of BOQ Specialist and are in line with guidance provided at acquisition. The increase in amortisation of customer contracts over the prior year includes recognition of BOQ Specialist customer contracts following purchase price adjustment allocations completed in the latest half year. Hedge ineffectiveness represents earnings volatility from hedges that are partially ineffective under the application of IAS 39 Financial Instruments and create a timing difference in reported profit, where these hedges remain economically effective. (Refer to the Reconciliation of Statutory Profit to Cash Earnings chart below). Figures disclosed in this report are on a Cash Earnings basis unless stated as Statutory Profit basis. Unless otherwise stated, all financial comparisons in this document refer to the prior half (to 28 February 2015) and the prior year (to 31 August 2014). These non-statutory measures have not been subject to review or audit. RECONCILIATION OF STATUTORY PROFIT TO CASH EARNINGS ($M) 14 1 3 318 20 1 357 INTEGRATION OF BOQ SPECIALIST Statutory Net Profit after Tax Amortisation of customer contracts Amortisation of fair value adjustments Hedge ineffectiveness Integration / due diligence Legacy Cash Earnings after Tax 9 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 1.2 GROUP HIGHLIGHTS Cash Earnings after Tax ($m) 19% 301 357 Statutory Profit after Tax ($m) 22% 261 318 131 140 161 167 190 135 126 85 154 164 2H13 1H14 2H14 1H15 2H15 2H13 1H14 2H14 1H15 2H15 Cash Net Interest Margin (‘NIM’) (%) 1.82 15BPS 1.97 1.97 0.11 1.87 0.02 1.85 1.86 1.97 1.97 1.72 1.77 Cash Cost to Income (%) 46.0 210BPS 48.1 3.0 1.1 43.9 43.9 43.8 43.9 0.1 1.4 42.4 44.0 44.0 2H13 1H14 2H14 1H15 2H15 2H13 1H14 2H14 1H15 2H15 BOQ Specialist BOQ Specialist Property & CRM Impairment Cash Basic Earnings per Share (‘EPS’) (cents) 97.3 89.5 9% DIVIDENDS PER SHARE (CENTS) 12% 74 66 40.7 43.2 46.3 45.8 51.5 30 32 34 36 38 2H13 1H14 2H14 1H15 2H15 2H13 1H14 2H14 1H15 2H15 CASH RETURN ON AVERAGE EQUITY (‘ROE’) (%) 10.4 30BPS 10.7 CASH RETURN ON AVERAGE TANGIBLE EQUITY (‘ROTE’) (%) 13.2 120BPS 14.4 10.3 10.4 10.3 11.2 13.2 13.2 13.8 15.0 9.7 12.3 2H13 1H14 2H14 1H15 2H15 2H13 1H14 2H14 1H15 2H15 10 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 CASH COST TO INCOME RATIO 46% 44.5% before one-off costs (1) IMPAIRED ASSETS $237 million Reduced $56m (19%) on the prior year 1.2 GROUP HIGHLIGHTS (CONTINUED) CASH EARNINGS NET INTEREST MARGIN (CASH) $357 million increased by 19% on the prior year $43 million first full year BOQ Specialist contribution 8% earnings growth excluding BOQ Specialist and one-offs (1) LOAN IMPAIRMENT EXPENSE $74 million Down 4bps to 18bps of lending and 14% reduction over the prior year (1) Excluding one-off CRM impairment and property costs. 1.97% Up 15 bps over the prior year. The inclusion of BOQ Specialist and liability mix initiatives have contributed to the increase COMMON EQUITY TIER 1 8.91% Capital increasing 28bps over the year further ratio strengthened, BOQ has delivered a record full year profit with Cash Earnings increasing 19% to $357 million and Statutory Profit after Tax increasing 22% to $318 million. Our clear and simple strategy has delivered improved momentum as we continue to build a more streamlined and lower risk organisation with sustainable earnings growth. This is the first full financial year following the acquisition of BOQ Specialist which was acquired in July 2014. The contribution of BOQ Specialist to the Group result of $43 million was 13% above the earnings guidance of $38 million provided on announcement of the acquisition. The business has been successfully integrated and is delivering on its strategy to provide specialised banking solutions to a professional market niche. Net Interest Margin was maintained in the second half at 1.97%, an increase of 15 basis points on the prior year, with an 11 basis point improvement from BOQ Specialist as expected. Whilst the maintenance of the Net Interest Margin in the second half was supported by the impact of lower liquid asset requirements, this was a solid result against a backdrop of contracting industry margins over this period. We continue to target measured growth in a dynamic market which remains highly competitive, maintaining a prudent outlook in the changing economic and regulatory environment. Our Cost to Income ratio during the year was 46%, which was rebased by the first full year of BOQ Specialist and included a number of one-off costs. These were the impairment of the pilot Customer Relationship Management (‘CRM’) System for $10 million and $6 million of premises consolidation costs. Excluding these one-off costs, the Cost to Income ratio for the Group was 44.5%, in line with earlier market guidance. Underlying cost growth of 4%, excluding the acquisition of BOQ Specialist and one-off costs, was delivered whilst we continued to build out our front line capability and invest in new channels such as our developing Broker presence. Lending growth of 7% was a significant improvement over the prior year as we gain further traction with the ‘Customer in Charge’ strategy by widening the choice of channels through which our customers can engage with us. We continue to gain penetration through the Broker channel which provided 15% of settlements this year compared to 5% last year. Second half growth was slower as we moved ahead of other industry participants with our pace of implementation in meeting the Australian Prudential Regulatory Authority’s (‘APRA’) required lending serviceability standards. Lending growth through proprietary channels was credible as branch numbers once again moved in response to changes in consumer preferences. Loan impairment expense reduced by 14% to $74 million in 2015 reflecting underlying improvement in credit quality across the retail and commercial portfolios supported by declining levels of defaults in the lower interest rate environment. The 30 day housing arrears reduced to the lowest level in recent years. We did witness an increase in impairment charge across the BOQ Finance portfolio with defaults of mining related exposures attributable to the subdued economic environment and the impact of the industry downturn. We continue to closely monitor our exposures and did see an improvement in the arrears trend in this portfolio in the last quarter. As mentioned in the February 2015 results, we have successfully transitioned to the new APRA APS210 Liquidity framework. The new framework and steps taken to improve the resilience of the Bank’s liability base, in line with broader industry changes, have been positive to the management of our liquidity requirements. Our recent rating upgrades have allowed us to selectively increase the duration of our wholesale funding profile whilst maintaining our retail deposit funding mix. At year end, our Common Equity Tier 1 ratio was 8.91%, an increase of 28 basis points on the prior year. The Board has determined to pay a final dividend of 38 cents per share fully franked, with the full year dividend of 74 cents, an increase of 12% on the 2014 financial year. 11 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 1.3 STRATEGY BOQ is a full service financial institution, listed on the Australian Securities Exchange (‘ASX’), regulated by the Australian Prudential Regulation Authority as an authorised deposit-taking institution (‘ADI’) and ranked among the top 100 companies by market capitalisation on the ASX. We have grown from being the first Permanent Building Society in Queensland in 1874 to the current day with a network of retail branches, and other points of presence spanning every state and territory in Australia. BOQ aspires to build a differentiated position in the Australian financial services sector by demonstrating to customers that “It is Possible to Love a Bank.” BOQ’s corporate strategy is to focus on niche customer segments that value a more intimate banking relationship beyond what they receive from the major banks. Importantly, BOQ’s strategic focus plays to its competitive strengths as a small challenger bank of being able to provide customers with personalised relationship management, passionate customer service, focused products and solutions, and nimble decision-making and problem resolution. The strategy is executed through BOQ’s four strategic pillars: (i) Customer in Charge (ii) Grow the Right Way (iii) There’s Always a Better Way, and (iv) Loved Like No Other. In terms of Customer in Charge, we are continuing to expand our source of originations through growth in the mortgage broker market as well as improvements to digital, online and call centre channels. We have further expanded our mortgage broker distribution network with accredited brokers servicing customers in New South Wales, Victoria, Western Australia, South Australia and, more recently, our home state of Queensland. The successful integration of BOQ Specialist (formerly Investec Bank (Australia) Limited’s Professional Finance and Asset Finance & Leasing businesses) has provided BOQ with unique access to a compelling and expanding customer base of high net worth medical, dental and accounting professionals served through a high touch, specialist banking proposition. In our Retail network, a new commission model has been introduced for Owner Managed Branches based upon a balanced scorecard approach. The new scorecard balances lending, deposits, cross sales and compliance components and strongly aligns interests of Owner Managers and the Bank. The new scorecard and commission model forms the basis of a new standardised franchise agreement which is being rolled out on a progressive basis as existing agreements expire. There is also significant work underway to optimise branch mix and locations, particularly across our Corporate-owned branches. To Grow the Right Way and achieve the right balance of return for risk taken, we continue to diversify our balance sheet by pursuing higher margin segments in Business Banking, Agribusiness and Asset Leasing. In Business Banking, a tiered approach to origination through our distribution channels has been embedded to reflect deal complexity. Business mix changes reflecting a core focus on credit quality were evident across the retail portfolio, with the concentration of poorer performing line of credit mortgages being substantially reduced. There’s Always a Better Way, which is the pursuit of operational efficiency, has seen continued focus on improving processes and systems to reduce the turnaround time on compliant retail and business lending applications. In 2016, we will implement a new digitised mortgage origination process as well as continue to simplify our product suite. A good example of this approach is our simple low cost mortgage offering ‘Clear Path’ which has been well received by our customers, particularly in the owner occupied segment. Loved Like No Other is about building a culture that makes BOQ a great place to work and inspires our passion to deliver exceptional customer outcomes. The major brand refresh around ‘It’s Possible to Love a Bank’ resulted in an increase in national unprompted awareness of our brand. We have seen a further increase in our Net Promoter Scores (1) from 16.1% in August 2014 to 30.5% in August 2015 placing us second amongst all measured banks (up from 9.9% in August 2013) which demonstrates strong customer satisfaction and advocacy. Our internal Employee Engagement score also saw a significant increase from 43% in July 2014 to 67% in July 2015. Through continued focus on our four strategic pillars, we aim to deliver robust and sustainable financial performance, consistent growth in returns to shareholders and superior service to our customers and the wider community. (1) Roy Morgan Research, MFI customers aged 14+, 6 month averages, competitors exclude mutual banks. Net promoter® and NPS® are registered trademarks and Net Promoter Score and Net Promoter System are trademarks of Bain & Company, Satmetrix Systems and Fred Reichheld. 12 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2. GROUP PERFORMANCE ANALYSIS 2.1 INCOME STATEMENT & KEY METRICS (1) Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 $ million Net Interest Income Non-Interest Income Total Income Operating Expenses Underlying Profit Loan Impairment Expense Profit before Tax Income Tax Expense Cash Earnings after Tax 907 180 1,087 (500) 587 (74) 513 (156) 357 761 169 930 (408) 522 (86) 436 (135) 301 19% 7% 17% 23% 12% (14%) 18% 16% 19% 459 96 555 (244) 311 (38) 273 (83) 190 164 448 84 532 (256) 276 (36) 240 (73) 167 154 2% 14% 4% (5%) 13% 6% 14% 14% 14% 6% Statutory Net Profit after Tax 318 261 22% Key Metrics Shareholder Returns Share Price Market Capitalisation Dividends per share (fully franked) Dividend yield Grossed-up dividend yield (including franking) Cash Earnings basis Basic Earnings per Share (‘EPS’) (2) Diluted EPS Dividend payout ratio Statutory basis Basic EPS Diluted EPS Dividend payout ratio Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 ($) ($ million) (cents) (%) (%) 12.67 4,698 74 5.84 8.34 (cents) (cents) (%) (cents) (cents) (%) 97.3 92.2 76.5 86.8 82.8 85.7 12.58 4,560 66 5.25 7.49 89.5 87.0 75.0 77.4 75.9 86.9 1% 3% 12% 59bps 85bps 9% 6% 150bps 12% 9% (120bps) 12.67 4,698 38 5.95 8.50 51.5 48.9 74.1 44.5 42.6 85.9 13.96 5,123 36 5.20 7.43 45.8 44.8 79.1 42.3 41.6 85.8 (9%) (8%) 6% 75bps 107bps 12% 9% (500bps) 5% 2% 10bps (1) (2) Includes the first full year of results for BOQ Specialist acquired on 31 July 2014 Intangible assets amortisation identified as part of the acquisition accounting for BOQ Specialist is included in 2H15 only, prior half has not been restated. 13 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.1 INCOME STATEMENT & KEY METRICS (CONTINUED) (1) Key Metrics Profitability and efficiency measures Cash Earnings basis Net Profit After Tax (1) Underlying Profit (2) Net Interest Margin Cost to Income Ratio Loan Impairment Expense to Gross Loans and Advances (‘GLA’) Return on Average Equity Return on Average Tangible Equity (4) Statutory basis Net Profit After Tax (3) Underlying Profit (2) (3) Net Interest Margin Cost to Income Ratio Loan Impairment Expense to GLA Return on Average Equity (3) Return on Average Tangible Equity (3) (4) Asset Quality 30 days past due (‘dpd’) Arrears 90dpd Arrears Impaired Assets Specific Provisions to Impaired Assets Collective Provisions to Risk Weighted Assets Capital Common Equity Tier 1 Ratio Total Capital Adequacy Ratio (bps) (%) (%) ($ million) ($ million) (%) (%) (bps) (%) (%) ($ million) ($ million) ($ million) (%) (%) (%) (%) ($ million) ($ million) (%) 357 587 1.97 301 522 1.82 19% 12% 15bps (%) 46.0 43.9 210bps 18 10.7 14.4 318 536 1.95 50.7 18 9.6 12.9 478 257 237 53.3 0.56 22 10.4 13.2 261 469 1.82 50.0 22 9.0 11.5 456 221 293 52.1 0.55 (4bps) 30bps 120bps 22% 14% 13bps 70bps (4bps) 60bps 140bps 5% 16% (19%) 120bps 1bps 190 311 1.97 44.0 18 11.2 15.0 164 275 1.96 50.0 18 9.7 13.0 478 257 237 53.3 0.56 167 276 1.97 48.1 18 10.3 13.8 154 261 1.94 51.4 18 9.5 12.8 533 259 259 51.9 0.57 8.82 12.03 26,057 14% 13% - (410bps) - 90bps 120bps 6% 5% 2bps (140bps) - 20bps 20bps (10%) (1%) (8%) 140bps (1bps) 9bps 69bps 1% Risk Weighted Assets (‘RWA’) ($ million) 26,321 25,032 5% 26,321 8.91 12.72 8.63 12.02 28bps 70bps 8.91 12.72 (1) (2) (3) Includes the first full year results for BOQ Specialist acquired on 31 July 2014. Profit before loan impairment expense and tax. Intangible assets amortisation identified as part of the acquisition accounting for BOQ Specialist is included in 2H15 only, prior half has not been restated. (4) Based on after tax earnings applied to average shareholders’ equity (excluding preference shares and treasury shares) less goodwill and identifiable intangible assets (customer related intangibles/ brands and computer software). 14 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.2 BOQ SPECIALIST (A) INCOME STATEMENT The following analysis provides details of the BOQ Specialist contribution to the Group result for the year. It also provides a view of underlying results excluding BOQ Specialist to allow a like for like comparison to the prior periods. Year End Performance Half Year Performance Group Aug-15 BOQ Specialist Aug-15 Group excluding BOQ Specialist Aug-15 $ million Net Interest Income Non-Interest Income Total Income Operating Expenses Underlying Profit Loan Impairment Expense Profit before Tax Income Tax Expense Cash Earnings after Tax 907 180 1,087 (500) 587 (74) 513 (156) 357 129 12 141 (71) 70 (8) 62 (19) 43 Aug-14 752 168 920 778 168 946 (429) (403) 517 (66) 451 (137) 314 517 (86) 431 (133) 298 Aug 15 vs Aug 14 3% - 3% 6% - (23%) 5% 3% 5% Aug-15 Feb-15 391 89 480 387 79 466 (208) (221) 272 (34) 238 (72) 166 245 (32) 213 (65) 148 Aug 15 vs Feb 15 1% 13% 3% (6%) 11% 6% 12% 11% 12% (B) BOQ SPECIALIST FINANCIAL PERFORMANCE BOQ Specialist has made a significant contribution to the annual results of the Group in its first full financial year since acquisition. Strong loan growth of $1.6 billion has been delivered while maintaining solid margins and sound credit quality. The strategic focus on the new on-balance sheet residential mortgage offering has delivered $1.3 billion of this growth. Total mortgage originations including off-balance sheet third party lending is $1.9 billion for the year, which is up 54% up on the prior year. This business initiative is performing well ahead of the expectations we had upon acquisition, targeting half of mortgage originations to be on-balance sheet by the end of FY15. Commercial lending growth of $0.3 billion has also been achieved representing a growth rate of 14% which is approximately double APRA System growth. BOQ Specialist continues to target niche customer segments in the health, medical and accounting professions and continues to benefit from the higher growth rates of these segments compared to the broader economy. The business has delivered $43 million of earnings for the financial year, well exceeding the maintainable earnings guidance outlined at the announcement of the acquisition of $38 million. This has provided both earnings per share and return on equity accretion to our overall Group result, with the FY16 expected EPS accretion of 4% announced upon acquisition, has largely been delivered in the 2015 year. The significant uplift in mortgage originations over the year contributed to a 26% increase in cash earnings this period to $24 million. The on-balance sheet mortgage strategy is yet to deliver enhanced earnings relative to the previous third party distribution model. The full year outcome was $1 million lower as a result, with this impact occurring in the first half and neutralising in the second half. This strategy should deliver enhanced earnings growth for this business in future years. 15 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.2 BOQ SPECIALIST (CONTINUED) (C) KEY METRICS EXCLUDING IMPACT OF BOQ SPECIALIST The following analysis eliminates the impact of the BOQ Specialist acquisition and associated equity raising in the prior period on a proforma basis. Key Metrics Cash Earnings basis Net Profit After Tax Underlying Profit Net Interest Margin Cost to Income Ratio Loan Impairment Expense to Gross Loans and Advances (‘GLA’) Return on Average Equity Return on Average Tangible Equity (1) Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 ($ million) ($ million) (%) (%) (bps) (%) (%) 314 517 1.87 45.3 18 10.9 14.0 298 517 1.81 43.9 24 10.7 13.6 5% - 6bps 140bps (6bps) 20bps 40bps 166 272 1.87 43.3 18 11.4 14.5 148 245 1.86 47.4 18 10.3 13.4 12% 11% 1bps (410bps) - 110bps 110bps (1) Based on after tax earnings applied to average shareholders’ equity (excluding preference shares and treasury shares) less goodwill and identifiable intangible assets (customer related intangibles/ brands and computer software). Excluding the impact of BOQ Specialist, Cash Earnings of $314 million represented a 5% increase on the prior year. Excluding the CRM impairment this year and elevated property costs that were incurred in both years, underlying Cash Earnings growth was 8%. 2.3 NET INTEREST INCOME • Net Interest Margin increased by 15bps to 1.97% for the year $ million Net Interest Income - excluding BOQ Specialist Net Interest Income - including BOQ Specialist Average Interest Earning Assets Net Interest Margin Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 778 907 46,098 1.97% 752 761 41,912 1.82% 3% 19% 10% 15bps 391 459 46,272 1.97% 387 448 45,924 1.97% 1% 2% 1% - Net Interest Income increased by 19% on the prior year to $907 million including the full year contribution from BOQ Specialist. The increase in Net Interest Margin of 15bps over the prior year included the contribution of the higher margin BOQ Specialist business which added 11bps of margin as anticipated. Through active management of the liability mix we increased pre-acquisition Net Interest Margin over the prior year, which contributed a further 4 basis points. Net Interest Margin of 1.97% in the second half was consistent with the first half. The second half result benefited by approximately 3bps from the impact of lower liquid asset levels as a result of consolidating BOQ Specialist under the Bank’s licence and the maturing of the Bank’s implementation of APRA’s APS 210 liquidity framework. Average interest earning assets increased over the second half as we achieved further penetration in new distribution channels through Broker networks and BOQ Specialist’s on-balance sheet mortgage offering (refer Section 2.8). 16 ANNUAL REPORT 2015 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.3 NET INTEREST INCOME (CONTINUED) NET INTEREST MARGIN - FEBRUARY 2015 TO AUGUST 2015 2.26% 0.29%(1) 1.97% 0.04% 0.04% 0.03% 0.03% 2.26% 0.29% (1) 1.97% Feb 15 Asset Pricing and Mix Funding Costs and Mix Net Interest Margin Capital and Low Cost Deposits Third Party Costs Liquids Aug 15 (1) Third party costs largely represent commissions to Owner Managers and brokers. Normalised Net Interest Margin remained flat over the half at 1.97%. Underlying movements within the Net Interest Margin included the following: Asset pricing: This half saw a 4bps decline in asset pricing reflecting competitive pricing on new business. Funding Costs and Mix: Further benefits of 4bps in the half were achieved through continued success in improving the liability mix. Capital: The 3bps reduction this half was due to the declining yield curve environment which continues to reduce the return on the liquid asset ‘replicating portfolio’ used to manage the free funding benefit of capital and low cost deposits. Liquids: A 3bps impact is attributed to a reduction in the liquid assets portfolio following transition to the APS 210 liquidity standard, partially offset by costs associated with maintaining the RBA committed liquidity facility, and a reduction in group liquidity requirements after consolidating the BOQ Specialist banking operations into the Bank’s licence. Competition in the banking market is currently going through a dynamic phase with pricing levels in certain portfolio segments moving in different directions. Portfolio margins are in transition as the industry adjusts to changes in regulatory capital resulting from the Financial System Inquiry and macro prudential actions targeted towards the residential investment market. There are many factors driving the outlook for margins in the year ahead given the changing regulatory environment, with all banks positioning for global industry change under the ‘Basel IV’ framework expected to be introduced in coming years. It appears that capital measures and regulatory risk weighted asset rules are converging, both across jurisdictions and between advanced and standardised banks. The potential reduction in the significant capital advantage enjoyed by advanced accredited banks should be a positive to BOQ’s competitive position and relative return performance. 2.4 NON-INTEREST INCOME $ million Banking Income Insurance Income Trading Income Other Income Total Non-Interest Income Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 110 33 20 17 180 97 42 16 14 169 13% (21%) 25% 21% 7% 59 16 10 11 96 51 17 10 6 84 16% (6%) - 83% 14% 17 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.4 NON-INTEREST INCOME (CONTINUED) Non-Interest Income increased this year with the additional contribution from BOQ Specialist. Excluding this impact, a reduced contribution from the St Andrews’ Insurance business was offset by improvements in the Banking result. The second half result saw a $10 million positive improvement over the first half. Approximately $4 million of this movement reflected some lumpy items that impacted the first half result and were not repeated. The remaining $6 million increase occurred through improved contribution from the Group’s investment in its financial markets offering, some seasonality around timing of collection of commercial lending fees and underlying growth in activity levels. Trading income of $20 million for the year was a strong result and towards the upper end of the range of our expectations. The Virgin Money (Australia) contribution is included in Other Income and contributed $2 million to the year’s result. The business continues to demonstrate strong customer acquisition, with a 38% increase in new credit cards over the year demonstrating the power of the brand. We are well progressed to commence offering Virgin Money branded mortgages in 2016. The St Andrews’ result reduced this year due to higher claims experience and reduced profitability as one of the business’ key partner distribution relationships was successfully renewed, but on current market commercial terms that are less favourable than the previous arrangement. The result is discussed in more detail in Section 2.5 below. 2.5 INSURANCE OVERVIEW $ million Gross Written Premium (net of refunds) Net Earned Premium Underwriting Result Other Insurance Income Total Income Consolidation Adjustment Group Insurance Result Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 55 72 25 6 31 2 33 68 70 34 6 40 2 42 (19%) 3% (26%) - (23%) - (21%) 26 36 12 3 15 1 16 29 36 13 3 16 1 17 Aug 15 vs Feb 15 (10%) - (8%) - (6%) - (6%) St Andrew’s Insurance contributed $33 million to Non-Interest Income, a $9 million reduction from the prior year. Gross Written premiums reduced 19% due to lower volumes of single premium policies, a trend set to continue in coming periods. Sales of regular premium policies continued to increase in line with strategy to diversify product revenue streams with increased sales of term life, funeral and involuntary unemployment insurance. Overall this resulted in an increase in Net Earned Premiums of 3%, however this was more than offset by an increase in commissions reflecting the changing mix of business. Underwriting margins reduced by $9 million (26%), due to a $6 million increase in claims expenses with the remaining $3 million reflecting other impacts of the changing mix of business. The impact of the shift in the business mix will continue to be a headwind of similar magnitude over each of the next 2 years, until the strategy to diversify into newly established wholesale partnership arrangements begins to provide a more meaningful contribution to earnings. Claims loss ratios on key life products have been below the long-term trend levels of 42-45% in recent years, but this reversed in FY15, increasing from 34% in the prior year to 49%. 18 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.6 OPERATING EXPENSES • 4% increase in underlying costs from the prior year • The below operating expenses include the first full year of BOQ Specialist expenses following acquisition in July 2014 $ million Employee Expenses Occupancy Expenses General Expenses IT Expenses Other Expenses Total Operating Expenses (1) BOQ Specialist Total Operating Expenses Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 189 42 100 79 19 429 71 500 182 39 86 79 17 403 5 408 4% 8% 16% - 12% 6% n/a 23% 95 18 46 39 10 208 36 244 94 24 54 40 9 221 35 256 1% (25%) (15%) (3%) 11% (6%) 3% (5%) Cost to Income Ratio (including BOQ Specialist) Cost to Income Ratio (excluding one-off costs) (2) Number of employees (FTE) (1) 46.0% 44.5% 1,991 43.9% 43.2% 1,903 210bps 130bps 5% 44.0% 44.0% 1,991 48.1% 45.1% 1,859 (410bps) (110bps) 7% (1) FTE numbers and Operating Expenses exclude Virgin Money (Australia) as the net result is included in Non-Interest Income. (2) One-off costs are CRM Impairment of $10 million in 1H15 and $6 million property transition costs incurred in both the 2H14 and 1H15 periods. Operating expenses increased to $500 million in 2015, including the first full year of BOQ Specialist. This drove the 23% increase at the Group level and rebased the Cost to Income ratio to 44.5% (excluding one-off costs) which was in line with previous guidance. The first half also included non-recurring costs due to the impairment of the CRM system and costs associated with the transition of Brisbane and Sydney head offices. To provide a view of underlying expenses the following graph breaks out the impact of BOQ Specialist’s full year contribution and the one-off impacts of impairment and property transition costs. 4% Underlying cost increase 10 16 71 429 16 413 500 16 484 Underlying Expenses CRM Impairment FY15 BOQ (excluding BOQ Specialist) BOQ Specialist FY15 403 6 (1) 397 FY14 (1) Property transition costs were experienced equally in both the FY14 and FY15 years. One-off costs Recurring costs 19 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.6 OPERATING EXPENSES (CONTINUED) Operating Expenses exclude costs relating to Virgin Money (Australia) where the net result has been consolidated in Non-Interest Income for presentation of Cash Earnings. The total expenses for Virgin Money (Australia) were $14 million for the half. A reconciliation of Cash Earnings to Statutory Profit is set out in Section 4.1 (b). The Group has been investing in a number of key transformational change programs to digitise the Bank and reset key outsourcing arrangements. This investment program will create a significant uplift in the Bank’s amortisation profile with the amortisation charge expected to double over the next two years from the $17 million charge in the current financial year (refer Section 2.7). Whilst the benefits being generated from the revised outsourcing arrangements will help to shelter some of this impact, net underlying cost growth is likely to be elevated above inflation estimates in 2016 before the benefits of the investment program begin to be fully realised. Following the BOQ Specialist acquisition the Group’s underlying cost to income ratio has been reset to 45%. Whilst the longer term outlook for a reduction in the cost to income ratio towards the low 40s remains, the pace of that improvement will be dependent on the cost leverage provided by our digitisation program currently underway. Further operating cost uplift will occur as the Virgin Money (Australia) mortgage product is brought to market with the cost to income profile of that initiative being consistent with the profile of new business originations on the Bank’s existing mortgage operations. The number of staff over the full year has increased 5% (refer Graph below). Whilst staff numbers reduced in the first half as we rebalanced the corporate branch network and implemented the evolved IT outsourcing operating model, the second half did see an increase in investment in frontline capability with the focus on supporting the broker network, including the opening of a second customer contract centre on the Gold Coast, transition of Owner Managed Branches to Corporate run branches, and the new mortgage servicing support for the BOQ Specialist mortgage channel. Whilst the net number of Corporate branches increased by 4 over the year, following a contraction in the first half, there was an increase of 7 branches in the second half. The Group continues to enhance its investment in risk practices, with operational risk and risk culture being a particular focus in the current year. BOQ FTE FY15 V FY14 23 24 8 68 1,903 Customer in Charge- driving frontline capability 53 18 There’s always a better way / Grow the right way 1,991 Aug 14 BOQ Specialist Retail Strategy Call Centre/ Broker Processing Business & Agri Operational Risk and Risk Culture Aug 15 IT outsourcing, integration synergies & efficiency gains 2.7 CAPITALISED INVESTMENT SPEND To drive our operational excellence strategy ‘There’s Always A Better Way’, we are currently undertaking a strategic transformation in our operational infrastructure requiring significant reinvestment. The strategic project pipeline is aimed at improving the customer experience and reducing turnaround times, while generating front and back office efficiency. This includes a new retail lending origination platform, business process systems and transitioning from legacy manual processes to a digitised environment with full workflow management capability. 20 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.7 CAPITALISED INVESTMENT SPEND (CONTINUED) We expect the amortisation profile to double over the coming years with approximately 75% of this uplift expected to occur in the 2016 year. This heightened level of investment is evident in the increased carrying value of intangible assets over the last two years, though this should peak over the next financial year based on current deliverables and timing of key projects. CARRYING VALUE OF INTANGIBLE ASSETS ($M) 84 51 33 1H14 105 60 45 2H14 108 66 42 1H15 135 63 72 2H15 Assets under construction Software Intangible asset balance 2.8. LENDING We achieved higher lending growth of $2.6 billion (7%) in FY15 after the low growth experienced in the prior year, with gross loans and advances now totalling $40.9 billion. This was marginally below system growth and reflected the contribution from new channels in BOQ Specialist and the broker networks. A key strategic pillar is ‘Grow the Right Way’ and we have continued to maintain strong credit and pricing for risk disciplines to ensure portfolio quality is not compromised. $ million Housing Lending - APRA on-balance sheet Housing Lending - APS 120 qualifying securitisation (2) Housing Lending - BOQ Specialist Commercial Lending Commercial Lending - BOQ Specialist BOQ Finance BOQ Finance - BOQ Specialist Consumer Consumer - BOQ Specialist Gross Loans and Advances Specific and Collective Provisions Net Loans and Advances (1) Growth rates have been annualised (2) Securitised loans subject to capital relief under APRA Prudential Standard APS120 Securitisation As at Aug-15 Feb-15 Aug-14 25,641 24,504 23,548 2,737 2,818 2,961 28,378 27,322 26,509 1,424 8,258 2,280 4,015 222 324 191 501 8,041 2,120 4,029 217 334 189 160 7,656 2,007 3,919 204 342 180 40,975 39,726 38,426 (272) (275) (290) 40,703 39,451 38,136 Aug 15 vs Feb 15 (1) Aug 15 vs Aug 14 9% (6%) 8% 9% (8%) 7% 365% 790% 5% 15% (1%) 5% (6%) 2% 6% (2%) 6% 8% 14% 2% 9% (5%) 6% 7% (6%) 7% 21 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.8. LENDING (CONTINUED) GROWTH IN GROSS LOANS & ADVANCES GROWTH IN HOUSING ($M) 7% Growth 0.9x System 1,869 1,264 605 FY15 New BOQ Specialist on balance sheet mortgages BOQ BOQ Specialist 1% Growth 0.1x System 199 FY14 HOUSING LENDING The housing portfolio grew $1.9 billion or 7% (0.9x System) for the full year with the newly acquired BOQ Specialist book generating $1.3 billion of growth and the Retail Bank channels contributing the remaining $600 million. Whilst broker volumes generated the bulk of the growth in the Retail Bank and represented 15% of housing settlements in 2015, growth momentum in this channel was lower than the first half. In November 2014, APRA released the Prudential Practice Guide APG 223- Residential Mortgage Lending relating to enhancing industry-wide mortgage lending and serviceability practices. We had been progressively implementing improvements in our lending standards and serviceability practices and made further revisions following APRA’s release. In a highly competitive market at the time, it is clear that the practices of other industry participants lagged some of the changes we had made and meant we were well below other ADIs in the assessment of the maximum loan amounts we were willing to offer our customers. Mortgage growth across all BOQ branded channels in the third quarter was negative. Following a benchmarking exercise undertaken by APRA, changes in competitor lending standards emerged in April, after which customer considerations and new business pipelines returned toward their previous levels. The broker channel was extended into the Queensland market in 2014, where we have our strongest brand recognition. BOQ now has Business Development Managers supporting the 2,500 accredited Brokers located in every state across the country with an anticipated 4,000 Brokers expected by the end of FY16. The opening of our new Gold Coast customer contact centre in March provides the support for increasing volumes in this channel. The increased originations through the broker and BOQ Specialist channels has improved portfolio diversification with an increasing presence in the NSW and WA markets as well as increasing the weighting of the portfolio to owner occupied and PAYG borrowers. The proprietary channels have generated a 1% increase in settlements year on year despite the impacts of the consolidation of the branch network, which reduced by 18 branches over the last year. This reflects a range of factors including Corporate branch lease expiries in sub- optimal locations and Owner Manager retirements and consolidations. Approximately 20% of the branch network was impacted through closures, repositioning and consolidation of customer portfolios. These impacted branches have experienced higher customer run-off that has been a headwind to portfolio growth. A similar sized program is anticipated in the coming year with this wave of targeted network optimisation expected to be completed in the next 18 months. Growth in these channels has been further impacted by the continuing runoff of the Line of Credit portfolio ($460 million) and the acceleration of customer repayments in line with the low interest rate environment. BOQ continues to invest in enhancing its Digital and online presence across all brands in the BOQ group together with digitising loan processing, which will provide a quicker ‘time to yes’, improve the customer experience and provide productivity gains to the Bank, with these benefits expected to be most evident in the 2017 financial year. Enabling customers to choose how they deal with the Bank, whether online, in a branch, via a broker or the contact centre is the key to putting the ‘Customer in Charge’ and ensuring BOQ is ‘Loved like no Other’. 22 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 2.8. LENDING (CONTINUED) GROWTH IN COMMERCIAL & BOQ FINANCE ($M) 349 14 (1) 335 602 273 329 BOQ BOQ Specialist BOQ Finance 65 96 Commercial BOQ Finance Commercial BOQ Finance FY14 FY15 Commercial BOQ Finance Commercial BOQ Finance Growth rate System growth Growth vs System 6.6% 5.3% 1.2x 1.8% (0.2%) n/a 7.9% 9.2% 0.9x 2.4% (0.1%) n/a (1) Growth from Acquisition for the month of August 2014 BOQ BUSINESS The BOQ Business Banking team continues to execute on its strategy to differentiate by geography, industry sector and asset class whilst deepening customer relationships through a focus on reliability and responsiveness. For the seventh consecutive year, BOQ has achieved the number 1 position on the East & Partners Business Banking Index. Overall, the commercial lending balances have grown 8% to $8.3 billion. The Corporate Banking, Property Finance and Private Bank teams experienced solid growth over the year but had a slower second half. Strong competition in both pricing and credit terms was evident in areas of the market where the business had previously achieved solid new business growth at sound risk versus return metrics. Not compromising on our ‘Grow the Right Way’ strategy, the team looked to successfully retain customer relationships and focus on other areas of the market for profitable growth with new business pipelines improving along with growth outlook. BOQ Specialist commercial increased 14% to $2.4 billion which continues the strong growth profile and validates the success of the integration of the business. During the year, a specialist lending team was established to support SME customers being originated and managed through the branch network. This initiative, along with process improvements, credit decisioning enhancements and a renewed focus on SME banking has improved momentum. We expect to see an uplift in performance moving into the next financial year. In addition to this, the Group’s Financial Markets capability has been bolstered to increase the product set for targeted business banking customers and has begun to show positive revenue momentum. The BOQ Finance portfolio grew by 2% to $4.0 billion. This was a solid result in an operating environment that has seen slowing small business investment in plant and equipment. BOQ Finance’s strategy of expanding its third party origination sources while continuing to support the Business and Retail Bank networks’ growth has assisted in delivering this result and positioned the business well in a challenging environment. 