Bank of Queensland Limited Annual Report 2019

Plain-text annual report

2 0 1 9 A n n u a l R e p o r t 2019 ANNUAL REPORT Year ended 31 August 2019 1 Annual Report 2019 CONTENTS Message from the Chairmen 5 Introduction to the Managing Director & CEO 7 10 15 58 59 87 90 91 92 93 97 98 170 171 181 184 185 186 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 Year Financial Summary Glossary Bank of Queensland Limited ABN 32 009 656 740 AFSL NO. 244616 ABOUT THIS REPORT This 2019 Annual Report (Report) incorporates the Group’s audited financial statements and other statutory disclosures. The Report is lodged with the Australian Securities Exchange (ASX). Bank of Queensland (BOQ) is publicly listed in Australia. The 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. Unless otherwise stated, the Report encompasses all BOQ activities for the financial year commenced 1 September 2018 and ended 31 August 2019. All monetary values in this document are presented in Australian dollars, which is the Bank’s functional currency. OUR 2019 REPORTING SUITE BOQ produces a range of reports designed to meet the evolving expectations of a wide range of stakeholders. Our 2019 reporting suite consists of the following additional documents: 2019 ANNUAL REVIEW 2019 SUSTAINABILITY REPORT Year ended 31 August 2019 Year ended 31 August 2019 2019 CORPORATE GOVERNANCE STATEMENT ANNUAL REVIEW BOQ’s 2019 Annual Review (Review) provides an overview CORPORATE GOVERNANCE STATEMENT Our 2019 Corporate Governance Statement discloses of BOQ’s operations across the Group and outlines our how we have complied with the ASX Corporate commitment to, and strategies for creating long-term Governance Council’s Corporate Governance Principles value for shareholders, customers, suppliers, employees, & Recommendations (3rd edition) and is available on the and the community. It can be found on the Annual Reports Corporate Governance page of our website. page of our website. SUSTAINABILITY REPORT Our 2019 Sustainability Report outlines information about our performance against social, environmental and economic opportunities and challenges. This report is available on the Annual Reports page of our website and is supported by supplementary information available on the Sustainability section of our website. We are always looking for ways to evolve and improve our reporting. Please send your questions, comments or suggestions to our Investor Relations team at InvestorRelations@boq.com.au. 3 Annual Report 2019OUR 2019 PERFORMANCE PROFIT RESULTS ($m) EARNINGS & DIVIDENDS (¢ per ordinary share) 8 360 338 378 352 372 336 320 298 95.6 74 97.6 76 94.7 76 79.6 65 2016 2017 2018 2019 2016 2017 2018 2019 Cash Earnings after Tax Statutory Net Profit after Tax Cash Basic Earnings per Ordinary Share Dividends per Ordinary Share 2019 CASH EARNINGS AFTER TAX STATUTORY NET PROFIT AFTER TAX $320m 14% from FY18 $298m 11% from FY18 Special Dividend per Ordinary Share CASH BASIC EARNINGS PER ORDINARY SHARE (¢ per share) 79.6¢ 16% from FY18 DIVIDENDS PER ORDINARY SHARE (¢ per share) 65¢ 14% from FY18 NET INTEREST MARGIN CASH COST TO INCOME RATIO CASH RETURN ON EQUITY 1.93% 50.5% 8.3% Up 300bps from FY18 Down 160bps from FY18 Down 5bps from FY18 LOAN IMPAIRMENT EXPENSE ($m) 67 48 41 74 $74m 16bps of gross loans 2016 2017 2018 2019 4 Bank of Queensland Limited and its Controlled Entities EARNINGS & DIVIDENDS (¢ per ordinary share) Dear Shareholder 2019 has been a year of significant change for the banking industry and for BOQ. As we reported at our first half results, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) will have long lasting effects on the Australian financial services landscape. We have already started to see the impact of higher costs as a result of the increase in expectations from regulators and the community. Meanwhile, the sector has also faced challenges of an uncertain outlook for housing prices and credit growth and the lower for longer interest rate environment, including the recent move to a record low cash rate of 0.75%. At BOQ, we have also seen changes in leadership throughout the year. Our former Managing Director & CEO Jon Sutton announced his resignation for health reasons in December 2018. We finalised plans for the Chairman succession in May 2019 with the announcement of Patrick Allaway as BOQ’s next Chairman effective 18 October 2019, and announced the appointment of our new Managing Director & CEO, George Frazis in June 2019. During this period of change, the business has continued to execute on a strategy of growing our niche business segments, while enhancing our technology platforms and processes to make it easier for our customers to deal with us through their channel of choice. We have also maintained our prudent risk settings and sought to further enhance our risk and compliance capability to meet rising stakeholder expectations. A major achievement for the year has been the development and refinement of our purpose and values. Our purpose is to deliver more human, empathetic experiences that help customers and communities prosper. Our values are: we show we care; we act with integrity; we achieve together; and we make a difference. We believe that by living our purpose and values and helping customers and communities prosper, we will deliver on our financial performance objectives and deliver returns for shareholders. In terms of our 2019 financial performance, our results have been below expectations and reflective of the difficult operating environment. Cash earnings after tax decreased 14 per cent from 2018 to $320 million and cash basic earnings per share decreased 16 per cent to 79.6 cents per share. Return on equity also decreased 160 basis points to 8.3 per cent. These reductions were driven by lower income, higher operating expenses and a large increase in loan impairment expense. A two per cent contraction in income was the result of subdued asset growth, a five basis point reduction in net interest margin and a 12 per cent reduction in non-interest income. We achieved growth in lending balances of two per cent across the Group. This included strong growth of 15 per cent or $667 million in the asset finance and leasing businesses of BOQ Finance. The growth momentum continued in Virgin Money Australia and BOQ Specialist housing loans, with growth of $914 million and $626 million respectively. Our core BOQ housing loan portfolio, however, contracted during the year. This is attributable to a number of factors including a reduced distribution footprint, more onerous lending processes and digital customer offerings which lag our peers. We have plans in place to address these issues and anticipate improved performance from our Retail Bank in 2020. The contraction in net interest margin was most pronounced in the first half of the year, due in part to the higher bank bill swap rate which normalised later in the year, as well as ongoing price competition for new business. The reduction in non-interest income was driven by ongoing downward pressure on fees and insurance income. CHAIRMAN’S REVIEW Operating expenses increased by four per cent which took our cost to income ratio to 50.5 per cent. We have continued to invest for the future by improving our technology, risk and compliance capability. As we flagged at the 2018 results and in the first half this year, the increased capitalised investment expenditure we have been incurring will lead to an increase in amortisation as these important foundational projects are completed. We continue to explore opportunities to offset this increase through digitation and automation of processes to improve efficiency. Our underlying asset quality remains sound. Despite this, impaired assets increased 20 per cent from a very low level to $197 million. This represents 43 basis points of our total loan balances. Our loan impairment expense also increased substantially during the year, reflecting the move to a new collective provisioning model to align with new accounting standards, as well as the deterioration in a number of forward looking economic indicators and a small number of larger exposures. Arrears trends have increased slightly but remain at relatively low levels. We remain comfortable with the overall performance of the loan portfolio, with no systemic issues emerging and support from the recent stabilisation of house prices, low interest rates and low levels of unemployment. BOQ’s capital position remains appropriate with a Common Equity Tier 1 ratio (CET1) of 9.04 per cent. CET1 has reduced in recent years as we have reinvested in the future of the business and continued growth in higher capital-consumptive commercial lending segments. Given the challenging outlook, the dividend was reduced by 14 per cent, in line with the reduction in cash earnings, to 65 cents per share. We have taken a prudent approach which keeps the payout ratio consistent with the level of the first half. An important milestone in 2019 has been the decision to proceed with additional investment in Virgin Money Australia to build a new digital bank. We are very excited about the prospects for this business given the recent success the brand has demonstrated in attracting customers across its other product lines. You will hear more about how this will contribute to BOQ’s future through 2020. We have also made considerable progress in the modernisation of our technology infrastructure, which has involved shifting our data centres to a cloud-based environment. This will deliver benefits in the future as we have better capacity to scale up, reduce cost, implement change and partner with external providers to deliver better solutions for our customers. We are also on track to rollout a more contemporary mobile banking offering to our customers in 2020. These are critical investments that will support our transformation and future aspirations. Many challenges remain for BOQ, including changes in regulation, technology and customer behaviour, as well as the broader economic challenges facing the sector. However, there are good opportunities available for BOQ to capitalise on and again return to growth with a clear and focused strategy. I am confident that under Patrick and George’s leadership, I am leaving the Bank in very good hands to do just this. It has been a privilege to serve on the BOQ Board and as your Chairman. I would like to thank my colleagues on the Board, the management team and everyone at BOQ, our customers and you, our shareholders, for your ongoing support. Roger Davis Retiring Chairman 5 Annual Report 2019Dear Shareholder I take on the role as Chair of BOQ effective from 18 October with appreciation of the considerable responsibility for the Board and management to deliver better outcomes for our stakeholders. Our FY19 cash earnings after tax of $320 million represents a 14 per cent decline on last year. We are operating in a low growth environment with rising investment needs, regulatory costs and community expectations. Irrespective of the challenging operating environment, we are not satisfied with our performance. We recognise that BOQ needs to take decisive action to transform to a more sustainable business model with a clear strategy to return to growth whilst continuing to deliver our purpose of helping customers and communities prosper. We are confident that in transforming BOQ we can grow long term sustainable shareholder value. At the half year we foreshadowed providing our strategy update later this calendar year. Whilst we are well into the process of our strategic review, we are now of the view that it would be prudent to defer this market update to February 2020. This will enable our new Chief Executive Officer, George Frazis, to optimise the strategy and conduct a productivity review to ensure we have a fit for purpose operating model aligned with our niche growth strategy. In the interim, George, a seasoned banker with considerable leadership experience in transformation and digital innovation, has settled into his new role well. We are excited about the change he will lead at BOQ. The foreshadowed transformation strategy will focus on five high level priorities for BOQ: 1. Return to profitable and sustainable growth. We will continue to focus on niche growth segments, lift the performance of our Retail Bank and seek to optimise risk adjusted returns. 2. Embed our purpose led, customer culture. To achieve this we need to attract, develop and retain the right talent. We will invest in developing our people and building an inclusive and diversified workforce that respects and endorses BOQ as a great place to work. 3. Simplify our business, improve productivity and address costs. We will address our rising cost to income ratio through a structural productivity and operating model review, aimed at reducing complexity and adopting technology to drive efficiency. 4. Close the digital and data gap, delivering our mobile and Virgin Money Australia investments. We are committed to delighting our customers by providing a seamless end to end experience across all channels, including new internet and mobile banking platforms. 5. Continue to strengthen the Bank through strong governance, compliance and prudent risk management. We have more work to do in improving our non-financial risk governance and are investing in continuous improvement. 6 CHAIRMAN’S WELCOME Looking ahead, the environment in banking and the broader global and local economy remains challenged. We anticipate that industry disruption will accelerate, requiring BOQ to transform to an agile challenger bank with a refocus of our retail strategy on targeted segments, as we have successfully achieved through our niche segment strategy in BOQ Business. This includes the rollout of Virgin Money Australia as a digital bank of the future in FY20, following a successful proof of concept earlier this year. We recognise that our transformation will take time. The investments being made to make BOQ stronger will mean FY20 will be a difficult year. We anticipate a decline in year on year cash earnings in FY20, largely driven by low revenue growth, higher regulatory compliance costs and increased amortisation and operating expenses related to our increased investment in technology. Following the finalisation of our strategic and productivity review we will provide a further update to the market in relation to the impact of these initiatives on our FY20 performance. We will be transparent about our transformation when we outline our plans to the market in February 2020, providing clear benchmarks to monitor progress. We recognise that many of our shareholders rely on dividends to support their income. We have paid a full year divided for FY19 of 65 cents per share, representing a payout ratio of 82 per cent. We will continue to factor the importance of dividends for shareholders into our future capital management plans as we invest in the business to return to profitable and sustainable growth. We have announced that our outgoing Chair, Roger Davis, will be stepping down from the Board in October. In addition, David Willis will be stepping down at the AGM, providing for an orderly succession plan. I would like to thank Roger and David for their significant contribution to BOQ. During their tenure, BOQ has made a number of niche investments that have delivered strong growth for shareholders in specialty sectors providing a good foundation for our strategy to return the Group to growth. We will take this opportunity to both refresh and reduce the size of the Board. I would also like to thank Anthony Rose, our interim CEO, and Matt Baxby, our outgoing CFO, for their contribution to BOQ and wish them all the best in their future careers. It is a great honour to be appointed Chair of BOQ and I relish the opportunity to be a change agent and harness the collective strength of the Board and the organisation to transform BOQ and to grow long term sustainable value uplift for all stakeholders. Thank you for your continued support, Patrick Allaway Chairman Elect Bank of Queensland Limited and its Controlled EntitiesINTRODUCTION TO THE MANAGING DIRECTOR & CEO Dear Shareholder I am delighted to join Bank of Queensland as CEO, at a time of evolution and change for BOQ and the banking sector as a whole. I have been in banking for 18 years and am passionate about the important role it plays in our society. What excites me most about leading BOQ is the genuine love our people have for BOQ and our customers, along with the opportunity to build an organisation that is innovative and makes banking easy for our customers. My experience has taught me that building strong relationships with our customers begins with our people – our purpose, values, culture and the way we go about our business. In the recent past BOQ has not lived up to its full potential and has underperformed for its key stakeholders, including our shareholders. However, let me assure you, I am very focused on delivering sustainable and profitable growth and improved shareholder returns. Our success will come from a clear vision for growth coupled with inclusive leadership that harnesses the diverse skills of all of our team. But achieving this will take time – 2020 will be another tough year of transition. There are challenges ahead, however, fundamentally, BOQ is a good business. Our capital is well positioned for unquestionably strong, we have a good funding position and our underlying asset quality is sound. A strong balance sheet will be a focus. We have good opportunities to differentiate and profitably grow. This is evidenced by the success of Virgin Money Australia and our niche business segments which have developed clear customer propositions that are differentiated in the market. My high level priorities are: 1. return to profitable and sustainable growth; 2. embed our purpose led, customer culture; 3. simplify our business, improve productivity and address costs; 4. close the digital and data gap, delivering our mobile and Virgin Money Australia investments; and 5. continue to strengthen the Bank. I would like to thank our outgoing Chairman Roger Davis and congratulate our incoming Chairman Patrick Allaway. I will be working closely with the Board on my strategic review of the business and look forward to updating you on the outcomes early in the coming year. Thank you for your support. George Frazis Managing Director and CEO Annual Report 2019 7 2019 DIRECTORS’ REPORT The Directors present their report together with the financial report of Bank of Queensland Limited (the Bank or BOQ) and of the Consolidated Entity (or the Group), being the Bank and its controlled entities, for the year ended 31 August 2019 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 Retiring Chairman Non-Executive Independent Director Experience, special responsibilities and other Directorships Mr Davis was appointed Chair of BOQ on 28 May 2013 and has been a Non-Executive Director since August 2008. He has over 30 years’ experience in banking and investment banking in Australia, the US and Japan. 