23 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 3. BUSINESS SETTINGS 3.1 ASSET QUALITY • Lower impairment expense (18bps/GLAs) on prior year • Impaired asset reduction (19% on prior year) demonstrating further improvement in the credit quality of portfolio Year End Performance Half Year Performance Aug-15 Aug-14 (1) Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 Loan impairment expense Loan Impairment Expense / GLA Impaired Assets 30dpd Arrears 90dpd Arrears Collective Provision & General Reserve for Credit Losses (‘GRCL’) / RWA (2) (1) The prior year includes one month’s loan impairment expense for BOQ Specialist. ($ million) bps ($ million) ($ million) ($ million) bps 74 18 237 478 257 100 86 22 293 456 221 95 (14%) (4bps) (19%) 5% 16% 5bps 38 18 237 478 257 100 36 18 259 533 259 6% - (8%) (10%) (1%) 102 (2bps) (2) The first half of 2015 has been restated following completion of the Acquisition accounting for BOQ Specialist. The table above summarises the Bank’s key credit indicators with comparison against August 2014 and February 2015: • Loan impairment expense has continued to reduce, reflective of strong credit management practices implemented across the business, favourable commercial realisations and continued benefits from the low rate interest environment. The full year impairment expense of $74 million or 18bps/GLA is a $12 million (4bps) improvement on the prior year. • Impaired assets declined by $56 million (19%) to $237 million following a reduction in the volume of new impaired assets and maintaining momentum in realisations. One exposure greater than $10 million transitioned to impaired status in the second half of the year, which is the only exposure greater than $5 million in the impaired portfolio. • Past due performance at a total portfolio level has increased in dollar value slightly but decreased as a percentage of GLA’s (refer ‘Arrears’ Section on Page 28). • Collective provisioning has marginally increased over the prior year to $146 million. LOAN IMPAIRMENT EXPENSE $ million Expense by Product Retail Lending Commercial Lending BOQ Finance Total Year End Performance Half Year Performance Aug-15 Aug-14 (1) Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 22 21 31 74 33 31 21 86 (33%) (32%) 48% (14%) (4bps) 10 11 17 38 12 10 14 36 18bps 18bps (17%) 10% 21% 6% - Loan Impairment Expense / GLA 18bps 22bps (1) The prior year includes one month’s loan impairment expense for BOQ Specialist The table above shows the continued improving trend across the Retail and Commercial portfolios with significant reductions in impairment expense. The Retail portfolio is aided by record low interest rates, improved market conditions and faster clearance rates. The Commercial portfolio has benefitted from several favourable writebacks following workouts of previously provisioned exposures, fewer new impaired assets recognised and continued momentum in the time taken to realise impaired assets. BOQ Finance impairment expense has increased significantly on the prior year, which is attributable to larger provisions and write-offs in the second half, impacted predominantly by the downturn in the mining industry and related sectors of the economy. 24 ANNUAL REPORT 2015 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 As at Aug-15 Feb-15 (1) Aug-14 (1) Aug 15 vs Feb 15 Aug 15 vs Aug 14 94 106 30 7 237 110 117 26 6 259 120 143 25 5 293 (15%) (9%) 15% 17% (8%) (22%) (26%) 20% 40% (19%) 3.1 ASSET QUALITY (CONTINUED) IMPAIRED ASSETS $ million Retail Lending Commercial Lending BOQ Finance BOQ Specialist Total Impaired Assets Impaired Assets / GLA 58bps 65bps 76bps (7bps) (18bps) (1) Prior periods have been restated following completion of the Acquisition accounting for BOQ Specialist. The Bank’s impaired assets have reduced by 19% over the full year. This has been driven by a continued reduction in Commercial and Retail impaired assets. The impact has however been offset by increased levels of impaired assets in BOQ Finance’s equipment finance portfolio, reflecting the effect of the downturn in the mining industry and related sectors. Over the full year, Retail impaired assets fell by $26 million (22%), Commercial portfolio reduced by $37 million (26%) and BOQ Finance increased by $5 million (20%). The graph below outlines the continued progress in the reduction of impaired assets throughout 2015. IMPAIRED ASSETS ($M) 82 3 16 38 25 116 2 15 48 51 293 5 (1) 25 120 143 74 6 17 27 24 96 5 13 43 35 Retail $16m (15%) Commercial $11m (9%) (19%) 237 7 30 94 106 259 6 26 110 117 Aug 2014 New Impaired Realisations Feb 2015 New Impaired Realisations Aug 2015 Commercial Retail BOQ Finance BOQ Specialist (1) Acquired on acquisition of BOQ Specialist as at July 2014. 25 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 3.1 ASSET QUALITY (CONTINUED) COMMERCIAL IMPAIRED ASSETS Commercial impaired assets have significantly reduced by $37 million (26%) throughout the year showing the continued decline in large new impaired assets. The first half of the year was superior to the second half in terms of reduction, $26 million versus $11 million, due to the impact of the only impaired asset over $5 million being recognised in the second half totalling $11 million. RETAIL IMPAIRED ASSETS Retail impaired assets reduced $16 million (15%) over the half continuing favourable trends over recent periods. The positive result is driven by the improved security position across those exposures going into default, market conditions for asset realisation and historically low interest rates. BOQ FINANCE IMPAIRED ASSETS BOQ Finance impaired assets have experienced an uplift over the half of $4 million (15%) along with an increase in specific provisions and write-offs, particularly within the Equipment Finance portfolio, reflecting the current economic stress within industries relating to mining and mining related services. This is particularly evident geographically in both WA and QLD. A rise in the 30 day arrears occurred towards the end of the first half that continued through the third quarter. This trend reversed in the fourth quarter with 30 day arrears ending below the position at the half year. COLLECTIVE PROVISION/ GLA VS PEERS The graph below shows the Bank’s level of collective provisions and GRCL to risk weighted assets against the current peer levels as published in their most recent financial reports. It should be noted that the major banks utilise an advanced approach to the calculation of RWA’s which increases their respective coverage ratio in comparison to BOQ and the other standardised banks. Collective Provision and GRCL/RWA v Peers BOQ(1) 1.02% 0.45% 1.00% 0.44% 0.85% 0.09% 0.81% 0.06% 0.88% 0.80% 0.02% 0.57% 0.56% 0.76% 0.75% 0.88% 0.78% 1.09% 0.77% 0.68% 0.60% 0.17% 0.41% BOQ 1H15 BOQ FY15 ANZ CBA NAB WBC BEN SUN Collective Provision to RWA General Reserve for Credit Losses to RWA (1) Includes restatement following completion of Acquisition accounting for BOQ Specialist. 26 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 3.1 ASSET QUALITY (CONTINUED) PROVISION COVERAGE In line with the increased realisations and in tandem with the reduced volume of new impaired assets, BOQ has reduced its specific provisions over the year by 14%. Specific provision coverage to impaired assets has increased to 53%. The GRCL has been increased to allow for asset growth and the finalisation of the purchase price allocation entries relating to BOQ Specialist. $ million Specific Provision Collective Provision Total Provisions GRCL Specific Provisions to Impaired Assets Total Provisions and GRCL to Impaired Assets (1) Total Provisions and GRCL to RWA (1) (1) GRCL gross of tax effect. (2) Prior periods have been updated with a reclassification of BOQ Specialist provisions SPECIFIC PROVISIONS ($M) 28 2 6 12 8 47 1 7 16 23 146 3(1) 15 52 76 As at Aug-15 Feb-15 (2) Aug-14 (2) Aug 15 vs Feb 15 Aug 15 vs Aug 14 127 148 275 70 49% 145% 1.4% 30 4 10 8 8 126 146 272 81 53% 164% 1.5% 127 4 14 48 61 146 144 290 70 50% 133% 1.6% (1%) (1%) (1%) (14%) 2% (6%) 16% 16% 400bps 300bps 1900bps 3100bps 10bps (10bps) 31 3 5 12 11 126 5 19 44 58 Aug 2014 New Specifics Realisations Feb 2015 New Specifics Realisations Aug 2015 (1) Acquired on acquisition of BOQ Specialist as at July 2014 Retail Commercial BOQ Finance BOQ Specialist 27 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 3.1 ASSET QUALITY (CONTINUED) ARREARS Portfolio Balance $m Proportion of Portfolio (%) Aug-15 Aug-15 Feb-15 Aug-14 (1) Aug 15 vs Feb 15 Aug 15 vs Aug 14 By Product 30 days past due: GLAs (Housing) 25,272 90 days past due: GLAs (Housing) 30 days past due: GLAs (LOC) 90 days past due: GLAs (LOC) 30 days past due: GLAs (Consumer) 90 days past due: GLAs (Consumer) 30 days past due: GLAs (Commercial) 90 days past due: GLAs (Commercial) 30 days past due: GLAs (BOQ Finance) 90 days past due: GLAs (BOQ Finance) Total Lending 30 days past due ($ million) 90 days past due ($ million) 30 days past due: GLAs 90 days past due: GLAs 3,106 324 8,258 4,015 40,975 1.02% 0.55% 1.61% 0.74% 1.85% 0.93% 1.63% 1.06% 0.79% 0.13% 478 257 1.2% 0.6% 1.27% 0.56% 2.18% 1.01% 1.61% 0.74% 1.41% 1.04% 0.89% 0.13% 533 259 1.3% 0.7% 1.10% 0.48% 1.73% 0.88% 1.79% 0.97% 1.42% 0.93% 0.68% 0.11% 456 221 1.2% 0.6% (25bps) (1bps) (57bps) (27bps) 24bps 19bps 22bps 2bps (10ps) - (10%) (1%) (10bps) (10bps) (8bps) 7bps (12bps) (14bps) 6bps (4bps) 21bps 13bps 11bps 2bps 5% 16% - - (1) August 2014 numbers have been updated to include BOQ Specialist which were previously excluded from the Asset Quality section RETAIL ARREARS As anticipated, Retail arrears have improved in both 30DPD and 90DPD over the half as post Christmas period seasonality has unwound as expected. The reduction in arrears reflects improved credit quality, driven largely by the low interest rate environment and a strong residential property market. BOQ BUSINESS ARREARS Commercial arrears have seen a deterioration over the half with 30DPD and 90DPD increasing 22bps and 2bps respectively. An increase in BOQ Finance 30DPD arrears late in the first half continued through the third quarter of the financial year, however reduced in the fourth quarter as the levels of defaults moderated. 28 ANNUAL REPORT 2015 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 3.2 FUNDING AND LIQUIDITY • We successfully managed the transition to the new Basel III Liquidity Coverage Ratio • Fitch joined Standard and Poors and Moody’s by lifting BOQ’s long-term credit rating from (BBB+) to (A-) in November 2014 • Proactive pricing and liquidity management initiatives further strengthened the liquidity and funding profile providing a more diverse and stable funding composition During 2015 customer deposits grew $0.8 billion to $26.9 billion, resulting in a deposit to loan ratio of 66%. The BOQ Specialist business was more than fully funded by retail deposits, a significant portion being at higher cost. In line with the strategy announced at the date of acquisition, these deposits were repriced at expiry to BOQ Group levels at materially lower spreads. Despite the lower spreads paid, the Bank was able to raise sufficient retail funding through the channel to fund the additional asset growth achieved. Pleasingly, strong transaction account growth of $260 million, an increase of 14%, was achieved throughout the year. The branch network was critical to this result and benefited from strong gains in customer Net Promoter Scores, with the strongest improvement amongst the measured industry participants (refer Section 1.3). The Bank successfully integrated the BOQ Specialist operations during the year with the return of its banking licence occurring at the end of May. This, together with significant work on improving the deposit mix under the evolution of the new Basel III APS 210 Liquidity Standard, allowed the physical holding of liquid assets to be reduced by approximately $1 billion. The year end Liquidity Coverage Ratio (‘LCR’) was 125%. The improvement in the retail deposit mix reduced reliance on more price sensitive, higher cost and less stable deposits. $ million Customer Deposits (2) Wholesale Deposits Total Deposits Borrowings Other Liabilities Total Liabilities As at Aug-15 Feb-15 Aug-14 26,914 26,058 26,266 7,818 7,959 7,840 34,732 34,017 34,106 8,713 1,104 9,378 1,102 8,364 1,094 44,549 44,497 43,564 Aug 15 vs Feb 15 Aug 15 vs Aug 14 (1) 3% (2%) 2% (7%) - - 2% - 2% 4% 1% 2% (1) There has been a reclassification of Transferable Deposits from Wholesale Deposits for August 2014 to Borrowings to better reflect the underlying substance with contractual terms being on average greater than twelve months. (2) The classification of customer deposits is defined as all deposits excluding those from financial institutions as defined under the Liquidity Prudential Standard APS210. Prior years have been amended. FUNDING MIX ($b) LONG-TERM WHOLESALE ($b) 42.5 8.0 8.2 43.5 9.3 8.1 26.3 26.1 43.4 8.6 7.9 26.9 8.0 1.9 5.5 9.3 3.2 5.5 8.6 3.0 4.8 0.6 Aug 14 Senior Unsecured 0.6 Feb 15 Securitisation 0.8 Aug 15 Sub-Debt/ CPS (2) Aug 14 Feb 15 Aug 15 Customer Deposits (1) Short-Term Wholesale Long-Term Wholesale (1) The classification of customer deposits is defined as all deposits excluding those from financial institutions as defined under the Liquidity Prudential Standard APS210. Prior years have been amended. (2) Convertible Preference Shares and Wholesale Capital Notes 29 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 3.2 FUNDING AND LIQUIDITY (CONTINUED) BOQ has maintained a strong customer deposit to loan ratio at 66% and has continued to build out the long-term wholesale funding profile, creating more liquid and transparent market pricing for investors. As at Aug-15 Feb-15 (1) Aug-14 (1) Aug 15 vs Feb 15 Aug 15 vs Aug 14 Customer deposit funding Wholesale deposit funding 77% 23% 77% 23% 77% 23% Total GLA’s (net of specific provision) ($’million) 40,849 39,592 38,277 Deposit to Loan Ratio 66% 66% 69% - - 3% - - - 7% (3%) (1) The classification of customer deposits is defined as all deposits excluding those from financial institutions as defined under the Liquidity Prudential Standard APS210. Prior years have been amended. FUNDING Over the financial year we have continued to strengthen our customer deposit base, maintained our short-term funding in line with previous periods, and have continued to build out our long-term wholesale funding profile with additional long-term wholesale issuance of $3.1 billion. This includes two new benchmark term senior debt issues being a $600 million 5 year issue in November 2014 and a $500 million 2.25 year issue in February 2015. This has further extended the Bank’s domestic debt yield curve. The balance of long-term wholesale funding came through securitisation issues, various term senior debt private placements and additional issuance into current senior term debt lines. During the financial year the Bank issued $1.7 billion of securitisation funding with the completion of the Series 2014-1 REDS EHP Trust and Series 2015-1 REDS Trust transactions. The total level of long term wholesale funding has slightly decreased year on year due to securitisation run-off. Post balance date, the overall long- term wholesale funding balance has been maintained with a $750 million REDS EHP transaction in September 2015, replacing the securitisation run-off. 30 ANNUAL REPORT 2015 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 3.2 FUNDING AND LIQUIDITY (CONTINUED) MAJOR MATURITIES ($M) (1) (2) Following the ratings upgrades BOQ continued to build out its long-term wholesale funding curve with the issuance of two additional benchmark maturities totalling $1.1 billion. Strengthening the senior unsecured curve has provided more transparent market pricing for investors and promotes the core values of our funding strategy which are centred around building capacity, diversity and resilience of the wholesale funding base. 800 600 400 200 0 200 400 230 500 500 600 600 50 50 Nov-15 Feb-16 May-16 Aug16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20 Senior Unsecured BOQS Sub Debt BOQ Sub Debt (1) Maturities equal to or greater than $50 million shown. (2) Redemption of Sub Debt Notes at the scheduled call date is to BOQ’s option and is subject to obtaining prior written approval from APRA. LIQUIDITY BOQ maintains a portfolio of high quality, diversified liquid assets to facilitate balance sheet liquidity needs and meet internal and regulatory requirements. The Bank was granted a Reserve Bank of Australia (‘RBA’) Committed Liquidity Facility (‘CLF’) sufficient to enable the Bank to meet its regulatory minimum of greater than 100% of the Liquidity Coverage Ratio from 1 January 2015. As at 31 August 2015 the LCR was 125% with liquid assets contributing to the LCR of $5.5 billion. LCR has increased slightly over the past 6 months from 122% at half year to 125% at year end. 2015 saw liquidity management rebased for the new Basel III APS 210 Liquidity Standard. Significant work was undertaken on improving the deposit mix with a focus on products and customer relationships with low liquidity run-off factors under the new standard (refer Section 4.9). As a result, liquid asset holdings were able to be reduced, whilst enabling management within target LCR ranges to be achieved. Liquid Assets have also reduced over the year with the retirement of the BOQ Specialist ADI licence resulting in a material reduction in the level of liquid assets held. In addition to the liquid assets that contribute to the LCR, as at 31 August 2015 we also held internal securitisation of $2.6 billion which is eligible for repurchase arrangements with the RBA as a source of contingent liquidity in the event of a crisis scenario. Significant further liquidity is also available with a material proportion of the Bank’s retail lending assets eligible to be placed as collateral into this structure in a crisis scenario. LIQUIDITY COMPOSITION - BASEL III ($B) 8.9 (4) 2.3 4.2 2.4 9.2 (4) 3.3 3.8 2.1 8.1 2.6 3.4 2.1 Aug 14 HQLA1 (1) Feb 15 Liquid Assets (2) Aug 15 Internal RMBS (3) (1) High Quality Liquid Assets (HQLA1) includes government and semi-government securities, cash held with RBA and notes & coins (2) Liquid Assets include all unencumbered RBA repurchase eligible liquid assets able to be pledged as collateral to the RBA under the CLF (3) Internal RMBS are able to be pledged as collateral to the RBA CLF (4) Prior period figures have been restated to follow LCR categorisation 31 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 3.3 CAPITAL MANAGEMENT CAPITAL ADEQUACY $ million Common Equity Tier 1 (‘CET1’) Additional Tier 1 Capital Total Tier 2 Total Capital Base Total RWA Common Equity Tier 1 Ratio Total Capital Adequacy Ratio As at Aug-15 Feb-15 Aug-14 Aug 15 vs Feb 15 Aug 15 vs Aug 14 2,346 2,298 2,161 450 551 300 536 300 548 3,347 3,134 3,009 26,321 26,057 25,032 2% 50% 3% 7% 1% 9% 50% 1% 11% 5% 8.91% 8.82% 8.63% 12.72% 12.03% 12.02% 9bps 69bps 28bps 70bps We have further strengthened the Group’s capital ratios during the year with the Common Equity Tier 1 ratio increasing 28bps to 8.91%. The second half saw an increase in Common Equity Tier 1 as underlying cash earnings were sufficient to support 7% annualised loan growth and a 2 cent increase in the final dividend, generating 18bps of surplus capital. Additional Tier 1 Capital was increased following the issuance in May 2015 of $150 million in Wholesale Capital Notes. COMMON EQUITY TIER 1 CAPITAL We delivered underlying capital generation of 36 basis points over the year. The increase in capitalised software, as we invest in the Bank’s digitisation program, reduced CET1 by 18 basis points. This rate of capital strain is expected to reduce as the amortisation tail increases and the project portfolio matures. The BOQ Specialist integration and transaction costs consumed 8 basis points of capital, with that program now materially completed. The impact of net movements in reserves contributed 11 basis points of CET1, with a strong first half partially reversing in the second half. The AFS Reserve, representing the mark to market movements in liquid asset holdings not taken to profit and loss, was the most significant contributor to this movement. The reduction in deferred tax assets, largely associated with reduced provisions for impaired assets, product remediation and legacy items, caused a 7 basis point impact over the year. There was a timing difference between the first and second half result where concessional risk weighted asset treatment for BOQ Specialist mortgages was only established in the second half. Prior to this change, these assets were recorded as 100% risk weighted. 32 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 3.3 CAPITAL MANAGEMENT (CONTINUED) FY15 V FY14 Underlying Capital Generation 0.46% 1.47% 0.65% Organic Growth of 36bps 0.18% 0.08% 0.11% 8.63% 0.07% 8.91% FY14 Cash Earnings (1) RWA Growth Dividend net of DRP Capitalised Software BOQ Specialist integration costs Reserves (2) Other (3) FY15 (1) Cash earnings adjusted for one-off non-recurring items. (2) Reserves includes the impact of movements in the Equity Reserve for Credit Loss and the AFS Reserve. (3) Other items are largely positive due to a reduction in the net DTA as a result of lower specific provisions as well as reducing remediation/ legacy provisions. 2H15 V 1H15 Underlying Capital Generation 0.23% 0.73% 0.32% Organic Growth of 18bps 0.10% 0.05% 0.14% 0.10% 0.02% 8.82% 8.91% Feb15 Cash Earnings (1) RWA Growth (2) Dividend net of DRP Capitalised Software BOQ Specialist integration costs RWA timing impact Reserves (3) Other Aug15 (1) Cash earnings adjusted for one-off non-recurring items. (2) Underlying RWA growth excludes the one-off impacts of APS210 transition benefit as well as the benefit of lower risk weights on BOQ Specialist housing loans upon transition, correcting an opposite timing difference in the first half result. (3) Reserves includes the impact of the movement in the Equity Reserve for Credit Loss and the AFS Reserve. 3.4 TAX EXPENSE Tax expense arising on Cash Earnings for the year amounted to $156 million. This represents an effective tax rate of 30.4%, which is above the corporate tax rate of 30% primarily due to non-deductibility of interest payable on convertible preference shares issued in 2013 and Wholesale Capital Notes issued in 2015. 33 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 4.1 RECONCILIATION OF STATUTORY PROFIT TO CASH EARNINGS The Cash Earnings provided is used by Management to present a clear view of our underlying operating results. This excludes a number of items that introduce volatility and/or one-off distortions of the current year performance, and allows for a more effective comparison of BOQ’s performance across reporting periods. The main costs incurred this year relate to the BOQ Specialist integration and transaction costs, which are in line with market guidance and the finalisation of the a purchase price allocation entries for the acquisition of BOQ Specialist. Amortisation of customer contracts and fair value adjustments increased as a result. The prior year reflects the provision for the settlement of the Storm Financial proceedings. (A) RECONCILIATION OF CASH EARNINGS TO STATUTORY NET PROFIT AFTER TAX $ million Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 Cash Earnings after Tax 357 301 19% Amortisation of customer contracts (acquisition) (1) Amortisation of Fair Value adjustments (acquisition) (1) Hedge ineffectiveness Government Guarantee break fee Integration / transaction costs Legacy items Statutory Net Profit after Tax (14) (1) (3) - (20) (1) 318 (6) - (2) (1) (8) (23) 261 133% 100% 50% (100%) 150% (96%) 22% (1) The second half of 2015 includes 12 months amortisation of intangibles recognised following the completion of the Acquisition accounting for BOQ Specialist. 190 (9) (1) (4) - (12) - 164 167 14% (5) - 1 - (8) (1) 154 80% 100% (500%) - 50% (100%) 6% (B) NON-CASH EARNINGS RECONCILING ITEMS $ million Net Interest Income Non-Interest Income Total Income Operating Expenses Underlying Profit Loan Impairment Expense Profit before Tax Income Tax Expense Profit after Tax Cash Earnings Aug-15 907 180 1,087 (500) 587 (74) 513 (156) 357 VMA - 14 14 (14) - - - - - Amortisation of customer contracts (acquisition) Amortisation of fair value adjustments Hedge ineffectiveness Integration/ transaction costs Legacy items Statutory Net Profit Aug-15 - - - (15) (15) - (15) 1 (14) - - - (1) (1) - (1) - (1) - (5) (5) - (5) - (5) 2 (3) (7) - (7) (21) (28) - (28) 8 (20) - (1) (1) (1) (2) - (2) 1 (1) 900 188 1,088 (552) 536 (74) 462 (144) 318 34 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 4.2 OPERATING CASH EXPENSES (EXCLUDING BOQ SPECIALIST) Employee expenses Salaries Superannuation contributions Payroll tax Employee Share Programs Other Occupancy expenses Lease expense Depreciation of Fixed Assets Other General expenses Marketing Commissions to Owner Managed Branches Communications and postage Printing and stationery Impairment Processing costs Other operating expenses IT expenses Data processing Amortisation of Intangible Assets Depreciation of Fixed Assets Other expenses Professional fees Directors’ fees Other Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 150 144 15 10 8 6 13 10 8 7 189 182 30 9 3 42 14 7 19 4 10 24 22 100 62 16 1 79 12 2 5 19 28 8 3 39 12 6 20 5 - 26 15 86 63 14 2 79 10 2 5 17 4% 15% - - (14%) 4% 7% 13% - 8% 17% 17% (5%) (20%) n/a (8%) 47% 16% (2%) 14% (50%) - 20% - - 12% 76 7 5 4 3 95 12 5 1 18 8 4 10 2 - 11 11 46 31 8 - 39 7 1 2 10 74 8 5 4 3 94 18 4 2 24 6 3 9 2 10 13 11 54 31 8 1 40 5 1 3 9 3% (13%) - - - 1% (33%) 25% (50%) (25%) 33% 33% 11% - n/a (15%) - (15%) - - (100%) (3%) 40% - (33%) 11% Total Operating Expenses 429 403 6% 208 221 6% 35 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 4.2 OPERATING CASH EXPENSES (EXCLUDING BOQ SPECIALIST) (CONTINUED) Employee Expenses Growth in employee costs over the year has been driven by staff supporting the broker channel and the transition of Owner Managed Branches to corporate run. Occupancy Expenses Property lease costs have rebased at a lower value in the second half as the transition costs of the Brisbane and Sydney head office relocations ceased. General Expenses The increase from the prior year reflected impairment of the pilot CRM system for $10 million. Other operating expenses were also lower in the prior year due to receipts of indirect tax credits relating to prior years. It Expenses IT expenses were flat for the full year with early stage benefits realised from the recently renegotiated IT outsourcing agreement. Other Expenses Slight increase in professional fees in the half as a result of CEO and executives recruitment fees. 4.3 PROPERTY PLANT & EQUIPMENT (CONSOLIDATED) Cost Balance as at 1 September 2014 Additions Disposals Transfers between categories Balance as at 31 August 2015 Amortisation and impairment losses Balance as at 1 September 2014 Depreciation for the year Disposals Balance as at 31 August 2015 Carrying amount as at 31 August 2014 Carrying amount as at 31 August 2015 Leasehold improvements $m Plant furniture and equipment $m IT equipment $m (1) Capital works in progress $m Assets under Operating Lease $m 44 20 (2) 7 69 25 7 (2) 30 19 39 32 1 (4) 3 32 22 2 (2) 22 10 10 34 2 (4) - 32 31 1 (3) 29 3 3 10 1 - (10) 1 - - - - 10 1 26 9 (10) - 25 17 10 (10) 17 9 8 Total $m 146 33 (20) - 159 95 20 (17) 98 51 61 (1) Opening balances have been restated to reflect the impact of the finalisation of the Acquisition accounting for BOQ Specialist 36 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 4.4 CASH EPS CALCULATIONS Year End Performance Half Year Performance Aug-15 Aug-14 Aug 15 vs Aug 14 Aug-15 Feb-15 Aug 15 vs Feb 15 Basic EPS Diluted EPS (cents) (cents) Reconciliation of Cash Earnings for EPS Cash Earnings available for ordinary shareholders ($ million) Add: CPS Dividend Add: Wholesale Capital Notes (1) Cash Diluted Earnings available for ordinary shareholders ($ million) ($ million) ($ million) Weighted Average Number of Shares (‘WANOS’) Basic WANOS Add: Effect of award rights Add: Effect of CPS Add: Effect of Wholesale Capital Notes (1) Diluted WANOS for Cash Earnings EPS (million) (million) (million) (million) (million) (1) On 26 May 2015, the Bank issued 150,000 Wholesale Capital Notes at a price of $10,000 per note 97.3 92.2 357 16 2 375 367 3 24 12 406 89.5 87.0 301 16 - 317 337 3 25 - 365 9% 6% 51.5 48.9 45.8 44.8 13% 9% 19% 190 167 14% - - 8 2 8 - - - 18% 200 175 14% 9% 2% (6%) - 11% 369 3 24 12 409 365 3 23 - 1% - 4% - 391 (2%) 4.5 ISSUED CAPITAL ORDINARY SHARES Movements during the year Balance at the beginning of the year – fully paid Issue of ordinary shares - October 2014 at $12.29 (1) Dividend reinvestment plan - November 2014 at $12.06 Dividend reinvestment plan - May 2015 at $13.06 Balance at the end of the year – fully paid Consolidated 2015 Number 2015 $m 362,516,835 3,052 900,000 3,565,212 3,786,729 11 43 49 370,768,776 3,155 (1) On 24 October 2014, 900,000 ordinary shares were issued to the trustee of the BOQ Employee Shares Plans Trust to satisfy the exercise of award rights and issue of shares under the Award Rights Plan and issue of shares under the BOQ Restricted Share Plan and BOQ Employee Share Plan. 37 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 4.6 AVERAGE BALANCE SHEET AND MARGIN ANALYSIS Interest earning assets Gross loans & advances at amortised cost Investments & other securities Total interest earning assets Non-interest earnings assets Property, plant & equipment Other assets Provision for impairment Total non-interest earning assets Total Assets Interest bearing liabilities Retail deposits Wholesale deposits & Borrowings Total Interest bearing liabilities Non - interest bearing liabilities Total Liabilities Shareholder's funds Total liabilities & shareholders funds Interest margin & interest spread Interest earning assets Interest bearing liabilities Net interest spread August 2015 (Full Year) August 2014 (Full Year) Average Balance $m Interest $m Average Rate % Average Balance $m Interest $m Average Rate % 2,037 190 2,227 5.13 2.98 4.83 726 594 1,320 2.73 3.58 3.06 39,713 6,385 46,098 61 1,599 (280) 1,380 47,478 26,595 16,593 43,188 885 44,073 3,405 47,478 35,655 6,257 41,912 43 1,366 (294) 1,115 43,027 24,169 15,151 39,320 689 40,009 3,018 43,027 1,917 195 2,112 5.38 3.12 5.04 772 579 3.19 3.82 1,351 3.44 46,098 43,188 2,227 1,320 4.83 3.06 1.77 0.20 1.97 41,912 39,320 2,112 1,351 41,912 761 5.04 3.44 1.60 0.22 1.82 Benefit of net interest-free assets, liabilities and equity Net interest margin - on average interest earning assets 46,098 907 38 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 4.6 AVERAGE BALANCE SHEET AND MARGIN ANALYSIS (CONTINUED) Interest earning assets Gross loans & advances at amortised cost Investments & other securities Total interest earning assets Non-interest earnings assets Property, plant & equipment Other assets Provision for impairment Total non-interest earning assets Total Assets Interest bearing liabilities Retail deposits Wholesale deposits & Borrowings Total Interest bearing liabilities Non - interest bearing liabilities Total Liabilities Shareholder's funds Total liabilities & shareholders funds Interest margin & interest spread Interest earning assets Interest bearing liabilities Net interest spread 46,272 43,359 1,086 627 Benefit of net interest-free assets, liabilities and equity Net interest margin - on average interest earning assets 46,272 459 August 2015 (Six month period) February 2015 (Six month period) Average Balance $m Interest $m Average Rate % Average Balance $m Interest $m Average Rate % 1,003 83 1,086 4.93 2.78 4.66 343 284 627 2.53 3.41 2.87 40,343 5,929 46,272 64 1,618 (274) 1,408 47,680 26,847 16,512 43,359 884 44,243 3,437 47,680 39,083 6,841 45,924 58 1,580 (286) 1,352 47,276 26,343 16,674 43,017 886 43,903 3,373 47,276 1,034 107 1,141 5.34 3.15 5.01 383 310 693 2.93 3.75 3.25 4.66 2.87 1.79 0.18 1.97 45,924 43,017 1,141 693 5.01 3.25 1.76 0.21 45,924 448 1.97 39 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 4.7 DISTRIBUTION FOOTPRINT We have continued to develop our ‘Customer in Charge’ strategy to allow our customers to engage with us through the channel of their choice. This includes the traditional face to face in our Owner Managed or Corporate branches, their preferred broker, online via digital, mobile or social media and on the telephone to our award winning Perth based customer service centre or our newly opened Gold Coast customer service centre. Branch numbers reduced by 18 over the year which included a number of consolidations across the Owner Managed network. The increase in the Corporate Network included new ‘icon’ branches in Charlestown, Sydney and the head office Newstead branch located in Brisbane. We continue to see improving branch productivity and an increase in average footings per branch. The network has been focussed on driving productivity initiatives including the Fit 4 Biz program which promotes the Bank’s sales and service culture. These initiatives have resulted in an increase in applications and settlement volumes across the network this financial year and looks to ensure that BOQ is ‘Loved like no Other’. Broker channel expansion accelerated in 2015 with the total accredited more than doubling to 2,506. The majority of these are based outside of Queensland (83%, further diversifying the portfolio. The second half saw sizeable inroads into the Queensland Broker market to leverage our strong brand appeal in our home state and this grew to 420 brokers by year end. The number of Broker aggregators was also widened with the inclusion of Finsure, Loan Market and Beagle Finance. NT 23 2 SA 1 2 37 118 1 254 WA 16 74 10 212 568 82 corporate branches 588 boq branded ATM’s 144 owner managed branches 2455 redi atm’s 8 transaction centres 2506 brokers 40 QLD 45 8 85 420 310 463 NSW & ACT 13 25 736 127 856 VIC 7 625 71 20 562 TAS 2 3 16 71 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 4.7 DISTRIBUTION FOOTPRINT (CONTINUED) QLD NSW / ACT VIC WA NT TAS SA Total As at Aug-15 Corporate Branches Owner managed branches Transaction Centres As at Aug-14 Corporate Branches Owner managed branches Transaction Centres 45 85 8 138 13 25 - 38 7 20 - 27 16 10 - 26 - 2 - 2 - 2 - 2 QLD NSW / ACT VIC WA NT TAS SA 41 98 8 147 14 25 - 39 6 27 - 33 16 12 - 28 - 2 - 2 - 2 - 2 CORPORATE, OWNER MANAGED BRANCHES (‘OMB’) & TRANSACTION CENTRES 252 14 11 3 5 1 1 - - 1 1 - - 1 82 144 8 234 Total 78 166 8 252 234 144 82 8 166 78 8 Aug-14 OMB Closures/ Mergers Corporate OMBs to Corporate Corporate to OMBs Corporate Closures New Corporate branch Aug-15 OMBs Transaction Centres 4.8 CREDIT RATING The Bank monitors rating agency developments closely. Entities in the Group are rated by Standard and Poor’s, Moody’s Investor Service (‘Moody’s’) and Fitch Ratings. Our current long-term debt ratings are shown below. Rating Agency Standard & Poor’s Fitch Moody’s Short Term Long Term A2 F2 P2 A- A- A3 Outlook Stable Stable Stable 41 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 4.9 LIQUIDITY COVERAGE RATIO As at 1 January 2015, following the introduction of APS 210, APRA requires ADIs to maintain a minimum 100% Liquidity Coverage Ratio (‘LCR’). This is calculated as the ratio of high quality liquid assets to a 30 day net cash outflow projected under a prescribed stress scenario. A revision to prudential standard APS330 Public Disclosures introduced requirements for an ADI to provide disclosure information in respect of the LCR for reporting periods after 1 July 2015. Publication of data related to reporting periods prior to this date is not required. Liquid Assets have reduced during the quarter with the retirement of the BOQ Specialist ADI licence resulting in a material reduction in the volume of liquid assets required to be held. There are three broad categories of eligible liquid assets. 1. HQLA 1: cash, Australian government and semi-government securities Assets eligible under the Committed Liquidity Facility (‘CLF’) provided by the Reserve Bank of Australia (‘RBA’): 2. Negotiable certificates of deposit, bank bills, bank term securities and asset-backed securities that are eligible for repurchase arrangements with the RBA 3. Internal RMBS, being mortgages that have been securitised but retained by the Bank, that also qualify for repurchase with the RBA The objective of the Bank’s funding profile is to create a stable, diverse and resilient funding structure that mitigates the chance of a liquidity stress event across various funding market conditions. The Bank utilises a range of funding tools including customer deposits, securitisation, short term and long term wholesale debt instruments. Bank lending is predominantly funded from stable funding sources with short term wholesale funding primarily used to fund highly liquid assets and trading securities. Quantitative disclosures are calculated as simple averages of daily observations over the previous quarter. The reported period covers 92 days of data which includes 64 business day observations. The following table outlines the key components and resulting LCR. BOQ maintains a portfolio of high quality, diversified liquid assets to facilitate balance sheet liquidity needs and meet internal and regulatory requirements. The LCR has increased slightly over the past 3 months from 122% to 125% at the period end with an average across the quarter of 131%. Net cash outflows have been reduced over the last year as Basel III liquidity management initiatives were successfully implemented, resulting in lower levels of liquid assets required for a similar LCR. The key liquidity management initiatives that have been undertaken include: • • • • The introduction of a 31 day right to break deposit product reducing the sensitivity of the Bank to a short term liquidity stress event; Lengthening the weighted average term of deposit products through targeted pricing; Continuing to build out the Bank’s senior unsecured funding curve through regular issuances of consistent size across multiple tenors. This has enhanced depth of market liquidity and price discovery as well as a reduction on the reliance of short-term wholesale funding; Targeting “stable” and “less stable” deposit sources with lower LCR cash outflow impacts through strengthening relationships with customers; and, • Managing the Bank’s maturity profile of both assets and liabilities to reduce the volatility of the LCR through time. The main sources of LCR volatility relate to the short-term maturity profile which continues to be actively managed. BOQ does not have significant derivative exposures or currency exposures that could adversely affect the Bank’s cash flows. The Common Disclosure and Regulatory Capital reconciliation documents appear in the Regulatory Disclosure section of the Bank’s website at the following address: http://www.boq.com.au/regulatroy_disclosures.htm 42 ANNUAL REPORT 20154.9 LIQUIDITY COVERAGE RATIO (CONTINUED) Liquid Assets, of which High-quality liquid assets (‘HQLA’) Alternative liquid assets (‘ALA’) Total Liquid Assets Cash Outflows Customer deposits and deposits from small branch customers, of which stable deposits less stable deposits Unsecured wholesale funding, of which non-operational deposits unsecured debt Secured wholesale funding Additional requirements, of which outflows related to derivatives exposures and other collateral requirements credit and liquidity facilities Other contractual funding obligations Other contingent funding obligations Total Cash Outflows Cash Inflows Inflows from fully performing exposures Other cash inflows Total Cash Inflows Total Net Cash Outflows Total Liquid Assets Total Net Cash Outflows Liquidity Coverage Ratio (%) DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 Total Unweighted Value Total Weighted Value (Q415 average) (Q415 average) $m $m n/a n/a 12,185 5,697 6,488 3,848 3,006 842 n/a 385 299 86 347 7,486 24,251 684 474 1,158 23,093 n/a n/a n/a 2,066 2,991 5,057 1,258 285 973 2,479 1,637 842 63 303 299 4 45 548 4,696 363 474 837 3,859 5,057 3,859 131% 43 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 Dear Shareholder Please find attached the 2015 Remuneration Report. Following your feedback we have again sought to make the information provided more readable and easier to understand. We have also listened to your feedback concerning the short term incentive (STI) plan and provided more information concerning the measures which are set at the beginning and scored at the end of the financial year. Our core Remuneration principals have remained in place for the 2015 financial year: • We do not make cash payments for Executives on commencement with BOQ; • • • • The Board holds the right to defer and/or clawback unvested short term and long term incentives (LTI); The Bank’s LTI is awarded on the basis of the current share price (face value) and not a risk adjusted value (fair value); Fixed and total remuneration for each key management personnel (KMP) is benchmarked to the market each remuneration round; Total remuneration for KMP is structured at approximately one third fixed pay, one third STI and one third LTI; • Key performance measures are required and agreed for all Executives, covering both financial and non-financial targets; and • The Board has discretion on all remuneration outcomes. The only change of any significance during the 2015 financial year was the removal of cash net profit after tax (NPAT) as a gateway measure to the STI Plan and its replacement with cash earnings per share (EPS). This change was signalled last year and reflects shareholder feedback which favoured an EPS measure as it is believed to be closer to the creation of shareholder value than NPAT. Last year we also signalled an addition to the vesting measure used for the LTI Plan. Previously there had been a single measure based on total shareholder return (TSR) relative to a basket of other listed companies. Again, following your feedback we will add a second vesting measure of cash EPS for the 2015 Performance Award Rights (PARs) allocations, with a weighting of 20%. In January 2015 we appointed Jon Sutton as Managing Director & Chief Executive Officer (MD) of the Bank. Jon had been acting in the role whilst we undertook an extensive search for a new MD. We were fortunate to attract a number of quality candidates and ultimately determined Jon’s appointment was in the best interests of shareholders. We are delighted to have been able to select the best candidate internally, confirming our succession planning process. Jon’s remuneration has been disclosed publicly and follows the principals outlined above. The Human Resources and Remuneration Committee (HR & Remuneration Committee) took external advice before concluding the negotiations and his package is less than that of the previous MD. As part of the 2015 remuneration process all employees, including KMP and Responsible Persons (RPs), were assessed against their key performance indicators (KPIs) agreed at the beginning of the financial year. For the majority of employees, except KMP, remuneration recommendations relating to fixed pay, STI and LTI were proposed by management and moderated by the BOQ Senior Executive team. With regard to KMP, the MD assessed each Executive’s performance and made recommendations; and for the MD, the Board Chair undertook the performance review and made recommendations concerning his remuneration. The HR & Remuneration Committee considered the overall Bank wide fixed pay increase, the Bank wide STI pools and the specific recommendations for the MD, KMP and RPs. In undertaking this role, the HR & Remuneration Committee considered the year’s performance overall including the makeup of the result, the distribution of performance ratings and remuneration outcomes and the TSR created. We took external advice concerning market comparatives for each KMP and RP role. We also ensured that any deficiencies in risk behavior were reflected in the outcomes. In recommending MD, KMP and RPs outcomes to the BOQ Board for approval, the HR & Remuneration Committee made a number of changes and were influenced by several factors, including a desire for more work on internal systems and processes, primarily technology related, financial services sector leading TSR, a 19% improvement in cash earnings, and higher staff engagement and customer satisfaction. Overall fixed pay increases for the 2015 year were limited to 2.5% and STI awards on average fell 10%. Total LTI which is awarded on the basis of retention and potential decreased by 4.7%. Your Board has accepted the HR & Remuneration Committees recommendations as serving the best interests of shareholders in the short and medium term. Yours sincerely DAVID WILLIS CHAIRMAN OF THE HUMAN RESOURCES & REMUNERATION COMMITTEE 44 ANNUAL REPORT 2015REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 2015 REMUNERATION REPORT - AUDITED This Remuneration Report is prepared for consideration by shareholders at the 2015 Annual General Meeting of the Bank. It outlines the overall remuneration strategy, framework and practices adopted by the Consolidated Entity for the period 1 September 2014 to 31 August 2015 and has been prepared in accordance with Section 300A of the Corporations Act 2001 and its regulations. Contents 1. Key management personnel 2. Remuneration governance 3. Remuneration policy 4. Executive remuneration framework 5. Non-executive Director remuneration 6. Remuneration disclosures 7. 8. Transactions with Directors and Senior Executives Executive contracts 1. KEY MANAGEMENT PERSONNEL (KMP) Page 45 46 46 46 52 54 65 66 KMP include those Directors and Executives who have authority and responsibility for planning, directing and controlling the activities of the Bank and the Consolidated Entity. The KMP for the financial year ended 31 August 2015 were as follows: (i) Directors Current Roger Davis Jon Sutton Neil Berkett Bruce Carter Carmel Gray Richard Haire Chairman (Non-executive) Managing Director and Chief Executive Officer (Appointed 5 January 2015) Director (Non-executive) Director (Non-executive) Director (Non-executive) Director (Non-executive) Margaret Seale Director (Non-executive) Michelle Tredenick Director (Non-executive) David Willis Director (Non-executive) Former Steve Crane Director (Non-executive) (Resigned 22 January 2015) (ii) Senior Executives (KMP) Current Matthew Baxby Group Executive, Retail Banking Peter Deans Karyn Munsie Anthony Rose Chief Risk Officer Group Executive, Corporate Affairs, Investor Relations & Government Relations Chief Financial Officer Michelle Thomsen General Counsel and Company Secretary (Appointed 13 July 2015) Donna-Maree Vinci Group Executive Enterprise Solutions (Appointed 27 July 2015) Brendan White Group Executive Business Banking Former Julie Bale Chief Information Officer (Until 15 May 2015) Brian Bissaker Chief Executive Officer, Virgin Money Australia (Until 13 March 2015) 45 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 2. REMUNERATION GOVERNANCE The HR & Remuneration Committee makes recommendations to the Board on remuneration policies, Directors’ and executives’ remuneration and broader HR matters. This Committee considers remuneration and HR issues regularly and obtains advice from external independent remuneration specialists to assist in its deliberations. Under the Consolidated Entity’s HR & Remuneration Committee Charter, the Committee undertakes to do the following: • Conduct regular (at least biennial) reviews of the Consolidated Entity’s Remuneration Policy to ensure compliance with the Consolidated Entity’s objectives and risk management framework; • Review and provide recommendations to the Board on remuneration, recruitment, retention and termination policies for Senior Executives; • Review and provide annual recommendations to the Board on the individual remuneration arrangements for Senior Executives (i.e. Managing Director and Chief Executive Officer and his direct reports) and all other Responsible Persons (as defined by the Australian Prudential Regulation Authority Prudential Standard CPS 520); • Review and provide annual recommendations to the Board on the remuneration principles for employees in Group Risk, Finance and Legal functions, on a group basis; • Review and provide recommendations to the Board on the remuneration for all remaining groups of employees not otherwise specified; and • Consider and recommend Non-Executive Director (NED) remuneration, including ensuring that the structure of NED remuneration is clearly distinguished from that of Senior Executives. The HR & Remuneration Committee generally meets around six times per year and, in the 2015 financial year, five meetings were held. 2.1 Use of external advisors and remuneration consultants Where necessary, the Board seeks advice from independent experts and advisors, including remuneration consultants. Remuneration consultants are engaged by, and report directly to, the HR & Remuneration Committee which ensures, upon engagement, that the appropriate level of independence exists from the Consolidated Entity’s Management. Where the consultant’s engagement requires a recommendation, the recommendation is provided to, and discussed directly with the Chairman of the HR & Remuneration Committee. During the year, the Board paid an amount of $65,373 to Egan & Associates in respect of remuneration advice covering a number of remuneration-related issues, including benchmarking and determination of pay for the Senior Executives. Egan & Associates provided no advice directly to Management in the 2015 year. The Board is satisfied that remuneration advice provided by external advisers during the year was free from undue influence by members of the Senior Executive to whom the advice related. 3. REMUNERATION POLICY The Consolidated Entity’s executive reward policy is designed to balance five objectives: • Incentivise executives to pursue the short and long-term goals of the Consolidated Entity within an appropriate risk control framework; • Demonstrate a clear relationship between executive performance and remuneration; • Align the interest of management with those of the shareholders; • Provide sufficient rewards to ensure the Consolidated Entity attracts and retains suitably qualified and experienced executives; and • Ensure that an element of these rewards is deferred to assist in appropriate risk-based decision-making and behaviour. The HR & Remuneration Committee monitors and reshapes remuneration programs to support these underlying objectives, responds to proposed and enacted legislation and regulatory initiatives, and adjusts to changes in the business cycle. 4. EXECUTIVE REMUNERATION FRAMEWORK The remuneration structure in place for the Senior Executives and Responsible Persons (RPs) is consistent with the Consolidated Entity’s Remuneration Policy, and is based on a total remuneration approach comprising an appropriate mix of fixed (salary and benefits) and variable (at-risk) pay in the form of cash and equity-based incentives. 4.1 Current remuneration framework Total remuneration for the Senior Executives consists of the following three components: • Fixed remuneration; • Short term incentives - at-risk remuneration consisting of cash and deferred equity; and • Long term incentives - at-risk equity remuneration, where the equity is offered on the basis of face value, not fair value. 46 ANNUAL REPORT 2015REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 4.2 Fixed remuneration All employees are offered a competitive fixed component of their reward to reflect the core performance requirements and expectations of their roles. Senior Executives and RPs fixed remuneration is approved by the Board and reviewed at least annually. It is referenced to market data provided by remuneration consultants, to ensure that it has regard to remuneration within the financial services sector. The fixed remuneration for Senior Executives is set out in Table 11 of this report. 4.3 Short term incentive - At-risk remuneration The STI links individual performance with that of the Consolidated Entity. It is designed to ensure that the participants have a performance-focused work environment, whilst exercising an appropriate level of risk. In 2015, Senior Executives and RPs participated in the STI Plan under which the participants receive payments dependent upon the achievement of specified, quantifiable results and within appropriate risk management parameters. Senior Executive KPIs and the STI Plan design features are reviewed annually by the HR & Remuneration Committee prior to the commencement of the plan. As in previous years, once any STI payment exceeds $100,000, 50% of the total amount awarded is deferred. For Senior Executives, the deferral is into restricted shares for a period of two years. Restricted shares provide an additional incentive to act in the shareholders’ longer-term interests over the two year deferral period. The decision to release deferred STI will be at the discretion of the Board, which consults with the Chief Risk Officer (CRO) in making this decision. Table 1 Overview BOQ Senior Executive STI Plan (For KMP) The Senior Executive STI Plan is an incentive plan under which participants have the opportunity to receive amounts in cash and equity, having regard for quantifiable results achieved within appropriate risk management parameters. Participants Senior Executives, being those individuals who have the ability to directly influence achievement of the Board’s objectives. STI opportunity The STI opportunity for each participant is stated as a percentage of total fixed remuneration (TFR). For the Senior Executive STI Plan, the STI opportunity ranges are as follows: Managing Director & Chief Executive Officer Group Executive (GE) Business Banking, GE Retail Banking Chief Financial Officer, Chief Risk Officer, GE Corporate Affairs, Investor Relations & Government Relations, GE Enterprise Solutions, and General Counsel and Company Secretary 0 - 150% of TFR 0 - 140% of TFR 0 - 100% of TFR Link between performance and award For 2015, reflecting feedback from investors, the gateway hurdle was changed from NPAT to EPS. As a gateway hurdle, achievement of a threshold of 90% of target EPS is required for payments under the STI Plan to occur. If performance does not meet the gateway EPS threshold, payment of any STI is at the discretion of the Board. In exercising this discretion the Board will have regard for a range of factors as outlined in Section 4.5. The performance measures are: • • • • The Consolidated Entity’s performance against target cash EPS; The Consolidated Entity’s performance against target cash NPAT; The Consolidated Entity’s cash cost to income ratio (CTI ratio); Individual performance criteria; and • Adherence with the Consolidated Entity’s risk framework and expected behaviours. Measure EPS Weighting 20% Rationale for use of this measure How does this measure operate? As a measure where, ‘exceptional’ performance can deliver to the maximum of this measure’s weighting. In response to feedback from investors. Also, the EPS measure is a direct and transparent measure of the financial performance of the Consolidated Entity as it is believed to be more closely related to share price than NPAT. 47 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 Link between performance and award (continued) Measure NPAT Weighting 20% CTI ratio 10% Individual performance criteria including BOQ strategic initiatives 50% Rationale for use of this measure How does this measure operate? The NPAT measure is included as a direct and transparent measure of the financial performance of the Consolidated Entity. The CTI ratio is included as a measure within the STI Plan to assist in driving efficiency and aligning participants with the financial growth of the Consolidated Entity. This measure directly aligns with the operational excellence component of the Consolidated Entity’s strategy. These measures are selected to reflect the Consolidated Entity’s short-term and long- term objectives. As the level of NPAT increases, the quantum of STI payable in respect of the NPAT component increases, up to the maximum potential of this measure’s weighting. Participants receive a percentage of the STI payment if the Consolidated Entity achieves its budgeted CTI ratio, increasing on a sliding scale as the ratio improves and decreasing as performance deteriorates. Personal performance measures are agreed annually and are role specific. Individual performance criteria consider multiple factors including individual behaviours, the business results and/or strategic accomplishments of the business or function, and people management, together with adherence to risk criteria. Performance measurement framework The measurement framework for each of the four measures noted above has four levels of performance, i.e. threshold, target, superior and exceptional (as detailed below). Threshold Target Superior Exceptional This is a point below the target (i.e budget - which still represents an improvement on the prior year) and is considered a satisfactory performance for the year. Target is defined by the business budget which is approved by the Board and must reflect the full set of financial and non-financial strategic measures. Superior is when, on top of the approved Target, ‘stretch’ goals are delivered. Stretch goals are also approved by the Board. When the individual and Consolidated Entity’s performance is deemed exceptional across the board, the maximum of the STI range may apply. Performance period Change of control Performance will be assessed over the financial year. Payments under the STI will generally be made in October, following assessment of performance over the relevant performance period. In the event of a change of control, all STIs will either remain on foot or be paid out on a pro rata basis or in full (depending on the circumstances). The restriction on deferred STI (restricted shares) will either remain on foot or be lifted depending on the circumstances of the change in control. Any such decision will be at the Board’s discretion. Dividends Senior Executives who hold restricted shares as part of deferred STI receive dividends when they become payable. 48 ANNUAL REPORT 2015 REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 Deferral As noted earlier, any STI payment exceeding $100,000 has 50% of the total amount awarded deferred as restricted shares (ordinary BOQ shares held by a trustee on behalf of participants and subject to disposal restrictions). The restricted shares will be released to the individual at the end of the deferral period subject to continued employment and the Board determining that no “forfeiture” events have occurred. The Board retains discretion to determine what constitutes a “clawback” event but such events can include breaches of risk KPIs, departure to a direct competitor and instances where there has been a material misstatement in the financial statements. Forfeiture The STI award and / or any deferred component will only be awarded to Senior Executives who are employed by the Consolidated Entity at the relevant STI payment date and who have not given notice of resignation prior to this date. Once awarded, restricted shares remain subject to disposal restrictions and will be forfeited where the participant: 1. Resigns in order to take up employment with a defined competitor; 2. Takes up employment with a direct competitor within three months of ceasing employment; 3. Ceases employment by reason of summary dismissal or for reasons associated with a breach of their Agreement or other employment terms or any policy of the Company or a related Company; and 4. Is deemed by the Board to have committed an act of fraud, material misstatement, financial mismanagement, gross misconduct or a serious breach of their duties and obligations in relation to the Company’s affairs. The deferred portion of a Senior Executives’ STI award may also be forfeited where the Board determines that risk conditions have not been met during the deferral period. Advice may be sought from the CRO in making this determination. 4.3.1 Performance against STI awarded The Board reviewed the Consolidated Entity’s performance (Table 2) and the performance of each Senior Executive against the measures outlined for 2015 STI Plan, in order to determine the appropriate payment under the STI Plan. The key financial and non-financial objectives for the Senior Executives in the 2015 financial year, with commentary on key highlights, are provided below in Table 3. Table 2 - Consolidated Entity performance (last 5 years) Statutory net profit/(loss) after tax Cash net profit after tax (1) Cash diluted earnings per share (1) Cash cost to income ratio (1) Share price Dividends paid (1) Non-statutory measures are not subject to audit. 2015 $318m $357m 92.2c 46.0% $12.67 $272m 2014 2013 2012 2011 $261m $301m 87.0c 43.9% $12.58 $216m $186m $251m 75.1c 44.3% $9.60 $180m $(17m) $31m 7.9c 45.7% $7.55 $152m $159m $177m 66.7c 44.5% $7.48 $126m Table 3 - 2015 STI performance commentary for Senior Executives Measure EPS NPAT CTI ratio Weighting Commentary/Results 20% 20% 10% For the period ending August 31, 2015, the EPS figure increased 6% to 92.2 cents which was deemed to be within the Eligible target performance range. For the period ending August 31, 2015, the NPAT figure increased by 19% to $357 million which was determined to be within the Eligible target performance range. For the period ending August 31, 2015, the CTI ratio increased by 2.1% to 46% which was assessed within the Eligible target performance range. 49 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 Table 3 - 2015 STI performance commentary for Senior Executives (continued) Measure Weighting Commentary/Results Individual Performance Objectives including BOQ strategic initiatives 50% The BOQ strategy has four pillars, Loved Like No Other, Grow the Right Way, There’s always a Better Way and Customer in Charge - we’re seeing the impact of this through improved growth, employee engagement, customer satisfaction and increased risk awareness and compliance. Some examples of Target goals for individual Senior Executives include: • Customer in Charge • Growth in Retail and Business Banking - relative to system • Promote channel diversity through growth in new channels • Enhanced divisional product growth • Grow the Right Way • • Improvement in branch audits Improvement in bad & doubtful debts • • Effective balance between margin and growth • Manage liquidity and effective transition to APS210 - Liquidity There’s Always a Better Way • • Reduction in external reporting times • Delivery of the product remediation program Loved Like No Other • • • Reduction in number of lost time injuries Improvement in employee engagement scores Improvement in customer net promoter scores Overall, the individual performances of Senior Executives was judged to be in the range of Target to Superior. Based on this level of organisational and individual performance reported for the 2015 financial year, the Board approved Senior Executive payments at between 47% and 73% of their STI opportunity. Refer to Table 5 for disclosure of individual STI payments. 4.4 Long-term incentive remuneration The Board considers the granting of equity remuneration to Senior Executives to be an important component in aligning their interests to those of shareholders. This includes encouraging behaviour that supports the risk management framework and the long-term financial soundness of the Consolidated Entity. The Board reviews the structure and quantum of the long-term incentives on an annual basis to ensure their effectiveness, and recognise the potential impact of participants on the Consolidated Entity’s future performance. Senior Executives participated in the 2015 Award Rights Plan under which the participants receive rights to acquire shares at no cost, subject to achievement of performance and service conditions. No amount is payable by employees for the grant or exercise of these award rights. The Award Rights Plan was approved by shareholders on 11 December 2008 and further ratified at the AGM’s of 2011 and 2014. There are two types of award rights that can be granted under the plan - Performance Award Rights (PARs) and Deferred Award Rights (DARs). Eligibility, quantum and mix of PARs and DARs varies based upon a participant’s accountabilities, contribution, potential and seniority. As per the Board’s 2014 decision, DARs are no longer awarded to Senior Executives. Grants of PARs are made to Senior Executives and other identified key senior managers due to the important role they play in achieving the longer-term business goals of the Consolidated Entity. PARs have performance hurdles which will allow the Board to ensure that incentives are aligned with the Consolidated Entity’s future strategies and the interests of shareholders. DARs are awarded to a broader group of employees below Senior Executives to promote employee retention and productivity. The number of DARs awarded to an individual employee depends on their position, performance and potential, as determined under the normal performance review cycle undertaken for all employees. The range for the number of DARs allocated per employee is governed by the Board. PARs are awarded to Senior Management (including KMP) to promote alignment with long term performance. The number of PARs awarded to a Senior Executive depends on their position, performance and potential, as determined under the normal performance review cycle undertaken for all employees. The Board govern the LTI award range for Senior Executives. The allocations for KMP are a maximum of 100% of fixed remuneration, based on a face value grant (not ‘fair’ or discounted value). There are no voting or dividend rights attached to unvested PARs and DARs. Upon exercise of Award Rights, participants receive BOQ ordinary shares to which voting and dividend rights are attached. As noted earlier, in the event of a change of control, all LTI awards will either remain on foot or vest on a pro rata basis or in full (depending on the circumstances). Table 4 provides an overview of the PARs and DARs Plans for 2015. Of those allocated, the 2009 PARs tested in October 2012 vested at 54%, the 2010 PARs tested in October 2013 vested at 52%, while the 2011 PARs, tested in October 2014 vested at 100%. 50 ANNUAL REPORT 2015REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 4.4.1 Vesting of LTI in FY2015 PARs and DARs that were granted under the LTI Plan in prior years vested during the current financial year, in line with the relevant Award Rights plans. Details are shown in Section 6. Table 4 Participants Link between performance and award Performance Award Rights (PARs) Deferred Award Rights (DARs) Senior Executives and other identified key senior managers. From 2014 onwards, Senior Executives no longer receive DARs. In prior years, only TSR was used as a performance measure. Under the updated LTI Plan rules, in 2015 80% of PARs vest based on the Consolidated Entity’s TSR performance measured against a Peer Group over a three year period. The confirmation of the comparator groups and the vesting calculation is undertaken independently. DARs are linked with continued employment and adherence to risk management principles with the intent of focussing employees on the Consolidated Entity’s performance and potential. The vesting conditions for DARs include continued employment with the Consolidated Entity and meeting risk parameters. TSR is a measure of the entire return a shareholder would derive from holding an entity’s securities over a period, taking into account factors such as changes in the market value of the securities and dividends paid over the period. The Board chose relative TSR performance as a measure because it reflects the returns made to shareholders relative to other comparable securities and provides a meaningful reward for Executives where the Company outperforms peers. The Peer Group consists of the S&P / ASX 200 companies, excluding: • all entities in the resources sector; • all real estate investment trusts; • all entities in the energy and utilities sectors; and • telecommunications companies whose headquarters are offshore. Additionally, the Board may add or exclude such other companies as it considers appropriate. No such exclusions or inclusions have been made to this group since implementation of the scheme in 2008, other than to reflect companies moving in to, or out of, the ASX 200 or being delisted. The remaining 20% of PARs vest based on the Consolidated Entity’s EPS performance, measured against a Financial Services Peer Group over a three year period. In prior years 50% of PARs vested at the peer group median and 50% at the top 25th percentile. From 2015, the vesting criteria remains the same for the TSR measured PARs (80% of total as per above). That is, all eighty percent of the TSR-measured PARs vest if the Consolidated Entity’s TSR performance is in the top 25%. For TSR performance between those targets, a pro-rata of the PARs between forty percent and eighty percent would vest. Ten percent of the EPS measured PARs, vest if the Consolidated Entity’s EPS performance over the three year holding period is in the top 40% of the Financial Services Peer Group (the four major banks and Bendigo & Adelaide Bank). All twenty percent of the EPS-measured PARs vest if the Consolidated Entity’s EPS performance is in the top 10% against the Peer Group. For EPS performance between those targets, a pro-rata of the PARs between ten percent and twenty percent would vest. None of the PARs vest if the Consolidated Entity’s TSR performance is in the bottom 50% or EPS performance is in the bottom 60% of the respective Peer Groups. Vesting schedule DARs granted to other senior managers during FY 2015 vest proportionately over three years in the ratio of 20% (at the end of Year 1), 30% (at the end of Year 2) and 50% (at the end of Year 3). This is subject to continued employment at BOQ. Performance period The performance period is three years. Not applicable. 51 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 4.4.1 Vesting of LTI in FY2015 (continued) Table 4 Performance Award Rights (PARs) Deferred Award Rights (DARs) Forfeiture - all participants excluding Senior Executives If an employee ceases employment for serious misconduct involving fraud or dishonesty, their PARs (whether exercisable or not) will lapse. If an employee resigns or is terminated for other reasons, vested PARs may, at the Board’s discretion, be exercised within 90 days of the employee ceasing employment. If an employee ceases employment for serious misconduct involving fraud or dishonesty, their DARs (whether exercisable or not) will lapse. If an employee resigns or is terminated for other reasons, vested DARs may generally be exercised within 90 days of the employee ceasing employment. PARs which have not vested may, at the Board’s discretion, vest on a pro rata basis and become exercisable if the employment ceases for reasons including a transfer of employment to an Owner-Managed Branch (“OMB”), retirement, redundancy, death or total and permanent disablement. DARs which have not vested may, at the Board’s discretion, vest on a pro rata basis and become exercisable if the employment ceases for reasons including a transfer of employment to an OMB, retirement, redundancy, death or total and permanent disablement. Otherwise, unvested DARs will lapse on cessation of employment. Forfeiture - Senior Executive In line with changes proposed in 2014, the Board has amended the forfeiture arrangements for Senior Executives. Previously, the Board had discretion over the accelerated vesting of these equities. Under the new arrangements, instead of accelerated vesting on departure, some or all unvested PARs may remain on foot at the Board’s discretion for their full vesting period and only vest in accordance with the plan rules and performance hurdles. 4.5 Application of discretion in the management of Senior Executive Remuneration Whilst the performance of Senior Executives is assessed against a range of performance measures, the Board and the HR & Remuneration Committee recognise that there remain a range of factors which should be taken into account when considering overall remuneration outcomes. The HR & Remuneration Committee may make discretionary adjustments to the outcomes for Senior Executives that may impact their remuneration negatively or positively. Through this process, remuneration outcomes have been adjusted both positively and negatively in the last three years. Criteria used by the HR & Remuneration Committee to apply discretionary adjustments include: • factors either not known or relevant at the beginning of a financial year, which can impact performance positively or negatively during the course of the financial year; • the degree of ‘stretch’ implicit in the measures and targets and the context in which the targets were set; • whether the operating environment during the financial year was materially different than forecast; • • • comparison with the performance of the Group relative to its competitors; the emergence of any major positive or negative risk or reputational issues; the quality of the financial result as shown by its composition and consistency; • whether leadership behaviours and BOQ’s CANDO values have been consistently demonstrated throughout the year; and • any other matters that the Board and the HR & Remuneration Committee deemed to be relevant and which are not outlined above. At the end of the year the HR & Remuneration Committee reviews performance against objectives and applies any adjustments it considers appropriate. The HR & Remuneration Committee then recommends STI outcomes for each Senior Executive to the Board for approval, thereby ensuring the Board retains oversight of final awards. 5. NON-EXECUTIVE DIRECTOR REMUNERATION Remuneration Framework Non-Executive Directors’ (NEDs) fees are set based upon the need to attract and retain individuals of appropriate calibre. Fees are reviewed annually by the HR & Remuneration Committee having regard to advice provided by independent remuneration specialists to ensure market comparability. The Chairman’s fees are determined independently to the fees of other Directors and are also based upon information provided by independent remuneration specialists. The Chairman is not present at any discussions relating to the determination of his own remuneration. In order to maintain independence and impartiality, NEDs do not receive any performance-related remuneration. 52 ANNUAL REPORT 2015REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 Fee Pool NED fees are determined within an aggregate fee pool limit, which is periodically recommended for approval by shareholders. The maximum currently stands at $2,600,000 (inclusive of superannuation) and was approved by shareholders on 27 November 2013. The increase in the fee pool was made principally to allow the Board flexibility in dealing with changes to the size and composition of the Board as a means of ensuring that an appropriate mix of skills and experience is maintained and to be market competitive when making those changes. During the course of the 2015 year one Director resigned from the Board, bringing the Board membership to nine. The NED fees were last increased during the 2014 financial year (the first increase since 2010), in line with recommendations made by the independent remuneration specialist. The fees for the 2015 financial year are set out in the table below. Directors’ Annual Fees The current NEDs’ fees comprise: Directors’ Annual Fees Fixed component of remuneration for Directors (1) Chairman (1) (2) Additional remuneration is paid to Non-Executive Directors for committee work: St Andrews Board of Directors (2) Audit Committee Risk Committee Nomination & Governance Committee Human Resources and Remuneration Committee Investment Committee (3) Due Diligence Committee (4) Information Technology Committee 01/09/14 - 31/08/15 Chairman / Committee Chair $ 01/09/14 - 31/08/15 Directors / Committee Members $ - 400,000 - 45,000 45,000 15,000 35,000 2,250 2,250 35,000 150,000 45,000 22,500 22,500 10,000 17,500 2,250 2,250 17,500 (1) Committee members received one fee for serving on Bank and subsidiary committees with a seperate fee received for St Andrew’s committees. (2) David willis is also a member of the St Andrew’s Board of Directors. (3) The Chairman receives no additional remuneration for involvement with Committees. (4) Per deliberative meeting. Remuneration Framework Equity Participation NEDs do not receive shares, award rights or share options. Retirement Benefits NEDs are no longer provided with retirement benefits apart from statutory superannuation. The balance of the accrued benefits is nil as at 31 August 2015 (2014: Nil). 53 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 6. REMUNERATION DISCLOSURES Senior Executives receive a mix of cash, deferred equity and long term incentives that are tested over the following two and three years, depending on service and performance. To assist shareholders in understanding the actual amount of remuneration an executive received in the 2015 financial year, the Board has again included a number of non-statutory disclosure tables. The statutory disclosures for the 2015 financial year are provided in Tables 7 to 10 and may differ to the non-statutory disclosures. 6.1 Non-Statutory disclosures Tables 5 and 6 set out: • • • • variable cash remuneration (split between the portion of the 2015 STI paid in October 2015 and the portion of the STI deferred until FY 2016 and FY 2017); fixed remuneration (base remuneration, fringe benefits and employer superannuation contributions); other benefits and termination benefits; and the value of previous years’ long term incentive awards and short term deferrals that vested during the 2015 financial year. Table 5 - STI received by current and former Senior Executives Maximum STI Potential (1) % STI Paid (2) $ STI Deferred (3) Total STI Paid (4) Current Jon Sutton Matthew Baxby Peter Deans Karyn Munsie Anthony Rose Michelle Thomsen Donna-Maree Vinci Brendan White Former Julie Bale Brian Bissaker 150% 140% 100% 100% 100% 100% 100% 140% 100% 140% $ 600,000 235,000 235,000 160,000 235,000 600,000 235,000 235,000 160,000 235,000 92,500 (5) 92,500 (5) - - 305,000 305,000 - - - - % 96% 83% 70% 73% 72% 47% - 95% - - Additional information – Non Statutory Remuneration Methodology (1) The maximum STI is represented as a percentage of fixed remuneration. The minimum STI potential is zero. (2) This is 50% of the 2015 STI for performance during the 12 months to 31 August 2015 (payable October 2015). (3) This represents 50% of the 2015 STI award that is deferred until 1 October 2016 (50%) and 1 October 2017 (50%). The deferred awards are subject to Board review at the time of payment and are deferred into restricted shares subject to vesting conditions. (4) Total STI paid as a percentage of fixed remuneration. (5) This is a contractual obligation for the first year of employment. 54 ANNUAL REPORT 2015REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 6. REMUNERATION DISCLOSURES (CONTINUED) Table 6 - Cash remuneration received by current and former Senior Executives Base plus superannuation $ (1) 2015 STI Performance $ (2) Current Jon Sutton Matthew Baxby Peter Deans Karyn Munsie Anthony Rose Michelle Thomsen Donna-Maree Vinci Brendan White Former Julie Bale Brian Bissaker 1,176,689 569,733 682,894 456,878 663,499 48,292 47,369 667,364 301,782 291,756 600,000 235,000 235,000 160,000 235,000 92,500 (4) - 305,000 Previous Years’ Awards that Vested during 2015 (3) Deferred Equity Awards $ 231,912 155,930 142,372 78,507 144,690 - - 181,119 Total Cash Payments in relation to the 2015 year $ 1,776,689 804,733 917,894 616,878 898,499 140,792 47,369 972,364 - - 301,782 291,756 76,922 39,202 (1) Base Remuneration and Superannuation make up an Executive’s fixed remuneration. (2) This is 50% of the 2015 STI for performance during the 12 months to 31 August 2015 (payable October 2015). The remaining 50% is deferred into restricted shares, 50% released at 12 months and 50% released at 24 months subject to approval of the Board. (3) The value of all deferred cash (to be paid in October 2015) and / or equity awards (closing share price on vesting date) that vested during 2015 financial year. This includes the value of the award that vested, plus any interest and / or dividends accrued during the vesting period. This excludes deferred equity awards granted in previous years which have not vested in FY15. (4) This is a contractual obligation only for the first year of employment. 