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. Mr Davis is currently Chair of AIG Australia Limited and Charter Hall Retail Management Limited, a Non-Executive Director of Argo Investments Limited and was formerly a Non-Executive Director of Aristocrat Leisure Ltd, Ardent Leisure Group, Ardent Leisure Management Ltd and Ardent Leisure Ltd. Mr Davis has a Bachelor of Economics (Hons) degree from the University of Sydney and a Master of Philosophy degree from Oxford. Mr Davis is Chair of the Investment Committee and Nomination & Governance Committee, a member of each of the Audit and Risk Committees, and an attendee at all other Board Committees. PATRICK ALLAWAY BA/LLB Chairman Elect Non-Executive Independent Director (commencing as Chairman on 18 October 2019) Mr Allaway was appointed as a Non-Executive Director of the Bank in May 2019. Mr Allaway has extensive senior executive, non-executive, and corporate advisory experience across the financial services, property, media and retail sectors. Mr. Allaway’s executive career was in financial services with Citibank and Swiss Bank Corporation (now UBS) working in Sydney, New York, Zurich and London. Mr. Allaway was Managing Director SBC Capital Markets & Treasury with direct responsibility for a global business operating in 16 countries. Mr Allaway brings over 30 years’ experience in financial services across financial markets, capital markets, and corporate advisory. This included an advisory role in the media sector, responding to considerable digital disruption. Mr Allaway has over 15 years’ Non-Executive Director experience and was formerly a Non-Executive Director of Macquarie Goodman Industrial Trust, Metcash Limited, Fairfax Media, Woolworths South Africa, David Jones, and Country Road Group. Mr Allaway Chaired the Audit & Risk Committees for Metcash, David Jones, and Country Road Group. Mr Allaway is currently a non-executive Director of Nine Entertainment Co and Domain Limited. He is also a member of the Information Technology Committee and Human Resources & Remuneration Committee at BOQ. Mr Carter was appointed as a Non-Executive Director of BOQ on 27 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. Mr Carter has worked with all the major financial institutions in Australia. 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 Aventus Capital Limited, Deputy Chair of SkyCity Entertainment Group Limited and a Non-Executive Director of Eudunda Farmers Ltd and Genesee & Wyoming Inc. Mr Carter is Chair of the Risk Committee and a member of the Audit Committee, Information Technology Committee, Investment Committee and the Nomination & Governance Committee. BRUCE CARTER B Econ, MBA, FAICD, FICA Non-Executive Independent Director 10 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTName, qualifications and independence status RICHARD HAIRE B.Ec, FAICD Non-Executive Independent Director JOHN LORIMER B Com Non-Executive Independent Director Experience, special responsibilities and other Directorships Mr Haire was appointed as a Non-Executive Director of BOQ on 18 April 2012. Mr Haire has more than 29 years’ experience in the international cotton and agribusiness industry, including 27 years in agricultural commodity trading and banking. He is Chair of the Cotton Research and Development Corporation, Reef Corporate Services Limited and Endeavour Foundation. He also serves as a Non-Executive Director of BEC Stockfeed Solutions Pty Ltd. Mr Haire was formerly a Director of Open Country Dairy (NZ) and New Zealand Farming Systems Uruguay. Mr Haire is a member of each of the Risk, Human Resources & Remuneration and Information Technology Committees. Mr Lorimer was appointed as a Non-Executive Director of BOQ on 29 January 2016. Mr Lorimer has spent more than 30 years in financial services and held executive roles in Australia, Asia and Europe. Mr Lorimer’s most recent executive roles were in the United Kingdom where he was Group Head of Finance and then Group Head of Regulatory Risk and Compliance for Standard Chartered Bank. He also held a number of management positions in the retail bank of Citigroup and served as the Chairman of CAF Bank Limited (a subsidiary of Charities Aid Foundation based in the United Kingdom). He is Chair of Bupa Asia Ltd (HK) Ltd, and a Non-Executive Director of Bupa Australia Pty Ltd, Bupa Aged Care Holdings Pty Ltd and Aberdeen New Dawn Investment Trust plc. Mr Lorimer is a member of the Information Technology and Risk Committees. WARWICK NEGUS B Bus, M Com, SF Fin Non-Executive Independent Director Mr Negus was appointed as a Non-Executive Director of BOQ on 22 September 2016. Mr Negus brings more than 30 years’ of finance industry experience in Asia, Europe and Australia. His most recent executive roles include Chief Executive Officer of 452 Capital, Chief Executive Officer of Colonial First State Global Asset Management and Goldman Sachs Managing Director in Australia, London and Singapore. He was also a Vice President of Bankers Trust Australia and a Director of the University of NSW (UNSW) Foundation and FINSIA. KAREN PENROSE B Com, CPA, FAICD Non-Executive Independent Director MICHELLE TREDENICK B Sc, FAICD, F Fin Non-Executive Independent Director Mr Negus is Chair of Pengana Capital Group and URB Investments Limited and a Non-Executive Director of Washington H Soul Pattinson & Co Ltd, Virgin Australia Holdings Limited and Terrace Tower Group. He is a member of the Council of UNSW and Chair of UNSW Global Limited. Mr Negus is a member of the Audit Committee, Human Resources & Remuneration Committee and Investment Committee. Ms Penrose was appointed as a Non-Executive Director of BOQ on 26 November 2015. Ms Penrose has been a full-time director since 2014. Her executive career was in leadership and CFO roles, mainly in financial services. She is passionate about customer outcomes, financial management and well-versed in operating in a rapidly changing regulatory environment, which stems from her 20 years in banking with Commonwealth Bank of Australia and HSBC and eight years to early 2014 as a listed- company CFO and COO. Ms Penrose is a Non-Executive Director of Vicinity Centres Limited, Spark Infrastructure Group and Estia Health Limited. Ms Penrose was formerly a Non-Executive Director of AWE Limited, Landcom and Future Generation Global Investment Company Limited. She is a member of Chief Executive Women. Ms Penrose is Chair of the Audit Committee and is a member of each of the Human Resources & Remuneration, Risk and Investment Committees. Ms Tredenick was appointed a Non-Executive Director of BOQ in February 2011. Ms Tredenick is an experienced company director and corporate advisor with over 30 years’ experience in leading Australian businesses. Ms Tredenick is currently a Non-Executive Director of Insurance Australia Group Limited (IAG), Cricket Australia and Urbis Pty Ltd. She is a member of the Senate of the University of Queensland (UQ) as well as sitting on the board of the Ethics Centre. Ms Tredenick has previously held executive roles and been a member of the Executive Committee at National Australia Bank, MLC and Suncorp. Her experience includes holding the position of Chief Information Officer with each 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 is a member of each of the Human Resources & Remuneration, Risk and Nomination & Governance Committees. 11 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTName, qualifications and independence status DAVID WILLIS B Com, ACA, ICA Non-Executive Independent Director Experience, special responsibilities and other Directorships Mr Willis was appointed as a Non-Executive Director of BOQ in February 2010. Mr Willis has over 35 years’ experience in financial services in the Asia Pacific, the UK and the USA. He is a qualified Accountant in Australia and New Zealand and has had 26 years’ experience working with Australian and foreign banks. Mr Willis is the founder of Sydney-based Charity “The Horizons Program”. Mr Willis is Chair of the Human Resources & Remuneration Committee, and is a member of each of the Audit and the Nomination & Governance Committees. He is also a Non-Executive Director of BOQ’s insurance subsidiaries, St Andrew’s Australia Services Pty Ltd, St Andrew’s Life Insurance Pty Ltd and St Andrew’s Insurance (Australia) Pty Ltd. KATHLEEN BAILEY-LORD BA (Hons), MAMP, FAICD Non-Executive Independent Director Ms Bailey-Lord was appointed as a Non-Executive Director of BOQ in May 2019. Ms Bailey-Lord is an experienced company director and corporate advisor. Ms Bailey-Lord is currently a Non-Executive Director of QBE Insurance (AUSPAC), Melbourne Water and Monash College. GEORGE FRAZIS B. Eng (Hons), MBA Managing Director & CEO Executive Director JON SUTTON Managing Director & CEO Executive Director (resigned 5 December 2018) Ms Bailey-Lord has 20 years of senior executive experience across Australia, New Zealand and Asia. Ms Bailey-Lord has led businesses through complex and transformational change, often leveraging digital solutions to enable new business models. Ms Bailey-Lord’s experience spans the technology industry at IBM, financial services at ANZ Bank, professional services and marketing/media. Ms Bailey-Lord sits on the AICD Victorian Council and the AICD Technology, Governance and Innovation Panel (pro bono roles). She is a member of Chief Executive Women. Ms Bailey-Lord is a member of the Information Technology Committee and Human Resources & Remuneration Committee. Mr Frazis was appointed as Managing Director & CEO of the Bank on 5 September 2019. Mr Frazis has 26 years’ corporate experience, the past 17 years in Banking and Finance. Most recently, he was Chief Executive of Westpac Group’s Consumer Bank responsible for managing the end to end relationship with consumer customers. Prior to that Mr Frazis was Chief Executive Officer, St. George Banking Group and Chief Executive, Westpac New Zealand Limited and has also been Group Executive General Manager at National Australia Bank. Mr Frazis has held senior executive roles in Commonwealth Bank of Australia’s Institutional and Business Banking Divisions as well as Air New Zealand. He has also been a partner with the Boston Consulting Group and an officer in the Royal Australian Air Force. Mr Sutton was appointed Managing Director & CEO in January 2015 following four months as our Acting Chief Executive Officer. Mr Sutton originally joined BOQ in July 2012 as our 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 (CBA), he was central to the establishment of CBA’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. 12 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTCOMPANY SECRETARIES VICKI CLARKSON BA/LLB (Hons), FGIA, FCIS, GAICD Ms Clarkson joined BOQ on 3 April 2017. Ms Clarkson commenced her career as a corporate lawyer at Blake Dawson Waldron (now Ashurst) before joining Clayton Utz. Prior to her role as BOQ’s GM Corporate Governance & Head of Secretariat, Ms Clarkson held senior legal and governance roles in ASX listed entities including Aurizon Holdings Limited, Flight Centre Limited and Shine Corporate Ltd. Ms Clarkson is an active member and Deputy Chair of the Queensland State Council of the Governance Institute of Australia. FIONA DALY LLB, LLM, AGIA, ACIS, MAICD Ms Daly joined BOQ in October 2018 and was appointed joint company secretary on 30 April 2019. Ms Daly commenced her career as a corporate lawyer at Phillips Fox (now DLA Piper) before joining Allens. Prior to working for BOQ, Ms Daly held senior legal and regulatory roles including as senior legal counsel, global regulatory affairs manager and joint company secretary at Energy Developments, an international energy company. 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 A 12 2 13 13 13 13 13 13 13 4 4 B 13 2 13 13 13 13 13 13 13 4 4 A - 3 - - - - - - 7 - - B - 3 - - - - - - 7 - - A 7 - - 7 7 7 5 7 2 - - B 7 - - 7 7 7 5 7 2 - - A 6 - 7 8 3 - 8 - 5 - - B 8 - 8 8 3 - 8 - 5 - - A 2 - - 2 - - - 2 2 - - B 2 - - 2 - - - 2 2 - - Human Resources & Remuneration Committee - BOQ & St Andrews Information Technology Committee Investment Committee A - - 7 - 7 - 6 6 7 1 - B - - 7 - 7 - 7 7 7 1 - A - - - 6 6 6 - 6 - 1 3 B - - - 6 6 6 - 6 - 1 3 A 2 - 2 2 - - 1 - - - - B 2 1 2 2 - - 1 - - - - 13 7 7 8 2 7 6 2 Roger Davis (1) Jon Sutton (2) Warwick Negus Bruce Carter Richard Haire John Lorimer Karen Penrose Michelle Tredenick David Willis (3) Patrick Allaway (4) Kathleen Bailey-Lord (5) Total number of meetings held 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) Roger Davis is Chair of the Nomination & Governance Committee, a member of each of the Audit Committee and Risk Committees, and an attendee at all other Board Committees, (2) Jon Sutton was also a member of St Andrew’s Audit Committee and Risk Committee. Additionally, Mr Sutton was invited by the Board to attend the Risk Committee, Audit Committee, Human Resources & Remuneration Committee, Investment Committee and Information Technology Committee meetings (or part thereof). Mr Sutton resigned on 5 December 2018. (3) David Willis is also a member of the St Andrew’s Audit Committee and Risk Committee. (4) Patrick Allaway joined the Board on 1 May 2019 and the Information Technology Committee and Human Resources & Remuneration Committee on 1 July 2019. (5) Kathleen Bailey-Lord joined the Board and Information Technology Committee on 1 May 2019. 2019 Corporate Governance Statement BOQ’s governance arrangements and practices are set out in our Corporate Governance Statement. BOQ must also comply with its constitution, the Corporations Act 2001 (Cth), the ASX Listing Rules, the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (3rd Edition) (ASX Principles), the Banking Act 1959 (Cth), including Part IIAA of the Banking Executive Accountability Regime (BEAR) amongst other laws, and, as an Authorised Deposit-taking Institution, with 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 2019 Corporate Governance Statement available at: http://www.boq.com.au/aboutus_corporate_governance.htm 13 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTCONTENTS - OPERATING AND FINANCIAL REVIEW Page Highlights and strategy Disclosure considerations Group highlights Strategy Risk and regulatory developments Group performance analysis Income statement and key metrics Net interest income Non-interest income Insurance overview Operating expenses Capitalised investment expenditure Lending Business settings Asset quality Funding and liquidity Capital management Tax expense Divisional performance Retail income statement, key metrics and financial performance review BOQ Business income statement, key metrics and financial performance review Other segment income statement and financial performance review Appendices Reconciliation of statutory profit to cash earnings Operating cash expenses Property, plant & equipment (consolidated) Cash EPS calculations Issued capital Average balance sheet and margin analysis Distribution footprint Credit rating Regulatory disclosures 1 1.1 1.2 1.3 1.4 2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 3 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 5 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 14 15 15 16 18 19 27 27 29 30 30 31 31 32 35 35 40 43 44 45 45 47 49 50 50 51 52 53 53 54 56 57 57 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTOPERATING AND FINANCIAL REVIEW 1. HIGHLIGHTS AND STRATEGY 1.1 DISCLOSURE CONSIDERATIONS Future performance This document contains certain ‘forward-looking statements’ about BOQ’s business and operations, market conditions, results of operations, financial condition, capital adequacy and risk management practices which reflect BOQ’s views held and current expectations as at the date of this document. 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. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of BOQ and which may cause actual results to differ materially from those expressed or implied in such statements. Readers are cautioned not to place undue reliance on any forward-looking statements. Actual results or performance may vary from those expressed in, or implied by, any forward-looking statements. BOQ does not undertake to update any forward-looking statements contained in this document, subject to disclosure requirements applicable to it. Rounding In accordance with applicable financial reporting regulations and current industry practices, amounts in this report have been rounded off to the nearest one million dollars, unless otherwise stated. Any discrepancies between total and sums of components in tables contained in this report are due to rounding. Note on statutory profit and cash earnings Statutory profit is prepared in accordance with the Corporations Act 2001 (cth) 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 5.1 Reconciliation of statutory profit to cash earnings of the Appendices for a reconciliation of cash earnings to statutory net profit after tax. Refer to the Reconciliation of statutory profit to cash earnings chart below. The main exclusions relate to: • Regulatory/compliance costs including external costs and other related costs associated with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), The Banking Executive Accountability Regime (BEAR), Code of Banking Practice, Comprehensive Credit Reporting, Anti-Money Laundering (AML) compliance and regulatory matters of an extraordinary nature consistent with prior periods; • Amortisation of acquisition fair value adjustments arising from the historical acquisition of subsidiaries; and • Hedge ineffectiveness representing earnings volatility from hedges that are not fully effective and create a timing difference in reported profit. These hedges remain economically effective. Figures disclosed in this report are on a cash earnings basis unless stated as being on a statutory profit basis. Unless otherwise stated, all financial comparisons in this document refer to the prior half (1H19), current half (2H19) and the prior year (FY18). These non-statutory measures have not been subject to review or audit. Reconciliation of statutory profit to cash earnings ($m) 8 1 6 1 320 6 298 Statutory Net Profit after Tax Amortisation of fair value adjustments Hedge ineffectiveness Integration/ transaction costs Regulatory/ compliance Legacy Cash Earnings after Tax 15 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT1.2 GROUP HIGHLIGHTS Cash earnings after tax ($m) 203 16 372 DOWN 14% 320 Statutory profit after tax ($m) 191 16 336 DOWN 11% 298 187 182 190 167 153 175 174 162 156 142 2H17 1H18 2H18 1H19 2H19 2H17 1H18 2H18 1H19 2H19 Impact of disposal of vendor finance entity Impact of disposal of vendor finance entity Cash basic earnings per share (EPS) (cents) Dividends per ordinary share (cents) 52.1 4.1 94.7 DOWN 16% 79.6 48.0 46.5 48.2 41.8 37.8 8 38 76 DOWN 14% 65 38 38 34 31 2H17 1H18 2H18 1H19 2H19 2H17 1H18 2H18 1H19 2H19 Impact of disposal of vendor finance entity Special dividend Cash net interest margin (NIM) (%) Cash cost to income (CTI) (%) 1.98 DOWN 5bps 1.93 47.2 1.3 47.5 UP 300bps 50.5 1.96 1.97 1.98 1.94 1.92 45.9 47.6 47.3 49.5 51.5 2H17 1H18 2H18 1H19 2H19 2H17 1H18 2H18 1H19 2H19 Impact of disposal of vendor finance entity Cash return on average equity (ROE) (%) Cash return on average tangible equity (ROTE) (%) 10.9 0.8 9.9 DOWN 160bps 8.3 14.3 1.1 12.9 DOWN 210bps 10.8 10.1 9.9 10.0 8.8 7.8 13.2 12.9 13.0 11.4 10.2 2H17 1H18 2H18 1H19 2H19 2H17 1H18 2H18 1H19 2H19 Impact of disposal of vendor finance entity Impact of disposal of vendor finance entity 16 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORT1.2 GROUP HIGHLIGHTS (CONTINUED) CASH EARNINGS AFTER TAX CASH NET INTEREST MARGIN $320m Decreased by 14 per cent on FY18. 1.93% Down five basis points from FY18 driven by elevated basis levels and the impact of the lower rate environment. LOAN IMPAIRMENT EXPENSE COMMON EQUITY TIER 1 $74m Up seven basis points to 16 basis points of lending and an 80 per cent uplift on FY18 following the implementation of the new AASB 9 Financial Instruments (AASB 9) standard. 9.04% Decrease of 27 basis points for FY19 reflecting higher growth in capital intensive lending, higher capitalised investment, reduced earnings and lower dividend reinvestment plan participation. OPERATING EXPENSES $550m Four per cent increase on FY18. DIVIDENDS FINAL & INTERIM $0.65 Decreased 14 per cent on FY18. BOQ’s cash earnings after tax for FY19 was $320 million, a 14 per cent decrease from FY18. Statutory net profit after tax decreased 11 per cent to $298 million. The reduction in earnings was driven by a combination of lower income, higher operating expenses and higher loan impairment expense. increase in capitalised investment. This contributed to an increase in IT expenses in FY19 and will lead to a higher level of amortisation in future periods as new functionality is deployed. Opportunities to improve efficiency continue to be explored to minimise the impact of these expense headwinds. Asset quality remains sound with impaired assets of $197 million or 43 basis points of gross loans, while arrears remain at relatively low levels. Despite this, there has been an increase in provisions, as a result of the implementation of a new forward looking collective provisioning model under AASB 9 and following impairment of a small number of larger commercial exposures. This has in turn led to a $33 million increase in loan impairment expense to $74 million, or 16 basis points of gross loans. Despite this increase, BOQ’s portfolio remains well provisioned with no systemic areas of stress emerging. BOQ remains appropriately capitalised with a common equity tier one ratio of 9.04 per cent. This is lower than the 9.31 per cent reported at the end of FY18, due primarily to higher growth in more capital-intensive commercial lending and leasing as well as higher capitalised investment. There was also a reduction in dividend reinvestment plan participation for the 2018 final dividend and 2019 interim dividend, which combined with lower earnings, has reduced organic capital generation. Total income reduced two per cent compared to FY18, with net interest income down $4 million and non interest income down $17 million or 12 per cent. While lending growth of $937 million or two per cent was achieved over the year, this was offset by a five basis point reduction in net interest margin to 1.93 per cent. There were strong levels of lending growth in BOQ Finance ($667 million), Virgin Money Australia (VMA, $914 million) and BOQ Specialist ($756 million), but a contraction in branch network lending balances as the impact of lower borrower demand and a smaller branch footprint continued to reduce new business volumes. The five basis point reduction in NIM was driven primarily by competition and discounting for new business as well as the higher bank bill swap rate and associated increase in hedging costs in 1H19. Non-interest income was lower due to a combination of reduced banking fees, the transition of the BOQ Business merchant offering to a third party arrangement, and lower insurance income. Operating expenses increased by four per cent on FY18. Following the Final Report from the Royal Commission, costs associated with addressing regulatory and compliance requirements have increased for BOQ and across the industry to meet heightened regulatory and compliance expectations. As announced as part of the FY18 results, BOQ has embarked on a transformation program to improve technology platforms, meet new regulatory and compliance requirements and deliver digital offerings that improve the BOQ customer experience, supported by an 17 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT1.3 STRATEGY BOQ is a financial institution whose primary function is gathering deposits and lending. It is listed on the Australian Securities Exchange (ASX) and regulated by the Australian Prudential Regulation Authority (APRA) as an authorised deposit-taking institution (ADI). BOQ was established in 1874 and was the first Permanent Building Society in Queensland. It has evolved into a national institution with a network of retail branches and brokers across Australia. BOQ’s primary business segments are Retail Banking and BOQ Business and the Group operates a number of brands including BOQ, BOQ Specialist, BOQ Finance, Virgin Money (Australia) and St Andrew’s Insurance, which are covered in more detail below. BOQ’s corporate purpose is to deliver more human, empathetic experiences that help customers and communities prosper. This is achieved through the values of: We Show We Care; We Act With Integrity; We Achieve Together; and We Make a Difference. Given the changing operating environment, in 2019 BOQ has commenced a strategic review, recognising the need to take decisive action to transform to a more sustainable business model with a clear strategy to return to growth. An update on BOQ’s strategy is planned for February 2020. During FY19, BOQ has been aiming to build a differentiated position in the Australian financial services sector by focusing on niche customer segments that value a more intimate banking relationship. This strategy has been delivered through four strategic pillars: Customer in Charge; Grow the Right Way; There’s Always a Better Way; and Loved Like No Other. Customer in Charge is about improving customers’ experience and expanding BOQ’s avenues for growth by putting customers in charge of when, where and how they choose to engage with BOQ. This is regardless of whether they come into a branch, use online services, call on the phone or buy products through a third party intermediary. Many of BOQ’s retail branches are run by local owner managers, meaning the person running the branch owns the branch. As small business owners, owner managers know what it means to deliver personal service. Through specialisation and deep industry knowledge in niche commercial segments, including medical & dental, corporate healthcare & retirement living, hospitality & tourism and agribusiness, BOQ also provides a level of support to business banking customers unique to that offered by other banks. BOQ’s home loan products, including VMA home loans, are distributed by more than 7,500 accredited brokers, making BOQ more accessible to customers who prefer to use brokers. BOQ has also been working to streamline customer experience across channels through the consolidation of customer touchpoints. A number of projects are also underway to improve the digital experience for BOQ customers, including upgrades to internet and mobile banking platforms. Grow the Right Way is about building a strong and profitable business by making the right decisions about where and how to grow. This includes focusing on niche customer segments that value an intimate banking relationship. BOQ has continued its prudent approach to lending, maintaining a high quality lending portfolio. BOQ adheres to APRA’s serviceability and validation guidelines and the delivery of a lending transformation program will deliver an improved customer experience. BOQ has also been selective in the commercial industry segments it lends to, has clearly defined risk appetite statements which take into account geographic, industry and a number of other risk factors. There’s Always a Better Way is about BOQ’s commitment to making its systems and processes simpler, faster and smarter. The aim is to improve efficiency, reduce costs, deliver better customer service and establish a nimble organisation positioned to take advantage of a rapidly changing landscape. BOQ is continuing to make improvements to retail, commercial and lease management lending systems. Ongoing focus on efficiency across the Group to minimise expense growth, whilst investing in new technology aligned to a simplified target architecture will enable BOQ to respond more quickly to emerging opportunities than has been possible in the past. Loved Like No Other is about how BOQ maintains positive stakeholder relationships by living its values, creating a place where people love to work and contributing to the communities in which it operates. In recent years, BOQ has reinforced its commitment to ethical conduct and supporting its customers. It has also introduced a range of initiatives that bring BOQ’s purpose and values to life and drive a customer centric culture. BOQ continues to demonstrate its commitment to a diverse and inclusive workforce through a number of diversity initiatives and its reconciliation journey. BOQ is committed to engaging positively with all stakeholders in a fair and transparent way to create value for customers, employees, investors and the communities in which it operates. More information on BOQ’s approach to sustainability is available in the sustainability section of the BOQ website (https://www.boq.com.au/Shareholder-centre/sustainability). Information on BOQ’s corporate governance practices can be located in BOQ’s Corporate Governance Statement available on the corporate governance page of the BOQ website (https://www.boq.com.au/About-us/corporate-governance). Portfolio of businesses As noted above, the Group’s subsidiaries and brands include BOQ Specialist, BOQ Finance, Virgin Money Australia and St Andrew’s which are described below. BOQ Specialist delivers distinctive banking solutions to niche market segments including medical, dental and veterinary professionals. BOQ acquired the business (previously Investec Professional Finance) as part of Investec Bank (Australia) Limited in 2014. BOQ Specialist operates as a separate division of BOQ’s Business Bank. BOQ Finance is a wholly owned subsidiary of BOQ specialising in asset, cash flow and structured finance solutions. BOQF is a mid-market financier providing deep industry and product skills to its partner base. BOQF has been operating in the Australian and New Zealand markets for more than 45 years. Virgin Money Australia is a retail financial services company, which provides a wide range of financial products that are easy to understand as well as being a compelling alternative to the big banks. BOQ acquired Virgin Money Australia in 2013 and it operates as a standalone business within the BOQ Group. St Andrew’s is a provider of consumer insurance and life insurance products in Australia. In response to a change in industry dynamics, St Andrew’s has made the decision to cease distribution of consumer credit insurance. Existing customers will continue to be served and the interests of existing policyholders will remain a priority. 18 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORT1.4 RISK AND REGULATORY DEVELOPMENTS The financial services industry continues to face heavy scrutiny from the Federal Government, regulators, investors and consumers. In recent years, a significant number of regulatory consultations, inquiries and industry reviews led to a number of changes that could impact BOQ. A summary of the key areas of reform and areas of increased risk focus are outlined below. REGULATORY DEVELOPMENTS Anti-Money Laundering and Counter Terrorism Financing Act 2006 Compliance Since the emergence of industry issues with Anti-Money Laundering (AML) / Counter Terrorism Financing (CTF) compliance in 2017, the Bank has continued to enhance and strengthen its AML/CTF systems and controls. During this period the Bank has been working in close consultation with Australian Transaction Reports and Analysis Centre (AUSTRAC) in relation to the Bank’s AML/CTF program. AUSTRAC conducted a scheduled on-site review of the Bank’s AML/ CTF systems and controls in July 2018 to assess progress and compliance with AML/CTF legislation. As noted in the Directors Report for the half year ended 28 February 2019, following this scheduled on-site review, the Bank received a Compliance Assessment Report from AUSTRAC on 21 December 2018 (Report). The Report identified potential compliance contraventions of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth). Since receipt of the Report, the Bank has continued to consult and update AUSTRAC about the significant progress that has been made to investigate and address the issues identified in the Report. In addition, the Bank has continued to strengthen its AML/CTF Program. This work involves additional investment in prevention mechanisms, ensuring an effective and efficient control environment, and uplifting compliance capability. The Bank has a long history of working co-operatively with regulators and law enforcement agencies to prevent money laundering and terrorism financing. The Bank is committed to fully meeting regulatory requirements and will continue to monitor and improve compliance with AML/CTF legislation in conjunction with AUSTRAC. Unfair contracts In November 2016, the Bank implemented new terms and conditions for its small business customers in response to the introduction of unfair contract terms legislation by the Federal government. Notwithstanding the measures taken by the Bank, on 4 September 2019, the Australian Securities and Investments Commission (ASIC) commenced proceedings alleging that certain terms in the Bank’s small business contracts were nevertheless unfair contract terms in breach of the ASIC Act. Both prior to and following the issue of proceedings, the Bank has sought to engage with ASIC at all times in a constructive manner to achieve a resolution of this issue. As part of that process, the Bank has pro-actively volunteered to carry out a review of all small business lending contracts entered into on or after November 2016 with a view to identifying if there are any instances where the Bank has relied upon or enforced one or more of the terms (alleged by ASIC to be unfair) in a manner which is adverse to the customer’s interests. While the Bank’s review is ongoing, it currently believes that very few, if any, customers have been adversely affected by the alleged unfair contract terms. While any question of liability for compensation for any affected customer would turn, in part, on whether ASIC is correct in any of its assertions made in the proceedings, on any likely scenario the potential total compensation payable to customers will be very limited, if not zero, even if any terms are determined to be unfair contract terms within the meaning of the Act. The Bank continues to communicate with ASIC regarding the proceedings. In the meantime, the Bank has also commenced a further review of its small business contract terms and conditions. This project involves additional investment in reviewing various suites of standard terms applicable to relevant Bank contracts. Consistent with the Bank’s long history of working co-operatively with regulators and law enforcement agencies, the Bank will continue to monitor compliance with the ASIC Act and its unfair contract terms provisions, and seek to continue to work constructively with ASIC. Meeting revised regulatory reporting requirements The economic and financial statistics (EFS) collection – previously the Domestic Books collection – is a series of reporting requirements administered on behalf of the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia (RBA) (collectively, the Agencies) by APRA. The collection focuses on the Australian (domestic) operations and activities of authorised deposit-taking institutions (ADIs) and Registered Financial Corporations (RFCs). The EFS collection is being introduced in three phases progressively over late FY19 and FY20. The EFS collection materially increased the quantity of data required from ADIs and RFCs, and has resulted in heightened scrutiny regarding the quality and governance supporting the relevant data. The Bank is committed to meeting its regulatory reporting requirements. In relation to EFS, this has created challenges given data requirements, complexity of origination systems and the need for additional controls. A material program of work has been prioritised to raise the standards of data quality and data governance to support the Bank’s ability to provide timely and accurate EFS data to APRA on behalf of the Agencies. The Bank acknowledges the priority of this work and will continue to work closely with APRA and other Agencies. Consumer Credit Insurance Regulatory and community expectations continue to impact the insurance sector, particularly consumer credit insurance. In response to the release of ASIC’s Report 622 relating to consumer credit insurance, St Andrew’s has made the decision to cease sale of consumer credit insurance. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established on 14 December 2017 and conducted through 2018 and 2019. The Commissioner, the Honourable Kenneth Madison Hayne AC QC, submitted an Interim Report to the Governor-General on 28 September 2018 which was tabled in Parliament on 28 September 2018. The final report was submitted to the Governor-General on 1 February 2019 and it tabled in Parliament on 4 February 2019. In response, the Government announced that it was taking action on all 76 recommendations contained within the Commission’s Final Report and in a number of important areas is going further. 19 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT RISK AND REGULATORY DEVELOPMENTS (CONTINUED) 1.4 The Government said its response would address the issues identified by the Royal Commission and substantially build on the Government’s existing agenda by: • strengthening protections for consumers, small businesses and rural and regional communities; • enhancing accountability; • ensuring strong and effective financial system regulators; and • further improving consumer and small business access to redress. In undertaking these reforms, the Government stated it would ensure that the financial system continued to provide consumers and small businesses with access to credit and other affordable financial services that they need, and that the financial system remains competitive, efficient and resilient. To ensure these reforms are implemented efficiently and effectively, the Government stated that the Treasury Royal Commission Taskforce will continue as a Financial Services Reform Implementation Taskforce. To ensure ongoing coordinated delivery of reforms, a Financial Services Reform Implementation Committee was also established consisting of the Treasury, ASIC, APRA, the Office of the Parliamentary Counsel and other agencies as required. Starting in three years, the Government will establish an independent inquiry to review and assess whether industry practices have changed following the Royal Commission and have led to better consumer outcomes. The Government will also require a similar assessment of the regulators in three years by a new regulator oversight body that the Government has agreed to establish. A number of the recommendations made by the Royal Commission, and the subsequent response from the Government and regulators, have and will impact BOQ as reforms continue to be implemented in the years ahead. BOQ is committed to meeting its regulatory and compliance obligations and will implement changes as required to comply with regulatory changes emanating from the Royal Commission and the Government’s response. APRA self-assessments In June 2018, APRA wrote to the boards of 36 authorised deposit- taking institutions, insurers and superannuation licensees, including Bank of Queensland, requesting a written self- assessment of the effectiveness of governance, accountability and culture in their institution. The request followed the release of the Final Report of the Prudential Inquiry into the Commonwealth Bank of Australia. Across the industries, four themes emerged: • non-financial risk management requires improvement; • accountabilities are not always clear, cascaded and effectively enforced; • acknowledged weaknesses are well-known and • some have been long-standing; and risk culture is not well understood, and therefore may not be reinforcing the desired behaviours. BOQ continues to evolve and mature its capability to manage non-financial risks in order to deliver sustainable improvement in risk management practices. BOQ will be undertaking an on-site review with APRA in the near term. Banking Executive Accountability Regime As part of the 2017-18 Budget, the Federal Government announced that it would legislate to introduce a new Banking Executive Accountability Regime (BEAR). The intention of BEAR is to enhance the responsibility and accountability of banks and their directors and senior executives. The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017 (Cth) passed through Federal Parliament on 7 February 2018 and received its Royal Assent on 20 February 2018. Large financial institutions needed to comply with the regime on 1 July 2018, with a deferral period for commencement of the variable remuneration requirements to 1 January 2019. Small and medium sized ADIs (which includes BOQ) needed to comply with BEAR from 1 July 2019. Parliamentary Joint Committee on Corporations and Financial Services – Operation and effectiveness of the Franchising Code of Conduct On 22 March 2018, the Senate referred an inquiry into the operation and effectiveness of the Franchising Code of Conduct to the Parliamentary Joint Committee for report by 30 September 2018. The Committee’s report was released in March 2019 and, in response, the Government has established an inter-agency Franchising Taskforce to examine the feasibility and implementation of recommendations in the report. The Taskforce will provide advice to the Minister for Employment, Skills, Small and Family Business and the Assistant Treasurer in the second half of 2019, which will inform the Government’s response to the Committee’s report. The response will provide an achievable plan for the reform of the franchising framework that is fair, effective and accountable for franchisors and franchisees while avoiding unnecessary regulatory burden. BOQ will continue to engage cooperatively with the Government when the response is released. Australian Financial Complaints Authority (AFCA) On 1 May 2018, the Government announced the authorisation of Australian Financial Complaints Limited to operate AFCA, and members of the inaugural AFCA Board. AFCA has become the one-stop shop external dispute resolution (EDR) body for disputes arising in the financial sector. The objective of AFCA is to provide free, fast and binding dispute resolution for consumers and small businesses and to increase transparency of dispute resolution practices by enabling ASIC to publish banks’ internal dispute resolution data. AFCA commenced accepting complaints from 1 November 2018. Any existing FOS disputes continued to be dealt with under the previous FOS terms of reference until resolved. Earlier this year, the Government approved amendments to the AFCA Rules which allows AFCA to accept eligible complaints about conduct that occurred on or after 1 January 2008. This change took effect from 1 July 2019, and customers will be able to raise these complaints with AFCA until 30 June 2020. 20 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORT1.4 RISK AND REGULATORY DEVELOPMENTS (CONTINUED) New Banking Code of Practice The new Banking Code of Practice took effect from 1 July 2019. The Banking Code is enforceable as part of a customer’s contract with their bank. This is a strong commitment to ethical and transparent behaviour, responsible lending and greater financial protections for customers. New additions to the Banking Code include: • More information about changes to customers’ accounts and greater assistance to vulnerable customers; • Simplified small business loan contracts with fewer conditions for more than 92 per cent of businesses; • New cooling off periods for guarantors; and • An independent compliance committee with specific small business and agribusiness expertise to investigate breaches of the Banking Code. The recommendations from the Royal Commission include six proposed further changes to the Banking Code. Amendments to the Code covering five of these changes have been drafted and submitted to the regulators for approval. These changes are due to be implemented by March 2020. Consumer Data Right Bill and Open Banking From 2017 to 2018, the Government consulted on exposure draft legislation to implement the Consumer Data Right (CDR). The CDR will provide individuals and businesses with a right to efficiently and conveniently access specified data in relation to them held by business; and authorise secure access to this data by trusted and accredited third parties. The CDR will also require businesses (like BOQ) to provide public access to information on specified products they have on offer. CDR is designed to give customers more control over their information, leading to more choice in where they take their business, or more convenience in managing their money. The Government has committed to applying the CDR in the banking, energy and telecommunications sector. For the banking sector, this is referred to as “Open Banking” and will be the first sector to apply the CDR. The CDR is intended to reduce the barriers that currently prevent customers from switching between banks. Banks will be required to provide open access to data on product terms and conditions, transaction use, and will have the ability to direct that their data be shared with other service providers (banks and non-banks). On 9 May 2018, the Government agreed to the recommendations of the Review into Open Banking, both for the framework of the overarching CDR and for the application of the right to Open Banking. The CDR bill passed Parliament on 1 August 2019. The CDR rules for banking (or Open Banking) were published by the ACCC on 2 September 2019, providing increased detail on the rules for Open Banking and a refined approach to phasing. The first important compliance milestone for major banks is 1 February 2020, where they will need to be able to share consumer data with accredited persons on transactional accounts, with loan account data required by 1 July 2020. All remaining banks (including BOQ) will be required to comply with CDR rules with a 12-month delay from when majors must comply. Introduction of the Modern Slavery Act On 28 June 2018, the Government introduced the Modern Slavery Bill 2018. This Bill requires certain organisations based in, or operating in Australia, which have an annual consolidated revenue of more than $100 million (defined as ‘reporting entities’), to annually report on the risks of modern slavery in their operations and supply chains, and to address those risks. The annual statements will need to address mandatory criteria set out in the Bill, including the entity’s key modern slavery risks and describing their actions to address those risks. These criteria will provide certainty for business about how to report and ensure statements can be easily compared. The Modern Slavery Act was passed by Parliament on 29 November 2018 and the reporting requirement entered into force on 1 January 2019. BOQ will submit its first Modern Slavery Statement to the Minister of Home Affairs within six months after the end of BOQ’s FY20 reporting period (by the end of February 2021). APRA’s proposed revisions to the capital framework for ADIs On 14 February 2018, APRA released two discussion papers for consultation with ADIs on proposed revisions to the capital framework. The papers include proposed revisions to the capital framework resulting from the Basel Committee finalising the Basel III reforms in December 2017, as well as other changes to better align the framework to risks, including in relation to housing lending. APRA also released a discussion paper on implementation of a leverage ratio requirement. APRA stated that it is not seeking to increase capital requirements beyond what was already announced in July 2017 as part of the ‘unquestionably strong’ benchmarks. The key proposed changes to the capital framework include: • lower risk weights for low LVR mortgage loans, and higher risk weights for interest-only loans and loans for investment purposes, than apply under APRA’s current framework; • amendments to the treatment of exposures to small-to medium-sized enterprises (SME), including those secured by residential property under the standardised and IRB approaches; • constraints on IRB ADIs’ use of their own parameter estimates for particular exposures, and an overall floor on risk weighted assets relative to the standardised approach; and • a single replacement methodology for the current advanced and standardised approaches to operational risk. On 7 June 2019, APRA released its response to the first round of consultation on proposed changes to the capital framework for ADIs. APRA is proposing to revise some of its initial proposals, including: • for residential mortgages, some narrowing in the capital difference that applies to lower risk owner-occupied, principal- and-interest mortgages and all other mortgages; • more granular risk weight buckets and the recognition of additional types of collateral for SME lending, as recommended by the Productivity Commission in its report on Competition in the Financial System; and • lower risk weights for credit cards and personal loans secured by vehicles. 21 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT RISK AND REGULATORY DEVELOPMENTS (CONTINUED) 1.4 APRA’s consultation on the revisions to the ADI capital framework is a multi-year project. APRA expects to conduct one further round of consultation on the draft prudential standards for credit risk prior to their finalisation. It is intended that they will come into effect from 1 January 2022, in line with the Basel Committee on Banking Supervision’s internationally agreed implementation date. An exception is the operational risk capital proposals for ADIs that currently use advanced models: APRA is proposing these new requirements be implemented from the earlier date of 1 January 2021. APRA’s consultation on increasing the loss-absorbing capacity of authorised deposit-taking institutions On 8 November 2018, APRA released a discussion paper outlining its proposed changes to the application of the capital adequacy framework for authorised deposit-taking institutions (ADIs) to support orderly resolution in the unlikely event of failure. On 8 July 2019, APRA released its response to submissions on proposed changes. For small to medium ADIs, APRA stated that extra loss- absorbing capacity would be considered on a case-by-case basis as part of the resolution planning process. APRA’s amendments to guidance on residential mortgage lending On 4 July 2019, APRA announced that it would proceed with proposed changes to its guidance on the serviceability assessments that ADIs perform on residential mortgage applications. APRA confirmed its updated guidance on residential mortgage lending would no longer expect ADIs to assess home loan applications using a minimum interest rate of at least 7 per cent. Instead, ADIs will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate. KEY BUSINESS RISKS AND AREAS OF INCREASED RISK FOCUS The following business risks are considered to be key risks to BOQ’s performance and growth and identified under BOQ’s Risk Management Framework. Compliance Risk The risk to earnings and capital arising from violations of or non-compliance with laws, rules, regulations, prescribed practices or ethical standards. It also includes overseeing the establishment and maintenance of risk-based controls to mitigate the risks associated with money laundering and terrorism financing. The policies adopted to manage Compliance Risk include a Conflicts of Interest Policy, Whistleblower Policy and Breach & Incident Management Process. BOQ employees also undertake a range of compliance training to manage Compliance Risk, including in relation to Consumer Credit Insurance, Consumer Protection, Code of Banking Practice, National Consumer Credit Protection, Privacy and Anti-money Laundering & Counter Terrorism Financing. BOQ continues to enhance and develop policies, frameworks and training to meet ongoing and new compliance obligations. Regulatory Risk The risk that new or changes in legislation and regulations will materially impact a security, business, sector, or market. A change in legislation, regulations or made by government, regulatory and/ or industry bodies may increase the costs of operating a business, reduce the attractiveness of an investment, or change the competitive landscape. BOQ manages Regulatory Risk through monitoring changes to legislation, regulations and/or industry codes, understanding and assessing the potential impacts to BOQ’s products, services, businesses and operations and developing programs that support the implementation of any changes impacting BOQ or its customers. Credit Risk The risk that a debtor or transactional counterparty will default and/or fail to meet their contractual obligations, and includes the risk of loss of value of assets due to deterioration in credit quality and credit concentration risk. This risk primarily arises from BOQ’s lending activities and the holding of various financial instruments for investment or liquidity purposes. BOQ has a set of well documented credit risk policies to manage these risks within the limits set by the Board. They include the Treasury Credit Policy, Large Exposures Policy, Sector Risk Concentration Policy, the Delegated Approval Authority Policy, and specific credit policies for each customer segment and their respective lending products. Insurance Risk The risk that BOQ incorrectly assesses its risk of exposure to financial loss and inability to meet its liabilities due to inadequate or inappropriate insurance product design, claims management or reinsurance management. Liquidity and Funding Risk The risk that BOQ cannot meet or generate sufficient cash resources to meet its payment obligations in full as they fall due, or can only do so at materially disadvantageous terms. BOQ’s Liquidity and Funding Policy and Contingency Funding Plan are used to manage this risk. Market Risk This includes Traded Market Risk (the risk that the value of an investment will decrease due to moves in market factors such as foreign exchange rates, interest rates, equity prices, commodity price and credit spreads) and Non Traded Market Risk (the risks arising from the various structural dimensions of the balance sheet including Interest Rate Risk in the Banking Book, Liquidity, Funding, Securitisation and Capital Risk). BOQ has adopted a number of Treasury Risk Policies to manage Market Risk. Operational Risk The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risk management covers a wide variety of risks including legal risk, franchise risk, environmental sustainability, Enterprise Continuity Management (comprising business continuity management, crisis management and disaster recovery, IT Security and technology/system risk) and human resources risk management. BOQ has implemented a number of systems and policies to address operational risks including a Code of Conduct, Outsourcing Policy (including off-shoring of services), Product Development Policy, Information Security Policy and IT risk management policies, Workplace Health & Safety Policy, Workplace Rehabilitation Standard and Harassment, Discrimination & Bullying Standard. 