55 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 6.2 Statutory disclosures The following tables include details of the nature and amount of each major element of the remuneration of each Director and Senior Executive of the Consolidated Entity, calculated in accordance with accounting standards. The amounts shown in Table 7 to Table 10 below may differ from those shown above in Table 5 and Table 6. Table 7 - Director’s remuneration Details of the nature and amount of each major element of the remuneration of each Director of the Consolidated Entity are as outlined in the table below. Executive Director Jon Sutton - Managing Director & Chief Executive Officer 2015 2014 Non-Executive Directors - Current Salary and fees $ STI at risk $ 1,157,897 691,556 600,000 400,000 Roger Davis Neil Berkett Bruce Carter Carmel Gray Richard Haire Margaret Seale Michelle Tredenick David Willis 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Non-Executive Directors - Former Steve Crane 2015 2014 400,000 362,500 178,333 177,875 208,125 95,083 194,167 192,500 235,000 219,583 185,000 99,353 230,833 189,583 260,000 213,333 76,667 209,750 - - - - - - - - - - - - - - - - - - Short-term Non-monetary benefits (1) $ Other short term benefits $ - - - - - - - - - - - - - - - - - - - - 49,808 49,808 - - - - - - - - - - - - - - - - - - Total $ 1,807,705 1,141,364 400,000 362,500 178,333 177,875 208,125 95,083 194,167 192,500 235,000 219,583 185,000 99,353 230,833 189,583 260,000 213,333 76,667 209,750 (1) The Bank has also paid insurance premiums in respect of Directors’ and Officers’ Liability Insurance which is not reflected in the above table as there is no appropriate basis for allocation. (2) This includes superannuation benefits and interest which is accrued at the CPI rate on Director retirement benefits which was frozen effective from 31 August 2003. (3) Comprises long service leave accrued or utilised during the financial year. (4) The fair value of the rights is calculated at the date of grant using an industry accepted option pricing model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the rights allocated to this period. (5) Represents restricted shares awarded through deferred STI payments. 56 Post-employment long-term Termination benefits Share based payments Total related remuneration Proportion of Value of options remuneration and rights as performance proportion of Rights (4) Shares and units (5) $ $ $ $ % % 466,094 477,917 2,782,243 393,782 366,915 1,923,048 51% 48% 17% 20% Other (3) $ 11,735 3,126 - - - - - - - - - - - - - - - - - - (2) $ 18,792 17,861 18,871 17,717 14,250 12,781 19,772 8,876 18,871 17,943 18,871 17,943 17,575 9,267 21,929 17,630 18,871 17,943 7,826 17,943 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 418,871 380,217 192,583 190,656 227,897 103,959 213,038 210,443 253,871 237,526 202,575 108,620 252,762 207,213 278,871 231,276 84,493 227,693 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ANNUAL REPORT 2015 Salary and fees STI at risk $ $ 1,157,897 691,556 600,000 400,000 Short-term Non-monetary benefits (1) $ Other short term benefits $ 49,808 49,808 Executive Director Jon Sutton - Managing 2015 Director & Chief Executive Officer Non-Executive Directors - Current Roger Davis Neil Berkett Bruce Carter Carmel Gray Richard Haire Margaret Seale Michelle Tredenick David Willis 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Non-Executive Directors - Former Steve Crane 400,000 362,500 178,333 177,875 208,125 95,083 194,167 192,500 235,000 219,583 185,000 99,353 230,833 189,583 260,000 213,333 76,667 209,750 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total $ 1,807,705 1,141,364 400,000 362,500 178,333 177,875 208,125 95,083 194,167 192,500 235,000 219,583 185,000 99,353 230,833 189,583 260,000 213,333 76,667 209,750 - - - - - - - - - - - - - - - - - - (1) The Bank has also paid insurance premiums in respect of Directors’ and Officers’ Liability Insurance which is not reflected in the above table as there is no appropriate basis for allocation. (2) This includes superannuation benefits and interest which is accrued at the CPI rate on Director retirement benefits which was frozen effective from 31 August 2003. (4) The fair value of the rights is calculated at the date of grant using an industry accepted option pricing model and allocated to each reporting period evenly over the period from grant date to vesting date. (3) Comprises long service leave accrued or utilised during the financial year. The value disclosed is the portion of the fair value of the rights allocated to this period. (5) Represents restricted shares awarded through deferred STI payments. REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 Post-employment (2) Other long-term (3) Termination benefits Share based payments Total Proportion of remuneration performance related Value of options and rights as proportion of remuneration $ $ $ Rights (4) $ Shares and units (5) $ $ % % 18,792 17,861 18,871 17,717 14,250 12,781 19,772 8,876 18,871 17,943 18,871 17,943 17,575 9,267 21,929 17,630 18,871 17,943 7,826 17,943 11,735 3,126 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 466,094 477,917 2,782,243 393,782 366,915 1,923,048 51% 48% 17% 20% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 418,871 380,217 192,583 190,656 227,897 103,959 213,038 210,443 253,871 237,526 202,575 108,620 252,762 207,213 278,871 231,276 84,493 227,693 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 57 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 Post-employment long-term Termination benefits Share based payments Total related remuneration Proportion of Value of options remuneration and rights as performance proportion of Rights (5) Shares and units (5) $ $ $ $ % % Other (3) $ 3,840 2,393 4,548 3,241 1,816 1,266 4,168 2,755 81 85 4,421 2,831 - - 1,404 (2) $ 18,792 17,861 18,792 17,861 18,792 17,861 18,792 17,861 2,145 2,670 18,792 17,861 13,746 17,861 10,507 17,861 - - - - - - - - - - - - 367,023 298,028 370,913 237,092 191,718 94,421 424,638 330,779 - - 391,589 345,428 253,825 1,429,421 217,896 237,242 192,063 158,853 129,015 240,833 196,354 38,542 - 316,642 261,396 1,319,447 1,580,405 1,370,865 969,265 832,523 1,568,139 1,385,539 179,415 47,454 1,685,016 1,546,634 350,392 (74,529) 1,176 - 91,891 412,500 - (50,998) 121,662 73,183 80,277 118,061 110,917 650,828 667,691 771,319 997,854 50% 48% 46% 44% 50% 47% 47% 45% - - 51% 50% 12% 38% 14% 41% 26% 23% 23% 17% 20% 11% 27% 24% - - 23% 22% (11%) 14% (7%) 12% REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 Table 8 - Senior Executive remuneration Details of the nature and amount of each major element of the remuneration of each Senior Executive of the Consolidated Entity are as outlined in the table below. Short-term Salary and fees $ STI at risk (1) $ Other short term benefits $ Total $ 550,941 508,269 664,102 620,800 438,086 424,960 644,707 580,290 46,147 44,699 648,572 579,118 288,036 376,486 281,249 566,010 235,000 275,000 235,000 250,000 160,000 165,000 235,000 257,500 92,500 (6) - 305,000 340,000 - 100,000 - 180,000 - - 49,808 49,808 - - - - - - - - - - - - 785,941 783,269 948,910 920,608 598,086 589,960 879,707 837,790 138,647 44,699 953,572 919,118 288,036 476,486 281,249 746,010 Executives - Current Matthew Baxby Peter Deans Karyn Munsie Anthony Rose Michelle Thomsen Donna-Maree Vinci Brendan White Executives - Former Julie Bale Brian Bissaker 2015 2014 2015 2014 2015 2014 2015 2014 2015 2015 2015 2014 2015 2014 2015 2014 (1) STI at risk reflects 50% of the amounts paid or accrued in respect of the year ended 31 August 2015. Refer to Section 4.3 “Executive remuneration framework” for a discussion of the Bank’s short-term incentive arrangements. (2) This includes superannuation and salary sacrificed benefits. (3) Comprises long service leave accrued or utilised during the financial year. (4) The fair value of the rights is calculated at the date of grant using an industry accepted option pricing model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options and rights allocated to this reporting period. (5) Represents restricted shares awarded through deferred STI payments. (6) This is a contractual obligation only for the first year of employment. 58 ANNUAL REPORT 2015 Short-term Salary and fees STI at risk (1) $ $ Other short term benefits $ Total $ 550,941 508,269 664,102 620,800 438,086 424,960 644,707 580,290 46,147 44,699 648,572 579,118 288,036 376,486 281,249 566,010 235,000 275,000 235,000 250,000 160,000 165,000 235,000 257,500 92,500 (6) 305,000 340,000 100,000 180,000 - - - 49,808 49,808 - - - - - - - - - - - - - - 785,941 783,269 948,910 920,608 598,086 589,960 879,707 837,790 138,647 44,699 953,572 919,118 288,036 476,486 281,249 746,010 Executives - Current Matthew Baxby Peter Deans Karyn Munsie Anthony Rose Michelle Thomsen Donna-Maree Vinci Brendan White Executives - Former Julie Bale Brian Bissaker 2015 2014 2015 2014 2015 2014 2015 2014 2015 2015 2015 2014 2015 2014 2015 2014 (1) STI at risk reflects 50% of the amounts paid or accrued in respect of the year ended 31 August 2015. Refer to Section 4.3 “Executive remuneration framework” for a discussion of the Bank’s short-term incentive arrangements. (4) The fair value of the rights is calculated at the date of grant using an industry accepted option pricing model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the (2) This includes superannuation and salary sacrificed benefits. (3) Comprises long service leave accrued or utilised during the financial year. portion of the fair value of the options and rights allocated to this reporting period. (5) Represents restricted shares awarded through deferred STI payments. (6) This is a contractual obligation only for the first year of employment. REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 Post-employment (2) Other long-term (3) Termination benefits Share based payments Total Proportion of remuneration performance related Value of options and rights as proportion of remuneration $ $ $ Rights (5) $ Shares and units (5) $ $ % % 18,792 17,861 18,792 17,861 18,792 17,861 18,792 17,861 2,145 2,670 18,792 17,861 13,746 17,861 10,507 17,861 3,840 2,393 4,548 3,241 1,816 1,266 4,168 2,755 81 85 4,421 2,831 - - - - - - - - - - - - 367,023 298,028 370,913 237,092 191,718 94,421 424,638 330,779 - - 391,589 345,428 253,825 1,429,421 217,896 237,242 192,063 158,853 129,015 240,833 196,354 38,542 - 316,642 261,396 1,319,447 1,580,405 1,370,865 969,265 832,523 1,568,139 1,385,539 179,415 47,454 1,685,016 1,546,634 - 350,392 (74,529) 1,176 - 91,891 - 412,500 1,404 - (50,998) 121,662 73,183 80,277 118,061 110,917 650,828 667,691 771,319 997,854 50% 48% 46% 44% 50% 47% 47% 45% - - 51% 50% 12% 38% 14% 41% 26% 23% 23% 17% 20% 11% 27% 24% - - 23% 22% (11%) 14% (7%) 12% 59 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 6.3 Equity held by Senior Executives The movement during the 2015 financial year in the number of rights over ordinary shares held by each Senior Executive as part of their remuneration, are as follows: Table 9 - Movement in rights held by Senior Executives during FY 2015 Senior Executive Type Grant Date Share Price at Grant Date $ Balance at 1 September 2014 Granted (1) Exercised Lapsed Balance at 31 August 2015 (1) (2) Vested during the year (%) (3) Forfeited during the year (%) Movements during the 2015 Financial Year Current Jon Sutton Matthew Baxby Peter Deans Karyn Munsie Anthony Rose 2012 PARs 2012 DARs 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted Shares 2012 PARs 2012 DARs 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 2012 PARs 2012 DARs 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted Shares 2012 PARs 2012 DARs 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 26/02/2012 18/12/2012 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 01/02/2012 18/12/2012 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 10/05/2012 18/12/2012 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 29/02/2012 18/12/2012 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 7.48 7.26 7.26 11.43 11.43 11.43 11.70 11.70 7.44 7.26 7.26 11.43 11.43 11.43 11.70 11.70 6.89 7.26 7.26 11.43 11.43 11.43 11.70 11.70 11.43 11.43 11.43 11.70 11.70 7.34 7.26 7.26 11.43 11.43 11.43 11.70 11.70 74,627 5,608 56,075 60,189 9,028 31,599 - - 73,964 4,206 42,056 45,142 5,079 21,320 - - 69,061 6,173 48,064 51,591 5,804 18,138 - - 37,833 5,675 11,083 - - 75,075 5,007 50,067 53,740 6,046 18,379 - - - - - - - - 58,084 33,191 - - - - - - 43,563 22,819 - - - - - - 53,935 20,744 - - - 36,510 13,691 - - - - - - 51,860 21,366 - 2,103 - - 1,805 15,800 - - - 1,577 - - 1,015 10,660 - - - 3,086 - - 1,160 9,069 - - - 1,135 5,542 - - - 1,878 - - 1,209 9,190 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 74,627 3,505 56,075 60,189 7,223 15,799 58,084 33,191 73,964 2,629 42,056 45,142 4,064 10,660 43,563 22,819 69,061 3,087 48,064 51,691 4,644 9,069 53,935 20,744 37,833 4,540 5,541 36,510 13,691 75,075 3,129 50,067 53,740 4,837 9,189 51,860 21,366 - 30% - - 20% 50% - - - 30% - - 20% 50% - - - 30% - - 20% 50% - - - 20% 50% - - - 30% - - 20% 50% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1) This represents the maximum number of award rights that may vest to each Executive. (2) No amounts at 31 August 2015 are vested and exercisable. (3) Percentage of initial rights granted. 60 ANNUAL REPORT 2015 REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 6.3 Equity held by Senior Executives (continued) Table 9 - Movement in rights held by Senior Executives during FY 2015 (continued) Senior Executive Type Grant Date Share Price at Grant Date $ Balance at 1 September 2014 Granted (1) Exercised Lapsed Balance at 31 August 2015 (1) (2) Vested during the year (%) (3) Forfeited during the year (%) Movements during the 2015 Financial Year Current Brendan White Former Julie Bale Brian Bissaker 2012 PARs 2012 DARs 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted Shares 2013 May DARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 2013 May PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 10/02/2012 18/12/2012 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 14/05/2013 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 7.33 7.26 7.26 11.43 11.43 11.43 11.70 11.70 7.26 11.43 11.43 11.43 11.70 11.70 9.68 11.43 11.43 11.43 11.70 11.70 67,476 6,258 50,067 51,591 5,804 24,708 - - 6,408 30,095 3,386 6,810 - - 31,748 47,291 3,547 5,241 - - - - - - - - 49,786 28,212 - - - - 29,042 8,298 - - - - 33,191 14,936 - 3,129 - - 1,160 12,354 - - 2,403 - 677 3,405 - - - - 709 2,621 - - - - - - - - - - 4,005 30,095 2,709 - 29,042 - 7,511 47,291 2,838 - 33,191 - 67,476 3,129 50,067 51,591 4,644 12,354 49,786 28,212 - - - 3,405 - 8,298 24,237 - - 2,620 - 14,936 - 30% - - 20% 50% - - 30% - 20% 50% - - - - 20% 50% - - - - - - - - - - 50% 100% 80% - 100% - 24% 100% 80% - 100% - (1) This represents the maximum number of award rights that may vest to each Executive. (2) No amounts at 31 August 2015 are vested and exercisable. (3) Percentage of initial rights granted. 61 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 6.3 Equity held by Senior Executives (continued) The table below shows the total value of any rights that were granted, exercised or lapsed to Senior Executives. Table 10 - Value of rights held by Senior Executives during FY 2015 Senior Executive Grant Grant Date Current Fair value per right at grant date $ Value at grant date $ (1) Exercise Date Share price at exercise date $ (2) Value at Exercise Date $ (3) Expiry / Lapsing Date Value at Expiry / Lapsing Date $ Jon Sutton 2012 DARs 26/02/2012 6.60 413,734 2012 PARs Restricted shares 26/02/2012 26/02/2012 5.18 6.70 386,568 700,000 2012 DARs 18/12/2012 6.20 43,456 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 1.74 (4) 7.63 10.38 11.43 6.13 11.70 97,571 459,242 93,711 361,177 356,055 388,335 Matthew Baxby 2012 DARs 01/02/2012 6.60 244,081 Peter Deans 2012 PARs 2012 DARs 01/02/2012 18/12/2012 5.18 6.20 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted Shares 2012 PARs 2012 DARs 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 10/05/2012 18/12/2012 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 1.74 (4) 7.63 10.38 11.43 6.13 11.70 3.70 6.20 1.74 (4) 7.63 10.38 11.43 6.13 11.70 383,134 32,593 73,177 344,433 52,720 243,688 267,041 266,982 255,526 38,273 83,631 393,639 60,246 207,317 330,622 242,705 01/05/2013 07/05/2014 - 05/01/2013 07/07/2013 05/01/2014 05/02/2014 02/01/2015 - - 02/01/2015 16/12/2014 - - 30/10/2013 09/07/2014 - 09/07/2014 30/12/2014 - - 30/12/2014 16/12/2014 - - - 30/10/2014 28/01/2015 - - 28/01/2015 16/12/2014 - - 9.93 11.95 - 7.61 8.88 12.23 10.84 12.20 - - 12.20 11.70 - - 11.96 12.15 - 12.15 12.20 - - 12.20 11.70 - - - 12.66 12.37 - - 12.37 11.70 - - 311,246 374,549 - 227,166 397,611 365,078 15,187 25,657 - - 22,021 184,860 - - 221,152 224,666 - 12,770 19,239 - - 12,383 124,722 - - - 15,622 22,909 - - 14,349 106,107 - - 05/05/2017 05/05/2017 16/12/2017 09/01/2014 09/01/2014 09/01/2014 18/12/2017 18/12/2017 18/12/2017 16/12/2018 16/12/2018 16/12/2015 16/12/2019 16/12/2024 05/05/2017 05/05/2017 16/12/2017 18/12/2017 18/12/2017 18/12/2017 16/12/2018 16/12/2018 16/12/2015 16/12/2019 16/12/2024 16/12/2017 18/12/2017 18/12/2017 18/12/2017 16/12/2018 16/12/2018 16/12/2015 16/12/2019 16/12/2024 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1) Represents rights held at 1 September 2014 or granted during the 2015 financial year. (2) Closing share price on exercise date of rights that have a nil exercise price. (3) Closing share price on exercise date multiplied by the number of rights exercised during the year. (4) The fair value as based on a valuation period from 18 October 2012 to grant date. The Bank’s total shareholder return over this period was below the peer group, decreasing the vesting probability and reducing the fair value calculation. 62 ANNUAL REPORT 2015 REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 6.3 Equity held by Senior Executives (continued) Table 10 - Value of rights held by Senior Executives during FY 2015 (continued) Senior Executive Grant Grant Date Fair value per right at grant date $ Value at grant date $ (1) Exercise Date Share price at exercise date $ (2) Value at Exercise Date $ (3) Expiry / Lapsing Date Value at Expiry / Lapsing Date $ Current Karyn Munsie 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 16/12/2013 16/12/2103 16/12/2013 16/12/2014 16/12/2014 7.63 10.38 11.43 6.13 11.70 288,666 58,907 126,679 223,806 160,185 Anthony Rose 2012 DARs 29/02/2012 6.60 198,198 2012 PARs 2012 DARs 29/02/2012 18/12/2012 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 5.18 6.20 1.74 (4) 7.63 10.38 11.43 6.13 11.70 388,888 38,800 87,117 410,036 62,757 210,072 317,902 249,982 Brendan White 2012 DARs 10/02/2012 6.60 498,788 2012 PARs 2012 DARs 2012 PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 10/02/2012 18/12/2012 18/12/2012 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 5.18 6.20 1.74 (4) 7.63 10.38 11.43 6.13 11.70 349,526 38,800 87,117 393,639 60,246 282,412 305,188 330,080 Former Julie Bale 2012 DARs 18/12/2012 6.20 49,662 Brian Bissaker 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 2013 May PARs 2013 PARs 2013 DARs Restricted shares 2014 PARs Restricted shares 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 14/05/2013 16/12/2013 16/12/2013 16/12/2013 16/12/2014 16/12/2014 7.63 10.38 11.43 6.13 11.70 2.39 7.63 10.38 11.43 6.13 11.70 229,625 35,147 77,838 178,027 97,087 75,878 360,830 36,818 59,905 203,461 174,751 - 22/12/2014 16/12/2014 - - 30/10/2013 25/07/2014 - 15/01/2014 08/01/2015 - 16/12/2014 08/01/2015 - - - 01/05/2013 03/06/2014 - 23/12/2014 - - 23/12/2014 16/12/2014 - - 17/01/2014 22/12/2014 - 22/12/2014 16/12/2014 - - - - 29/12/2014 16/12/2014 - - - 12.16 11.70 - - 11.96 12.57 - 11.89 11.94 - 11.70 11.94 - - - 9.93 12.00 - 12.08 - - 12.08 11.70 - - 12.28 12.16 - 12.16 11.70 - - - - 12.33 11.70 - - - 13,802 68,841 - - 179,579 188,739 - 14,874 22,423 - 107,523 14,435 - - - 375,225 453,444 - 37,798 - - 14,013 144,542 - - 19,673 29,220 - 8,232 39,839 - - - - 8,742 30,666 - - 16/12/2018 16/12/2018 16/12/2015 16/12/2019 16/12/2024 05/05/2017 05/05/2017 16/12/2017 18/12/2017 18/12/2017 18/12/2017 16/12/2018 16/12/2018 16/12/2015 16/12/2019 16/12/2024 05/05/2017 05/05/2017 16/12/2017 18/12/2017 18/12/2017 16/12/2018 16/12/2018 16/12/2015 16/12/2019 16/12/2024 15/05/2015 15/05/2015 15/05/2015 15/05/2015 16/12/2015 15/05/2015 16/12/2024 13/03/2015 13/03/2015 13/03/2015 16/12/2015 13/03/2015 16/12/2024 - - - - - - - - - - - - - - - - - - - - - - - - - - 52,946 - 397,856 35,813 - 383,935 - 106,130 668,222 40,101 - 468,989 - (1) Represents rights held at 1 September 2014 or granted during the 2015 financial year. (2) Closing share price on exercise date of rights that have a nil exercise price. (3) Closing share price on exercise date multiplied by the number of rights exercised during the year. (4) The fair value as based on a valuation period from 18 October 2012 to grant date. The Bank’s total shareholder return over this period was below the peer group, decreasing the vesting probability and reducing the fair value calculation. 63 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 6.4. Equity Instruments - holdings and movements Movement in shares The number of shares held directly, indirectly or beneficially by each Director or Senior Executive is as follows: Held at 1 September 2014 Purchases / (Sales) Received on exercise of award rights / restricted shares Held at 31 August 2015 72,372 (19,708) 19,708 72,372 17,281 23,265 6,854 12,209 4,347 9,543 10,635 1,770 346 655 6,553 - - - - 100 - - - - - - - - 17,627 23,920 13,407 12,209 4,347 9,543 10,635 1,870 28,642 (28,642) - - 38,033 (30,091) 2,093 1,279 35,279 3,330 - - - (6,677) (31,281) (16,643) (6,485) (709) 13,252 13,315 6,677 12,277 16,643 6,485 3,330 21,194 15,408 1,279 16,275 3,330 - 2,621 Ordinary shares Executive Director Jon Sutton Directors - Current Roger Davis Neil Berkett Bruce Carter Carmel Gray Richard Haire Margaret Seale Michelle Tredenick David Willis Directors - Former Steve Crane Executives - Current Matt Baxby Peter Deans Karyn Munsie Anthony Rose Brendan White Executives - Former Julie Bale Brian Bissaker 64 ANNUAL REPORT 2015REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 7. TRANSACTIONS WITH DIRECTORS AND SENIOR EXECUTIVES Loan transactions Loans to Directors and Senior Executives are provided in the ordinary course of business. Normal terms and conditions are applied to all loans and any discounts are the same as those available to all employees of the Consolidated Entity. There have been no write downs or amounts recorded as provisions during the financial year 2015. Details of loans outstanding at the reporting date to Senior Executives, where the individual’s aggregate loan balance exceeded $100,000 at any time in the reporting period, are as follows: Executives Matthew Baxby Michelle Thomsen Brendan White 2015 Balance at 1 September 2014 $ Interest paid and payable during the year $ Balance at 31 August 2015 $ Highest balance during the year $ 1,198,641 - 271,367 40,866 1,837 21,238 1,030,868 1,315,988 892,500 604,862 892,500 604,862 Details regarding the aggregate of loans made, guaranteed or secured by any entity in the economic entity to all Senior Executives and their related parties, and the number of individuals in each group are as follows: Directors Executives Balance at 1 September 2014 $ Balance at 31 August 2015 $ Interest paid and payable $ Number in group at 31 August 2015 # - - 1,479,341 2,535,397 - 63,941 - 4 Other transactions Transactions between the Consolidated Entity and Directors and Senior Executives other than loans and shares during the financial year related to personal banking, investment and deposit transactions. All transactions were on normal commercial terms and conditions and are trivial or domestic in nature. On 26 May 2015, the Bank issued 15,000 Wholesale Capital Notes at a price of $10,000 per note. Details of those notes issued to BOQ Directors are set out below: Roger Davis David Willis Total Balance at 31 August 2015 $ Interest receivable $ Highest balance during the year $ 200,000 70,000 270,000 2,452 858 3,310 202,452 70,858 273,310 Transactions between the Consolidated Entity and other related parties of Directors and Senior Executives relate to loans on normal commercial terms and conditions. Details of loans outstanding at the reporting date to other related parties of Directors and Senior Executives are as follows: Richard Haire Related Party Jon Sutton Related Party Total 2015 Balance at 1 September 2014 $ Interest paid and payable during the year $ Balance at 31 August 2015 $ Highest balance during the year $ 191,000 - 191,000 9,148 3,023 12,171 191,000 147,448 338,448 191,777 150,000 341,777 65 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616REMUNERATION REPORT YEAR ENDED 31 AUGUST 2015 8. EXECUTIVE CONTRACTS The remuneration and terms of Senior Executives are formalised in their employment agreements. Each of these employment agreements provide for the payment of fixed and performance-based remuneration, superannuation and other benefits such as statutory leave entitlements. Table 11 - Senior Executives Notice Periods KMP Jon Sutton Julie Bale Matthew Baxby Brian Bissaker Peter Deans Karyn Munsie Anthony Rose Michelle Thomsen Donna-Maree Vinci Brendan White Term of agreement Fixed annual remuneration $ Notice period by executive Notice period by the Consolidated Entity Open Open Open Open Open Open Open Open Open Open 1,250,000 3 months 3 months 400,000 3 months 3 months 565,000 3 months 3 months 550,000 3 months 3 months 675,000 3 months 3 months 440,000 3 months 3 months 650,000 3 months 3 months 395,000 3 months 3 months 570,000 3 months 3 months 640,000 3 months 3 months Termination payment 9 months base pay (including notice period) 9 months base pay (including notice period) 9 months base pay (including notice period) 9 months base pay (including notice period) 6 months base pay (including notice period) 9 months base pay (including notice period) 9 months base pay (including notice period) 9 months base pay (including notice period) 9 months base pay (including notice period) 9 months base pay (including notice period) 66 ANNUAL REPORT 2015DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 Indemnification of officers Audit and Non-audit services The Bank’s Constitution provides that all officers of the Bank are indemnified by the Bank against liabilities incurred by them in the capacity of officer to the full extent permitted by the Corporations Act 2001. Insurance of officers Since the end of the previous financial year the Bank has paid insurance premiums in respect of a Directors’ and Officers’ liability insurance contract. The contract insures each person who is or has been a Director or Executive officer (as defined in the Corporations Act 2001) of the Bank against certain liabilities arising in the course of their duties to the Bank and its controlled entities. The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the insurance contract as such disclosure is prohibited under the terms of the contract. Directors’ interests Directors’ interests as at the date of this report were as follows: 17,627 72,372 23,920 13,407 12,209 4,347 9,543 10,635 1,770 Roger Davis Jon Sutton Neil Berkett Bruce Carter Carmel Gray Richard Haire Margaret Seale Michelle Tredenick David Willis Audit services – KPMG Australia - Audit and review of the financial reports - Other regulatory and audit services Audit-related services – KPMG Australia - Other assurance services - Regulatory assurance services Non-audit services – KPMG Australia - Taxation services - Due diligence services - Other During the year KPMG, the Bank’s auditor, has performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditor are in accordance with written advice provided by resolution of the Audit Committee, and is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • • all non-audit services were subject to the corporate governance procedures adopted by the Bank and have been reviewed by the Audit Committee to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided do not undermine the general principles relating to auditor’s independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Bank, acting as an advocate for the Bank or jointly sharing risks and rewards. Details of the amounts paid to the auditor of the Bank, KPMG and its related practices for audit and non-audit services provided during the year are set out below: Consolidated Bank 2015 $000 2014 $000 2015 $000 2014 $000 1,118 364 1,482 445 167 612 372 - 37 409 1,011 401 1,412 225 - 225 188 234 - 422 441 167 608 445 167 612 372 - 37 409 681 203 884 169 - 169 143 234 - 377 67 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616DIRECTORS’ REPORT YEAR ENDED 31 AUGUST 2015 Lead Auditor’s Independence Declaration The lead auditor’s independence declaration is set out on page 69 and forms part of the Directors’ report for the year ended 31 August 2015. Director and Management changes Jon Sutton was officially appointed as Managing Director and Chief Executive Officer (CEO) on 5 January 2015 after being appointed to the role of acting CEO in August 2014. During the year, Michelle Thomsen (General Counsel and Company Secretary) and Donna-Maree Vinci (Group Executive Enterprise Solutions) were appointed to the Executive Team. Steve Crane resigned from his position as a Non-Executive Director on 22 January 2015. Brian Bissaker and Melissa Grundy ceased employment respectively from the positions of Chief Executive Officer of Virgin Money (Australia) and Company Secretary on 13 March 2015, and Julie Bale ceased employment as Chief Information Officer on the 15 May 2015. Management attestation The Board has been provided with a written statement from the Group’s Chief Executive Officer and Chief Financial Officer, confirming the accompanying financial statements and notes are in accordance with the Corporations Act 2001 and they present a true and fair view in all material respects of the Group’s financial position and performance as at and for the year ending 31 August 2015. The Directors’ declaration can be found on page 137 of the financial statements. Environmental regulation The Group’s operations are not subject to any significant environmental regulations under either Commonwealth or State legislation. The Board confirms that the Group is not aware of any breach of environmental requirements. Subsequent events Dividends have been determined after 31 August 2015. The financial effect of the above transaction has not been brought to account in the financial statements for the year ended 31 August 2015. Further details with respect to the dividend amount per share, payment date and dividend re-investment plan can be obtained from Section 2.4 Dividends. No matters or circumstances have arisen since the end of the financial year and up until the date of this report which significantly affects the operations of the Bank, the results of those operations, or the state of affairs of the Bank in subsequent years. Rounding of amounts The Bank is a company of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 (as amended by Class Order 04/667 dated 15 July 2004) and in accordance with that Class Order, amounts in this financial report and Directors’ report have been rounded off to the nearest million dollars, unless otherwise stated. This represents a change from the 31 August 2014 reporting period whereby amounts were rounded to the nearest hundred thousand dollars. This change is in accordance with Class Order 98/100 and has not had a material impact on the financial report. Signed in accordance with a resolution of the Directors: Roger Davis Chairman 7 October 2015 Jon Sutton Managing Director 7 October 2015 68 ANNUAL REPORT 2015LEAD AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 To: the Directors of Bank of Queensland Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 August 2015 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Martin McGrath Partner Sydney 7 October 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 69 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616INCOME STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 Interest income Less: Interest expense Net interest income Other operating income Net banking operating income Premiums from insurance contracts Investment revenue Less: Claims and policyholder liability expense from insurance contracts Net insurance operating income Total operating income before impairment and operating expenses Less: Expenses Less: Impairment on loans and advances Profit before income tax Less: Income tax expense Profit for the year Profit attributable to: Equity holders of the parent Basic earnings per share - Ordinary shares (cents) Diluted earnings per share - Ordinary shares (cents) The income statements should be read in conjunction with the accompanying notes. Consolidated Bank 2015 $m 2,227 1,327 900 155 1,055 72 4 43 33 1,088 552 74 462 144 318 2014 $m 2,112 1,351 761 136 897 71 5 34 42 939 470 86 383 122 261 2015 $m 2,072 1,430 642 252 894 - - - - 894 442 43 409 117 292 2014 $m 2,026 1,437 589 234 823 - - - - 823 422 63 338 100 238 318 261 292 238 86.8 82.8 77.4 75.9 Section 2.1 2.1 2.1 2.1 2.1 2.1 2.2 3.4 2.3 2.6 2.6 70 ANNUAL REPORT 2015STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 AUGUST 2015 Profit for the year Other comprehensive income, net of income tax Items that may be reclassified subsequently to profit or loss Cash flow hedges: Net losses taken to equity Net gains / (losses) transferred to profit and loss Foreign currency translation differences on foreign operations Net losses on hedge of net investment in foreign operation Change in fair value of assets available for sale Other comprehensive (expense) / income for the year, net of income tax Total comprehensive income for the year Consolidated Bank 2015 $m 318 2014 $m 261 2015 $m 292 2014 $m 238 (73) (27) (72) 2 - - 35 (36) 282 (1) 1 (1) 29 1 262 2 - - 35 (35) 257 (26) (1) - - 28 1 239 Total comprehensive income attributable to: Equity holders of the parent 282 262 257 239 The statements of comprehensive income should be read in conjunction with the accompanying notes. 71 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616BALANCE SHEETS AS AT 31 AUGUST 2015 Assets Cash and liquid assets Due from other financial institutions - Term deposits Financial assets available-for-sale Financial assets held for trading Derivative financial assets Loans and advances at amortised cost Other assets Shares in controlled entities Property, plant and equipment Deferred tax assets Intangible assets Investments in joint arrangements Total assets Liabilities Due to other financial institutions - Accounts payable at call Deposits Derivative financial liabilities Accounts payable and other liabilities Current tax liabilities Provisions Insurance policy liabilities Borrowings including subordinated notes Amounts due to controlled entities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total Equity (1) The prior year balances have been restated. Refer to Section 1.4. The balance sheets should be read in conjunction with the accompanying notes. 72 Consolidated Bank Section 2015 $m 2014 (1) $m 2015 $m 2014 $m 3.1 3.3 3.3 3.8 3.4 6.5 2.3 4.1 6.7 3.2 3.8 4.2 5.1 3.5 1,103 91 2,827 1,940 225 1,034 93 3,864 2,473 160 553 19 2,996 1,940 162 397 15 3,349 2,473 132 40,703 38,136 36,830 32,035 113 - 61 89 848 18 131 - 51 114 828 21 240 1,543 52 74 133 - 242 1,527 41 101 102 - 48,018 46,905 44,542 40,414 259 207 259 207 34,732 34,106 35,378 32,357 297 390 55 62 41 249 399 72 104 63 8,713 8,364 - - 44,549 43,564 283 345 55 50 - 3,896 907 41,173 207 337 71 88 - 2,660 1,224 37,151 3,469 3,341 3,369 3,263 3,122 90 257 3,469 3,021 114 206 3,128 75 166 3,024 98 141 3,341 3,369 3,263 ANNUAL REPORT 2015STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 2015 Consolidated Ordinary shares Employee benefits reserve Equity reserve for credit losses Cashflow hedge reserve Translation reserve Available- for-sale reserve Retained profits Total equity Year ended 31 August 2015 $m $m $m $m $m $m $m $m Balance at beginning of the year 3,021 33 70 (27) Total comprehensive income for the year Profit - - - - Other comprehensive income, net of income tax Cash flow hedges: Net losses taken to equity Net gains / (losses) transferred to profit and loss Net losses on hedge of net investment in foreign operation Foreign currency translation differences on foreign operations Change in fair value of assets available-for-sale Transfers to equity reserve for credit losses Total other comprehensive income / (expense) Total comprehensive income / (expense) for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Issues of ordinary shares (1) Dividend reinvestment plan Dividends to shareholders Equity settled transactions Treasury Shares (2) Total contributions by and distributions to owners - - - - - - - - 11 93 - - (3) 101 - - - - - - - - - - - 1 - 1 - (73) - - - - 11 10 - - - - 11 (63) 11 (63) - - - - - - - - - - - - Balance at the end of the year 3,122 34 81 (90) 1 - - - - - - - - - - - - - - - 1 37 206 3,341 - 318 318 - (8) - - 35 - 27 27 - - - - - - - (73) - - - - (11) (11) 307 2 - - 35 - (36) 282 - - 11 93 (256) (256) - - 1 (3) (256) (154) 64 257 3,469 (1) On 24 October 2014, the Bank issued 900,000 ordinary shares at $12.29 to the trustee of the BOQ Employee Share Plans Trust to satisfy the exercise of award rights and issue of shares under the Award Rights Plan and issue of shares under the BOQ Restricted Share Plan and BOQ Employee Share Plan. (2) Treasury shares represent the value of shares held by a subsidiary that the Bank is required to include in the Consolidated Entity’s financial statements. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Bank’s own equity instruments. The statements of changes in equity should be read in conjunction with the accompanying notes. 73 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 2015 Consolidated Ordinary shares Employee benefits reserve Equity reserve for credit losses Cashflow hedge reserve Translation reserve Available- for-sale reserve Retained profits Total equity Year ended 31 August 2014 $m $m $m $m $m $m $m $m Balance at beginning of the year 2,563 31 70 1 Total comprehensive income for the year Profit - - - - Other comprehensive income, net of income tax Cash flow hedges: Net losses taken to equity Net gains transferred to profit and loss Net losses on hedge of net investment in foreign operation Foreign currency translation differences on foreign operations Change in fair value of assets available-for-sale Total other comprehensive income / (expense) Total comprehensive income / (expense) for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Dividend reinvestment plan Dividends to shareholders Equity settled transactions Treasury Shares (1) Instutitional entitlement offer (2) Retail entitlement offer (2) Costs of capital issue (2) Total contributions by and distributions to owners - - - - - - - 66 - - (2) 183 218 (7) 458 - - - - - - - - - 2 - - - - 2 - - - - - - (27) (1) - - - (28) - (28) - - - - - - - - - - - - - - - - Balance at the end of the year 3,021 33 70 (27) 1 - - - (1) 1 - - - - - - - - - - - 1 8 - - - - - 29 29 29 - - - - - - - - 144 2,818 261 261 - - - - - - (27) (1) (1) 1 29 1 261 262 - 66 (199) (199) - - - - - 2 (2) 183 218 (7) (199) 261 37 206 3,341 (1) Treasury shares represent the value of shares held by a subsidiary that the Bank is required to include in the Consolidated Entity’s financial statements. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Bank’s own equity instruments. (2) As part of the acquisition of BOQ Specialist Bank Limited formerly Investec Bank (Australia) Limited during the 2014 year, the Bank issued $394 million (net of transaction costs) worth of new shares in two tranches. The institutional and retail tranches were for $183 million and $218 million respectively. The statements of changes in equity should be read in conjunction with the accompanying notes. 74 ANNUAL REPORT 2015STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 2015 Ordinary shares Employee benefits reserve Equity reserve for credit losses $m 3,024 $m 33 $m 57 Cashflow hedge reserve Available- for-sale reserve Retained profits Total equity $m (29) - (72) 10 - - (62) (62) - - - - - $m 37 $m $m 141 3,263 - - (8) 35 - 27 27 - - - - - 292 292 - - - (11) (11) 281 (72) 2 35 - (35) 257 - - 11 93 (256) (256) - 1 (256) (151) - - - - - - - - - - 1 1 - - - - 11 11 11 - - - - - - - - - - - - 11 93 - - 104 3,128 Bank Year ended 31 August 2015 Balance at beginning of the year Total comprehensive income for the year Profit Other comprehensive income, net of income tax Cash flow hedges: Net losses taken to equity Net gains transferred to profit and loss Change in fair value of assets available-for-sale Transfers to equity reserve for credit losses Total other comprehensive income / (expense) Total comprehensive income / (expense) for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Issues of ordinary shares (1) Dividend reinvestment plan Dividends to shareholders Equity settled transactions Total contributions by and distributions to owners Balance at the end of the year 34 68 (91) 64 166 3,369 (1) On 24 October 2014, the Bank issued 900,000 ordinary shares at $12.29 to the trustee of the BOQ Employee Share Plans Trust to satisfy the exercise of award rights and issue of shares under the Award Rights Plan and issue of shares under the BOQ Restricted Share Plan and BOQ Employee Share Plan. The statements of changes in equity should be read in conjunction with the accompanying notes. 