22 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTBOQ’s values, together with its range of policies and frameworks are the foundational elements for how its people behave and are accountable for the decisions they make. BOQ is committed to ensuring an ethical and accountable behaviour across all staff within the Group and its strategic partners, which is supported through: • Ongoing education of all staff in ethics and values; • Dedicated Ethics & Security Committee made of Senior Executive and Management who both review and make decisions on actual or alleged misconduct issues in addition to analysing potential trends for future risks to the group; • Appointment of a Customer Advocate who champions the voice of the customer and acts as the key internal arbitrator with a continual focus on the best interests of the customer and minimising the likelihood of future complaints or incidents; • Active participation in independent Industry Risk Culture Survey that benchmarks BOQ against peers around attitudes to risk and governance. The outcomes from the survey are then used to assist the ongoing development of risk and culture program across the group; and • The reporting and monitoring of Risk Culture has continued to mature, with the ongoing enhancement of risk culture dashboards and the rollout of divisional operational risk committees that support good governance of both Risk and Culture. Cyber and business resilience Risk events that result from the external environment continue to be a major focus for all financial institutions and third parties that support us. The increase of cyber-related attacks, environmental and weather events, pandemics or systems failures can significantly disrupt the systems and processes that enable us to protect our staff, customers and shareholders. Across BOQ both Cyber and Business Continuity are regarded as material business risks that are actively managed and monitored across the Group. Critical to BOQ’s investment in Cyber and Business Resilience is its: • Specialised and highly-experienced staff; • Ongoing simplification of systems to reduce the point of potential compromise; • Development of policies, processes and controls that reflect international and industry standards and best practices; • Relationships with strategic partners, including the assessment of their systems and processes, to ensure they continue to maintain the same level of resilience and security as BOQ; and • Ongoing development of business continuity plans and responses through scenario based testing of systems and processes. RISK AND REGULATORY DEVELOPMENTS (CONTINUED) 1.4 Contagion Risk The risk that problems arising in BOQ’s subsidiary companies may compromise the financial and operational position of BOQ as an ADI. Reputation Risk The risk to earnings and capital arising from negative public opinion resulting from the loss of reputation, public trust or standing, and is considered to be a risk derived from business activities and is considered in conjunction with the underlying risks resulting from those activities. Securitisation Risk The risk to earnings in the event of a major disruption in market demand for asset backed securities thereby increasing BOQ’s funding costs as the BOQ Group seeks alternative, more expensive, funding sources. This may have an impact on net interest margin, profitability and may limit securitisation as a funding and capital management tool. Strategic Risk The potential for financial loss associated with the vulnerability of business earnings to changes in the strategic environment. Talent Risk The risk arising from the inability to attract or retain the quality of talent required to deliver for customers, shareholders and the communities in which the Bank operates. Cyber Security Risk The risk arising from failure to secure and protect computers, networks, programs and data from unintended or unauthorised access. Conduct Risk The risk of inappropriate, unethical or unlawful behaviour by Management or employees, which could have significant ramifications for our customers, shareholders, clients, counterparties and the markets in which the Bank operates. Sustainability and Climate Change Risk Climate change is becoming increasingly relevant to businesses in the Australian economy. The ongoing effects of climate change risks may impact the long-term prosperity of Australia’s economy, environment and society. In addition to the above, there are a number of areas of increased risk focus, driven largely by external developments such as changes in community expectations, technology and regulatory activity. These include: Ethics and business conduct The conduct of the financial services industry has been under increasing scrutiny with a range of regulatory investigations impacting not just the brand and reputation of the companies involved, but also heightening attention across the broader industry. Regardless of the outcome, these investigations incur a cost and a loss of value, so it’s understandable that stakeholders want greater clarity on how ethics and business conduct are managed. While it is not possible to control the actions of every individual within a company, strong management controls and a culture that values integrity go a long way to minimising the risk of adverse employee behaviour. 23 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT1.4 RISK AND REGULATORY DEVELOPMENTS (CONTINUED) Climate change The risks and opportunities of climate change are becoming increasingly relevant to most businesses in the Australian economy. Through the Paris Agreement of 2015, governments around the world agreed to take action to limit global warming to less than 2 degrees Celsius above pre-industrial levels and as close to 1.5 degree Celsius as possible and to transition to net zero emissions by 2050. As a result, the Australian Government has set a target to reduce emissions by 26-28 per cent below 2005 levels by 2030. The transition to a low carbon economy and the ongoing effects of climate change will impact the long-term prosperity of Australia’s economy, environment and society. Therefore businesses are increasing the level of disclosure around how the risks and opportunities of climate change are relevant to their particular business. In 2017, the Financial Stability Board’s Taskforce on Climate- related Financial Disclosures (TCFD) published its final report which set out its recommendations for helping businesses disclose climate-related financial information. The TCFD report establishes recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change, and provide decision- useful information to lenders, insurers, and investors. The recommendations are structured around four thematic areas that represent core elements of how organisations operate: governance, strategy, risk management, and metrics and targets. An overview of the information relevant to BOQ across these themes is provided below. Governance Management of risk is ultimately overseen by the BOQ Board and Risk Committee. BOQ has an integrated Risk Management Framework in place to identify, assess, manage and report risks on a consistent and reliable basis. This framework has been developed to accord with the tolerance levels set out in the BOQ Risk Appetite Statement. A number of risks have been identified as material business risks for BOQ under this Risk Management Framework, including credit risk, operational risk, reputation risk and strategic risk. The Board delegates day to day management of the business to the management team. This includes identification of opportunities for the business as well as management of risk within the risk appetite that has been approved by the Board. The management team utilises the Executive Committee, Business Performance Committee and Executive Credit Committee as well as various policies to assess and manage risks. Strategy Risks The following tables outline the potential climate-related risks which are currently considered to be most relevant to BOQ in the context of its future strategies. The physical risks identified are more likely to manifest over the medium to long term (5-30 years+). The timing and magnitude of transition risks are less certain but have the potential to arise sooner (3-5 years), depending on actions taken by governments, regulators, businesses and consumers to expedite a transition to a low carbon economy. Transition risks Climate-related risks Potential financial impacts for BOQ Potential actions for BOQ to mitigate Reduced income for businesses or individuals currently reliant on income from unsustainable sources, or increased climate- related transition expenses Increased loan impairment expense (due to reduced capacity for customers to repay) Changing customer behaviour, including reduced demand for certain products Decreased income (if BOQ product/service offerings do not meet customer needs/ expectations) Increased expenses Costs to offset emissions or transition to lower emissions energy/fuel sources; Regulatory change; Enhanced reporting obligations; Increased stakeholder concern; Exposure to litigation; Increased insurance premiums Identify existing customers most at risk and assist with transition; Consider sustainability of income in any new lending. Monitor community attitudes and customer behaviour; Operate in a way that aligns with customer and community expectations; Design and distribute products and services that meet customer needs and expectations. Identify opportunities to reduce exposure to higher emission energy/fuel sources; Monitor community and stakeholder views and expectations; Continue to enhance disclosures to meet stakeholder expectations. BOQ will continue to monitor and assess external developments which may lead to increased transition risk, in order to better understand the likely risks that may arise for BOQ over the short, medium and long term. In its commercial lending and BOQ Finance portfolios, BOQ has limited direct lending exposure to the sectors at highest risk from a more rapid transition. 24 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORT1.4 RISK AND REGULATORY DEVELOPMENTS (CONTINUED) Physical risks Climate-related risks Potential financial impacts for BOQ Potential actions for BOQ to mitigate Decline in value of assets due to: Increase in impact of climate-related extreme weather events; Rising sea levels; Rising temperatures; Rise in insurance premiums or inability to obtain insurance. Increased loan impairment expense Identify existing customers and assets most at risk; Assist customers to understand risks and mitigate where possible; Assess climate-related risk of new lending. Business disruption due to climate-related extreme weather events, rising sea levels or rising temperatures Decreased income; Increased expenses. Prepare for business disruption scenarios As part of its annual portfolio stress testing simulation, in 2018 BOQ included a weather-related event as a scenario to be tested. This involved a severe flood scenario in South-East Queensland, with inundation to a level of seven metres (compared to the 2011 Brisbane flood level of four metres). The financial impact of this scenario was immaterial in terms of direct physical impact on BOQ’s lending portfolio. BOQ’s 2019 stress testing scenarios include a severe long term drought scenario and a long term sea-level rise analysis (based on data from the Intergovernmental Panel on Climate Change’s (IPCC) RCP8.5 high emissions scenario). The final results of these scenarios are expected to be available later in the 2019 calendar year and will be included in BOQ’s Internal Capital Adequacy Assessment Process (ICAAP) Report. Opportunities The following are the key climate-related opportunities which are most relevant to BOQ: • Funding investment in renewable energy. • Developing finance solutions to meet the needs of businesses and consumers in a lower-carbon economy. These opportunities would primarily impact BOQ through increased revenues. There may also be opportunities to achieve lower costs through pursuit of more resource and energy efficient operations. An example of this is that in FY19, BOQ Finance established a new Energy Efficient Equipment Finance Program, by joining the Clean Energy Finance Corporation (CEFC) co-financing program. The CEFC is a government entity established to facilitate increased flows of finance into Australian based renewable energy, energy efficiency and low emissions technology. This program will allow BOQ to provide small business owners with competitive finance for eligible equipment. Risk management BOQ’s process for identifying, assessing and managing risks is integrated into its overall Risk Management Framework. Climate risk can emerge in the assessment of credit risk, operational risk, reputation risk, and strategic risk, which have been identified as material risks under BOQ’s Risk Management Framework. The management team utilises the Executive Credit Committee and credit policies such as the Ecological Care and Sustainability Lending Policy to assess potential implications to credit risk. Credit risk is assessed at a portfolio level as well as at an individual credit exposure level on a case-by-case basis. On an individual exposure level this would include consideration of future cash flows available to service debt as well as valuations of assets taken as security. Property valuations take into account factors such as flooding and environmental risk in estimating the value of properties, which BOQ uses as a basis for determining an appropriate level of lending to be extended relative to that property value. In addition, BOQ’s loan agreements require customers to maintain comprehensive insurance for any property provided as security for a loan. Where flood is identified as a potential risk in the valuation, flood cover is required to be included in the insurance policy. This provides a level of protection to the value of security in the event that there is damage or destruction caused by extreme weather events. Reputation risk is managed in line with BOQ’s Conduct and Reputational Risk Framework, through monitoring of both the internal and external environment and regular stakeholder engagement with customers, investors, suppliers, employees, government, media, regulators and community partners. This includes a combination of structured engagement through surveys, regular reporting and industry forums as well as direct feedback from customers and staff or indirect information gathering and monitoring of issues that may be or may become relevant to BOQ. BOQ’s Risk team is conducting a review of its current approach to managing climate-related risk with a view to making recommendations which will be considered for implementation in 2020, to better embed climate-related risk in BOQ’s policies and processes. 25 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT1.4 RISK AND REGULATORY DEVELOPMENTS (CONTINUED) Metrics and targets BOQ is reviewing metrics that would be most relevant to monitor specific climate-related risks for the business. A metric that is currently reported is the dollar value and proportion of the loan portfolio that has been extended to businesses who are directly involved in fossil fuel mining ($30 million or <0.1 per cent of BOQ’s total loan portfolio as at 31 August 2019). This is a metric that will reduce to zero by 2023 as BOQ has committed to no further financing of equipment directly involved in the extraction of fossil fuels. BOQ has no direct exposure to coal-fired power generators and has no appetite for lending to this sector. For BOQ’s housing loan portfolio, lending identified in mining- dependent regions are subject to specific policy considerations. Monthly internal reporting on exposures and arrears levels is used to monitor risk in these locations. Given the size and nature of its business, BOQ’s greenhouse gas (GHG) emissions are not significant, with purchased electricity for its support centres and branches being the biggest contributor to emissions. Electricity consumption and other environmental impact metrics are published in the Non-financial performance measures section of BOQ’s Sustainability Report. 26 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORT 2. GROUP PERFORMANCE ANALYSIS INCOME STATEMENT AND KEY METRICS 2.1 $ 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 Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 961 128 1,089 (550) 539 (74) 465 (145) 320 965 145 1,110 (527) 583 (41) 542 (170) 372 - (12%) (2%) 4% (8%) 80% (14%) (15%) (14%) 485 63 548 476 65 541 (282) (268) 266 (44) 222 (69) 153 273 (30) 243 (76) 167 2% (3%) 1% 5% (3%) 47% (9%) (9%) (8%) Statutory net profit after tax (1) 298 336 (11%) 142 156 (9%) (1) Refer to Section 5.1 Reconciliation of statutory profit to cash earnings of the Appendices for a reconciliation of cash earnings to statutory net profit after tax. Key Metrics SHAREHOLDER RETURNS Share price Market capitalisation Dividends per ordinary share (fully franked) CASH EARNINGS BASIS Basic Earnings per Share (EPS) Diluted EPS Dividend payout ratio STATUTORY BASIS Basic EPS Diluted EPS Dividend payout ratio Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 ($) ($ million) (cents) (cents) (cents) (%) (cents) (cents) (%) 9.17 3,721 65 79.6 74.0 82.4 74.2 69.2 88.5 11.49 4,565 (20%) (18%) 76 (14%) 94.7 89.3 80.7 85.5 81.2 89.3 (16%) (17%) 170bps (13%) (15%) (80bps) 9.17 3,721 31 37.8 35.3 82.2 35.3 33.0 88.6 9.01 3,620 2% 3% 34 (9%) 41.8 39.0 81.8 39.0 36.4 87.6 (10%) (9%) 40bps (9%) (9%) 100bps 27 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT 2.1 INCOME STATEMENT AND KEY METRICS (CONTINUED) Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 320 539 1.93 50.5 16 8.3 10.8 298 509 1.93 53.5 16 7.7 10.1 499 312 197 43.3 0.48 372 583 1.98 47.5 9 9.9 12.9 336 534 1.98 52.4 9 8.9 11.6 469 260 164 52.4 0.39 (14%) (8%) (5bps) 300bps 7bps (160bps) (210bps) (11%) (5%) (5bps) 110bps 7bps (120bps) (150bps) 6% 20% 20% (910bps) 9bps 153 266 1.92 51.5 19 7.8 10.2 142 252 1.92 54.3 19 7.3 9.5 499 312 197 43.3 0.48 167 273 1.94 49.5 13 8.8 11.4 156 257 1.94 52.8 13 8.2 (8%) (3%) (2bps) 200bps 6bps (100bps) (120bps) (9%) (2%) (2bps) 150bps 6bps (90bps) 10.7 (120bps) 505 287 152 (1%) 9% 30% 50.4 (710bps) 0.46 2bps Key Metrics PROFITABILITY AND EFFICIENCY MEASURES CASH EARNINGS BASIS Net profit after tax Underlying profit (1) NIM (2) CTI Loan impairment expense to gross loans and advances (GLA) ROE ROTE (3) STATUTORY BASIS Net profit after tax Underlying profit (1) NIM (2) CTI Loan impairment expense to GLA ROE ROTE (3) ASSET QUALITY 30 days past due (dpd) arrears 90dpd arrears Impaired assets Specific provisions to impaired assets Collective provisions to risk weighted assets (RWA) CAPITAL Common equity tier 1 (CET1) ratio Total capital adequacy ratio ($ million) ($ million) (%) (%) (bps) (%) (%) ($ million) ($ million) (%) (%) (bps) (%) (%) ($ million) ($ million) ($ million) (%) (%) (%) (%) RWA ($ million) 30,533 29,669 3% 30,533 29,978 9.04 12.40 9.31 12.76 (27bps) (36bps) 9.04 12.40 9.26 12.68 (22bps) (28bps) 2% (1) Profit before loan impairment expense and tax. (2) NIM net of offset accounts. (3) 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). 28 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORT2.2 NET INTEREST INCOME $ million Net interest income Average interest earning assets NIM Year End Performance Half Year Performance Aug-19 Aug-18 961 965 49,842 48,818 Aug-19 vs Aug-18 - 2% Aug-19 Feb-19 485 476 50,220 49,441 Aug-19 vs Feb-19 2% 2% 1.93 1.98 (5bps) 1.92 1.94 (2bps) Net interest income decreased $4 million from FY18. This was driven by a five basis point decrease in NIM, partially offset by a two percent increase in average interest earning assets. The five basis points reduction in NIM was primarily due to increased basis costs, though this moderated in 2H19, and the impact of lower interest rates on the Bank’s capital and low cost deposit portfolio. 2H19 performance saw net interest income increase by $9 million or two per cent. The increase in net interest income was a result of a two per cent increase in average interest earning assets in 2H19 and a higher day count in 2H19 compared to 1H19. This was partially offset by a reduction in NIM. Asset margins improved in 2H19 as asset pricing benefits offset continued pressure from competition for new lending and the impact of discounting on the existing portfolio. Hedging costs also improved in 2H19 from 1H19, driven by a reduced spread between the bank bill swap rate and overnight index swap rate. Funding costs rose as deposit pricing lagged the rapid changes in the movement in short term interest rates, both cash rate and bank bill swap rate, over 2H19. The net result was a two basis point decrease in NIM in 2H19. Net interest margin - February 2019 to August 2019 2.28% 0.34% (1) 1.94% 0.02% (0.05%) 0.03% (0.02%) NIL 2.26% 0.34% (1) 1.92% 1H19 Asset pricing and mix Funding costs and mix Hedging costs Capital and low cost deposits Third party costs 2H19 NIM Third party costs (1) (1) Third party costs largely represent commissions to Owner Managers and brokers. Underlying movements in NIM between 2H19 and 1H19 included the following: Asset pricing and mix: Asset pricing and mix improved by two basis points over 2H19. Loan repricing actions contributed positively to NIM by six basis points. This benefit was partially offset by continued margin pressure from competition for new housing loans, and retention discounting. This was responsible for a four basis points reduction in NIM. Funding costs and mix: Funding costs (excluding the impact of basis) reduced NIM by five basis points. Retail and middle market term deposit costs increased in 2H19 as industry pricing lagged a reduction in short term rates. Wholesale funding costs also rose in line with a lengthening of portfolio duration strengthening the Bank’s Net Stable Funding Ratio. Hedging costs: The impact of hedging costs improved NIM by three basis points in 2H19, driven by reductions in basis and other hedging costs. Half of the improvement was due to the basis portfolio spreads reducing from an average of 46 basis points to 39 basis points. The remainder was from favourable positioning of other hedging over the period. Capital and low cost deposits: The return on BOQ’s $4.4 billion replicating portfolio declined in 2H19, as the lower interest rate environment impacted the portfolio reinvestment rates. This drove a two basis point reduction in NIM over 2H19. 29 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT2.3 NON-INTEREST INCOME $ million Banking income Insurance income Other income (1) Trading income Total non-interest income (2) Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 82 11 30 5 128 93 19 32 1 145 (12%) (42%) (6%) 400% (12%) 39 4 15 5 63 43 7 15 - 65 (9%) (43%) - - (3%) (1) VMA third party income and costs are included in other income as a net result. (2) Refer to Section 5.1 (B) Non-cash earnings reconciling items of the Appendices for a reconciliation of cash non-interest income to statutory non-interest income. Trading income of $5 million was supported by improved credit spreads as investors chased yield in a low interest rate environment, improved short end funding conditions, basis performance and heightened volatility. Declining St Andrew’s insurance income is discussed in detail in Section 2.4 below. Non-interest income of $128 million reduced $17 million or 12 per cent from FY18. Banking income was $11 million or 12 per cent lower than in FY18. The reduction in banking income was largely due to the transition of the BOQ Business merchant terminal offering to a new third party arrangement, combined with continuing customer trends towards lower or no fee products and the impact from the implementation of AASB 15 Revenue from Contracts with Customers (AASB 15). Other income decreased $2 million or six per cent during FY19 and was flat half on half. The decrease is partly due to a reduction in the vendor program end of term income in the BOQ Finance business as a result of improving contract terms for customers. Included in other income was $8 million of VMA third party product distribution income, which was up 34 per cent on FY18. 2.4 INSURANCE OVERVIEW Year End Performance Half Year Performance $ million Aug-19 Aug-18 Gross written premium (net of refunds) Net earned premium Underwriting result Other insurance income Total income Consolidation adjustment Group insurance result 60 55 8 3 11 - 11 72 66 15 3 18 1 19 Aug-19 vs Aug-18 (17%) (17%) (47%) - (39%) (100%) (42%) Aug-19 Feb-19 Aug-19 vs Feb-19 29 26 2 2 4 - 4 31 29 6 1 7 - 7 (6%) (10%) (67%) 100% (43%) - (43%) St Andrew’s contributed $11 million or nine per cent to non- interest income in FY19, an $8 million reduction compared to FY18 due to a lower underwriting result. This was impacted by contracting net earned premium reflecting fewer premiums, partly offset by reduced commissions paid. Claims costs were flat on FY18, reflecting higher loss ratios on a smaller portfolio. Regulatory and community expectations continue to impact the insurance sector, particularly consumer credit insurance. A number of St Andrew’s corporate partners (including BOQ) have made the decision to cease distribution of consumer credit insurance, following release of ASIC’s Report 622. Existing customers will continue to be served and the interests of policyholders will remain a priority. 30 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORT2.5 OPERATING EXPENSES $ million Employee expenses Occupancy expenses General expenses IT expenses Other expenses Total operating expenses (1) (2) CTI Number of employees (FTE) (1) Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 264 42 91 125 28 550 263 44 81 119 20 527 - (5%) 12% 5% 40% 4% 50.5% 2,098 47.5% 2,039 300bps 3% 132 21 47 65 17 282 51.5% 2,098 132 21 44 60 11 268 49.5% 2,073 - - 7% 8% 55% 5% 200bps 1% (1) FTE numbers and operating expenses exclude VMA third party costs as the net result is included in non-interest income. Expenses relating to the VMA mortgage offering have been included in the above table. (2) Refer to Section 5.1 (B) Non-cash earnings reconciling items of the Appendices for a reconciliation of cash operating expenses to statutory operating expenses. Operating expenses increased $23 million or four per cent on FY18. Flat employee expenses were driven by lower short term incentives paid, including no Key Management Personnel receiving an award under the Short Term Incentive plan. This was offset by higher FTE to support regulatory and compliance programs and targeted growth in BOQ Business. General and Other expenses increased 12 per cent and 40 per cent respectively. This was largely due to addressing regulatory and compliance requirements, additional non-lending losses and higher industry levies. Also included are higher telecommunication costs incurred during the transition between data centre locations as part of the Bank’s infrastructure modernisation program. IT costs increased due to data collection activities addressing compliance requirements and new technology services resulting from the Bank’s technology transformation programs. 2.6 CAPITALISED INVESTMENT EXPENDITURE The Bank’s transformation program continues to drive an increase in the assets under construction balance, with a number of significant multi-year foundational investment programs underway. These include the functionality required to support the industry’s New Payment Platform, a treasury and market risk system upgrade, developing capability for digital offerings for retail, business and financial markets customers, as well as a program of work to modernise the Bank’s technology infrastructure. A number of investments delivered new functionality during 2H19, driving an increase in the software intangible asset balance. Carrying value of IT intangible assets ($m) Assets under construction Software intangible asset balance 172 44 128 180 69 111 193 93 100 232 117 115 Feb 18 Aug 18 Feb 19 Aug 19 31 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT2.7 LENDING Lending growth of two per cent was achieved during the year, in an environment characterised by slowing credit growth, strong competition and a shifting regulatory landscape. Strong new business acquisition was achieved through the different brand channels in BOQ Specialist and BOQ Finance. Virgin Money continued to deliver strong growth, with its home loan portfolio growing by $0.9 billion in FY19 to over $2.5 billion while the branch network experienced a contraction in balances, a result of a smaller distribution footprint. $ million Housing lending Housing lending – APS 120 qualifying securitisation (2) Commercial lending BOQ Finance Consumer Gross loans and advances Provision for impairment Net loans and advances As at Feb-19 Aug-18 28,330 28,007 2,215 30,545 10,040 4,898 296 2,499 30,506 9,881 4,595 297 45,779 45,279 (214) (201) 45,565 45,078 Aug-19 27,702 2,945 30,647 10,008 5,262 299 46,216 (233) 45,983 Aug-19 vs Feb-19(1) Aug-19 vs Aug-18 (4%) 65% 1% (1%) 15% 2% 2% 18% 2% (1%) 18% - 1% 15% 1% 2% 16% 2% (1) Growth rates have been annualised. (2) Securitised loans subject to capital relief under APRA Prudential Standard APS 120 Securitisation (APS 120). 32 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORT2.7 LENDING (CONTINUED) Growth in gross loans & advances Growth in housing ($m) FY18 2.2% Growth 0.4x System (1) FY19 0.5% Growth 0.2x System (1) 653 932 644 (923) 141 914 626 (1,399) VMA Home Loans BOQ Specialist BOQ (1) Source: Based on latest available APRA system growth statistics as at August 2019 Housing lending While housing loan growth was constrained in FY19 by a slowing mortgage market and an increasing competitive landscape, BOQ has maintained prudent credit settings with rigorous servicing, validation and responsible lending practices. The Bank has increased investment in its lending capability, in an effort to deliver improved customer outcomes and operational efficiencies. Housing growth improved over 2H19 with continued strong customer acquisition across the Virgin Money and BOQ Specialist channels, whilst runoff moderated across the BOQ branded portfolio. The overall housing loan portfolio has further diversified geographically with more than half of new business flows originated outside of Queensland. Distribution through third party channels represented 29 per cent of new business fundings, though this remains under-represented relative to the industry average of nearly 60 per cent. Virgin Money originated over $1.1 billion in new business fundings during FY19 taking the portfolio to more than $2.5 billion. The ‘Reward Me’ mortgage product has resonated with a new customer base aligned to the Virgin Money brand, predominantly younger and largely based outside of Queensland. Virgin Money continues to expand its broker presence and in 2019 introduced a direct online capability further leveraging its enhanced digital offering. BOQ Specialist housing loan balances grew by 14 per cent in FY19, including 16 per cent growth in its core medical segment. BOQ Specialist continues to deliver strong, above system growth on a maturing portfolio by focusing on building relationships with professionals in the early stages of their careers or at university. The diversity offered through this portfolio in geography, profession and age, improves the overall risk profile of the housing loan portfolio. The mortgage offering also creates future opportunities to meet the commercial lending needs of the targeted health professional market segments well into the future stages of their career progression. Customer growth of five per cent was achieved including 15 per cent growth in medical graduates highlighting the success of this part of the niche strategy. BOQ’s branch network improved its housing performance in 2H19, particularly across the Owner Manager channel, through improved retention rates. A new revenue share remuneration structure is on track to be introduced early in the new financial year which will further align outcomes for the Bank and Owner Managers. BOQ’s growth through the mortgage broker channel improved in 2H19 as retention rates improved. The broker support team has continued to work closely with key aggregator partners to further improve turnaround times and enhance the customer experience. 33 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORT2.7 LENDING (CONTINUED) Growth in commercial & BOQ Finance ($m) FY18 FY19 569 108 461 250 250 127 130 (3) 667 667 BOQ BOQ Specialist BOQ Finance Commercial BOQ Finance Commercial BOQ Finance Growth rate System growth (1) Growth vs System FY18 FY19 Commercial BOQ Finance Commercial BOQ Finance 6.1% 5.1% 1.2x 5.8% 4.8% 1.2x 1.3% 3.4% 0.4x 14.5% 3.2% 4.5x (1) Based on latest available APRA and AFIA system growth statistics as at August 2019. Commercial & BOQ Finance lending The commercial lending portfolio grew one per cent in FY19, with higher run-off due to large client exposure pay downs in 1H19 and a number of large customer asset sales in 2H19. The portfolio remains geographically diverse, with Queensland concentration at 42 per cent. The BOQ branded commercial portfolio was relatively flat year on year, however the Bank’s niche segment strategy continues to deliver with the corporate healthcare and retirement living segment delivering growth of 11 per cent. This was offset by run off in the property finance portfolio. The agribusiness niche segment had modest growth due to unfavourable weather conditions and BOQ’s focus on supporting existing customers for long term financial stability. Small business growth was flat as new business volumes were offset by run off in the mature portfolio. BOQ Specialist grew strongly at five per cent with solid performance in the core medical segment. Offering bespoke solutions to medical, dental and veterinary professionals results in building deeper customer relationships from graduation through to retirement. BOQ Specialist has captured a large part of the medical graduate market resulting in customer growth of 15 per cent, five per cent increase in total customer numbers and an estimated 25 per cent of market share in the core medical segment. BOQ Finance provided strong asset growth of over $660 million or 15 per cent to take the portfolio to $5.2 billion. Investment in systems has supported growth in the equipment finance business, novated lease business and new strategic partnerships in the wholesale business. Diversification of exposure has continued with growth in structured finance solutions, cashflow finance, equipment finance and dealer wholesale solutions. New green energy solutions have recently been developed to support future growth. 