75 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 2015 Bank Year ended 31 August 2014 Balance at beginning of the year Total comprehensive income for the year Ordinary shares Employee benefits reserve Equity reserve for credit losses Cashflow hedge reserve Available- for-sale reserve Retained profits Total equity $m 2,564 $m 31 $m 57 $m (2) $m $m $m 9 102 2,761 Profit - - - - - 238 238 Other comprehensive income, net of income tax Cash flow hedges: Net losses taken to equity Net gains transferred to profit and loss Change in fair value of assets available-for-sale Total other comprehensive income / (expense) Total comprehensive income / (expense) for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Dividend reinvestment plan Dividends to shareholders Equity settled transactions Instutitional entitlement offer (1) Retail entitlement offer (1) Costs of capital issue (1) Total contributions by and distributions to owners - - - - - 66 - - 183 218 (7) 460 - - - - - - - 2 - - - 2 - - - - - - - - - - - - (26) (1) - (27) (27) - - - - - - - - - 28 28 28 - - - - - - - - - - - (26) (1) 28 1 238 239 - 66 (199) (199) - - - - (199) 2 183 218 (7) 263 Balance at the end of the year 3,024 33 57 (29) 37 141 3,263 (1) As part of the acquisition of BOQ Specialist Bank Limited formerly Investec Bank (Australia) Limited during the 2014 financial year, the Bank issued $394 million (net of transaction costs) worth of new shares in two tranches. The institutional and retail tranches were for $183 million and $218 million respectively. The statements of changes in equity should be read in conjunction with the accompanying notes. 76 ANNUAL REPORT 2015 STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 31 AUGUST 2015 Consolidated Bank Cash flows from operating activities Interest received Fees and other income received Dividends received Interest paid Cash paid to suppliers and employees Operating income tax paid (Increase) / decrease in operating assets: Loans and advances at amortised cost Other financial assets Increase / (decrease) in operating liabilities: Deposits Securitisation liabilities Net cash inflow/(outflow) from operating activities Cash flows from investing activities Acquisition of BOQ Specialist Bank Limited Cash acquired upon acquisition of BOQ Specialist Bank Limited Payments for property, plant and equipment Payments for intangible assets Cash distribution received from equity accounted investments Capital injection in BOQ Specialist Bank Limited Proceeds from sale of property, plant and equipment Net cash outflow from investing activities Cash flows from financing activities Proceeds from issue of ordinary shares Cost of capital issues Proceeds from borrowings and foreign exchange instruments Proceeds from foreign exchange instruments Repayment of other financing activities Proceeds from issue of capital notes Repayments of borrowings Payments for treasury shares Dividends paid Dividends received Net cash inflow/(outflow) from financing activities Net increase in cash and cash equivalents Cash and liquid assets at beginning of year Cash and liquid assets at end of year The statements of cash flows should be read in conjunction with the accompanying notes. Section 3.5 3.1 3.5 3.1 2015 $m 2,228 128 2 (1,325) (516) (133) 384 (2,621) 1,593 691 (757) (710) - - (36) (59) 3 - 6 2014 $m 2,113 183 1 (1,341) (388) (80) 488 (724) (244) 1,921 (984) 457 (210) 52 (31) (52) 4 - 4 (86) (233) 11 - 1,473 30 - 148 (623) (11) (163) - 865 69 1,034 1,103 401 (10) 694 26 - - (1,033) (8) (133) - (63) 161 873 1,034 2015 $m 1,928 203 2 (1,425) (416) (131) 161 (4,571) 892 3,085 - (433) - - (26) (55) - (15) 1 (95) 11 - 1,522 30 (398) 148 (483) (11) (163) 28 684 156 397 553 2014 $m 1,861 218 1 (1,437) (351) (77) 215 (1,213) (55) 2,290 - 1,237 (210) - (22) (48) - (330) - (610) 401 (10) 694 26 (430) (1,033) (8) (134) 22 (472) 155 242 397 77 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 Section 1 Basis of preparation Page 1.1 1.2 1.3 1.4 Reporting entity Basis of accounting Use of estimates and judgements Restatement of acquisition accounting adjustments Section 2 Financial performance 2.1 2.2 2.3 2.4 2.5 2.6 Operating income Expenses Income tax expense and deferred tax Dividends Operating segments Earnings per share Section 3 Capital and balance sheet management 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Cash and liquid assets Deposits Financial assets Loans and advances at amortised cost Borrowings including subordinated notes Risk management Financial instruments Derivative financial instruments Capital management 3.10 Capital and reserves Section 4 Other assets and liabilities 4.1 4.2 Intangible assets Provisions Section 5 Insurance Business 5.1 Insurance business Section 6 Other notes 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 Employee benefits Commitments Contingent liabilities Related parties information Controlled entities Deed of cross guarantee Investments in joint arrangements Auditor’s remuneration Events subsequent to balance date 6.10 Significant accounting policies & new accounting standards 78 79 79 79 80 81 82 83 86 87 88 89 90 90 91 93 95 104 108 111 112 113 115 116 122 123 124 124 126 129 131 132 132 133 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 SECTION 1. BASIS OF PREPARATION 1.1. Reporting entity Bank of Queensland Limited (the “Bank”) is a company domiciled in Australia. The address of the Bank’s registered office is Level 6, 100 Skyring Terrace, Newstead, QLD, 4006 (+ 61 7 3212 3333). The consolidated financial report of the Bank for the financial year ended 31 August 2015 comprises the Bank and its subsidiaries (together referred to as the “Consolidated Entity”) and the Consolidated Entity’s interest in equity accounted investments. The Bank is a for profit entity primarily involved in providing retail banking, leasing finance, and insurance products, to its customers. 1.2. Basis of accounting (a) Statement of compliance These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001. The consolidated financial statements and notes thereto also comply with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial report was authorised for issue by the Directors on 7 October 2015. (b) Basis of measurement The financial report is prepared on the historical cost basis with the exception of the following assets and liabilities which are stated at their fair value: • • • • derivative financial instruments; financial instruments designated at fair value; financial instruments classified as available-for-sale; and assets and liabilities acquired through business combinations. (c) Functional and presentation currency The consolidated financial statements are presented in Australian dollars, which is the Bank’s functional currency. (d) Rounding The Consolidated Entity is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in this financial report and Directors’ report have been rounded off to the nearest million dollars, unless otherwise stated. 1.3. Use of estimates and judgements The preparation of a financial report in conformity with Australian Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. These accounting policies have been consistently applied by each entity in the Consolidated Entity. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised if the revision only affects that period, or in the period of the revision and future periods if the revision affects both current and future periods. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described below: • • • • • • Provisions for impairment - Section 3.4; Financial instruments - Section 3.7; Intangible assets - Section 4.1; Provisions - Section 4.2; Insurance policy liabilities - Section 5.1; and Contingent liabilities - Section 6.3. 79 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 SECTION 1. BASIS OF PREPARATION (CONTINUED) 1.4. Restatement of acquisition accounting adjustments The prior period consolidated balance sheet was stated using provisional entries for the acquisition of BOQ Specialist Bank Limited (now BOQ Specialist (Aust) Limited) in accordance with AASB 3 Business Combinations. These provisional entries have now been finalised resulting in the restatement of the 31 August 2014 consolidated balance sheet (refer to Section 6.5(c)). A summary of these restatements are provided below: Consolidated Increase / (Decrease) $m 2014 Reported $m 2014 Restated $m 54 112 23 100 2 702 827 (153) (137) (290) (3) 2 23 5 - (27) 1 7 (7) - 51 114 46 105 2 675 828 (146) (144) (290) Property, plant and equipment Deferred tax assets Intangible assets - Customer related intangibles and brands - Computer software - Other - Goodwill Total intangible assets Provisions for impairment - Specific - Collective Total Provisions for impairment 80 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 SECTION 2. FINANCIAL PERFORMANCE 2.1. Operating income Interest income Loans and advances Securities at fair value Total interest income Interest expense Retail deposits Wholesale deposits and borrowings Total interest expense Net interest income Income from operating activities Other customer fees and charges Share of fee revenue paid to Owner Managed Branches Securitisation income Net income from financial instruments and derivatives at fair value Commission Management fee – controlled entities Foreign exchange income – customer based Net profit / (loss) on sale of property, plant and equipment Other income Other operating income Net insurance operating income Total operating income Interest income and expense Consolidated Bank 2015 $m 2014 $m 2015 $m 2014 $m 2,038 189 2,227 729 598 1,327 900 111 (12) - 15 28 - 9 1 3 155 33 1,088 1,917 195 2,112 772 579 1,351 761 101 (13) - 11 24 - 9 (3) 7 136 42 939 1,634 438 2,072 678 752 1,430 642 101 (12) 78 14 13 22 11 (5) 30 252 - 894 1,603 423 2,026 766 671 1,437 589 99 (13) 72 11 13 24 9 (5) 24 234 - 823 Interest income and expense for all interest bearing financial instruments are recognised in the profit or loss using the effective interest rates of the financial assets or financial liabilities to which they relate. Other operating income Other operating income and expense (e.g. lending fees) that are considered an integral part of the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Non-yield related application and activation lending fee revenue is recognised when the loan is disbursed or the commitment to lend expires. Service fees that represent the recoupment of the costs of providing the service are recognised on an accruals basis when the service is provided. Dividends are recognised when control of a right to receive consideration is established. 81 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 2.2. Expenses Operating expenses Advertising Commissions to Owner Managed Branches Communications and postage Printing and stationery Non-lending losses Processing costs Other (1) Administrative expenses Professional fees Directors fees Other IT expenses Data processing Amortisation – computer software (intangible) Depreciation – IT equipment Occupancy expenses Lease rental Depreciation - plant, furniture, equipment and leasehold improvements Other Employee expenses Salaries and wages Superannuation contributions Amounts set aside to provision for employee entitlements Payroll tax Equity settled transactions Other Other Amortisation – acquired intangibles Expenses (1) The current year balance includes the impairment expense for the pilot Customer Relationship Management system. 82 Consolidated Bank 2015 $m 2014 $m 2015 $m 2014 $m 23 7 21 5 - 24 42 17 7 20 5 34 25 17 14 6 19 4 - 24 37 13 7 19 4 34 25 14 122 125 104 116 17 2 5 24 67 17 1 85 38 9 3 50 16 2 6 24 65 15 1 81 29 8 3 40 13 2 8 23 60 15 1 76 30 9 3 42 203 150 154 20 3 13 10 8 257 14 552 14 4 10 9 7 194 6 470 14 3 10 8 6 195 2 442 13 2 10 25 61 13 1 75 26 7 3 36 130 12 3 9 8 7 169 1 422 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 2.3. Income tax expense and deferred tax Income tax expense The major components of income tax expense for the years ended 31 August 2015 and 2014 along with a reconciliation between pre-tax profit and tax expense are detailed below: Consolidated Bank 2015 $m 2014 $m 2015 $m 2014 $m Current tax expense Current year Adjustments for prior years Deferred tax expense Origination and reversal of temporary differences Total income tax expense Attributable to: Continuing operations Deferred tax recognised in equity Equity raising costs Cash flow hedge reserve Other Numerical reconciliations between tax expense and pre-tax profit Profit before tax – continuing operations Profit before tax Income tax using the domestic corporate tax rate of 30% (2014: 30%) Increase in income tax expense due to: Non-deductible expenses Decrease in income tax expense due to: Other (1) Over provided in prior years Income tax expense on pre-tax net profit 130 (17) 113 31 31 144 144 - (17) 12 (5) 462 462 139 9 (3) 145 (1) 144 140 (8) 132 (10) (10) 122 122 (3) (9) 11 (1) 383 383 115 9 (1) 123 (1) 122 111 (14) 97 20 20 117 117 - (17) 12 (5) 409 409 123 6 (11) 118 (1) 117 (1) In the Bank, this includes the impact of dividends received from subsidiary Group members which are eliminated at a Group level and franking credits. 112 (6) 106 (6) (6) 100 100 (3) (10) 12 (1) 338 338 101 6 (6) 101 (1) 100 83 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 2.3. Income tax expense and deferred tax (continued) Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net 2015 $m 2014 (1) $m 2015 $m 2014 $m 2015 $m 2014 (1) $m Consolidated Accruals Capitalised expenditure Provision for impairment Other provisions Equity reserves Other 6 - 82 23 - 6 5 - 95 25 - 7 Tax assets / (liabilities) 117 132 Bank Accruals Capitalised expenditure Provision for impairment Other provisions Equity reserves Other Tax assets / (liabilities) 3 - 66 22 - 5 96 2 - 81 20 - 8 111 - (6) - - - (22) (28) - (3) - - - (19) (22) - (3) - - (6) (9) (18) - (1) - - (5) (4) (10) 6 (6) 82 23 - (16) 89 3 (3) 66 22 - (14) 74 5 (3) 95 25 (6) (2) 114 2 (1) 81 20 (5) 4 101 (1) The prior year balances have been restated. Refer to Section 1.4. Unrecognised deferred tax assets Deferred tax assets have not been brought to account for the following items as realisation of the benefit is not regarded as probable: Gross income tax losses (2) Gross capital gains tax losses (1) Tax losses were not disclosed in the prior year on the basis that the analysis confirming the quantum of these losses was not finalised. (2) Income tax losses are subject to utilisation over an expected 10-15 year period. Accounting for income tax 2015 $m 30 92 2014 (1) $m 32 92 Income tax expense comprises current and deferred tax. Income tax is recognised in profit or loss in the Income Statement except to the extent that it relates to items recognised directly in equity, or other comprehensive income. Current tax is the expected tax payable / receivable on the taxable income / loss for the year and any adjustment to the tax payable / receivable in respect of previous years. It is measured using tax rates enacted or substantially enacted at the reporting date. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets are recognised for unused tax losses and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantially enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Consolidated Entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. 84 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 2.3. Income tax expense and deferred tax (continued) Tax Consolidation The Bank is the head entity in the tax consolidated group comprising all the Australian wholly-owned subsidiaries. The implementation date for the tax- consolidated group was 1 September 2003. Current tax expense / income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using a ‘group allocation’ approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax- consolidated group and are recognised as amounts payable / (receivable) to / (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Bank as an equity contribution, or distribution from the subsidiary. Any subsequent period amendments to deferred tax assets arising from unused tax losses as a result of a revised assessment of the probability of recoverability is recognised by the head entity only. Nature of tax funding and tax sharing arrangements The Bank, in conjunction with other members of the tax-consolidated group, has entered into a tax funding agreement which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The tax funding agreement requires payments to / from the head entity equal to the current tax liability (asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the Bank recognising an inter-entity payable (receivable) equal in amount to the tax liability (asset) assumed. Contributions to fund the current tax liabilities are payable as per the Tax Funding Arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The Bank, in conjunction with other members of the tax-consolidated group, has also entered into a Tax Sharing Agreement (“TSA”). The TSA provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the TSA is considered remote. Taxation of Financial Arrangements (“TOFA”) TOFA began to apply to the tax-consolidated group on 1 July 2010. The regime aims to align the tax and accounting treatment of financial arrangements. The tax-consolidated group made a transitional election to bring pre-existing arrangements into TOFA. The deferred tax in relation to the transitional adjustment that this created was fully amortised in the 31 August 2014 financial year. 85 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 2.4. Dividends Ordinary shares Final 2014 dividend paid 27 November 2014 (2013: 4 December 2013) Interim 2015 dividend paid 12 May 2015 (2014: 23 May 2014) Convertible preference shares Final CPS dividend paid on 15 October 2014 (2013: 15 October 2013) Half-yearly CPS dividend paid on 15 April 2015 (2014: 15 April 2014) Bank 2015 2014 Cents per share $m Cents per share $m 34 36 275 273 124 132 256 8 8 16 30 32 286 269 96 103 199 9 8 17 All dividends paid on ordinary and preference shares have been fully franked at 100%. Since the end of the financial year, the Directors have determined the following dividends: Cents per share $m - Final CPS dividend - Final – ordinary shares 258 38 8 141 The final dividend payment will be fully franked and paid on 24 November 2015 to owners of ordinary shares at the close of business on 2 November 2015 (record date). Shares will be quoted ex-dividend on 29 October 2015. 30% franking credits available to shareholders of the Bank for subsequent financial years Bank 2015 $m 121 2014 $m 132 The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. All the franked dividends paid or declared by the Bank since the end of the previous financial year were franked at the tax rate of 30%. The balance of the Bank of Queensland Limited dividend franking account at the date of this report, after adjusting for franking credits and debits that will arise on payment of income tax and dividends relating to the year ended 31 August 2015, is $121 million credit calculated at the 30% tax rate (2014: $132 million credit). It is anticipated, based on these franking account balances that the Bank will continue to pay fully franked dividends in the foreseeable future. Dividend reinvestment plan As resolved by the Board, the Bank of Queensland Dividend Reinvestment Plan (“DRP”) provides shareholders with the opportunity to convert all or part of their entitlement to a dividend into new shares at a discount of 1.5%. The discount applied is 1.5% of the arithmetic average, rounded to four decimal places, of the daily volume weighted average price of: • all shares sold in the ordinary course of trading on the Australian Securities Exchange (“ASX”) automated trading system; and • where shares are sold on trading platforms of Australian licensed financial markets operated by persons other than ASX, all shares sold in the ordinary course of trading on such of those trading platforms determined by the Board from time to time, during the 10 trading day period commencing on the second trading day after the record date in respect of the relevant dividend. Shares issued or transferred under the Plan will be fully-paid. If, after this calculation there is a residual balance, that balance will be carried forward (without interest) and added to the next dividend for the purpose of calculating the number of shares secured under the DRP at that time. The last date for election to participate in the DRP for the 2015 final dividend is 4 November 2015. 86 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 2.5. Operating segments Segment information The Bank determines and presents operating segments based on the information that is provided internally to the Managing Director, who is the Bank’s Chief Operating Decision Maker. An operating segment is a component of the Bank that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Bank’s other components. All operating segments’ operating results are regularly reviewed by the Bank’s Managing Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the Managing Director include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The Bank has determined and presented the following two segments based on information provided to the Chief Operating Decision Maker. Banking Retail banking, commercial, personal, small business loans, equipment, debtor finance, treasury, savings and transaction accounts. Insurance Customer credit insurance, life insurance, accidental death insurance, funeral insurance and motor vehicle gap insurance. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects is measured differently from operating profit or loss in the consolidated financial statements. Income taxes are managed within the individual operating segments and thus disclosed this way. Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with third parties. No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Bank’s total revenue in 2015 or 2014. The Consolidated Entity’s business segments operate principally in Australia. The following table presents income and profit and certain asset and liability information regarding the Bank’s operating segments. Income External Inter-segment Total operating income Segment profit before income tax Income tax expense Segment profit after income tax Results Interest income Interest expense Depreciation and amortisation Impairment losses on loans and advances Assets Liabilities Banking Insurance Segment Total 2015 $m 2014 $m 2015 $m 2014 $m 2015 $m 2014 $m 1,055 4 1,059 439 137 302 2,227 1,327 27 74 47,954 44,522 897 5 902 352 113 239 2,112 1,351 24 86 46,834 43,529 33 (2) 31 23 7 16 - - - - 112 70 42 (2) 40 31 9 22 - - - - 126 86 1,088 2 1,090 462 144 318 2,227 1,327 27 74 48,066 44,592 939 3 942 383 122 261 2,112 1,351 24 86 46,960 43,615 87 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 2.5. Operating segments (continued) The following table sets out the reconciliation between the operating segments and the consolidated entity: Segment total Elimination of inter-segment revenue Consolidated total Segment total Elimination of inter-segment bank accounts Adjustment for other consolidation eliminations Consolidated total 2.6. Earnings per share 2015 $m 2014 $m 2015 $m 2014 $m Revenue Profit before tax 1,090 (2) 1,088 942 (3) 939 462 - 462 383 - 383 Assets Liabilities 48,066 46,960 44,592 43,615 (47) (1) (55) - (47) 4 (55) 4 48,018 46,905 44,549 43,564 Basic Earnings Per Share (“EPS”) is calculated by dividing the relevant earnings by the average weighted number of shares on issue. Diluted EPS takes into account the dilutive effect of all outstanding share rights vesting as ordinary shares. Consolidated 2015 $m 2014 $m 318 318 16 2 336 261 261 16 - 277 2015 Number 2014 Number 366,666,774 336,579,927 366,666,774 336,579,927 3,293,389 2,930,399 23,978,515 25,448,063 12,304,413 - 406,243,091 364,958,389 86.8 82.8 77.4 75.9 Earnings reconciliation Net profit Basic earnings Effect of distributions on CPS Effect of capital notes Diluted earnings Weighted average number of shares used as the denominator Number for basic earnings per share Ordinary shares Number for diluted earnings per share Ordinary shares Effect of award rights Effect of CPS Effect of capital notes Basic earnings per share - Ordinary shares (cents) Diluted earnings per share - Ordinary shares (cents) 88 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 SECTION 3. CAPITAL AND BALANCE SHEET MANAGEMENT 3.1. Cash and liquid assets Components of cash and liquid assets Cash and liquid assets comprise cash at branches, cash on deposit and balances with the Reserve Bank of Australia. Cash flows from the following activities are presented on a net basis in the statements of cash flows: • Sales and purchases of trading securities; • Customer deposits in and withdrawals from deposit accounts; and • Loan drawdowns and repayments. Notes, coins and cash at bank Remittances in transit Total Consolidated Bank 2015 $m 2014 $m 2015 $m 2014 $m 917 186 1,103 905 129 1,034 367 186 553 268 129 397 Notes to the statements of cash flows Reconciliation of profit for the year to net cash provided by operating activities. Profit from ordinary activities after income tax 318 261 Add / (less) items classified as investing / financing activities or non-cash items Depreciation Amortisation Dividends received from subsidiaries Software amortisation and impairment Investments equity accounted Equity settled transactions (Profit) / loss on sale of property, plant and equipment (Increase) / decrease in due from other financial institutions (Increase) / decrease in financial assets Increase in loans and advances at amortised cost (Increase) / decrease in derivatives Decrease in provision for impairment (Increase) / decrease in deferred tax asset Decrease in other assets (Increase) / decrease in amounts due from controlled entities Increase in due to other financial institutions Increase in deposits Increase / (decrease) in accounts payable and other liabilities Increase / (decrease) in current tax liabilities Increase / (decrease) in provisions Increase / (decrease) in deferred tax liabilities Decrease in insurance policy liabilities Decrease in borrowings including subordinated notes Net cash inflow/(outflow) from operating activities 20 14 - 27 - 10 (1) 2 1,592 (2,549) (20) (18) (10) 17 - 52 640 (2) (17) (42) 42 (22) (763) (710) 17 11 - 15 (3) 9 2 26 (269) (619) 45 (22) 13 11 - 6 1,914 (18) 48 25 (18) (10) (987) 457 292 10 2 (28) 25 - 8 5 (4) 907 (4,784) (14) (11) (1) 4 112 52 3,033 15 (16) (38) (2) - - 238 8 1 (22) 13 - 8 5 9 (97) (500) 40 (44) (2) 32 (772) 6 2,283 (13) 28 20 (4) - - (433) 1,237 89 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.2. Deposits Deposits at call Term deposits Certificates of deposit (1) Total Concentration of deposits: Customer deposits Wholesale deposits (1) Total Consolidated Bank 2015 $m 11,814 17,838 5,080 34,732 26,914 7,818 34,732 2014 $m 10,886 19,631 3,589 34,106 26,266 7,840 34,106 2015 $m 12,415 17,883 5,080 35,378 27,514 7,864 35,378 2014 $m 10,937 17,835 3,585 32,357 24,462 7,895 32,357 (1) The Bank has reclassified its Transferable Deposits (“TD’s”) from Wholesale deposits for 31 August 2015 and has also reflected this in the 31 August 2014 comparative figures. The TD’s have been reclassified to Borrowings to better reflect the underlying substance of the balances with contractual terms being on average greater than twelve months. 3.3. Financial assets Available-for-sale Debt instruments Unlisted equity instruments Held for trading Floating rate notes and bonds Negotiable certificates of deposit Promissory notes Consolidated Bank 2015 $m 2,818 9 2,827 595 1,345 - 1,940 2014 $m 3,855 9 3,864 949 1,449 75 2,473 2015 $m 2,987 9 2,996 595 1,345 - 1,940 2014 $m 3,340 9 3,349 949 1,449 75 2,473 Total financial assets 4,767 6,337 4,936 5,822 90 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.4. Loans and advances at amortised cost Loans and advances at amortised cost Loans and advances are originated by the Bank and are recognised upon cash being advanced to the borrower. Loans and advances are initially recognised at fair value plus incremental direct transaction costs and subsequently measured at each reporting date at amortised cost using the effective interest method. Refer to the table below for impairment of loans and advances. Residential property loans – secured by mortgages Securitised residential property loans – secured by mortgages Total residential property loans – secured by mortgages Personal loans Overdrafts Commercial loans Credit cards Leasing finance Gross loans and advances at amortised cost Less: Unearned lease finance income Specific provision for impairment Collective provision for impairment Consolidated Bank 2015 $m 21,029 7,349 28,378 260 277 7,786 64 4,626 41,391 (416) (126) (146) 2014 $m 19,285 7,224 26,509 288 330 7,174 54 4,527 2015 $m 21,029 7,349 28,378 260 277 7,790 64 322 2014 $m 19,125 7,223 26,348 162 330 5,426 - - 38,882 37,091 32,266 (456) (146) (144) (41) (106) (114) - (128) (103) Total loans and advances at amortised cost (1) 40,703 38,136 36,830 32,035 Provision for impairment Specific provision: Balance at the beginning of the year Add: Expensed during the year Acquired during the year Less: Bad debts written off net of recoveries Transfers from collective provision Unwind of discount Balance at the end of the year Collective provision: Balance at the beginning of the year Add: Expensed / (Released) during the year Acquired during the year Transfer from BOQ Specialist (Aust) Limited (1) Transfers to specific provision Balance at the end of the year Total provisions for impairment Consolidated Bank 2015 $m 2014 $m 2015 $m 2014 $m 146 72 - (84) - (8) 126 144 2 - - - 146 272 175 93 1 (115) 2 (10) 146 137 (7) 16 - (2) 144 290 128 38 - (52) - (8) 106 103 5 - 6 - 114 220 163 70 - (98) 3 (10) 128 112 (7) - - (2) 103 231 (1) On 1 June 2015 BOQ Specialist (Aust) Limited (formerly known as the Professional Finance and Asset Finance & Leasing businesses of Investec Bank (Australia) Limited) surrendered its Authorised Deposit-taking Institutions license following its acquisition on 31 July 2014. Subsequently all loans and advances and provisions for impairment for BOQ Specialist Pty Ltd were transferred to the Bank. 91 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.4. Loans and advances at amortised cost (continued) Transfer of financial assets The Bank conducts a loan securitisation program whereby mortgage loans are packaged and sold to the REDS Securitisation and Warehouse Trusts (“RMBS Trusts”). The Bank also securitises Hire Purchase, Chattel Mortgages and Finance Leases which are packaged and sold to REDS EHP Securitisation Trusts (“REDS EHP Trusts”) and the Nyala and Impala Securitisation Trusts. Refer to Section 6.10 (a)(ii) for further information. The following table sets out the transferred financial assets that did not qualify for derecognition and associated liabilities from conducting the securitisation program. Transferred financial assets Loans and advances at amortised cost Lease receivables Associated financial liabilities Securitisation liabilities - external investors Amounts due to controlled entities For those liabilities that have recourse only to transferred assets: Fair value of transferred assets Fair value of associated liabilities Net Position Consolidated Bank 2015 (1) $m 3,639 750 4,389 4,819 - 4,819 4,415 (4,819) (404) 2014 $m 4,752 613 5,365 5,516 - 5,516 5,379 (5,516) (137) 2015 (1) $m 3,739 - 3,739 - 4,120 4,120 3,754 (4,120) (366) 2014 $m 4,250 - 4,250 - 4,368 4,368 4,259 (4,368) (109) (1) On 1 June 2015 BOQ Specialist (Aust) Limited (formerly known as the Professional Finance and Asset Finance & Leasing businesses of Investec Bank (Australia) Limited) surrendered its Authorised Deposit-taking Institutions license following its acquisition on 31 July 2014. At this time the securitisation trusts and the associated assets and liabilities transferred to being under control of the Bank, as such these have been included within the transfer of financial assets note for the 2015 financial year. Lease receivables Loans and advances at amortised cost include the following finance lease receivables for leases of certain property and equipment where the Bank is the lessor. Gross investment in finance lease receivables: Less than one year Between one and five years More than five years Unearned lease finance income Net investment in finance leases The net investment in finance leases comprise: Less than one year Between one and five years More than five years Consolidated Bank 2015 $m 2014 $m 2015 (1) $m 2014 $m 1,714 2,814 98 4,626 (416) 4,210 1,532 2,593 85 4,210 1,679 2,759 89 4,527 (456) 4,071 1,479 2,539 53 4,071 15 254 53 322 (41) 281 15 223 43 281 - - - - - - - - - - (1) On 1 June 2015 BOQ Specialist (Aust) Limited (formerly known as the Professional Finance and Asset Finance & Leasing businesses of Investec Bank (Australia) Limited) surrendered its Authorised Deposit-taking Institutions license following its acquisition on 31 July 2014. Subsequently all finance lease receivables for BOQ Specialist Pty Ltd were transferred to the Bank. 92 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.5. Borrowings including subordinated notes The Consolidated Entity recorded the following movements on borrowings including subordinated notes: Securitisation liabilities (1) $m EMTN Program $m ECP Program $m Borrowings including subordinated notes $m Transferable Certificates of Deposit (2) $m Convertible Preference Shares (3) $m Capital Notes (4) $m Syndicated Loan $m Total $m Year ended 31 August 2015 Balance at beginning of year Proceeds from issues Repayments Deferred establishment costs Amortisation of deferred costs Foreign exchange translation Balance at end of the year 5,510 2,284 (3,041) (5) 5 59 64 29 (18) - - 6 4,812 81 319 88 (355) - - 42 94 347 - (22) - - - 1,830 1,356 (228) - - - 294 - - - 1 - - 150 - (2) - - 325 2,958 295 148 - - - - - - - Securitisation liabilities (1) $m EMTN Program $m ECP Program $m Borrowings including subordinated notes $m Transferable Certificates of Deposit $m Convertible Preference Shares (3) $m Syndicated Loan $m Year ended 31 August 2014 Balance at beginning of year 5,824 Acquired during the year (5) Proceeds from issues 667 760 96 - 65 Repayments (1,744) (94) Deferred establishment costs Amortisation of deferred costs Foreign exchange translation (2) 7 (2) Balance at end of the year 5,510 - - (3) 64 430 - 628 (718) - - (21) 319 271 76 - - - - - 1,059 293 223 118 741 (88) - - - - - - - 1 - - - (221) (2,865) - 1 (3) - (2) 9 (29) 8,364 347 1,830 294 (1) Securitisation liabilities are secured by a floating charge over securitised assets for amounts owing to noteholders and any other secured creditors of the securitisation vehicles. (2) The Bank has reclassified its Transferable Deposits (“TD’s”) from Wholesale deposits for 31 August 2015 and has also reflected this in the 31 August 2014 comparative figures. The TD’s have been reclassified to Borrowings to better reflect the underlying substance of the balances with contractual terms being on average greater than twelve months. (3) 3,000,000 Convertible Preference Shares (CPS) were issued on 24 December 2012. CPS are fully-paid, perpetual, convertible, unguaranteed and unsecured preference shares with preferred, discretionary, non-cumulative dividends. CPS will mandatorily convert into ordinary shares on 15 April 2020. The Bank is entitled to convert, redeem or transfer some or all of the CPS on the optional conversion / redemption date of 15 April 2018 subject to the prior written approval from the Australian Prudential Regulation Authority (“APRA”). The Bank is also entitled to convert, redeem or transfer some or all of the CPS on the occurrence of a regulatory event or tax event and in addition, conversion of the CPS into ordinary shares must occur immediately following the occurrence of a capital trigger event or a non-viability trigger event. CPS rank for payment of capital ahead of ordinary shareholders, equally with other securities or instruments ranking equally with CPS, but behind all other securities or instruments ranking ahead of CPS, and behind all depositors and other creditors. (4) On 26 May 2015, the Bank issued 15,000 Wholesale Capital Notes (“WCN”) at a price of $10,000 per note. WCN are non-cumulative and fully paid and are issued by the Bank on a perpetual, subordinated and unsecured basis. They are not guaranteed or secured. In a winding up of the Bank, if capital notes have not been converted or written-off on account of a non-viability trigger event or capital trigger event, WCN will rank for payment of capital ahead of ordinary shareholders, equally with other securities or instruments ranking equally with WCN, but behind all other securities or instruments ranking ahead of WCN, and behind all senior creditors. The WCN may covert to ordinary shares of the Bank in certain circumstances, which include the occurrence of a non-viability event or a capital trigger event. (5) Borrowings acquired during the 2014 year relate to the acquisition of BOQ Specialist Bank Limited formerly Investec Bank (Australia) Limited. 93 8,364 3,907 (3,664) (7) 6 107 8,713 Total $m 8,196 861 2,194 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.5. Borrowings including subordinated notes (continued) The Bank recorded the following movements on borrowings including subordinated notes: EMTN Program $m ECP Program $m Borrowings including subordinated notes (1) $m Transferable Certificates of Deposit (2) $m Convertible Preference Shares (3) $m Capital Notes (4) $m Syndicated Loan $m Total $m Year ended 31 August 2015 Balance at beginning of year Proceeds from issues Transfers from BOQ Specialist 64 29 - 319 88 - Repayments (18) (355) Deferred establishment costs Amortisation of deferred costs Foreign exchange translation Balance at end of the year - - 6 81 - - 42 94 271 - 49 - - - - 1,712 1,356 - (110) - - - 294 - - - - 1 - - 150 - - (2) - - 320 2,958 295 148 - - - - - - - - 2,660 1,623 49 (483) (2) 1 48 3,896 EMTN Program $m ECP Program $m Borrowings including subordinated notes (1) $m Transferable Certificates of Deposit $m Convertible Preference Shares (3) $m Syndicated Loan $m Total $m 96 65 (94) - (3) 64 430 628 (718) - (21) 319 271 - - - - 1,059 741 (88) - - 293 - - 1 - 271 1,712 294 223 - (221) 1 (3) - 2,372 1,434 (1,121) 2 (27) 2,660 Year ended 31 August 2014 Balance at beginning of year Proceeds from issues Repayments Amortisation of deferred costs Foreign exchange translation Balance at end of the year (1) Convertible Notes were issued in 2014 in three tranches of $60 million (“Tranche 1”), $45 million (“Tranche 2”) and $45 million (“Tranche 3”), and are cumulative, convertible, subordinated notes due June 2020, and pay, subject to a solvency condition, a monthly coupon equal to the 30 day bank bill rate plus 400 basis points. The Convertible Notes are unlisted with the final Tranche being Tranche 1, redeemed during the prior financial year. (2) The Bank has reclassified its Transferable Deposits (“TD’s”) from Wholesale deposits for 31 August 2015 and has also reflected this in the 31 August 2014 comparative figures. The TD’s have been reclassified to Borrowings to better reflect the underlying substance of the balances with contractual terms being on average greater than twelve months. (3) 3,000,000 Convertible Preference Shares (CPS) were issued on 24 December 2012. CPS are fully-paid, perpetual, convertible, unguaranteed and unsecured preference shares with preferred, discretionary, non-cumulative dividends. CPS will mandatorily convert into ordinary shares on 15 April 2020. The Bank is entitled to convert, redeem or transfer some or all of the CPS on the optional conversion / redemption date of 15 April 2018 subject to the prior written approval from the Australian Prudential Regulation Authority (“APRA”). The Bank is also entitled to convert, redeem or transfer some or all of the CPS on the occurrence of a regulatory event or tax event and in addition, conversion of the CPS into ordinary shares must occur immediately following the occurrence of a capital trigger event or a non-viability trigger event. CPS rank for payment of capital ahead of ordinary shareholders, equally with other securities or instruments ranking equally with CPS, but behind all other securities or instruments ranking ahead of CPS, and behind all depositors and other creditors. (4) On 26 May 2015, the Bank issued 15,000 Wholesale Capital Notes (“WCN”) at a price of $10,000 per note. WCN are non-cumulative and fully paid and are issued by the Bank on a perpetual, subordinated and unsecured basis. They are not guaranteed or secured. In a winding up of the Bank, if capital notes have not been converted or written-off on account of a non-viability trigger event or capital trigger event, WCN will rank for payment of capital ahead of ordinary shareholders, equally with other securities or instruments ranking equally with WCN, but behind all other securities or instruments ranking ahead of WCN, and behind all senior creditors. The WCN may covert to ordinary shares of the Bank in certain circumstances, which include the occurrence of a non-viability event or a capital trigger event. 