34 Highlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORT3. BUSINESS SETTINGS 3.1 ASSET QUALITY Loan impairment expense increased $33 million year on year to $74 million, or 16 basis points of gross loans and advances. Impaired asset balances of $197 million were $33 million higher than FY18. On transition to AASB 9 from 1 September 2018, a $10 million increase in the collective provision was recognised as an adjustment to retained profits. To align with requirements of AASB 9, BOQ has implemented a new collective provisioning model (CP model) which is a forward-looking, expected credit loss model. Whilst underlying portfolio trends remain sound, the Group’s new collective provisioning was impacted by a less certain economic outlook and an increase in arrears which were significant drivers for the increase in loan impairment expense. Loan impairment expense Loan impairment expense / GLA Impaired assets 30dpd arrears 90dpd arrears Collective provision & general reserve for credit losses (GRCL) / RWA ($ million) bps ($ million) ($ million) ($ million) bps Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 74 16 197 499 312 78 41 9 164 469 260 67 80% 7bps 20% 6% 20% 11bps 44 19 197 499 312 78 30 13 152 505 287 74 47% 6bps 30% (1%) 9% 4bps The table above summarises BOQ’s key credit indicators and shows: • • Loan impairment expense increased by $33 million (80 per cent) year on year to $74 million. Of the $33 million increase in loan impairment expense the collective provision contributed $22 million. This result included the implementation of a new CP model, which was impacted by increases in arrears rates and a less certain economic outlook. Excluding the impact of the collective provision, loan impairment expense / GLA in FY19 was 11 basis points, which is two basis points higher than FY18. Impaired assets of $197 million increased by $33 million (20 per cent) against FY18 and $45 million (30 per cent) against 2H19. The increase was driven by the Commercial and BOQ Finance portfolios and more particularly, a large well secured agribusiness exposure. The Group now holds two impaired exposures greater than $10 million and three exposures greater than $5 million. The impaired balances of these five connections were $57 million in total. At FY18, the Group held three exposures greater than $5 million in impaired status, totalling $25 million. • 30 day and 90 day arrears have increased $30 million and $52 million respectively year on year. The increase was driven by the Retail and BOQ Finance portfolios. Retail was impacted by new industry expectations surrounding hardships and recovery processes, while BOQ Finance was impacted by two large connections totalling $6 million moving into 90 days arrears. • Collective provisioning and GRCL coverage against RWA increased by 11 basis points in FY19 and four basis points in 2H19. This increase is due to a higher collective provision and includes a transitional adjustment upon implementation of a new CP model under AASB 9. In addition, less certain economic conditions and increases in arrears impacted the forward looking assumptions underlying the expected credit loss model. 35 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50 3.1 ASSET QUALITY (CONTINUED) Loan impairment expense Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 Feb-19 Expense ($m) Expense/ GLA (bps) Expense ($m) Expense/ GLA (bps) Expense ($m) Expense/ GLA (bps) Expense ($m) Expense/ GLA (bps) Retail lending Commercial lending BOQ Finance Total loan impairment expense 18 24 32 74 6 24 61 16 15 11 15 41 5 11 33 9 7 20 17 44 5 40 65 19 11 4 15 30 7 8 61 13 Higher loan impairment expense of $74 million during the year included $22 million attributable to higher collective provision impairment expense based on the new CP model under AASB 9. Specific provision impairment expense for FY19 was $52 million, a $5 million increase from FY18. Retail impairment expense increased by $3 million on FY18 and was mainly driven by higher specific provisioning activity in the housing portfolio. Continuing low levels of retail loan impairment expense in 2H19 reflects robust underwriting standards and collection practices. Commercial lending and BOQ Finance loan impairment expense increased by $13 million and $17 million respectively. Impacting both portfolios was the forward looking CP model. The CP model included model adjustments of $4 million in the Commercial portfolio to provide additional coverage across the agribusiness portfolio affected by the drought conditions in New South Wales and Queensland, and $6 million in BOQ Finance to better reflect observed loss given default metrics in the vendor finance portfolio. There was also an $8 million increase in specific provisions in 2H19, driven by a small number of connections greater than $1 million. Impaired assets $ million Retail lending Commercial lending BOQ Finance Total impaired assets Impaired assets / GLA As at Aug-19 Feb-19 Aug-18 Aug-19 vs Feb-19 Aug-19 vs Aug-18 73 98 26 197 60 69 23 152 67 81 16 164 22% 42% 13% 30% 43bps 33bps 36bps 10bps 9% 21% 63% 20% 7bps Total impaired assets increased by $33 million, up 20 per cent on FY18. The increase in retail impaired assets over 2H19 was driven by four new exposures greater than $1 million for a total of $9 million, reversing the previous halves’ downward trend. Commercial lending increase of $17 million during FY19 was driven by the impairment of two new large exposures totalling $40 million. Partially offsetting this was the realisation and clearing of one large exposure of $7 million. BOQ Finance impaired assets increased by $10 million during FY19, with $3 million in 2H19. This uplift was in line with historical provisioning levels and included a single name exposure raised in 2H19, underlying performance in this portfolio has been satisfactory. The Group now holds five impaired exposures greater than $5 million with a combined total of $57 million, with two of these exposures greater than $10 million. The Group held three exposures greater than $5 million at 1H19 and FY18 for a combined total of $18 million and $25 million respectively. 36 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50 3.1 ASSET QUALITY (CONTINUED) Impaired assets ($m) 33 8 14 11 (45) (1) (21) (23) 164 16 67 81 (45) (12) (13) (20) 90 15 26 49 Retail $13m or 22% Commercial $29m or 42% 20% 197 26 73 98 152 23 60 69 Aug 18 New impaired Realisations Feb 19 New impaired Realisations Aug 19 Commercial Retail BOQ Finance Provision coverage Total provisions increased by $32 million or 16 per cent to $233 million during FY19. The increase was due to an increase in the collective provision as a result of the implementation of a new CP model under AASB 9. Specific provision coverage of 43 per cent was down 900 basis points from FY18. This is reflective of the low specific provisioning activity in FY19 and indicative of adequate security backing the impaired assets. Total provision coverage reduced 11 per cent over FY19, while the GRCL increased by $3 million (five per cent). Total provisions and GRCL to RWA has remained stable from 1H19 and FY18 and BOQ remains satisfactorily provisioned compared to industry peers. $ million Specific provision Collective provision Total provisions GRCL Specific provisions to impaired assets Total provisions and GRCL coverage / impaired assets (1) Total provisions and GRCL / RWA (1) (1) GRCL gross of tax effect. As at Aug-19 Feb-19 Aug-18 Aug-19 vs Feb-19 Aug-19 vs Aug-18 85 148 233 62 43% 163% 1.1% 77 137 214 60 51% 197% 1.0% 86 115 201 59 10% 8% 9% (1%) 29% 16% 3% 5% 52% (800bps) (900bps) 174% (3400bps) (1100bps) 1.0% 5bps 5bps 37 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50 3.1 ASSET QUALITY (CONTINUED) Specific provisions ($m) 17 5 5 7 (26) (3) (7) (16) 86 13 27 46 77 15 25 37 30 11 7 12 (22) (6) (6) (10) 85 20 26 39 Aug 18 New specifics Realisations Feb 19 New specifics Realisations Aug 19 Commercial Retail BOQ Finance Collective provision and GRCL/RWA vs peers The graph below provides BOQ’s level of collective provisions and GRCL to RWA against the current levels of its peers, as published in their most recent financial reports. BOQ’s coverage increased 11 basis points over FY19 (four basis points increase from 1H19), driven by the forward looking collective provision to adequately provide for future events. BOQ continues to be adequately provisioned in comparison to industry peers. Standardised banks Advanced banks (1) BOQ 0.74% 0.28% 0.78% 0.78% 0.71% 0.69% 0.29% 0.45% 0.29% 1.02% 0.16% 0.85% 0.75% 0.69% 0.86% 0.75% 0.85% 0.46% 0.49% 0.33% 0.42% Feb 19 FY19 SUN BEN ANZ CBA NAB WBC Collective provision to RWA GRCL to RWA (1) Advanced accredited approach to risk weightings causes coverage to appear higher on a relative basis to the standardised banks. 38 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 503.1 ASSET QUALITY (CONTINUED) Arrears Portfolio Balance ($m) Key Metrics Aug-19 Aug-19 Feb-19 Aug-18 Aug-19 vs Feb-19 Aug-19 vs Aug-18 Total lending - portfolio balance ($ million) 30 days past due ($ million) 90 days past due ($ million) 30 days past due: GLAs 90 days past due: GLAs By product 46,216 45,779 45,279 499 312 505 287 469 260 Proportion of portfolio 1.08% 0.68% 1.10% 0.63% 1.04% 0.57% 30 days past due: GLAs (housing) 29,042 90 days past due: GLAs (housing) 30 days past due: GLAs (line of credit) 90 days past due: GLAs (line of credit) 30 days past due: GLAs (consumer) 90 days past due: GLAs (consumer) 1,605 299 30 days past due: GLAs (commercial) 10,008 90 days past due: GLAs (commercial) 1.02% 0.62% 2.80% 1.99% 1.00% 0.67% 1.19% 0.90% 30 days past due: GLAs (BOQ Finance) 5,262 0.68% 90 days past due: GLAs (BOQ Finance) 0.17% 1.00% 0.51% 2.19% 1.79% 1.01% 0.68% 1.29% 1.02% 0.90% 0.13% 0.92% 0.44% 2.33% 1.17% 1.35% 0.67% 1.38% 1.08% 0.47% 0.07% 1% (1%) 9% (2bps) 5bps 2bps 11bps 61bps 20bps (1bps) (1bps) 2% 6% 20% 4bps 11bps 10bps 18bps 47bps 82bps (35bps) - (10bps) (19bps) (12bps) (18bps) (22bps) 4bps 21bps 10bps Retail Arrears Retail arrears increased in both 30 and 90 day categories. This reflected a slower transition back to a performing status that is aligned to new industry expectations driving longer workout times in support of the customer. Line of credit (LOC) arrears have historically trended higher than the other portfolios due to the revolving nature of the credit facilities and the smaller LOC portfolio exacerbating the arrears ratios. BOQ Business Arrears Commercial arrears have decreased in both 30 and 90 day categories by 10 basis points and 12 basis points respectively from 1H19. This is driven by the clearance of one large connection which equated to 18 basis points across the 30 and 90 days categories. In addition, there have been a number of commercial loan facilities that, while being serviced and considered performing, were expired and the full balance was considered to be in arrears at 1H19. Since 1H19, these were reviewed and no longer considered to be in arrears. BOQ Finance arrears have decreased by 22 basis points in 30 days arrears but increased 4 basis points in the 90 days arrears since 1H19. The combination of seasonality and the settlement of one large exposure early in 2H19 contributed to the improvement in the 30 days arrears. The increase in 90 days arrears was driven by one large exposure equating to 8 basis points. Overall movement in FY19 shows a return to more normal levels following the historical lows seen in FY18. 39 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50 3.2 FUNDING AND LIQUIDITY BOQ’s liquidity strategy and risk appetite are designed to ensure it has the ability to meet financial obligations as they fall due in all market conditions. BOQ has developed a robust liquidity risk management framework including Board approved liquidity risk tolerances, detailed strategy and policy governing the management of liquidity and funding, together with annual Board approved funding and contingency funding plans. Management of liquidity risk at BOQ includes a focus on developing a stable customer deposit base, access to diversified wholesale funding markets and disciplined management of maturity profiles. The Bank also maintains a portfolio of unencumbered, high quality liquid assets, giving BOQ a buffer to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. BOQ regularly stress tests it’s liquidity risk framework to identify vulnerabilities under a diverse range of market scenarios. Liquidity Coverage Ratio (LCR) APRA requires LCR ADIs to maintain a minimum 100 per cent LCR. The LCR requires sufficient tier 1 high quality liquid assets (HQLA1) and alternative liquid assets, covered by the Committed Liquidity Facility (CLF), to meet net cash outflows over a 30 day period, under a regulator defined liquidity stress scenario. BOQ manages its LCR on a daily basis and actively maintains a buffer above the regulatory minimum in line with BOQ’s prescribed risk appetite and management ranges. The Bank’s LCR at 31 August 2019 was 145 per cent, which is 18 per cent higher than 31 August 2018 (127 per cent) and also higher than the LCR as at 1H19 of 124 per cent. BOQ’s average LCR for 2H19 was 140 per cent, which is eight per cent higher than the average for 1H19 of 132 per cent. Net Stable Funding Ratio (NSFR) APRA’s stated objective in implementing the NSFR was to strengthen funding and liquidity resilience. The NSFR encourages ADIs to fund their lending activities with more stable sources of funding, and thereby promoting greater balance sheet resilience. The NSFR establishes a minimum stable funding requirement based on the liquidity characteristics of the ADI’s assets and off-balance sheet activities over a one year time horizon. The NSFR is defined as the ratio of the amount of Available Stable Funding (ASF) to the amount of Required Stable Funding (RSF). APRA requires ADIs to maintain an NSFR of at least 100 per cent. BOQ manages its NSFR on a daily basis and actively maintains a buffer above the regulatory minimum in line with BOQ’s prescribed risk appetite and management ranges. BOQ’s NSFR as at 31 August 2019 was 112 per cent, up from 110 per cent at 28 February 2019. The primary drivers of the increase in NSFR have been an increase in customer deposits and long-term wholesale funding, partially offset by an increase in other assets and residential mortgages that are subject to or would qualify for a 35 per cent risk weight under APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112). The average NSFR for 2H19 was 110.8 per cent. LCR - August 2019 (145%) $7.9 BILLION OTHER ALA(1) INTERNAL RMBS HQLA1 $5.4 BILLION OTHER WHOLESALE FUNDING CUSTOMER DEPOSITS Liquid assets Net cash outflows (1) Alternative liquid assets (ALA) qualifying as collateral for the CLF, excluding internal RMBS, within the CLF limit. NSFR - August 2019 (112%) $37.7 BILLION WHOLESALE FUNDING & OTHER LIABILITIES CUSTOMER DEPOSITS CAPITAL ASF $33.5 BILLION OTHER LOANS RESIDENTIAL MORTGAGES ≤ 35% RISK WEIGHT LIQUIDS & OTHER ASSETS RSF 40 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50 3.2 FUNDING AND LIQUIDITY (CONTINUED) NSFR waterfall 28 February 2019 - 31 August 2019 2.3% (0.3%) (0.9%) 2.6% 110% (0.5%) (1.2%) 112% Feb 2019 Customer deposits Wholesale funding & other liabilities Liquid assets Residential mortgages ≤ 35% Other loans Other assets Aug 2019 Liquid assets BOQ maintains a portfolio of high quality, diversified liquid assets to facilitate balance sheet liquidity and meet internal and regulatory requirements. Liquid assets are comprised of HQLA1 (cash, Australian Semi-Government and Commonwealth Government securities) and alternative liquid assets covered under the CLF provided by the Reserve Bank of Australia (RBA). CLF assets include senior unsecured bank debt, covered bonds, asset backed securities (ABS) and residential mortgage backed securities (RMBS) that are eligible for repurchase with the RBA. BOQ was granted a $3.5 billion RBA CLF for the 2019 calendar year, enabling the Bank to meet its minimum regulatory requirement of greater than 100 per cent LCR. BOQ increased its contingent liquidity through its internal RMBS, in line with the increase in CLF to ensure it maintains a sufficient buffer to its physical liquidity. 41 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 503.2 FUNDING AND LIQUIDITY (CONTINUED) Funding The Bank’s funding strategy and risk appetite reflects the Group’s business strategy, adjusted for the current economic environment. Funding is managed to allow for various scenarios that may impact BOQ’s funding position. Funding mix ($billion) 48.1 10.0 6.8 48.2 10.4 6.8 50.3 12.0 5.9 31.3 31.0 32.4 Long term wholesale ($billion) 10.0 3.6 0.8 4.8 0.8 10.4 3.9 0.8 4.9 0.8 12.0 4.6 1.6 5.0 0.8 Aug 18 Feb 19 Aug 19 Additional tier 1 notes / subordinated debt Securitisation Senior unsecured Covered bond Customer deposits ($billion) 31.3 2.0 2.6 10.2 31.0 2.2 2.6 10.0 32.4 2.3 2.7 11.2 16.5 16.2 16.2 Aug 18 Customer deposits (1) Feb 19 Aug 19 Aug 18 Feb 19 Aug 19 Short term wholesale Long term wholesale (2) Term deposits Transaction accounts Savings & investment Mortgage offsets (1) The classification of customer deposits is defined as all deposits excluding those from financial institutions as defined under APS 210 Liquidity. (2) Foreign currency balances have been translated at end of day spot rates. Wholesale funding BOQ focuses on three main strategic elements in delivering its wholesale funding objectives - capacity growth, resilience and diversity - while minimising the cost of funds and maintaining its ability to take advantage of opportunities in the most appropriate markets. The Bank continues to focus on increasing longer dated, stable funding sources whilst tactically reducing reliance on short dated wholesale funding. In FY19, customer deposit growth coupled with long term wholesale funding growth supported both lending growth and targeted runoff of short term wholesale funding, whilst also strengthening the Bank’s liquidity position. The Bank’s deposit to loan ratio of 70 per cent was one per cent up from FY18 (69 per cent), driven by strong customer deposit growth in the Bank’s retail channels. 42 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 503.2 FUNDING AND LIQUIDITY (CONTINUED) Term funding issuance During FY19, BOQ issued a combination of secured and unsecured debt transactions in both domestic and offshore markets via benchmark and non-benchmark deals to increase the long term wholesale funding portfolio. The Bank’s benchmark sized transactions included a $500 million senior unsecured deal for three years, a €500 million (~AUD $811 million) covered bond for five years, a $779 million REDS EHP (ABS) deal and a $1 billion REDS (RMBS) capital relief transaction. Major maturities ($m) (1) (2) (3) (4) These transactions highlight BOQ’s ability to use a range of debt programmes to access long term wholesale funding markets, which provides diversification benefits whilst also allowing for manageable refinancing towers over the next five years. 