94 ANNUAL REPORT 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.6. Risk management The Consolidated Entity adopts a “managed risk” approach to its banking and insurance activities. As such, the articulation of a risk aware culture is prevalent throughout the Consolidated Entity’s credit, liquidity, market, operational, insurance risk and compliance policies and procedures. The Board has adopted policies in relation to the assessment, management and monitoring of these risks and ownership of the frameworks within which these risks are managed reside with the Chief Risk Officer. The Chief Risk Officer contributes towards the achievement of the Consolidated Entity’s corporate objectives through the operationalisation and progressive development of the Bank’s risk management function. In particular, improvement of the risk management function is focussed in a number of areas: 1. 2. 3. 4. 5. the efficiency and effectiveness of the Consolidated Entity’s credit, liquidity, market, operational risk and compliance management process controls and policies to support improved competitive advantage, support growth and enable improved cost controls; to provide management and the Board with risk reporting that contributes to the further development of sound corporate governance standards; to maintain regulatory compliance in line with regulators’ expectations; to provide a sound basis from which the Bank can progress to the required compliance level under the Basel II accord; and to contribute to the Consolidated Entity achieving risk based performance management. Group Risk is an independent function and is responsible for providing the framework, policies and procedures for managing credit, liquidity, market, operational risk and compliance throughout the Group. Policies are set in line with the governing strategy and risk guidelines set by the Board. Monitoring The Consolidated Entity’s enterprise risk management framework incorporates active management and monitoring of a range of risks including (but not limited to): 1. Market 2. Credit 3. Liquidity 4. Insurance (a) Market risk Market risk is the risk that movements in market rates and prices will result in profits or losses to the Bank. The objective of market risk management is to manage and control market risk. (i) Interest Rate Risk management The operations of the Consolidated Entity are subject to the risk of interest rate fluctuations as a result of mismatches in the timing of the repricing of interest rates on the Consolidated Entity’s assets and liabilities. The figures in the table below indicate the potential increase in net interest income for an ensuing 12 month period of a 1% parallel shock increase to the yield curve. A 1% decrease in the yield curve has an equal but opposite impact. Exposure at the end of the year Average monthly exposure during the year High month exposure during the year Low month exposure during the year (ii) Foreign exchange risk 2015 % 0.68 (0.03) 1.73 (1.17) 2014 % 1.16 1.19 2.16 (0.03) 2015 $m 2014 $m 6 - 16 (11) 9 9 16 - It is the Bank’s policy not to carry material foreign exchange rate exposures. At balance date there are no material foreign exchange rate exposures. The Bank uses cross currency swaps and foreign exchange forwards to hedge its exchange rate exposures arising from borrowing off-shore in foreign currencies. The Bank uses forward foreign exchange contracts to hedge potential exchange rate exposures created by customer-originated foreign currency transactions. The Bank’s investment in its New Zealand subsidiary is hedged by forward foreign exchange contracts which mitigate the currency risk arising from the subsidiary’s net assets. 95 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.6. Risk management (continued) (iii) Traded market risk Market risks attributable to trading activities are primarily measured using a parametric Value-at-Risk (“VaR”) model based on historical data. The Bank estimates VaR as the potential loss in earnings from adverse market movements and is calculated over a 1-day time horizon to a 99% confidence level using 2 years of historical data. VaR takes account of all material market variables that may cause a change in the value of the trading portfolio. Although an important tool for the measurement of market risk, the assumptions underlying the model have some limitations: • • • VaR typically understates the losses that may occur beyond the 99% confidence level; the reliance on historical data may prove insufficient to predict the severity of possible future outcomes; and a 1-day holding period assumes that it is possible to hedge or dispose of positions within that period. For certain illiquid assets or in certain market situations this might not be possible. As VaR is a statistical measure and only attempts to cover losses to a 99% confidence level, the Bank supplements this analysis with stress testing. Stress testing attempts to adequately assess the risks inherent in its trading activities by applying appropriate scenario analyses, whilst not addressing the likelihood of those outcomes. As an overlay, the individual market risks of interest rate, foreign exchange, credit and equity sensitivities are monitored and measured against limits delegated by the Asset-Liability Committee (“ALCO”) and approved by the Board Risk Committee. The portfolio (interest rate, foreign exchange, credit and equity) VaR for the Bank’s trading portfolio for the year was as follows: Trading VaR Average Maximum Minimum (b) Credit risk 2015 $m 0.71 1.61 0.23 2014 $m 0.65 1.33 0.28 Credit risk arises in the business from lending activities, the provision of guarantees including letters of credit and commitments to lend, investment in bonds and notes, financial market transactions and other associated activities. Credit risk is the potential loss arising from the possibility that customers or counterparties fail to meet contractual payment obligations to the Bank as they fall due. The Board of Directors have implemented a structured framework of systems and controls to monitor and manage credit risk comprising: • • • • • documented credit risk management principles which are disseminated to all staff involved with the lending process; documented policies; a process for approving risk, based on tiered delegated approval authorities, whereby the largest exposures are assessed by a committee consisting of Group Executives and senior risk managers chaired by the Chief Risk Officer; risk grading the Bank’s commercial exposures for facilities greater than $100,000 based on items inclusive of financial performance and stability, organisational structure, industry segment and security support. Exposures within this segment of the portfolio are generally subject to annual review including reassessment of the assigned risk grade; an automated scorecard approval model for the Bank’s retail portfolio inclusive of home loans, personal loans, and lines of credit. This model is supported by experienced Risk Assessment Managers; and • a series of management reports detailing industry concentrations, counterparty concentrations, loan grades and security strength ratings. The Consolidated Entity uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operating, financing and investing activities. In accordance with its treasury policy, the Consolidated Entity can hold derivative financial instruments for trading purposes. Credit risk on derivative contracts used for these purposes is minimised as counterparties are recognised financial intermediaries with acceptable credit ratings determined by a recognised rating agency. Maximum exposure to credit risk The amounts disclosed are the maximum exposure to credit risk, before taking account of any collateral held or other credit enhancements. For financial assets recognised on the Balance Sheet, the exposure to credit risk equals their carrying amount. For customer commitments, the maximum exposure to credit risk is the full amount of the committed facilities as at the reporting date. 96 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.6. Risk management (continued) (b) Credit risk (continued) (i) Maximum exposure to credit risk (continued) The carrying amount of the Consolidated Entity’s and Bank’s financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Cash and liquid assets Due from other financial institutions Other financial assets (including accrued interest) Derivative financial instruments Financial assets other than loans and advances Gross loans and advances at amortised cost Total financial assets Customer commitments (1) Total potential exposure to credit risk (1) Refer to Note Section 6.2 for full details of customer commitments. Distribution of financial assets by credit quality Neither past due or impaired Gross loans and advances at amortised cost Financial assets other than loans and advances Past due but not impaired Consolidated Bank 2015 $m 1,103 91 4,826 225 6,245 41,391 47,636 1,498 49,134 2014 $m 1,034 93 6,399 160 7,686 38,882 46,568 1,898 48,466 2015 $m 553 19 4,993 162 5,727 37,091 42,818 624 43,442 Consolidated Bank 2015 $m 40,056 6,245 2014 $m 37,459 7,686 2015 $m 35,899 5,727 2014 $m 397 15 5,882 132 6,426 32,266 38,692 1,024 39,716 2014 $m 31,004 6,426 Gross loans and advances at amortised cost 1,098 1,130 987 999 Impaired Gross loans and advances at amortised cost 237 47,636 293 46,568 205 42,818 263 38,692 There is no individual exposure included in impaired assets which exceeds 5% of shareholders’ equity (2014: nil). The Bank holds collateral against loans and advances to customers in the form of mortgage interest over property, other registered securities over assets and guarantees and mortgage insurance. To mitigate credit risk, the Bank can take possession of the security held against the loans and advances as a result of customer default. To ensure reduced exposure to losses, the collateral held by the Bank as mortgagee in possession is realised promptly. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. An estimate of the collateral held against past due but not impaired and impaired loans and advances at amortised cost is outlined below. It is not practical to determine the fair value of collateral held against performing loans. Held against past due but not impaired assets Held against impaired assets Consolidated Bank 2015 $m 1,482 159 2014 $m 1,593 202 2015 $m 1,415 142 2014 $m 1,486 186 97 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.6. Risk management (continued) (b) Credit risk (continued) (ii) Credit quality The credit quality of financial assets has been determined based on Standard and Poors credit ratings, APRA risk weightings and the Bank’s standard risk grading. The table below presents an analysis of the credit quality of financial assets: Consolidated 2015 $m 2014 $m Gross loans and advances Gross loans and advances Retail Commercial 23,736 4,461 404 314 3,346 7,771 1,316 43 Total loans and advances 27,082 12,232 1,720 357 Financial assets other than loans and advances 6,236 - 9 - Retail Commercial 22,771 3,540 412 404 2,980 7,368 1,367 40 Total loans and advances 25,751 10,908 1,779 444 Financial assets other than loans and advances 7,677 - 9 - 28,915 12,476 41,391 6,245 27,127 11,755 38,882 7,686 Bank 2015 $m 2014 $m Gross loans and advances Gross loans and advances Total loans and advances Financial assets other than loans and advances Retail Commercial Retail Commercial 23,736 4,461 404 314 2,634 4,911 588 43 26,370 9,372 992 357 5,549 108 70 - 22,611 3,413 412 404 1,540 3,255 591 40 Total loans and advances 24,151 6,668 1,003 444 Financial assets other than loans and advances 6,294 81 51 - 28,915 8,176 37,091 5,727 26,840 5,426 32,266 6,426 High Grade Satisfactory Weak Unrated (1) High Grade Satisfactory Weak Unrated (1) (1) Loans and advances which have been classified as unrated are not secured, however these are not deemed to be weak. All other loans and advances have been included in the appropriate category. 98 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.6. Risk management (continued) (b) Credit risk (continued) (iii) Loans and advances which were past due but not impaired Loans which are 90 or more days past due are not classified as impaired assets where the estimated net realisable value of the security is sufficient to cover the repayment of all principal and interest amounts due. Less than 30 days 31 to 90 days More than 90 days - Retail - Commercial - Retail - Commercial - Retail - Commercial Consolidated Bank 2015 $m 2014 $m 2015 $m 2014 $m 385 235 148 73 163 94 445 229 174 60 146 76 1,098 1,130 385 156 148 47 163 88 987 445 130 174 34 146 70 999 (iv) Concentration of exposure for gross loans and advances at amortised cost Concentration of credit risk exists when a number of counterparties are engaged in similar activities, or operate in the same geographical areas or industry sectors and have similar economic characteristics so that their ability to meet contractual obligations is similarly affected by changes in economic, political or other conditions. The Bank monitors concentrations of credit risk by geographical location for loans and advances. An analysis of these concentrations of credit risk at the reporting date is shown below: Geographical concentration of credit risk for loans and advances at amortised cost (before provisions and unearned income): Queensland New South Wales Victoria Northern Territory Australian Capital Territory Western Australia South Australia Tasmania International (New Zealand) Consolidated Bank 2015 $m 20,954 8,253 6,608 306 315 4,040 481 192 242 2014 $m 20,912 6,904 6,185 260 314 3,519 370 183 235 2015 $m 19,524 7,091 5,683 301 280 3,671 355 186 - 2014 $m 18,900 4,949 4,854 255 241 2,778 111 178 - 41,391 38,882 37,091 32,266 99 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.6. Risk management (continued) (c) Liquidity risk Liquidity risk arises from the possibility that the Bank is unable to meet its financial obligations as they fall due. Liquidity risk is managed through a series of detailed policies, including the management of cash flow mismatches, the maintenance of a stable, core retail deposits base, the diversification of the funding base and the retention of adequate levels of high quality liquid assets. The Consolidated Entity manages liquidity risk by maintaining adequate reserves and facilities by continuously monitoring forecast and actual cash flows, matching maturity profiles of financial assets and liabilities and liquidity scenario analysis. Consolidated 2015 Financial liabilities Due to other financial institutions Deposits Derivative financial instruments (1) Accounts payable and other liabilities Securitisation liabilities (2) Borrowings including subordinated notes Insurance policy liabilities Total Derivative financial instruments (hedging relationship) Contractual amounts payable Contractual amounts receivable Off balance sheet positions Guarantees, indemnities and letters of credit Customer funding commitments Consolidated 2014 Financial liabilities Due to other financial institutions Deposits Derivative financial instruments (1) Accounts payable and other liabilities Securitisation liabilities (2) Borrowings including subordinated notes Insurance policy liabilities Total Carrying amount $m 259 34,732 21 390 4,812 3,901 41 44,156 - - 86 - - - Carrying amount $m 207 34,106 5 399 5,510 2,854 63 43,144 At Call $m 3 mths or less $m 3 to 12 mths $m 1 to 5 years $m Over 5 years $m Policyholder $m 259 11,984 - 12,406 - - - - - 9 390 311 40 - - 9,794 7 - 1,343 1,083 - 12,243 13,156 12,227 - - - 287 1,211 1,498 447 (438) 9 - - - 559 (534) 25 - - - - 990 10 - 2,667 3,112 - 6,779 757 (666) 91 - - - - 12 2 - 931 - - 945 339 (313) 26 - - - - - - - - - 41 41 - - - - - - At Call $m 3 mths or less $m 3 to 12 mths $m 1 to 5 years $m Over 5 years $m Policyholder $m 207 11,297 - 13,958 - - - - - 2 399 933 85 - - 8,210 2 - - 1,215 2 - 1,693 2,549 508 - 2,426 - 6,192 - 17 - - 871 - - 888 - - - - - - 63 63 11,504 15,377 10,413 Total contractual cash flows $m 259 35,186 28 390 5,252 4,235 41 45,390 2,102 (1,951) 151 287 1,211 1,498 Total contractual cash flows $m 207 34,697 6 399 6,046 3,019 63 44,437 (1) Derivative financial instruments other than those designated in a cashflow hedge relationship. (2) Repayment of securitisation bonds is forecast based on the expected repayment profile of the underlying assets of the Trusts. 100 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.6. Risk management (continued) (c) Liquidity risk (continued) Carrying amount $m - - 113 - - - Consolidated 2014 Derivative financial instruments (hedging relationship) Contractual amounts payable Contractual amounts receivable Off balance sheet positions Guarantees, indemnities and letters of credit Customer funding commitments Bank 2015 Financial liabilities At Call $m 3 mths or less $m 3 to 12 mths $m 1 to 5 years $m Over 5 years $m Policyholder $m - - - 420 (408) 12 774 (737) 37 827 (725) 102 396 (321) 75 - - - - - - - - - - - - 252 1,646 1,898 Carrying amount $m At Call $m 3 mths or less $m 3 to 12 mths $m 1 to 5 years $m Over 5 years $m Total contractual cash flows $m 2,417 (2,191) 226 252 1,646 1,898 Total contractual cash flows $m - - - - - - Due to other financial institutions 259 259 - - Deposits 35,378 12,626 12,406 9,794 Derivative financial instruments (1) Accounts payable and other liabilities Borrowings including subordinated notes Amounts due to controlled entities 21 345 3,896 907 - - - 907 9 345 40 - 7 - 1,083 - Total 40,806 13,792 12,800 10,884 Derivative financial instruments (hedging relationship) Contractual amounts payable Contractual amounts receivable Off balance sheet positions Guarantees, indemnities and letters of credit Customer funding commitments - - 135 - - - - - - 287 337 624 437 (431) 6 - - - 447 (433) 14 - - - (1) Derivative financial instruments other than those designated in a cashflow hedge relationship. - 990 10 - 3,112 - 4,112 660 (577) 83 - - - - 12 2 - - - 259 35,828 28 345 4,235 907 14 41,602 162 (75) 87 - - - 1,706 (1,516) 190 287 337 624 101 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.6. Risk management (continued) (c) Liquidity risk (continued) Bank 2014 Financial liabilities Carrying amount $m At Call $m 3 mths or less $m 3 to 12 mths $m 1 to 5 years $m Over 5 years $m Total contractual cash flows $m Due to other financial institutions 207 207 - - Deposits 32,357 11,330 12,914 7,544 - 988 2 - 2,366 - 2 337 84 - 2 - 485 - 13,337 8,031 3,356 310 (315) (5) - - - 709 (678) 31 - - - 697 (618) 79 - - - - - - - - - - 208 (117) 91 - - - 207 32,776 6 337 2,935 1,224 37,485 1,924 (1,728) 196 227 797 1,024 Derivative financial instruments (1) Accounts payable and other liabilities Borrowings including subordinated notes Amounts due to controlled entities Total Derivative financial instruments (hedging relationship) Contractual amounts payable Contractual amounts receivable Off balance sheet positions Guarantees, indemnities and letters of credit Customer funding commitments 5 337 2,660 1,224 36,790 - - 100 - - - - - - 1,224 12,761 - - - 227 797 1,024 (1) Derivative financial instruments other than those designated in a cashflow hedge relationship. 102 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.6. Risk management (continued) (d) Insurance risk (i) Risk management objectives and policies for risk mitigation Insurance risks are controlled through the use of underwriting procedures, adequate premium rates and policy charges and sufficient reinsurance arrangements, all of which are approved through a Board approved governance structure. Controls are also maintained over claims management practices to assure the correct and timely payment of insurance claims. (ii) Strategy for managing insurance risk Portfolio of risks The Bank’s insurance subsidiaries issue consumer credit insurance, term life insurance, funeral insurance, accidental death insurance and motor vehicle gap insurance contracts. The performance of the Bank’s insurance subsidiaries and its continuing ability to write business depends on its ability to pre-empt and control risks. The Bank’s insurance subsidiaries have a risk management strategy which has been approved by their respective Boards. It summarises the approach to risk and risk management. Risk strategy In compliance with contractual and regulatory requirements, a strategy is in place to ensure that the risks underwritten satisfy objectives whilst not adversely affecting the Consolidated Entity’s ability to pay benefits and claims when due. The strategy involves the identification of risks by type, impact and likelihood, the implementation of processes and controls to mitigate the risks, and continuous monitoring and improvement of the procedures in place to minimise the chance of an adverse compliance or operational risk event occurring. Included in this strategy is the process for underwriting and product pricing to ensure products are appropriately priced. Capital management is also a key aspect of the Consolidated Entity’s risk management strategy. Capital requirements take account of all of the various regulatory reporting requirements to which the Consolidated Entity is subject. Prudential capital requirements Prudential capital requirements established by the APRA are in place to safeguard policyholders’ interests, which are primarily the ability to meet future claim payments to policyholders. These require the Company’s Capital Base to exceed the Prudential Capital Requirement throughout the year, not just at year end. The level of capital requirements also take into account specific risks faced by the Bank’s insurance subsidiaries. (iii) Methods to limit or transfer insurance risk exposures Reinsurance The insurance subsidiaries use reinsurance arrangements to pass on or cede to reinsurers, risks that are outside of the subsidiary’s risk appetite. Underwriting procedures Strategic underwriting decisions are put into effect using the underwriting procedures detailed in the Bank’s insurance subsidiaries Underwriting Policy. Such procedures include limits to delegated authorities and signing powers. Claims management Strict claims management procedures ensure timely and correct payment of claims in accordance with policy conditions. Asset and liability management techniques Assets are allocated to different classes of business using a risk based approach. The Bank’s insurance subsidiaries have a mix of short and long term business and invests accordingly. Market risk is managed through investing in cash and deposits and bank issued commercial bills. No more than 35% of shareholder funds and funds backing insurance policy liabilities can be invested with any one counterparty subject to counterparty credit ratings. (e) Concentration of insurance risk (i) Insurance risks associated with human life events The Bank’s insurance subsidiaries aim to maintain a stable age profile and mix of the sexes within its portfolio of policyholders. This policy maintains a balance between the current and future profitability of the life business, and exposure to the significant external events. Despite the inevitable growth in policyholders at the age of retirement, the age profile and mix of sexes within the population of policyholders is sufficiently spread so that the risk concentration in relation to any particular age group is minimal. 103 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.7. Financial instruments (a) Financial instrument classifications In addition to Loans and Advances and financial liabilities at amortised cost the Bank classifies its financial instruments into one of the following four categories upon initial recognition: (i) Financial assets held for trading Financial assets that are held as part of the Bank’s Trading Book (refer Section 3.3) are designated at fair value through the profit and loss. The Bank manages such financial assets and makes purchase and sale decisions based on their fair value in accordance with the Bank’s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit or loss in the Income Statement when incurred. Financial instruments at fair value through the profit and loss are measured at fair value, and changes therein are recognised in profit or loss in the Income Statement. (ii) Available-for-sale financial assets Assets that are intended to be held for an indefinite period of time but which may be sold in response to changes in interest rates, exchange rates and liquidity needs are classified as available-for-sale. These assets are initially measured at fair value plus any directly attributable transaction costs, with any changes in fair value other than impairment losses (refer section 3.4), being recognised in other comprehensive income and accumulated in reserves in equity until the asset is sold. Interest income received on these assets is recorded as net interest income and any realised gains or losses recorded in other income in the Income Statement. (iii) Receivables due from other financial institutions Receivables due from other financial institutions are recognised and measured at amortised cost and include nostro balances (an account held with a foreign bank usually in a foreign currency) and settlement account balances. (iv) Derivative financial instruments The Consolidated Entity uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operating, financing and investing activities. Refer to Section 3.8 for further information on Derivative Financial Instruments. (b) Fair value of financial instruments The financial assets and liabilities listed below are recognised and measured at fair value and therefore their carrying value equates to their fair value: • Available-for-sale financial assets; • Financial assets and liabilities designated at fair value through the profit and loss; and • Derivatives. The fair value estimates for instruments carried at amortised cost are based on the following methodologies and assumptions: Cash and liquid assets, due from and to other financial institutions, accounts payable and other liabilities The fair value approximates their carrying value as they are short term in nature or are receivable or payable on demand. Loans and advances Loans and advances are net of specific and collective provisions for doubtful debts and unearned income. The fair values of loans and advances that reprice within six months of year end are assumed to equate to the carrying value. The fair values of all other loans and advances are calculated using discounted cash flow models based on the maturity of the loans and advances. The discount rates applied are based on the current interest rates at the reporting date for similar types of loans and advances, if the loans and advances were performing at the reporting date. The differences between estimated fair values of loans and advances and carrying value reflect changes in interest rates and creditworthiness of borrowers since loan or advance origination. Deposits The fair value of non-interest bearing, call and variable rate deposits and fixed rate deposits repricing within six months is the carrying value. The fair value of other term deposits is calculated using discounted cash flow models based on the deposit type and its related maturity. Borrowings including subordinated notes The fair values are calculated based on a discounted cash flow model using a yield curve appropriate to the remaining maturity of the instruments. 104 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.7. Financial instruments (continued) (c) Comparison of fair value to carrying amounts The table below discloses the fair value of financial instruments where their carrying value is not a reasonable approximation of their fair value: Assets carried at amortised cost Loans and advances at amortised cost 3.4 Section Liabilities carried at amortised cost Deposits Borrowings including subordinated notes 3.2 3.5 Assets carried at amortised cost Loans and advances at amortised cost 3.4 Liabilities carried at amortised cost Deposits Borrowings including subordinated notes 3.2 3.5 Consolidated Entity Carrying value Fair value 2015 $m 40,703 40,703 (34,732) (8,713) (43,445) 2014 $m 38,136 38,136 (34,106) (8,364) (42,470) 2015 $m 40,829 40,829 (34,769) (8,715) (43,484) Bank Carrying value Fair value 2015 $m 36,830 36,830 (35,378) (3,896) (39,274) 2014 $m 32,035 32,035 (32,357) (2,660) (35,017) 2015 $m 36,893 36,893 (35,415) (3,897) (39,312) 2014 $m 38,197 38,197 (34,120) (8,369) (42,489) 2014 $m 32,068 32,068 (32,252) (2,783) (35,035) The estimated fair values disclosed do not include the assets and liabilities that are not financial instruments. 105 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.7. Financial instruments (continued) (d) Fair value hierarchy The Consolidated Entity measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements: • • • Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments. Level 2: inputs other than quoted prices included within level 1 that are observable either directly or indirectly. Level 3: inputs that are unobservable i.e. there is no observable market data. The table below analyses financial instruments carried at fair value, by valuation method. The fair value hierarchy classification of instruments in Section 3.7 (c) is Loans and advances level 3, Deposits and Borrowings including subordinated notes level 2. There were no material movements in Level 3 during the year. Consolidated Entity Instruments carried at fair value Available-for-sale financial assets Financial assets designated at fair value through profit and loss Derivative financial assets Derivative financial liabilities Consolidated Entity Instruments carried at fair value Available-for-sale financial assets Financial assets designated at fair value through profit and loss Derivative financial assets Derivative financial liabilities Bank Instruments carried at fair value Available-for-sale financial assets Financial assets designated at fair value through profit and loss Derivative financial assets Derivative financial liabilities 106 2015 Level 1 $m Level 2 $m Level 3 $m Total $m 1,149 - - 1,149 - 1,149 1,669 1,940 225 3,834 (297) 3,537 2014 Level 1 $m Level 2 $m Level 3 $m 1,893 - - 1,893 - 1,893 1,962 2,473 160 4,595 (249) 4,346 2015 Level 1 $m Level 2 $m Level 3 $m 1,149 - - 1,149 - 1,149 1,838 1,940 162 3,940 (283) 3,657 9 - - 9 - 9 9 - - 9 - 9 9 - - 9 - 9 2,827 1,940 225 4,992 (297) 4,695 Total $m 3,864 2,473 160 6,497 (249) 6,248 Total $m 2,996 1,940 162 5,098 (283) 4,815 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.7. Financial instruments (continued) (d) Fair value hierarchy (continued) Bank Instruments carried at fair value Available-for-sale financial assets Financial assets designated at fair value through profit and loss Derivative financial assets Derivative financial liabilities 2014 Level 1 $m Level 2 $m Level 3 $m Total $m 1,255 - - 1,255 - 1,255 2,085 2,473 132 4,690 (207) 4,483 9 - - 9 - 9 3,349 2,473 132 5,954 (207) 5,747 (e) Master netting or similar arrangements There have been no financial assets or financial liabilities offset in the balance sheets. The Consolidated Entity has netting arrangements in place with counter parties on Derivative Financial Instruments and the effects of these netting arrangements if they were to be applied in the balance sheets has been disclosed at Section 3.8(b). (f) Impairment of financial instruments policy Financial assets other than loans and advances at amortised cost The Consolidated Entity assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets, not carried at fair value through profit and loss, is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flow of that asset that can be estimated reliably. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss in the Income Statement - is reclassified from equity and recognised in profit or loss in the Income Statement as a reclassification adjustment. Impairment losses recognised in profit or loss in the Income Statement on equity instruments classified as available-for-sale are not reversed through the profit or loss in the Income Statement. For available-for-sale debt securities, if any increase in the fair value can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed through profit of loss in the Income Statement. Loans and advances and other assets at amortised cost If there is evidence of impairment for any of the Consolidated Entity’s financial assets carried at amortised cost, the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, excluding future credit losses that have not been incurred. The cash flows are discounted at the financial asset’s original effective interest rate. The loss is recognised in profit or loss in the Income Statement. (i) Specific impairment provisions Impairment losses on individually assessed loans and advances are determined on a case-by-case basis. If there is objective evidence that an individual loan or advance is impaired, then a specific provision for impairment is raised. The amount of the specific provision is based on the carrying amount of the loan or advance, including the security held against the loan or advance and the present value of expected future cash flows. Any subsequent write-offs for bad debts are then made against the specific provision for impairment. (ii) Collective impairment provisions Where no evidence of impairment has been identified for loans and advances, these loans and advances are grouped together on the basis of similar credit characteristics for the purpose of calculating a collective impairment loss. Collective impairment provisions are based on historical loss experience adjusted for current observable data. The amount required to bring the collective provision for impairment to its required level is charged to profit or loss in the Income Statement. 107 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.8. Derivative Financial Instruments (a) Accounting for derivatives The Consolidated Entity and Bank used derivative financial instruments for both hedging and trading purposes in the current year. Refer to Section 3.6(a) for an explanation of the Consolidated Entity’s and Bank’s risk management framework.The Consolidated Entity uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operating, financing and investing activities. In accordance with its Treasury policy, the Consolidated Entity can hold derivative financial instruments for trading purposes. Derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at trade date fair value and are subsequently remeasured at fair value at the reporting date. The gain or loss on re-measurement is recognised immediately in profit or loss in the Income Statement. However, when derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the hedge relationship as discussed below. The fair value of interest rate swaps is the estimated amount that the Consolidated Entity would receive or pay to terminate the swap at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the reporting date, being the present value of the quoted forward price. The fair value of futures contracts is their quoted market price. Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability of the cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in other comprehensive income and accumulated in reserves in equity. The ineffective portion of any gain or loss is recognised immediately in profit or loss in the Income Statement. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains and losses that were recognised directly in other comprehensive income are reclassified into profit or loss in the Income Statement in the same period or periods in which the asset acquired or liability assumed affects the Income Statement (i.e. when interest income or expense is recognised). When a hedging instrument expires or is sold, terminated or exercised, or the Consolidated Entity revokes designation of the hedge relationship but if the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in other comprehensive income and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, then the cumulative unrealised gain or loss is recognised immediately in profit or loss in the Income Statement. Fair value hedges Where an effective hedge relationship is established, fair value gains or losses on the hedging instrument are recognised in profit or loss. The hedged item attributable to the hedged risk is carried at fair value with the gain or loss recognised in profit or loss. When a hedge relationship no longer meets the criteria for hedge accounting, the hedged item is accounted for under the effective interest method from that point and any accumulated adjustment to the carrying value of the hedged item from when it was effective is released to profit or loss over the period to when the hedged item will mature. Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any foreign currency gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated in reserves in equity. To the extent the hedge is ineffective, a portion is recognised immediately in the Income Statement within other income or other expenses. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the Income Statement and are included in other income. The Bank has not designated any hedges as fair value hedges. (b) Master netting or similar arrangements The Consolidated Entity enters into derivative transactions under International Swaps and Derivatives Association (ISDA) master netting agreements. Amounts owed by each counterparty are aggregated into a single net amount that is payable by one party to another. The Consolidated Entity receives and gives collateral in the form of cash in respect of derivatives and such collateral is subject to standard industry terms. The Consolidated Entity has not offset these amounts in the Balance Sheets as their ISDA agreements do not meet the criteria to do so. The Consolidated Entity has no current legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events. The Consolidated Entity normally settles on a net basis or realises the derivative assets and 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. 2015 Gross amounts as presented in the Balance Sheets Net amounts of recognised assets and liabilities if offset Cash collateral Net amounts if offsetting applied in the balance sheets 225 (297) (102) 102 (10) 162 113 (33) Consolidated Derivative financial assets Derivative financial liabilities 108 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.8. Derivative Financial Instruments (continued) (b) Master netting or similar arrangements (continued) Consolidated Derivative financial assets Derivative financial liabilities Bank Derivative financial assets Derivative financial liabilities Bank Derivative financial assets Derivative financial liabilities (c) Fair value of derivatives 2014 Gross amounts as presented in the Balance Sheets Net amounts of recognised assets and liabilities if offset Cash collateral Net amounts if offsetting applied in the balance sheets 160 (249) (84) 84 2015 - 51 76 (114) Gross amounts as presented in the Balance Sheets Net amounts of recognised assets and liabilities if offset Cash collateral Net amounts if offsetting applied in the balance sheets 162 (283) (102) 102 (10) 162 50 (19) 2014 Gross amounts as presented in the Balance Sheets Net amounts of recognised assets and liabilities if offset Cash collateral Net amounts if offsetting applied in the balance sheets 132 (207) (85) 83 - 51 47 (73) The following table summarises the notional and fair value of the Consolidated Entity’s and Bank’s commitments to derivative financial instruments at reporting date. Fair value in relation to derivative financial instruments is estimated using net present value techniques. The table below sets out the fair values of the derivative financial instruments at 31 August 2015. Consolidated 2014 Fair Value Asset / (Liability) Asset $m Liability $m Derivatives at fair value through income statement Interest Rate Swaps Foreign Exchange Forwards Futures Derivatives held as cash flow hedges Interest Rate Swaps Cross Currency Swaps Foreign Exchange Forwards 2015 Notional Amount Fair Value Asset / (Liability) $m 16,023 249 15,331 31,603 35,243 421 344 36,008 Asset $m Liability $m 22 7 6 35 111 70 9 190 (15) (6) - (21) (125) (15) - (140) Notional Amount $m 21,491 261 12,720 34,472 29,513 578 387 24 1 5 30 99 30 1 30,478 130 (11) (2) - (13) (174) (44) (18) (236) 109 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.8. Derivative Financial Instruments (continued) (c) Fair value of derivatives (continued) Derivatives designated as fair value hedges Interest Rate Swaps Derivatives designated as net investment hedges Foreign Exchange Forwards Consolidated 2015 Notional Amount Fair Value Asset / (Liability) $m Asset $m Liability $m Notional Amount $m 2014 Fair Value Asset / (Liability) Asset $m Liability $m 835 29 - - (136) - - 17 - - - - 68,475 225 (297) 64,967 160 (249) Bank 2015 2014 Notional Amount Fair Value Asset / (Liability) Notional Amount Fair Value Asset / (Liability) Derivatives at fair value through income statement Interest Rate Swaps Foreign Exchange Forwards Futures Derivatives held as cash flow hedges Interest Rate Swaps Cross Currency Swaps Foreign Exchange Forwards Derivatives designated as fair value hedges $m 16,023 278 15,331 31,632 34,877 153 344 35,374 Asset $m Liability $m $m Asset $m Liability $m 22 7 6 35 110 8 9 127 (15) (6) - (21) (119) (7) - 20,916 423 12,720 34,059 29,513 159 387 (126) 30,059 24 2 5 31 99 - 2 101 (4) (1) - (5) (174) (10) (18) (202) Interest Rate Swaps 835 - (136) - - - 67,841 162 (283) 64,118 132 (207) 110 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.9. Capital management The Bank and Consolidated Entity’s capital management strategy aims to ensure adequate capital levels are maintained to protect deposit holders and to maximise shareholder return. The Bank’s capital is measured and managed in line with Prudential Standards issued by APRA. The capital management plan is updated annually and submitted to the Board for approval. The approval process is designed to ensure the plan is consistent with the overall business plan and for managing capital levels on an ongoing basis. The Board has set the Common Equity Tier 1 capital target range to be between 8.0% and 9.0% of risk weighted assets and the total capital range to be between 11.5% and 12.5% of risk weighted assets. As at August 2015: • • Common Equity Tier 1 capital was 8.9%; and Total capital adequacy ratio was 12.7%. Qualifying capital Common Equity Tier 1 Capital Paid-up ordinary share capital Reserves Retained profits, including current year profits Total Common Equity Tier 1 Capital Regulatory adjustments Goodwill and intangibles Deferred expenditure Other deductions Total Regulatory adjustments Net Common Equity Tier 1 Capital Additional Tier 1 Capital Net Tier 1 Capital Tier 2 Capital Tier 2 Capital General Reserve for Credit Losses Net Tier 2 Capital Capital Base Risk Weighted Assets Capital Adequacy Ratio Prepared in accordance with APS 110. Consolidated 2015 $m 3,122 36 254 3,412 (848) (142) (76) (1,066) 2,346 450 2,796 324 227 551 3,347 26,321 12.7% 2014 $m 3,021 58 207 3,286 (825) (122) (178) (1,125) 2,161 300 2,461 340 208 548 3,009 25,032 12.0% 111 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 3.10. Capital and reserves (a) Ordinary shares Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share rights are recognised as a deduction from equity, net of any tax effects. Treasury shares Ordinary shares of the Bank may be purchased from time to time by a subsidiary of the Bank authorised to do so under the Bank’s Award Rights Plan. Where these shares remain unvested to employees they are treated as treasury shares and deducted from capital as required by AASB 132 Financial Instruments: Presentation and Disclosure. No profit or loss is recorded on purchase, sale, issue or cancellation of these shares. Consolidated Bank 2015 Number 2014 Number 2015 Number 2014 Number Movements during the year Balance at the beginning of the year – fully paid 362,516,835 319,810,294 362,516,835 319,810,294 Dividend reinvestment plan BOQ Specialist Bank Limited (1) Issues of ordinary shares (2) 7,351,941 5,437,296 7,351,941 5,437,296 - 37,269,245 - 37,269,245 900,000 - 900,000 - Balance at the end of the year – fully paid 370,768,776 362,516,835 370,768,776 362,516,835 Treasury shares (included in ordinary shares above) Balance at the beginning of the year Net acquisitions and disposals during the year Balance at the end of the year 297,579 191,936 489,515 162,371 135,208 297,579 - - - 29,851 (29,851) - (1) In the prior year, the Bank acquired 100% of BOQ Specialist Bank Limited formerly Investec Bank (Australia) Limited. $210 million of the consideration was financed through the issue of new shares by way of Institutional Entitlement and Retail Entitlement offers. (2) On 24 October 2014, the Bank issued 900,000 ordinary shares at $12.29 to the trustee of the BOQ Employee Share Plans Trust to satisfy the exercise of award rights and issue of shares under the Award Rights Plan and issue of shares under the BOQ Restricted Share Plan and BOQ Employee Share Plan. Terms and conditions Holders of ordinary shares are entitled to receive dividends as determined from time to time and are entitled to one vote per share at shareholders’ meetings. In the event of winding up of the Bank, ordinary shareholders rank after preference shareholders and creditors and are fully entitled to any residual proceeds of liquidation. (b) Nature and purpose of reserves Employee benefits reserve The employee equity benefits reserve is used to record the value of share based payments provided to employees, including key management personnel, as part of their remuneration. Refer to Section 6.1 for further details of these plans. Equity reserve for credit losses Refer to significant accounting policies Section 6.10 (g). Available-for-sale reserve Changes in the fair value of investments, such as bonds and floating rate notes classified as available-for-sale financial assets, are recognised in other comprehensive income as described in Section 3.7 (a)(ii) and accumulated in a separate reserve within equity. Amounts are reclassified to profit or loss when the associated assets are sold or impaired. Cash flow hedge reserve The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised in other comprehensive income, as described in Section 3.8 (a). Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss. 112 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 SECTION 4. OTHER ASSETS AND LIABILITIES 4.1. Intangible assets Consolidated Customer related intangibles and brands $m Computer software $m Bank Other $m Total $m Goodwill $m Customer contracts $m Computer software $m Other $m Total $m Cost Balance as at 1 September 2013 Additions (1) Disposals Balance as at 31 August 2014 Balance as at 1 September 2014 Additions Disposals Balance as at 31 August 2015 Amortisation and impairment losses Balance as at 1 September 2013 Amortisation for the year Disposals Balance as at 31 August 2014 Balance as at 1 September 2014 Amortisation for the year Disposals Impairment Balance as at 31 August 2015 Carrying amounts Carrying amount as at 1 September 2013 Carrying amount as at 31 August 2014 Carrying amount as at 31 August 2015 Goodwill $m 488 187 - 675 107 23 - 130 675 130 - - - - 675 130 - - - - - - - - - 488 675 675 74 10 - 84 84 11 - - 95 33 46 35 231 56 (5) 282 282 59 (31) 310 163 15 (1) 177 177 17 (29) 10 175 68 105 135 9 1 - 835 267 (5) 10 1,097 10 3 - 13 6 2 - 8 8 2 - - 10 3 2 3 1,097 62 (31) 1,128 243 27 (1) 269 269 30 (29) 10 280 592 828 848 8 - - 8 8 - - 8 - - - - - - - - - 8 8 8 5 - - 5 5 - - 5 5 - - 5 5 - - - 5 - - - 219 47 (4) 262 262 55 (29) 288 157 13 (1) 169 169 15 (29) 10 165 62 93 123 4 1 - 5 5 3 - 8 3 1 - 4 4 2 - - 6 1 1 2 236 48 (4) 280 280 58 (29) 309 165 14 (1) 178 178 17 (29) 10 176 71 102 133 (1) Prior year balances have been restated. Refer to Section 1.4. Initial recognition and measurement Intangible assets are stated at cost less any accumulated amortisation and any impairment losses. Expenditure on internally generated goodwill, research costs and brands is recognised in the Income Statement as an expense as incurred. 113 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 4.1. Intangible assets (continued) Subsequent expenditure Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Consideration transferred included the fair values of the assets transferred, liabilities incurred by the Consolidated Entity to the previous owners of the acquired entity, and equity interests issued by the Consolidated Entity. Amortisation Except for Goodwill, amortisation is charged to profit and loss in the income statement on a straight-line basis over the estimated useful life of the intangible asset unless the life of the intangible asset is indefinite. Where applicable, intangible assets are amortised from the date they are available for use. The amortisation period and method are reviewed on an annual basis. The amortisation rates used in the current and comparative periods are as follows: Computer software Customer related intangibles and brands Impairment Years 3-15 3-12 As part of the Bank’s periodic assessment of the carrying value of intangible assets, impairment indicators were identified with respect to specific internally generated software development projects. These projects focused on customer relationship management with the impairment indicators identified being the failure of the projects to meet operational and regulatory requirements. As a result, detailed reviews were conducted and the recoverable amounts ascertained were lower than the carrying amount. The recoverable amount of nil was determined at an individual asset level and based on value in use. The Bank has subsequently raised an impairment of $10 million, which has been recognised in the profit and loss in the current reporting period. Goodwill Goodwill is the excess of the cost of acquisition over the fair value of the Bank’s share of the identifiable net assets of the acquired subsidiary. Any goodwill is tested annually for impairment, with any impairment taken directly to the profit or loss in the Income Statement. Consideration transferred included the fair values of the assets transferred, liabilities incurred by the Consolidated Entity to the previous owners of the acquired entity, and equity interests issued by the Consolidated Entity. The aggregate carrying amounts of goodwill are: BOQ Equipment Finance Limited Orix debtor finance division Pioneer Permanent Pty Ltd BOQ Home Limited Virgin Money (Australia) Pty Limited BOQ Specialist (Aust) Limited (formerly BOQ Specialist Bank Limited) (1) (1) Prior year balances have been restated. Refer to Section 1.4. Impairment testing of the cash generating units containing goodwill Consolidated Bank 2015 $m 2014 (1) $m 2015 $m 2014 $m 13 8 24 400 43 187 675 13 8 24 400 43 187 675 - 8 - - - - 8 - 8 - - - - 8 Goodwill on acquisition of all of the above entities has been allocated to the Banking cash generating unit (“CGU”). The impairment test for goodwill is performed by comparing the CGU’s carrying amount with its recoverable amount. The recoverable amount is based on the CGU’s value in use. The excess of the recoverable amount over the carrying amount was $1,231 million (2014: $641 million). Value in use was determined by discounting the future cash flows generated from the continued use of the CGU. The values assigned to the key assumptions represent management’s assessments of future trends in retail banking and are based on both external and internal sources. Below are the key assumptions used in determining value in use: • Cash flows were initially based on the banking segment’s 5 year projections (2014: 3 years); • Subsequent cash flows were extrapolated beyond the 5 year projections at a medium term growth rate of 5% (2014: 9%); • An exit value has been calculated at the end of year 10 based on a terminal earnings multiple of 12.0 (2014: 11.7) and a long term growth rate of 3% (2014: 3%); and • A pre-tax discount rate of 14.3% (2014: 15.8%) was used. 114 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 4.2. Provisions A provision is recognised in the Balance Sheet when the Consolidated Entity has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability. The carrying amounts of the provisions recognised are: Employee benefits (1) Leases Product Review (2) Provision for non-lending loss (3) Other (4) Total Consolidated Bank 2015 $m 2014 $m 2015 $m 2014 $m 23 3 3 25 8 62 22 5 36 34 7 104 20 2 3 25 - 50 15 3 36 34 - 88 (1) Employee benefits provisions consist of annual leave and long service leave entitlements for employees. (2) Product review provision for customer refunds and review costs. (3) Included within the Non-lending losses provision is $21.4m (2014: $31.5m) in respect of the Storm Financial settlement. On 22 September 2014, the Bank announced an agreement to settle the outstanding Storm Financial proceedings which had been brought against the Bank by the Australia Securities and Investment Commission (ASIC) and a class action on behalf of borrowers advised by Storm Financial. On 16 December 2014 the Federal Court approved the deed of settlement between the Bank and the lead applicants. This settlement concluded the legal proceedings of both the outstanding Storm Financial proceedings against the Bank. The Bank has commenced the payment of settlement amounts during the financial year. (4) Other provisions relate to insurance claims reserves. Movements in provisions Movements in each class of provision during the year, other than employee benefits, are as follows: 2015 Carrying amount at beginning of year Additional provision recognised Amounts utilised during the year Transfers from BOQ Specialist Limited Carrying amount at end of year Consolidated Bank Leases $m Product Review $m Non-lending loss Other $m Leases $m Product Review $m Non-lending loss Other $m 5 3 (5) - 3 36 - (33) - 3 34 4 (13) - 25 7 2 (1) - 8 3 2 (3) - 2 36 - (33) - 3 33 4 (13) 1 25 - 1 (1) - - 115 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 SECTION 5. INSURANCE BUSINESS 5.1. Insurance business (a) Basis of preparation The effective date of the actuarial report on life insurance policy liabilities and regulatory capital requirements is 31 August 2015. The actuarial report was prepared by Mr Wayne Kenafacke, Fellow of the Institute of Actuaries of Australia. This report indicates that Mr Kenafacke is satisfied as to the accuracy of the data upon which policy liabilities have been determined. The amount of policy liabilities have been determined in accordance with methods and assumptions disclosed in this financial report and the requirements of applicable accounting standards. Specifically, policy liabilities for life insurance contracts and general insurance contracts are determined in accordance with AASB 1038 Life Insurance Contracts and AASB 1023 General Insurance Contracts respectively, and LPS: 340 Valuation of Policy Liabilities. These require policy liabilities to be calculated in a way which allows for the systematic release of planned margins as services are provided to policyholders and premiums are received. Accumulation methods have been used to estimate the policy liabilities, as the provision for unearned premium reserve less a deferred acquisition cost component. Outstanding claims liabilities and Incurred But Not Reported (IBNR) liabilities are included in provisions. Premium earning pattern For single premium products, the Unearned Premium Reserve (“UPR”) is based on a premium earning pattern that is similar to the pattern of expected future claim payments. The future claim payments are based on an assessment of the future sum insured (e.g. outstanding loan balances for mortgage and loan protection) and future claims frequencies. Past experience is used to set these assumptions. This earning pattern is also used to recognise commissions incurred. For regular premium products, the UPR is based on the unearned proportion of premium for the given premium payment frequency. Mortality and morbidity Mortality and morbidity assumptions used in determining IBNR, pending and continuing claims provisions have been based on the experience of similar products issued by the Company and recent experience. The disputed claims provision is based on individual claim estimates and an assumed 50% probability of disputed claims being incurred. (b) Processes used to determine actuarial assumptions Sensitivity analysis As a result of using an accumulation approach in the determination of policy liabilities, changes of assumptions will not affect the policy liabilities in the current period. As at 31 August 2015, no Related Product Groups were in loss recognition. Changes in the underlying variables and assumptions will give rise to a difference in the emergence of profit margins in the future. Changes in assumptions relating to claims provisions would affect policy liabilities in the current period. Variable Impact of movement in underlying variable Mortality rates Morbidity rates For contracts providing death benefits, greater mortality rates would lead to higher levels of claims occurring sooner than anticipated, increasing associated claims cost and therefore reducing profit and shareholder’s equity. The cost of disability related claims depends on both the incidence of policyholders becoming disabled and the duration which they remain so. Higher than expected incidence and duration would be likely to increase claim costs, reducing profit and shareholder equity. 116 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 5.1. Insurance business (continued) (c) Reconciliation of movements Reconciliation of movements in insurance policy liabilities Life Insurance contract policy liabilities Gross life insurance contract liabilities at the beginning of the financial year Decrease in life insurance contract policy liabilities (i) Gross life insurance contract liabilities at the end of the financial year Liabilities ceded under reinsurance Opening balance at the beginning of the financial year Decrease in life reinsurance assets (ii) Closing balance at the end of the financial year Net life policy liabilities at the end of the financial year (i) plus (ii) = change in life insurance contract liabilities reflected in the Income Statement Components of net life insurance contract liabilities Future policy benefits Future charges for acquisition costs Total net life insurance contract policy liabilities Components of general insurance liabilities Unearned Premium Liability Outstanding Claims Liability Total Insurance Policy Liabilities 2015 $m 2014 $m 52 (20) 32 (2) 1 (1) 31 (19) 55 (24) 31 8 2 10 41 61 (9) 52 (2) - (2) 50 (9) 76 (26) 50 12 1 13 63 Note: Future policy benefits include the unearned premium components of the liability. The accumulation method has been used to calculate policy liabilities and components relating to expenses and profits are not separately calculated. 117 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 5.1. Insurance business (continued) (d) Life Insurance Regulatory Capital requirements (continued) The regulatory capital requirement of each fund and for the subsidiary in total is the amount required to be held in accordance with LPS 110: Capital Adequacy. These are amounts required to meet the prudential standards prescribed by the Life Insurance Act 1995 to provide protection against the impact of fluctuations and unexpected adverse circumstances on the life company. The methodology and bases for determining the Capital Base and regulatory capital requirements are in accordance with relevant Prudential Requirements. 2015 2014 Statutory Fund No. 1 $m Shareholders’ Fund $m Statutory Fund No. 1 $m Shareholders’ Fund $m 2015 $m 29 (9) 20 1 2 3 17 7 29 (9) 20 3 7 10 10 2 2014 $m 1 - 1 - - - 1 88 30 (9) 21 3 7 10 11 2 Capital Base Net Assets Add / (subtract) regulatory adjustments to Net Assets Total capital base Asset risk charge Operational risk charge Total prescribed capital amount Assets in excess of prescribed capital amount Capital adequacy multiple 28 (9) 19 1 2 3 16 6 1 - 1 - - - 1 60 Composition of capital Base Common equity tier 1 capital Subtract regulatory adjustments to common equity tier 1 capital Total capital base Prescribed Capital Amount Statutory Fund No. 1 Additional amount to meet company minimum Total prescribed capital amount Assets in excess of prescribed capital amount Capital adequacy multiple 118 ANNUAL REPORT 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 5.1. Insurance business (continued) (d) Life Insurance Regulatory Capital requirements (continued) Disaggregated information life insurance (before consolidation adjustments) Summarised Statement of Profit and Loss and Other Comprehensive Income 2015 $m 2014 $m Revenue Life insurance premium revenue Investment income Net life insurance revenue Expenses Net claims and other liability expense from insurance contracts Other expenses Profit before income tax Income tax expense Profit after income tax Statement of Sources of Profit for Statutory Funds Operating profit after income tax arose from: Components of profit related to movement in life insurance liabilities: Planned margins of revenues over expenses released Difference between actual and assumed experience Investment earnings on assets in excess of life insurance policy liabilities and provision Summarised Balance Sheet Assets Investment assets Other assets Liabilities Net life insurance liabilities Liabilities other than life insurance liabilities Issued capital, reserves and retained profits Directly attributable to shareholders The life insurance business has no life investment contracts. 41 3 44 18 5 23 21 (6) 15 15 (1) 1 82 3 85 28 28 56 29 29 56 4 60 27 5 32 28 (9) 19 17 1 1 99 2 101 47 24 71 30 30 119 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 5.1. Insurance business (continued) (e) Accounting policy The life insurance operations of the Consolidated Entity are conducted within separate funds as required by the Life Insurance Act 1995 and is reported in aggregate with the Shareholders’ Fund in the Income Statement, Balance Sheet and Statement of Cash Flows of the Consolidated Entity. The life insurance operations of the Consolidated Entity comprise the selling and administration of life insurance contracts. Life insurance contracts involve the acceptance of significant insurance risk. Insurance risk is defined as significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction). Any products sold that do not meet the definition of a life insurance contract are classified as life investment contracts. Insurance contracts include those where the insured benefit is payable on the occurrence of a specified event such as death, injury or disability caused by accident or illness. The insured benefit is either not linked or only partly linked to the market value of the investments held by the Consolidated Entity, and the financial risks are substantially borne by the Consolidated Entity. Monies held in the statutory fund are subject to distribution and transfer restrictions and other requirements of the Life Insurance Act 1995. Under AASB 1038, the financial statements must include all assets, liabilities, revenues, expenses and equity, irrespective of whether they are designated as relating to shareholders or policy owners. Therefore, the Consolidated Entity’s financial statements comprise the total of all statutory funds and the Shareholders’ Fund. Insurance contract liability Profits of the insurance contract business are brought to account on a Margin on Services (“MoS”) basis in accordance with guidance provided by LPS 340: Valuation of Policy Liabilities as determined by APRA. Under MoS, profit is recognised as fees are received and services are provided to policyholders. When fees are received but the service has not been provided, the profit is deferred. Losses are expensed when identified. Consistent with the principle of deferring unearned profit is the requirement to defer expenditure associated with the deferred profit. MoS permits costs associated with the acquisition of policies to be charged to profit or loss in the Income Statement over the period that the policy will generate profits. Costs may only be deferred to the extent that a policy is expected to be profitable. Profit arising from life insurance is based on actuarial assumptions, and calculated as the excess of premiums and investment earnings less claims, operating expenses and the amortisation of acquisition costs that will be incurred over the estimated life of the policies. The profit is systematically recognised over the estimated time period the policy will remain in force. Under MoS, insurance contract liabilities may be valued using an accumulation approach where this does not result in a material difference to the projection approach. The accumulation approach is deemed appropriate by the Directors and the appointed actuary. Under this approach, premiums received are deferred and earned in accordance with the underlying incidence of risk. Costs of acquiring insurance contracts, both direct and indirect, are deferred to the extent that related product groups are expected to be profitable. Where a related product group is not expected to be profitable, the insurance contract liability is increased by the excess of the present value of future expenses over future revenues. Revenue Recognition Premiums in respect of life insurance contracts are recognised as revenue in the Income Statement from the date of attachment of risk. Premiums with no due date are recognised as revenue on a cash basis. Premiums with a regular due date are recognised as revenue on an accruals basis. Unpaid premiums are only recognised as revenue during the days of grace or where secured by the surrender value of the policy and are included in the intergroup balance in the Balance Sheet. Investment income is recognised on an accruals basis. Realised and unrealised gains and losses are included in the Income Statement as investment income. Claims expense – insurance contracts Claims incurred all relate to the provision of services, including the bearing of risks, and are treated as expenses. Claims are recognised when the liability to the policyholder under the policy contract has been established. Claims recognition is based upon: • • cost estimates for losses reported to the close of the financial year; and estimated incurred, but not reported losses, based upon past experience. Deferred acquisition costs - Life insurance contracts The fixed and variable costs of acquiring new life insurance business are deferred to the extent that such costs are deemed recoverable from future premiums or policy charges. These costs include commission, policy issue and underwriting costs, certain advertising costs and other sales costs. Acquisition costs deferred are limited to the lesser of the actual costs incurred and the allowance for the recovery of such costs in the premium or policy charges. The actual acquisition costs incurred are recorded in profit or loss in the Income Statement. The value and future recovery of these costs are assessed in determining policy liabilities. This has the effect that acquisition costs are deferred within the policy liability balance and amortised over the period that they will be recovered from premiums or policy charges. 120 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 5.1. Insurance business (continued) (e) Accounting policy (continued) Critical Accounting Judgements and Estimates: The Consolidated Entity’s insurance subsidiaries make estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas where critical accounting judgements and estimates are applied are noted below. Policy liabilities Policy liabilities for life insurance contracts are computed using statistical or mathematical methods, which are expected to give approximately the same results as if an individual liability was calculated for each contract. The computations are made by suitably qualified personnel on the basis of recognised actuarial methods, with due regard to relevant actuarial principles. The methodology takes into account the risks and uncertainties of the particular classes of life insurance business written. The key factors that affect the estimation of these liabilities and related assets are: • • • The cost of providing benefits and administering these insurance contracts; Mortality and morbidity experience on life insurance products, including enhancements to policyholder benefits; and Discontinuance experience, which affects the Bank’s ability to recover the cost of acquiring new business over the lives of the contracts. In addition, factors such as regulation, competition, interest rates, taxes, securities market conditions and general economic conditions affect the level of these liabilities. 121 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 SECTION 6. OTHER NOTES 6.1. Employee benefits (a) Superannuation commitments Superannuation plan The Bank contributes to a number of defined contribution superannuation plans which comply with the Superannuation Industry (Supervision) Act 1993. Contributions are charged to profit or loss in the Income Statement as they are made. Basis of contributions Employee superannuation contributions are based on various percentages of employees’ gross salaries. The Consolidated Entity’s contributions are also based on various percentages of employees’ gross salaries. The Consolidated Entity is under no legal obligation to make superannuation contributions except for the minimum contributions required under the Superannuation Guarantee Legislation. During the year, employer contributions were made, refer to Section 2.2. (b) Share based payments The Consolidated Entity currently operates an Award Rights Plan for equity-settled compensation. The plan allows Consolidated Entity employees to acquire shares in the Bank. The fair value of rights granted is recognised as an employee expense with a corresponding increase to the Employee Benefits Reserve. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the rights. The fair value of the rights granted is measured using industry accepted pricing methodologies, taking into account the terms and conditions upon which the rights are granted. The fair value of the rights is expensed over the vesting period. Where rights do not vest due to failure to meet a non market condition (e.g. employee service period) the expense is reversed. Where rights do not vest due to failure to meet a market condition (e.g. Total Shareholder Return test) the expense is not reversed. (i) Description of share based payments Long-Term Incentives - Award Rights The Award Rights Plan was approved by shareholders on 11 December 2008. It is an equity based program under which Award Rights are granted as long-term incentives. The two types of award rights currently granted to executives under the plan are PARs and DARs. No amount is payable by employees for the grant or exercise of these award rights. PARs PARs have a vesting framework based on TSR of the Bank as measured against a Peer Group over a 2 to 3 year period. That Peer Group consists of the S&P / ASX 200 from time to time excluding selected entities in resources, real estate investment trusts, telecommunications (offshore headquartered), energy and utilities and such other inclusions and exclusions as the Board considers appropriate. TSR is a measure of the entire return a shareholder would obtain from holding an entity’s securities over a period, taking into account factors such as changes in the market value of the securities and dividends paid over the period. One half of an employee’s PARs will vest if the Bank’s TSR performance over the three year period is in the top 50% of the Peer Group. All of the PARs vest if the Bank’s TSR performance is in the top 25%. For TSR performance between those targets, a relative proportion of the PARs between 50% and 100% would vest. Vested PARs are generally exercisable within 5 years after they are granted (approximately 2 years after vesting). DARs There are no market performance hurdles or vesting conditions for DARs but the holder must remain an employee of the Bank. Vested DARs are generally exercisable within 5 years after they are granted (approximately 2 to 4 years after vesting). Restricted Shares The Consolidated Entity has used shares with restrictions on disposal as a non-cash, share based component of both short term and long term incentive awards. (ii) Award rights on issue The number of award rights and restricted shares on issue is as follows: Deferred Award Rights Performance Award Rights Restricted Shares 2015 ’000 941 621 (122) (354) 1,086 2014 ’000 1,029 408 (39) (457) 941 2015 ’000 2,198 809 (223) (271) 2,513 2014 ’000 1,462 904 (90) (78) 2,198 2015 ’000 2014 ’000 197 163 - (98) 262 29 198 - (30) 197 Balance at beginning of the year Granted during the year Forfeited / expired during the year Exercised during the year Outstanding at the end of the year 122 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.1. Employee benefits (continued) (b) Share based payments (continued) (iii) Measurement of fair values The fair value of the PARs and DARs has been measured using the trinomial pricing methodology. Restricted shares have been valued based on the volume weighted average price of ordinary shares in BOQ sold on the ASX during a 10 day trading period. The shares vest on the respective expiry dates and meeting certain service conditions. The weighted average of the inputs used in the measurements at grant date of the long-term incentive award rights were as follows: Fair value at grant date Share price at grant date Expected volatility Risk free interest rate Dividend yield 6.2. Commitments (a) Lease commitments Deferred award rights Performance award rights Restricted shares 2015 $9.28 $10.57 30.4% 2.7% 6.3% 2014 $7.64 $8.82 36.5% 2.9% 7.1% 2015 $5.28 $10.11 28.1% 2.8% 5.8% 2014 $5.00 $9.08 31.7% 2.9% 6.2% 2015 $11.65 $11.65 23.8% 2.7% 5.0% 2014 $11.43 $11.43 25.2% 2.8% 5.0% Consolidated Bank 2015 $m 2014 $m 2015 $m 2014 $m Future rentals in respect of operating leases (principally in respect of premises) not provided for in these financial statements comprise amounts payable: Within 1 year Between 1 year and 5 years Later than 5 years (b) Customer funding commitments Guarantees, indemnities and letters of credit Customer funding commitments 39 81 90 210 287 1,211 1,498 40 91 99 230 252 1,646 1,898 39 81 90 210 287 337 624 35 87 99 221 227 797 1,024 In the normal course of business the Bank makes commitments to extend credit to its customers. Most commitments either expire if not taken up within a specified time or can be cancelled by the Bank within one year. Credit risk is significantly less than the notional amount and does not crystallise until a commitment is funded. Guarantees are provided to third parties on behalf of customers. The credit risks of such facilities are similar to the credit risks of loans and advances. 123 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.3. Contingent liabilities While no proceedings have been brought against the Bank, there is the potential that proceedings may be brought against the Bank arising from the affairs of the Sherwin group of companies, including Wickham Securities Limited (in Liquidation), Sherwin Financial Planners Pty Ltd (in Liquidation), DIY Superannuation Services Pty Ltd (in Liquidation) and certain of their related entities, with respect to the operation of some of the Bank’s Money Market Deposit Accounts. It is currently not practicable for the Bank to provide an estimate of any liability in relation to any proceedings as no proceedings have been brought against the Bank. 6.4. Related parties information (a) Controlled entities Details of interests in material controlled entities are set out in Section 6.5. During the year there have been transactions between the Bank and all of its controlled entities. The Bank conducted normal banking business with its operating controlled entities. Amounts owing to or from controlled entities do not attract interest, except in respect of BOQ Equipment Finance Limited, St Andrew’s Australia Services Pty Ltd, BOQ Finance (Aust) Ltd, BOQ Finance (NZ) Ltd, Dell Financial Services Pty Ltd, and Virgin Money (Australia) Pty Limited where interest is charged on normal terms and conditions. The Bank receives management fees from B.Q.L. Management Pty. Ltd. and BOQ Equipment Finance Limited. The Bank has a related party relationship with equity accounted joint ventures, refer to Section 6.7. (b) Key management personnel compensation Key management personnel have authority and responsibility for planning, directing and controlling the activities of the Bank and the Consolidated Entity, including Directors and other executives. Key management personnel compensation included in ‘administrative expenses’ and ‘employee expenses’ (refer to Section 2.2) is as follows: Short-term employee benefits Post-employment benefits Long term employee benefits Termination benefits Share based employment benefits Consolidated and Bank 2015 $ 2014 $ 8,694,677 9,599,506 298,656 30,694 762,892 4,001,545 13,788,464 298,792 25,703 - 5,192,081 15,116,082 Individual Directors and executives compensation disclosures Information regarding individual Directors and executives compensation and some equity instruments disclosures as permitted by Corporations Regulation 2M.3.03 is provided in the Remuneration Report section of the Directors’ report. Apart from the details disclosed in the Remuneration Report, no Director has entered into a material contract with the Bank since the end of the previous financial year and there were no material contracts involving Directors’ interest existing at year end. 124 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.4. Related parties information (continued) (c) Other financial instrument transactions with key management personnel and personally-related entities A number of key management personnel or their related parties hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. Financial instrument transactions with key management personnel and personally-related entities during the financial year arise out of the provision of banking services, the acceptance of funds on deposit, the granting of loans and other associated financial activities. The terms and conditions of the transactions with key management personnel and their related parties were no more favourable than those available, or which might reasonably be expected to be available on similar transactions to non-Director related entities on an arm’s length basis. The following are transactions undertaken between the Consolidated Entity and key management personnel as at 31 August 2015: Balance as at For the period (1) 1 September 2014 (2) $ 31 August 15 $ Total Loan Repayments $ Total Loan Redraws / Further Advances $ Total Loan / Overdraft interest $ Total Fees on Loans / Overdraft $ Term Products (Loans / Advances) (1,479,341) (2,535,149) 1,177,622 1,278,465 62,105 360 Balance as at For the period (1) 1 September 2013 $ 31 August 14 $ Total Loan Repayments $ Total Loan Redraws / Further Advances $ Total Loan / Overdraft interest $ Total Fees on Loans / Overdraft $ Term Products (Loans / Advances) (2,292,172) (3,619,345) 791,954 (1,965,439) (153,368) (320) (1) Amounts are included only for the period that the Director / Executive is classified as a member of the key management personnel. (2) Balance as at 1 September 2014 will not equal 31 August 2014 closing balance due to changes in key management personnel during the year. Other transactions Transactions between the Consolidated Entity and key management personnel (other than loans/advances and shares) during the financial year related to personal banking, investment and deposit transactions. These transactions are considered trivial or domestic in nature, were on normal commercial terms and conditions and in the ordinary course of business. On 26 May 2015, the Bank issued 15,000 Wholesale Capital Notes at a price of $10,000 per note. Details of those notes issued to BOQ Directors are set out below: Roger Davis David Willis Total Balance at 31 August 2015 $ Interest receivable $ Highest balance during the year $ 200,000 70,000 270,000 2,452 858 3,310 202,452 70,858 273,310 Transactions between the Consolidated Entity and other related parties of key management personnel relate to loans on normal commercial terms and conditions. Details of loans outstanding at the reporting date to other related parties of Directors and Senior Executives are as follows: 2015 Interest paid and payable during the year $ Balance at 1 September 2014 $ Balance at 31 August 2015 $ Highest balance during the year $ Balance at 1 September 2013 $ 2014 Interest paid and payable during the year $ Balance at 31 August 2014 $ Highest balance during the year $ Richard Haire Related Party 191,000 Jon Sutton Related Party - 9,149 3,023 191,000 147,448 191,777 150,000 191,000 9,148 191,000 191,777 - - - - 125 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.5. Controlled Entities (a) Particulars in relation to material controlled entities The Group’s principal subsidiaries at 31 August 2015 are set out below. Unless otherwise stated, they have share capital consisting solely of ordinary shares that are held directly by the Group. The Bank owns 100% of all subsidiaries with nil ownership interest held by non-controlling interests. The country of incorporation or registration is also their principal place of business. Place of business/country of incorporation Parent entity’s interest Amount of investment (at cost) Principal activities 2015 % 100% 100% 100% 100% 100% 100% - - 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2014 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Controlled entities: B.Q.L. Management Pty. Ltd. B.Q.L. Nominees Pty. Ltd. B.Q.L. Properties Pty Ltd (1) Queensland Electronic Switching Pty Ltd BOQ Equipment Finance Limited St Andrew’s Australia Services Pty Ltd REDS Warehouse Trust No.1 REDS Warehouse Trust No.2 Series 2006-1E REDS Trust Series 2007-1E REDS Trust Series 2007-2 REDS Trust Series 2008-1 REDS Trust Series 2008-2 REDS Trust Series 2009-1 REDS Trust REDS Warehouse Trust No.3 Series 2010-1 REDS Trust Series 2010-2 REDS Trust Series 2012-1E EHP REDS Trust Series 2012-1E REDS Trust Series 2013-1 EHP REDS Trust Series 2013-1 REDS Trust Pioneer Permanent Pty Ltd (2) BOQ Home Pty Ltd (3) Home Financial Planning Pty Ltd Home Credit Management Pty Ltd (4) Statewest Financial Services Pty Ltd (5) Statewest Financial Planning Pty Ltd BOQ Share Plans Nominee Pty Ltd Bank of Queensland Limited Employee Share Plans Trust St Andrew’s Life Insurance Pty Ltd St Andrew’s Insurance (Australia) Pty Ltd BOQ Finance (Aust) Limited BOQ Credit Pty Limited BOQ Funding Pty Limited BOQ Finance (NZ) Limited Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Newcourt Financial (Australia) Pty Limited Australia (1) Entity was formerly known as B.Q.L Properties Limited. (2) Entity was formerly known as Pioneer Permanent Limited. (3) Entity was formerly known as BOQ Home Limited. (4) Entity was formerly known as Home Credit Management Limited. (5) Entity was formerly known as Statewest Financial Services Limited. 126 - 5 - - 15 - - - - - - - - - - - - - - - - 2015 $m 2014 $m - 5 - - Trust management Dormant Dormant Dormant 15 Asset Finance & Leasing - - - - - - - - - - - - - - - - Insurance Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Dormant Investment holding entity Dormant Investment holding entity Dormant Dormant Trust management Trust management Life Insurance General Insurance 60 600 60 600 - - - - - - - - - - - - - - - - 230 230 Asset Finance & Leasing - - 22 - - - 22 - Asset Finance & Leasing Asset Finance & Leasing Asset Finance & Leasing Dormant ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.5. Controlled Entities (continued) (a) Particulars in relation to material controlled entities (continued) Controlled entities: Dell Financial Services Pty Ltd (1) Hunter Leasing Pty Ltd (2) Virgin Money (Australia) Pty Limited Virgin Money Home Loans Pty Limited Virgin Money Financial Services Pty Ltd BOQ Specialist (Aust) Limited (3) BOQ Specialist Pty Ltd BOQ Asset Finance and Leasing Pty Ltd Impala Trust No. 1 Nyala Funding Trust CMBS 2013-1 Nyala Funding Trust No.1 Series 2014-1 EHP REDS Trust Series 2015-1 REDS Trust Place of business/ country of incorporation Parent entity’s interest Amount of investment (at cost) Principal activities Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 2015 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% 100% 2014 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - 2015 $m 2014 $m - - 43 - - - - 43 - - 567 552 1 - - - - - - - - - - - - - 1,543 1,527 Asset Finance & Leasing Dormant Financial services Dormant Financial services Professional Finance and Asset Finance & Leasing Professional Finance Asset Finance & Leasing Securitisation Securitisation Securitisation Securitisation Securitisation (1) Entity was formerly known as Equipment Rental Billing Services Pty Ltd. (2) Entity was formerly known as Hunter Leasing Limited. (3) Following the surrender of its Authorised Deposit-taking Institution license on 1 June 2014, this entity was renamed from BOQ Specialist Bank Limited to BOQ Specialist (Aust) Limited. (b) Significant restrictions In accordance with Prudential Standard APS 222 Associations with related entities, the Bank and its subsidiaries that form part of the Extended Licensed Entities are restricted from having unlimited exposures to related entities, including general guarantees. These related entities are as follows: • • • Virgin Money (Australia) Pty Limited; Virgin Money Home Loans Pty Limited; Virgin Money Financial Services Pty Ltd; • St Andrew’s Australia Services Pty Ltd; • St Andrew’s Life Insurance Pty Ltd; • St Andrew’s Insurance (Australia) Pty Ltd; • BOQ Specialist (Aust) Limited (Formerly BOQ Specialist Bank Limited); • BOQ Specialist Pty Ltd; and • BOQ Asset Finance and Leasing Pty Ltd. (c) Acquisition of controlled entities (i) Accounting for business combinations Acquisitions on or after 1 July 2009 The Consolidated Entity has adopted revised AASB 3 Business Combinations (2008 ) for business combinations occurring in the financial year starting 1 July 2009. All business combinations occurring on or after 1 July 2009 are accounted for by applying the acquisition method. The Consolidated Entity has also adopted AASB 10 Consolidated Financial Statements (2013) which has superseded AASB 127 Consolidated and Separate Financial Statements (as amended in 2008). For every business combination, the Group identifies the acquirer, which is the combining entity that obtains control of the other combining entities or businesses. The Group controls an entity if it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the investee. Contingent Liabilities A contingent liability of the acquiree is assumed in a business combination only if such a liability represents a present obligation and arises from a past event, and its fair value can be measured reliably. Transactions Costs Transaction costs that the Group incurs in connection with a business combination, such as a finders fee, legal fees, due diligence fees and other professional and consulting fees are expensed as incurred. 127 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.5. Controlled Entities (continued) (c) Acquisition of controlled entities (continued) (ii) Entities acquired during the prior year On 31 July 2014, the Bank acquired 100% of BOQ Specialist Bank Limited formerly known as the Professional Finance and Asset Finance & Leasing businesses of Investec Bank (Australia) Limited (Investec) for consideration of $210 million. The purchase was funded through a $400 million fully-underwritten, renounceable entitlement offer, as well as excess capital. BOQ Specialist (Aust) Limited (formerly BOQ Specialist Bank Limited) focuses on providing banking, advisory and investment products and services to a wide range of private, corporate and institutional clients. The Bank purchased BOQ Specialist (Aust) Limited for further diversification of the business and for the access to a niche market in Professional Finance. The net assets recognised in the 31 August 2014 Group financial statements were based on a provisional assessment of their fair value, while the Group finalised various matters impacting the acquisition accounting entries. Finalisation of provisional accounting resulted in the restatement of comparatives, which have been detailed at Section 1.4. Assets Cash and liquid assets Other financial assets Loans and advances at amortised cost Other assets Property, plant & equipment Intangible assets Deferred tax assets Total assets Liabilities Deposits Derivative financial instruments Accounts payable and other liabilities Borrowings including subordinated notes Deferred tax liabilities Total liabilities Net identifiable assets and liabilities Goodwill and other identifiable assets on acquisition Total Consideration Consideration paid, satisfied in cash Cash acquired Net cash outflow Recognised values on acquisition $m Pre-acquisition carrying amounts $m 52 545 2,504 13 - 29 11 52 544 2,508 13 3 - 1 3,154 3,121 (2,328) (2,326) (8) (43) (744) - (3,121) - (8) (43) (744) (8) (3,131) 23 187 210 210 (52) 158 BOQ Specialist (Aust) Limited (formerly BOQ Specialist Bank Limited) contributed $3.1 million to profit after tax of the Consolidated Entity for the financial year ended 2014. The following entities were established during the financial year: • Series 2014-1 EHP Reds Trust was opened on 18 September 2014; and • Series 2015-1 Reds Trust was opened on 19 March 2015. (d) Disposal of controlled entities The following entities were closed during the financial year: • REDS Warehouse Trust No.2 was closed on 4 December 2014; • Series 2012-1E EHP REDS Trust was closed on 13 April 2015; • REDS Warehouse Trust No.1 was closed on 23 April 2015; and • Nyala Funding Trust No. 1 was closed on 15 June 2015. 128 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.6. Deed of cross guarantee Pursuant to ASIC Class Order 98/1418 (as amended) dated 19 August 2005, certain wholly-owned subsidiaries are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and Directors’ reports. It is a condition of the Class Order that the Bank and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Bank guarantees to each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Bank will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Bank is wound up. During the year management undertook a review of those subsidiaries to the Deed, to ensure they were consistent with those included within the Extended License Entity. The result of this review was the removal of the following entities by way of a revocation deed on 1 March 2015: • B.Q.L. Nominees Pty. Ltd.; • B.Q.L. Properties Pty Ltd (Formerly known as B.Q.L Properties Limited); • B.Q.L. Management Pty. Ltd.; • BOQ Home Pty Ltd (Formerly known as BOQ Home Limited); • BOQ Share Plans Nominee Pty Ltd; • Dell Financial Services Pty Ltd (Formerly known as Equipment Rental Billing Services Pty Ltd); • Home Credit Management Pty Ltd (Formerly known as Home Credit Management Limited); • Hunter Leasing Pty Ltd (Formerly known as Hunter Leasing Limited); • Newcourt Financial (Australia) Pty Limited; • Pioneer Permanent Pty Ltd (Formerly known as Pioneer Permanent Limited); • Queensland Electronic Switching Pty Ltd; • StateWest Financial Services Pty Ltd (Formerly known as Statewest Financial Services Limited); and • St Andrew’s Australia Services Pty Ltd. Subsequent to the removal of the subsidiaries listed above, the remaining subsidiaries to the Deed are as follows: • BOQ Credit Pty Limited; • BOQ Equipment Finance Limited; • BOQ Finance (Aust) Limited; and • BOQ Funding Pty Limited. A summarised consolidated Income Statement and consolidated Balance Sheet, comprising the Bank and its controlled entities which are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, at 31 August 2015 is set out as follows: Summarised income statement and retained profits Profit before tax Less: Income tax expense Profit for the year Retained profits at beginning of year Removal of entities revoked from Deed (1) Dividends to shareholders Transfers to equity reserve for credit losses Retained profits at end of year Profit attributable to: Equity holders of the parent Profit for the year (1) Represents the retained profits balances as at 1 March 2015 of those entities revoked from the Deed. Consolidated 2015 $m 2014 $m 433 (126) 307 203 (83) (256) (11) 160 307 307 368 (110) 258 144 - (199) - 203 258 258 129 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.6. Deed of cross guarantee (continued) Balance Sheet Assets Cash and liquid assets Due from other financial institutions Financial assets available-for-sale Financial assets held for trading Derivative assets Loans and advances at amortised cost Other assets Shares in controlled entities Property, plant and equipment Deferred tax assets Intangible assets Investments in joint arrangements Total assets Liabilities Due to other financial institutions - Accounts payable at call Deposits Derivative liabilities Accounts payable and other liabilities Current tax liabilities Provisions Borrowings including subordinated notes Amounts due to controlled entities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity 130 Consolidated 2015 $m 561 19 1,940 2,996 162 2014 $m 431 - 2,473 3,349 132 40,491 35,591 237 608 52 90 422 9 253 646 41 112 564 21 47,587 43,613 258 34,791 290 374 56 51 4,282 4,435 44,537 233 33,648 207 373 71 95 942 4,712 40,281 3,050 3,332 2,810 80 160 3,050 3,018 111 203 3,332 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.7. Investments in joint arrangements The Consolidated Entity holds interests in a number of collectively and individually immaterial joint ventures that are accounted for using the equity method. The principal activity of the joint venture entities is land subdivision, development and sale. (a) Accounting for joint arrangements The Consolidated Entity’s investments in joint venture entities are accounted for under the equity method of accounting in the consolidated financial statements. These are entities in which the Consolidated Entity has joint control over all operational decisions and activities. Under the equity method, the investments in joint ventures are recognised at the cost of acquisition and the carrying value is subsequently adjusted by the Consolidated Entity’s share of the joint venture entity’s profit or loss and movement in post-acquisition reserves, after adjusting to align the accounting policies with that of the Consolidated Entity’s. The Consolidated Entity’s share of the joint venture entity’s net profit or loss is calculated based on the sale of land, together with any tax expense, and is brought to account based on the proportion of settled land sales contracts. (b) Joint venture details Set out below are the joint ventures of the Consolidated Entity as at 31 August 2015 which, in the opinion of the directors, are immaterial to the Consolidated Entity. Australia is the place of business and also the country of incorporation for all joint ventures. The proportion of ownership interest is the same as the proportion of voting rights held. Ocean Springs Pty Ltd (Brighton) Dalyellup Beach Pty Ltd (Dalyellup) East Busselton Estate Pty Ltd (Provence) Coastview Nominees Pty Ltd (Margaret River) Provence 2 Pty Ltd (Provence 2) Total equity accounted investments Ownership Interest Carrying amount 2015 (%) 9.31 17.08 25.00 5.81 25.00 2014 (%) 9.31 17.08 25.00 5.81 25.00 2015 $m 2014 $m 9 9 - - - 18 12 9 - - - 21 Summary financial information for equity accounted joint ventures, not adjusted for the percentage of ownership held by the consolidated entity and fair value adjustments on acquisition, is contained below: Profit from continuing operations Post-tax profit from discontinued operations Other comprehensive income Total comprehensive income 2015 $m 2014 $m 26 - - 26 40 - - 40 131 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.8. Auditor’s remuneration Audit services – KPMG Australia - Audit and review of the financial reports - Other regulatory and audit services Audit related services – KPMG Australia - Other assurance services - Regulatory assurance services Non-audit services – KPMG Australia - Taxation services - Due diligence services - Other Consolidated Bank 2015 $000 2014 $000 2015 $000 2014 $000 1,118 364 1,482 445 167 612 372 - 37 409 1,011 401 1,412 225 - 225 188 234 - 422 441 167 608 445 167 612 372 - 37 409 681 203 884 169 - 169 143 234 - 377 6.9. Events subsequent to balance date The Directors are not aware of any matters or circumstance that have arisen in the interval between the end of the financial year and the date of this report, or any item, event or transaction which significantly affects, or may significantly affect the operations of the consolidated entity in future financial years. 132 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.10. Significant accounting policies & new accounting standards The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial report, and have been applied consistently across the Consolidated Entity. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Bank. Control exists when the Bank has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to benefit from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial report from the date that control commences until the date that control ceases. In the Bank’s financial statements, investments in subsidiaries are carried at cost. (ii) Securitisation The Bank conducts a loan securitisation program whereby mortgage loans are packaged and sold to the REDS Securitisation and Warehouse Trusts (“RMBS Trusts”) and the Nyala and Impala Trusts. The Bank also securitises Hire Purchase, Chattel Mortgages and Finance Leases which are packaged and sold to REDS EHP Securitisation Trusts (“REDS EHP Trusts”). Consolidated Entity The Consolidated Entity receives the residual income distributed by the RMBS and REDS EHP Trusts after all payments due to investors and associated costs of the program have been met and as a result the Consolidated Entity is considered to retain the risks and rewards of the RMBS Trusts and as a result do not meet the de-recognition criteria of AASB 139 Financial Instruments: Recognition and Measurement. The RMBS Trusts fund their purchase of the loans by issuing floating-rate debt securities. The securities are issued by the RMBS Trusts. These are represented as borrowings of the Consolidated Entity however the Consolidated Entity does not stand behind the capital value or the performance of the securities or the assets of the RMBS Trusts. The Consolidated Entity does not guarantee the payment of interest or the repayment of principal due on the securities. The loans subject to the securitisation program have been pledged as security for the securities issued by the RMBS Trusts. The Consolidated Entity is not obliged to support any losses that may be suffered by investors and does not intend to provide such support. The Bank does however provide the securitisation programs with arm’s length services and facilities including the management and servicing of the leases securitised. The Bank has no right to repurchase any of the securitised assets and no obligation to do so, other than in certain circumstances where there is a breach of warranty within 120 days of the sale or when certain criteria are met under the Clean up Provision per the Trust Deed Supplement. The transferred assets are equitably assigned to the securitisation trusts. The investors in the securities issued by the Trusts have full recourse to the assets transferred to the Trusts. The Bank receives the residual income distributed by the Trusts after all payments due to investors and associated costs of the program have been met and as a result the Bank is considered to retain the risks and rewards of the Trusts. Bank Interest rate risk from the RMBS and REDS EHP Trusts is transferred back to the Bank by way of interest rate and basis swaps. Accordingly, under AASB 139 the original sale of the mortgages from the Bank to the RMBS Trusts does not meet the de-recognition criteria set out in AASB 139. The Bank continues to reflect the securitised loans in their entirety and also recognises a financial liability to the RMBS Trusts. The interest payable on the intercompany financial asset / liability represents the return on an imputed loan between the Bank and the Trusts and is based on the interest income under the mortgages, the fees payable by the Trusts and the interest income or expense not separately recognised under the interest rate and basis swaps transactions between the Bank and the Trusts. All transactions between the Bank and the Trusts are eliminated on consolidation. (iii) Transactions eliminated on consolidation Intra-group balances, and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (iv) Derecognition of financial assets and liabilities Financial assets are derecognised when the contractual rights to receive cash flows from the assets have expired, or where the Bank has transferred its contractual rights to receive the cash flows of the financial assets and substantially all the risks and rewards of ownership. Financial liabilities are derecognised when they are extinguished, i.e. when the obligation is discharged, cancelled or expired. 133 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.10. Significant accounting policies & new accounting standards (continued) (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into Australian dollars at the foreign exchange rate ruling at that date. Non-monetary items in a foreign currency that are measured at historical cost are translated using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the profit and loss. Where a foreign currency transaction is part of a hedge relationship it is accounted for as above, subject to the Hedge Accounting rules set out in Section 3.8, Derivative financial instruments. (ii) Foreign operations The consolidated entity has no foreign operations, all overseas activities are carried out through non-incorporated branches. (c) New accounting standards The following, are the amendments to standards and interpretations applicable for the first time to the current year: • AASB 2012-3 Amendments to Australian Accounting Standards: Offsetting financial assets and financial liabilities - This amendment adds application guidance to AASB 132 Financial Instruments: Presentation to address inconsistencies identified in applying some of the offsetting criteria of AASB 132. The Bank has reviewed the amendment and the clarifications within and determined that no disclosure changes are required. • AASB 2013-3 Amendments to AASB 136: Recoverable amount disclosures for non-financial assets - This amendment includes additional disclosure requirements with respect to impaired assets measured based on their fair value less costs of disposal. The Group has recognised an impairment loss during the period in relation to internally generated software, refer to Section 4.1 for further details. • AASB 2013-4 Amendments to Australian Accounting Standards: Novation of derivatives and continuation of hedge accounting - This amendment permits the continuation of hedge accounting in specified circumstances where a derivative, which has been designated as a hedging instrument, is novated from one counterparty to a central counterparty as a consequence of laws or regulations. There have been no derivatives novated by the Bank during the period and as such the introduction of this amendment has not impacted the Bank. • AASB 2013-7 Amendments to AASB 1038: Arising from AASB 10 in relation to consolidation and interests of policyholders - This amendment removes the specific requirements in relation to consolidation from AASB 1038, which leaves AASB 10 as the sole source for consolidation requirements applicable to life insurer entities. The Bank has reviewed the impact of this amendment on its consolidation requirements for St Andrew’s and determined there have been no changes. All other amendments to standards applicable for the 2015 year end do not impact the Consolidated Entity. The following standards and amendments have been identified as those which may impact the Consolidated Entity and the majority were available for early adoption at 31 August 2015 but have not been applied in these financial statements. • AASB 1031 Materiality - The revised AASB 1031 is an interim standard that cross-references to other standards and the Framework (issued December 2013) that contain guidance on materiality. AASB 1031 will be withdrawn when references to AASB 1031 in all standards and interpretations have been removed. These amendments are effective from 1 July 2014. This new standard did not have a material impact on the Consolidated Entity. • • AASB 9 Financial Instruments - This standard introduces changes in the classification and measurement of financial assets and financial liabilities, including a new expected credit loss model for impairment. The standard also introduces new requirements for hedge accounting that align hedge accounting more closely with risk management. This standard becomes mandatory for the Consolidated Entity’s 31 August 2018 financial statements. The potential effects on adoption of the amendments are yet to be determined. AASB 15 Revenue from contracts with customers - The core principle of AASB 15 is that an entity recognises revenue to depict 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 model features a contract based five-step analysis of transactions to determine whether, how much and when revenue is recognised. The potential effects of this standard is yet to be determined. (d) Impairment of non-financial assets Non-financial assets other than deferred tax assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For goodwill, and intangible assets with an indefinite life, the recoverable amount is estimated each year at the same time. The Bank conducts an annual internal review of non-financial asset values to assess for any indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets - Cash Generating Units (“CGU”). An impairment loss is recognised in profit or loss in the Income Statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit on a pro rata basis. 134 ANNUAL REPORT 2015NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.10. Significant accounting policies & new accounting standards (continued) (d) Impairment of non-financial assets (continued) This grouping is subject to an operating segment ceiling test. Non-financial assets, other than goodwill, that suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. An impairment loss in respect of goodwill is not reversed. (i) Calculation of recoverable amount The recoverable amount of a non-financial asset or CGU is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (e) Leases (i) Finance leases Finance leases in which the Bank is the lessor, are recorded in the Balance Sheet as loans and advances at amortised cost. They are recorded on the commencement of the lease as the net investment in the lease, being the present value of the minimum lease payments. The Consolidated Entity does not have finance leases as lessee. (ii) Operating leases Operating leases in which the Bank is the lessee, are expensed on a straight-line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property. When an operating lease terminates before the lease period expires, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. (f) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (“GST”), except where the amount of GST incurred is not recoverable from the Australian Tax Office (“ATO”). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the Balance Sheet. Cash flows are included in the Statements of Cash Flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. (g) Equity reserve for credit losses The Bank is required by APRA to maintain a general provision for credit losses. As the Bank is unable to hold a general provision under current accounting standards, the Bank has created an equity reserve for credit losses. The equity reserve for credit losses and the eligible component of the collective provision for impairment are aggregated for the purpose of satisfying the APRA requirement for a general reserve for credit losses. (h) Employee benefits (i) Wages, salaries and annual leave Liabilities for employee benefits for wages, salaries and annual leave represents present obligations resulting from employees’ services provided up to the reporting date, calculated at discounted amounts based on remuneration wage and salary rates that the Bank expects to pay as at reporting date including related on-costs. (ii) Long service leave The provision for employee benefits to long service leave represents the present value of the estimated future cash outflows to be made resulting from employees’ services provided to reporting date. The provision is calculated using expected future increases in wage and salary rates including related on-costs, and expected settlement dates based on turnover history and is discounted using the rates attached to national government bonds at reporting date which most closely match the terms of maturity of the related liabilities. The Bank has assessed the impact of using a high quality corporate bond rate when discounting its long service leave obligations, which resulted in a materially consistent balance to the carrying amount in the balance sheets. 135 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2015 6.10. Significant accounting policies & new accounting standards (continued) (i) Property, plant & equipment (i) Recognition and initial measurement Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation and accumulated impairment losses. The cost of self- constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. (ii) Subsequent costs Subsequent additional costs are only capitalised when it is probable that future economic benefits in excess of the originally assessed performance of the assets will flow to the Bank in future years. Where these costs represent separate components, they are accounted for as separate assets and are separately depreciated over their useful lives. Costs that do not meet the criteria for subsequent capitalisation are expensed as incurred. (iii) Subsequent measurement The Bank has elected to use the cost model to measure property, plant and equipment after recognition. The carrying value is the initial cost less accumulated depreciation and any accumulated impairment losses. (iv) Depreciation Depreciation is charged to the profit or loss in the Income Statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: IT Equipment Plant, furniture and equipment Leasehold improvements (1) (1) Or term of lease if less. The residual value if not significant, is reassessed annually. Years 3-10 3-20 12 136 ANNUAL REPORT 2015DIRECTORS’ DECLARATION 1. In the opinion of the Directors of Bank of Queensland Limited (the “Bank”): (a) the consolidated financial statements and notes and the remuneration report included within the Directors’ report set out on pages 44 to 136, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the Bank and Consolidated Entity as at 31 August 2015 and of their performance, for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Bank will be able to pay its debts as and when they become due and payable. 2. 3. 4. There are reasonable grounds to believe that the Bank and the Controlled Entities identified in Section 6.5 (a) will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Bank and those Controlled Entities pursuant to ASIC Class Order 98/1418. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 31 August 2015. The Directors draw attention to Section 1.2 (a) to the financial statements, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the Directors: Roger Davis Chairman 7 October 2015 Jon Sutton Managing Director and CEO 7 October 2015 137 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BANK OF QUEENSLAND LIMITED REPORT ON THE FINANCIAL REPORT We have audited the accompanying financial report of Bank of Queensland Limited (the ‘Bank’), which comprises the Balance Sheets as at 31 August 2015 and the Income Statements, Statements of Comprehensive Income, Statements of Changes in Equity and Statements of Cash Flows for the year ended on that date, Sections 1 to 6 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Bank and the Consolidated Entity comprising the Bank and the entities it controlled at the year’s end or from time to time during the financial year. DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL REPORT The directors of the Bank are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In Section 1.2 (a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report of the Bank and the Consolidated Entity comply with International Financial Reporting Standards. AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Bank’s and the Consolidated Entity’s financial position and of their performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. INDEPENDENCE In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. AUDITOR’S OPINION In our opinion: (a) the financial report of Bank of Queensland Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Bank’s and the Consolidated Entity’s financial position as at 31 August 2015 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report of the Bank and the Consolidated Entity also complies with International Financial Reporting Standards as disclosed in Section 1.2 (a). KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 138 ANNUAL REPORT 2015 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BANK OF QUEENSLAND LIMITED REPORT ON THE REMUNERATION REPORT We have audited the Remuneration Report included on pages 44 to 66 of the directors’ report for the year ended 31 August 2015. The directors of the Bank are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. AUDITOR’S OPINION In our opinion, the remuneration report of Bank of Queensland Limited for the year ended 31 August 2015, complies with Section 300A of the Corporations Act 2001. KPMG Martin McGrath Partner Sydney 7 October 2015 139 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616SHAREHOLDING DETAILS As at Monday 28 September 2015, the following shareholding details applied: 1. TWENTY LARGEST ORDINARY SHAREHOLDERS Shareholder HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED NATIONAL NOMINEES LIMITED CITICORP NOMINEES PTY LIMITED MILTON CORPORATION LIMITED BNP PARIBAS NOMS PTY LTD CITICORP NOMINEES PTY LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED AMP LIFE LIMITED WASHINGTON H SOUL PATTINSON AND COMPANY LIMITED JBWERE (NZ) NOMINEES LTD AVANTEOS INVESTMENTS LIMITED KARATAL HOLDINGS PTY LTD BKI INVESTMENT COMPANY LIMITED CARLTON HOTEL LIMITED NATIONAL NOMINEES LIMITED THE MANLY HOTELS PTY LIMITED UBS NOMINEES PTY LTD PRUDENTIAL NOMINEES PTY LTD Total Voting rights No. of ordinary shares % 71,534,800 19.29% 35,751,649 30,735,052 22,116,915 7,306,078 6,294,904 2,395,088 2,304,137 1,978,282 1,797,600 1,344,347 1,157,171 909,865 843,011 810,000 767,873 714,580 655,540 647,956 560,400 9.64% 8.29% 5.97% 1.97% 1.70% 0.65% 0.62% 0.53% 0.48% 0.36% 0.31% 0.25% 0.23% 0.22% 0.21% 0.19% 0.18% 0.17% 0.15% 190,625,248 51.41% On a show of hands every person present who is a holder of ordinary shares or a duly appointed representative of a holder of ordinary shares has one vote, and on a poll each member present in person or by proxy or attorney has one vote for each share that person holds. 140 ANNUAL REPORT 2015SHAREHOLDING DETAILS No. of ordinary shares % 72,940 55,155 50,000 44,483 40,445 35,526 32,200 32,130 21,000 17,167 16,700 15,000 13,000 10,000 10,000 10,000 10,000 10,000 9,500 9,482 2.43% 1.84% 1.67% 1.48% 1.35% 1.18% 1.07% 1.07% 0.70% 0.57% 0.56% 0.50% 0.43% 0.33% 0.33% 0.33% 0.33% 0.33% 0.32% 0.32% 514,728 18.32% As at Monday 28 September 2015, the following shareholding details applied: 2. TWENTY LARGEST CPS SHAREHOLDERS Shareholder J P MORGAN NOMINEES AUSTRALIA LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED MILTON CORPORATION LIMITED NATIONAL NOMINEES LIMITED NAVIGATOR AUSTRALIA LTD NULIS NOMINEES (AUSTRALIA) LIMITED DOMER MINING CO PTY LTD UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD LAWRENCES MOTORS PTY LTD THE TRUST COMPANY SUPERANNUATION LIMITED BNP PARIBAS NOMS PTY LTD WENTHOR PTY LTD MR JOHN HARRISON VALDER & MRS KAY ORMONDE VALDER EASTCOTE PTY LTD THE AUSTRALIAN NATIONAL UNIVERSITY SOUTHERN METROPOLITAN CEMETERIES F & B INVESTMENTS PTY LIMITED BCITF (QLD) JILLIBY PTY LTD JILRIFT NO 2 PTY LTD Total Voting rights The CPS do not give the holders any voting rights at any general shareholders meetings, except in certain circumstances. 3. DISTRIBUTION OF EQUITY SECURITY HOLDERS Category 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,000 - and over Total The number of ordinary shareholders holding less than a marketable parcel is 3,321. The number of convertible preference shareholders holding less than a marketable parcel is nil. Ordinary Shares CPS 2015 57,787 27,587 5,051 2,500 71 2014 56,165 26,067 4,847 2,463 71 2015 6,099 340 23 13 - 2014 6,214 355 19 11 1 92,996 89,613 6,475 6,600 141 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 244616SHAREHOLDING DETAILS 4. PARTLY PAID SHARES There are no partly paid shares. 5. THE NAMES OF SUBSTANTIAL SHAREHOLDERS IN THE BANK AND THE NUMBER OF SHARES IN WHICH EACH HAS AN INTEREST AS DISCLOSED IN SUBSTANTIAL SHAREHOLDER NOTICES GIVEN TO THE BANK ARE: Substantial shareholders AXA Group 6. STOCK EXCHANGE LISTING No. of ordinary shares in which interest is held (at date of notification) 18,560,287 Date of notification 9 September 2015 The shares of Bank of Queensland Limited (“BOQ”) and CPS (“BOQPD”) are quoted on the Australian Securities Exchange. 7. OPTIONS At 31 August 2015 there were no options over unissued ordinary shares. 8. ON MARKET BUY-BACK There is no current on market buy-back. 9. OTHER INFORMATION Bank of Queensland Limited is a publicly listed company limited by shares and is incorporated and domiciled in Australia. 142 ANNUAL REPORT 2015SHAREHOLDER INFORMATION KEY SHAREHOLDER DATES Dividend dates for ordinary shares only 2015 Final ex-dividend date Final dividend record date Final dividend payment date Annual General Meeting 2016 29 October 2015 2 November 2015 24 November 2015 26 November 2015 Financial half year end 29 February 2016 Interim results and dividend announcement Interim ex-dividend date Interim dividend record date Interim dividend payment date Financial full year end Full year results and dividend announcement Final ex-dividend date Final dividend record date Final dividend payment date Annual General Meeting 7 April 2016 28 April 2016 29 April 2016 19 May 2016 31 August 2016 6 October 2016 27 October 2016 28 October 2016 22 November 2016 30 November 2016 SHARE REGISTRY Link Market Services Limited Level 15 324 Queen Street Brisbane Qld 4000 Australia: 1800 779 639 International: +61 2 8280 7626 Facsimile: +61 2 9287 0303 Email:boq@linkmarketservices.com.au linkmarketservices.com.au COMPANY DETAILS Bank of Queensland Limited Level 6 100 Skyring Terrace Newstead Qld 4006 Telephone: +61 7 3212 3333 Investor Relations: +61 7 3212 3990 Facsimile: +61 7 3212 3399 boq.com.au twitter.com/boq facebook.com.au/BOQOnline CUSTOMER SERVICE 1300 55 72 72 (within Australia) +61 7 3336 2420 (overseas) ABN 32 009 656 740 CAN 009 656 740 143 Bank of Queensland Limited and its Controlled Entities ABN 32 009 656 740 AFSL No. 2446165 YEAR FINANCIAL SUMMARY $ millions (unless otherwise stated) Financial performance Net interest income Non interest income Total income Operating expenses Underlying profit before tax (1) Loan impairment expense Cash earnings before tax Cash earnings after tax attributable to ordinary shareholders (2) Statutory net profit (loss) after tax Financial position (3) Gross loans and advances (4) Total assets Customer deposits Total liabilities Total equity Shareholder performance Market capitalisation at balance date Share price at balance date ($) Basic cash earnings per share (5) Diluted cash earnings per share (5) Fully franked ordinary dividend per share Dividend payout ratio to ordinary shareholders Cash earnings ratios (6) Net interest margin (7) Cost-to-income ratio Return on average ordinary equity Capital adequacy Common equity tier 1 ratio (8) Total capital adequacy ratio 2015 $m 2014 $m 2013 $m 2012 $m 2011 $m 907 180 1,087 (500) 587 (74) 513 357 318 40,975 48,018 26,914 44,549 3,469 4,698 12.67 97.3c 92.2c 74c 77% 1.97% 46.0% 10.7% 761 169 930 (408) 522 (86) 436 301 261 38,426 46,905 26,266 43,564 3,341 4,560 12.58 89.5c 87c 66c 87% 1.82% 43.9% 10.4% 695 163 858 (380) 478 (115) 363 248 186 35,302 42,528 23,968 39,711 2,817 3,070 9.60 78.1c 75.1c 58c 99% 1.69% 44.3% 9.4% 656 161 817 (373) 444 (401) 43 21 (17) 34,560 41,758 22,270 38,859 2,899 2,331 7.55 7.9c 7.9c 52c n/a 1.67% 45.7% 1.3% 628 178 806 (359) 447 (200) 247 167 159 33,530 39,901 20,318 37,327 2,574 1,686 7.48 71.3c 66.7c 54c 77% 1.65% 44.5% 8.0% 8.91% 12.72% 8.63% 12.02% 8.63% 12.24% 8.58% 12.56% 8.37% 11.40% (1) Underlying profit before tax is profit before impairment on loans and advances, significant items and tax. (2) Cash earnings after tax exclude significant items (tax effected). (3) Includes BOQ Specialist (Aust) Limited. (4) Before specific and collective provisions. (5) Basic and diluted earnings per share for FY12 and FY13 have been adjusted for the effect of the rights issue that occurred during the current financial year. (6) Excludes impact of significant items. (7) Excluding amortisation of fair value adjustments (acquisitions). (8) This was the tier 1 capital ratio pre-2012. 144 ANNUAL REPORT 2015 ISO 14001 Environmental Management System in use. Manufactured using elemental chlorine free (ECF) pulps. Pulp is sourced only from responsibly managed forests. 2 0 1 5 A N N U A L R E P O R T FIND OUT MORE ABOUT HOW WE’RE DELIVERING OUR STRATEGY AT WWW.BOQ.COM.AU/ANNUAL_REPORTS/2015 

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