1,200 1,000 800 600 400 200 0 150 150 600 600 600 700 600 744 500 600 200 350 811 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2021 2022 2023 2024 2025 Additional Tier 1 Senior unsecured Subordinated debt Covered bond (1) Any transaction issued in a currency other than AUD is shown in the applicable AUD equivalent hedged amount. (2) Senior unsecured maturities greater than or equal to $50 million shown, excludes private placements. (3) Redemption of subordinated debt notes and additional tier 1 notes at the scheduled call date is at BOQ’s option and is subject to obtaining prior written approval from APRA. (4) Quarters are reflected in line with the Bank’s financial reporting year. 3.3 CAPITAL MANAGEMENT Capital adequacy $ million CET1 Additional tier 1 capital Total tier 2 Total capital base Total RWA CET1 ratio Total capital adequacy ratio As at Aug-19 Feb-19 Aug-18 Aug-19 vs Feb-19 Aug-19 vs Aug-18 2,761 500 525 3,786 2,776 500 524 2,762 500 524 3,800 3,786 (1%) - - - - - - - 30,533 29,978 29,669 2% 3% 9.04% 12.40% 9.26% 9.31% (22bps) (27bps) 12.68% 12.76% (28bps) (36bps) 43 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 503.3 CAPITAL MANAGEMENT (CONTINUED) The Group’s CET1 ratio decreased by 22 basis points during 2H19 from 9.26 per cent to 9.04 per cent. There was seven basis points of underlying capital consumption in 2H19. Reduced earnings and a decline in the dividend reinvestment plan participation, resulted in a higher net capital outflow from the 2019 interim dividend payment. Software expenditure utilised 12 basis points of capital during 2H19. This spend is consistent with the accelerated investment spend in 2H19 that was flagged at the 1H19 results. Fair value through other comprehensive income (FVOCI) reserves were impacted by movements in credit spreads and the effects of hedging on the underlying book during 2H19. BOQ completed a $1 billion capital efficient RMBS transaction during 2H19, which generated seven basis points of capital benefit. Other items reduced CET1 ratio by three basis points primarily due to an increase in deferred tax assets and non-cash items. Further details on the non-cash items can be found in Section 5.1 (B) Non- cash earnings reconciling items. Common Equity Tier 1 2H19 vs 1H19 Underlying capital consumption of 7bps 0.50% (0.23%) (0.34%) 0.07% (0.12%) (0.07%) (0.03%) 9.26% 9.04% 1H19 Cash earnings RWA growth Dividend net of DRP Securitisation Software expenditure FVOCI reserve movements Other items 2H19 3.4 TAX EXPENSE Tax expense arising on cash earnings for FY19 amounted to $145 million. This represented an effective tax rate of 31.2 per cent, which is above the corporate tax rate of 30 per cent primarily due to the non-deductibility of interest payable on WCN and Capital Notes. 44 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 504. DIVISIONAL PERFORMANCE 4.1 RETAIL INCOME STATEMENT, KEY METRICS AND FINANCIAL PERFORMANCE REVIEW Retail Banking provides solutions to personal customers who may choose to do their banking across multiple channels including the Owner Managed and corporate branch network; third party intermediaries and VMA distribution channels; online via digital, social media, mobile banking; or on the phone. The Retail bank had a challenging year in terms of growth, with assets contracting in an environment of slowing credit growth, intense competition and shifting customer preferences. While the Bank has maintained prudent credit settings with stringent serviceability requirements, changes have been made to manual lending processes late in FY19 to improve customer experience and reduce turnaround times. The investment in the Bank’s lending capability is also delivering improved customer outcomes and operational efficiencies. The VMA ‘Reward Me’ mortgage offering continues to be well received by customers and brokers, with the mortgage portfolio now exceeding $2.5 billion. These home loan customers provide geographic diversification from the Group’s traditional markets in addition to broadening the customer profile to a younger demographic. Retail Banking continues to invest in its digital enablement strategy with upgrades to both mobile banking and internet banking platforms underway. Investment has also been made in better understanding the needs of our customers to ensure that future strategies are aligned to delivering on customer expectations. $ 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 Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 432 63 495 (287) 208 (14) 194 (61) 133 458 67 525 (281) 244 (15) 229 (72) 157 (6%) (6%) (6%) 2% (15%) (7%) (15%) (15%) (15%) 217 31 248 (146) 102 (4) 98 (31) 67 215 32 247 (141) 106 (10) 96 (30) 66 1% (3%) - 4% (4%) (60%) 2% 3% 2% Cash earnings after tax of $133 million for FY19 was down 15 per cent on FY18 in an environment of slowing credit growth, intense competition, rising funding costs and shifting regulatory and community expectations. Net interest income of $432 million decreased $26 million or six per cent over FY19. This was a reflection of lower asset balances and margin compression driven by competition and increased basis costs, whilst deposit margins were managed through growth in the new fast track saver product which enabled less reliance on the more expensive term deposit portfolio. Non-interest income of $63 million for FY19 was $4 million or six per cent lower than FY18. This reflects lower banking income as customers continue to trend toward low or no fee products, as well as the impact from the implementation of AASB 15. Operating expenses of $287 million increased $6 million or two per cent on FY18, reflecting an increase in business activity to address risk and compliance requirements, the expansion of the VMA digital channel and additional investment in the customer experience. Impairment expense of $14 million reduced $1 million or seven per cent from FY18. This equates to six basis points of gross loans and reflects the Bank’s robust underwriting standards and collection practices. 45 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 504.1 RETAIL INCOME STATEMENT, KEY METRICS AND FINANCIAL PERFORMANCE REVIEW (CONTINUED) Key metrics CASH EARNINGS BASIS CTI ASSET QUALITY 90dpd arrears Impaired assets Loan impairment expense / GLA BALANCE SHEET GLA Housing Other retail CREDIT RWA CUSTOMER DEPOSITS (1) Term deposits Mortgage offsets Savings & investment Transaction accounts Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 (%) 58.0 53.5 450bps 58.9 57.1 180bps ($ million) ($ million) (bps) 210 67 6 148 59 6 ($ million) 24,783 25,252 ($ million) 24,717 25,170 42% 14% - (2%) (2%) ($ million) 66 82 (21%) 210 67 3 177 54 8 19% 24% (5bps) 24,783 24,717 66 24,996 24,922 (1%) (1%) 74 (12%) ($ million) 8,664 8,841 (2%) 8,664 8,775 (1%) ($ million) 15,742 ($ million) ($ million) ($ million) ($ million) 6,295 1,511 6,426 1,510 15,192 6,650 1,329 5,762 1,451 4% (5%) 14% 12% 4% 15,742 6,295 1,511 6,426 1,510 15,312 6,711 1,455 5,712 1,434 3% (6%) 4% 13% 5% DEPOSIT TO LOAN RATIO (%) 64 60 400bps 64 61 300bps (1) Treasury managed deposits are included in the Bank’s Other operating segment. 46 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 504.2 BOQ BUSINESS INCOME STATEMENT, KEY METRICS AND FINANCIAL PERFORMANCE REVIEW customer acquisition with housing loans growing above system at an annual rate of 14 per cent. This provides a good pipeline of customers with potential commercial lending needs in the future. BOQ Specialist focuses on very clearly defined niches and has developed a distinct competitive advantage through tailored consumer and commercial products and services to assist professionals through their practicing life cycles. BOQ Finance lending grew strongly in the period, with $667 million or 15 per cent balance growth during the year. BOQ Finance remained focused on its existing market proposition and grew across multiple portfolios increasing diversification of product mix. This business continues to grow year on year through targeted broker relationships in the equipment finance business and new structured programs. BOQ Business includes BOQ branded commercial lending activity, BOQ Finance and BOQ Specialist businesses. The division provides tailored business banking solutions including commercial lending, equipment finance and leasing, cashflow finance, foreign exchange, interest rate hedging, transaction banking and deposit solutions for commercial and specialist customers. The BOQ Business division continued to deliver on its strategy to grow in niche target segments in FY19, by providing a tailored relationship offering to customers. Overall loan growth was $1.4 billion in FY19. Queensland concentration for BOQ Business lending was 42 per cent. BOQ branded commercial loan growth was underpinned by an ongoing focus on quality and appropriate return for risk. Focus on the Bank’s niche segments of corporate healthcare and retirement living, hospitality and tourism and agribusiness continues to contribute to the diversification of the loan portfolio by geography, industry and asset class. BOQ Specialist achieved higher fundings compared to FY18, with solid growth despite both the commercial and home lending books maturing. Aggregate asset growth was $756 million. The BOQ Specialist’s mortgage offering delivered strong new $ 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 Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 527 50 577 514 59 573 (242) (228) 335 (60) 275 (86) 189 345 (26) 319 (100) 219 3% (15%) 1% 6% (3%) 131% (14%) (14%) (14%) 266 24 290 (124) 166 (40) 126 (39) 87 261 26 287 (118) 169 (20) 149 (47) 102 2% (8%) 1% 5% (2%) 100% (15%) (17%) (15%) Cash earnings after tax of $189 million was $30 million lower than FY18 due largely to higher loan impairment expense driven by increased collective provisions. operating expenses from the business. Non-interest income generated by asset sales in equipment finance and financial markets also reduced. Net Interest Income of $527 million was $13 million or three per cent higher than FY18. This was driven by lending growth of seven per cent with the BOQ Specialist and BOQ Finance businesses both performing strongly. Net interest margin reduced 13 basis points over the year due to the changing mix of the portfolio, higher costs and increased competition. Non-interest income of $50 million was $9 million or 15 per cent lower than FY18. The BOQ merchant offering was migrated to a third party in return for a revenue share of new and ongoing merchant income. This provides customers with improved technology and ongoing investment whilst removing risk and Operating expenses of $242 million increased by $14 million or six per cent on FY18 due to increased technology services resulting from the Bank’s transformation program and rising compliance and employee costs associated with managing the growing portfolio. Impairment expense of $60 million increased $34 million on FY18. The increase was attributable to the forward looking CP model and support of the growth in the asset finance portfolio, along with specific provisions related to a small number of large exposures raised in 2H19. 47 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 504.2 BOQ BUSINESS INCOME STATEMENT, KEY METRICS AND FINANCIAL PERFORMANCE REVIEW (CONTINUED) Key metrics CASH EARNINGS BASIS CTI ASSET QUALITY 90dpd arrears Impaired assets Loan impairment expense / GLA BALANCE SHEET GLA Housing Commercial and other BOQ Finance Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 (%) 41.9 39.8 210bps 42.8 41.1 170bps ($ million) ($ million) (bps) 102 130 28 113 104 13 (10%) 25% 15bps 102 130 38 110 98 19 (7%) 33% 19bps ($ million) 21,433 20,027 ($ million) ($ million) ($ million) 5,930 10,241 5,262 5,336 10,096 4,595 7% 11% 1% 15% 21,433 20,783 5,930 10,241 5,262 5,623 10,262 4,898 CREDIT RWA ($ million) 17,291 16,317 6% 17,291 16,873 CUSTOMER DEPOSITS (1) Term deposits Mortgage offsets Savings & investment Transaction accounts ($ million) 8,293 8,004 ($ million) ($ million) ($ million) ($ million) 1,512 838 4,755 1,188 1,739 671 4,453 1,141 4% (13%) 25% 7% 4% 8,259 1,512 838 4,755 1,188 7,745 1,609 781 4,266 1,089 3% 5% - 7% 2% 7% (6%) 7% 11% 9% DEPOSIT TO LOAN RATIO (%) 39 40 (100bps) 39 37 200bps (1) Treasury managed deposits are included in the Bank’s Other operating segment. 48 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 504.3 OTHER SEGMENT INCOME STATEMENT AND FINANCIAL PERFORMANCE REVIEW Other includes Group Treasury, St Andrew’s Insurance and Group Head Office. $ million Net interest income Non-interest income Total income Operating expenses Underlying profit Loan impairment expense Profit before tax Income tax expense Cash loss after tax Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Aug-18 2 15 17 (21) (4) - (4) 2 (2) (7) 19 12 (18) (6) - (6) 2 (4) 129% (21%) 42% 17% (33%) - (33%) - (50%) 2 8 10 (12) (2) - (2) 1 (1) - 7 7 (9) (2) - (2) 1 (1) - 14% 43% 33% - - - - - Other segment cash loss after tax was $2 million, driven predominantly by lower non-interest income compared to FY18. Non-interest income includes St Andrew’s insurance and trading income. Contributing to this was St Andrew’s insurance income deterioration (further information at Section 2.4 Insurance overview), partly offset by higher trading income. Operating expenses of $21 million increased by $3 million or 17 per cent on FY18, largely as a result of addressing regulatory and compliance requirements for the St Andrew’s insurance business in 2H19. 49 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 505. APPENDICES 5.1 RECONCILIATION OF STATUTORY PROFIT TO CASH EARNINGS Cash earnings is used to present a clear view of BOQ’s underlying operating results. This excludes a number of items that introduce volatility 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 exclusions relate to: • Regulatory/compliance costs ($6 million after tax) which include external costs and other related costs associated with the Royal Commission, BEAR, Code of Banking Practice ,Comprehensive Credit Reporting, AML and other regulatory matters; • Amortisation of acquisition fair value adjustments ($6 million after tax) arising from the historical acquisition of subsidiaries; and • Hedge ineffectiveness ($8 million after tax) which represents earnings volatility from hedges that are not fully effective and create a timing difference in reported profit. These hedges remain economically effective. (A) RECONCILIATION OF CASH EARNINGS TO STATUTORY NET PROFIT AFTER TAX Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 $ million Cash earnings after tax Amortisation of acquisition fair value adjustments Hedge ineffectiveness Integration/transaction costs Regulatory/compliance Software changes Legacy items Statutory net profit after tax (B) NON-CASH EARNINGS RECONCILING ITEMS 320 (6) (8) (1) (6) - (1) 298 372 (7) (3) (1) (9) (11) (5) 336 (14%) (14%) 167% - (33%) (100%) (80%) (11%) 153 (2) (5) (1) (3) - - 142 Aug-19 vs Feb-19 (8%) (50%) 67% - - - (100%) 167 (4) (3) - (3) - (1) 156 (9%) $ 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-19 961 128 1,089 (550) 539 (74) 465 (145) 320 VMA - 16 16 (16) - - - - - Amortisation of acquisition fair value adjustments Hedge ineffectiveness Integration/ transaction costs Regulatory/ compliance Legacy items Statutory net profit Aug-19 - - - (7) (7) - (7) 1 (6) - (11) (11) - (11) - (11) 3 (8) - - - (1) (1) - (1) - (1) - - - (9) (9) - (9) 3 (6) - 2 2 (4) (2) - (2) 1 (1) 961 135 1,096 (587) 509 (74) 435 (137) 298 50 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 505.2 OPERATING CASH EXPENSES Year End Performance Half Year Performance Aug-19 Aug-18 Aug-19 vs Aug-18 Aug-19 Feb-19 Aug-19 vs Feb-19 EMPLOYEE EXPENSES Salaries Superannuation contributions Payroll tax Employee share programs Other OCCUPANCY EXPENSES Lease expense Depreciation - fixed assets Other GENERAL EXPENSES Marketing Commissions to Owner Managed branches (OMB) Communications and postage Printing and stationery Impairment Processing costs Other operating expenses IT EXPENSES Data processing Amortisation - intangible assets Depreciation - fixed assets OTHER EXPENSES Professional fees Directors’ fees Other 217 20 13 8 6 264 30 10 2 42 16 5 19 3 4 15 29 91 84 40 1 125 18 2 8 28 214 20 13 10 6 263 32 9 3 44 15 5 17 3 2 15 24 81 75 43 1 119 13 2 5 20 1% - - (20%) - - (6%) 11% (33%) (5%) 7% - 12% - 100% - 21% 12% 12% (7%) - 5% 38% - 60% 40% 109 10 6 4 3 132 15 5 1 21 9 3 10 1 2 7 15 47 44 21 - 65 12 1 4 17 108 10 7 4 3 132 15 5 1 21 7 2 9 2 2 8 14 44 40 19 1 60 6 1 4 11 1% - (14%) - - - - - - - 29% 50% 11% (50%) - (13%) 7% 7% 10% 11% (100%) 8% 100% - - 55% Total operating expenses 550 527 4% 282 268 5% 51 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 505.2 OPERATING CASH EXPENSES (CONTINUED) Employee expenses Employee expenses of $264 million increased by $1 million on FY18. Flat employee expenses were driven by lower short term incentives paid, including no Key Management Personnel receiving an award under the Short Term Incentive plan. This was offset by higher FTE to support regulatory and compliance programs and targeted growth in BOQ Business. Occupancy expenses Occupancy expenses of $42 million decreased by $2 million or five per cent on FY18, due to consolidation of office space which offset increased depreciation on leasehold assets. General expenses General expenses of $91 million increased by $10 million or 12 per cent on FY18 due to higher non-lending losses reflecting improved remediation processes, and higher industry levies. In addition, there were higher telecommunication costs during the transition between data centre locations as part of the Bank’s infrastructure modernisation program. 5.3 PROPERTY, PLANT & EQUIPMENT (CONSOLIDATED) IT expenses IT expenses of $125 million increased by $6 million or five per cent on FY18. Data processing expenses increased by $9 million driven by new technology services associated with the Bank’s transformation programs, along with consultancy costs for data collection to support compliance activity. This was offset by a $3 million reduction in amortisation as a result of accelerated amortisation recognised in FY18. Other expenses Other expenses of $28 million increased by $8 million or 40 per cent on FY18. Professional fees increased by $5 million as a result of activity to address compliance requirements and support for divisional business strategy development. The Bank’s insurance costs also increased by $2 million, in line with a general trend of higher premiums across the industry. $ million COST Balance as at 31 August 2018 Additions Disposals Transfers between categories Balance as at 31 August 2019 DEPRECIATION AND LOSS ON DISPOSAL / IMPAIRMENT Balance as at 31 August 2018 Depreciation for the year Disposals Balance as at 31 August 2019 Carrying amount as at 31 August 2018 Carrying amount as at 31 August 2019 Leasehold improvements $m Plant furniture and equipment $m IT equipment $m Capital works in progress $m Assets under operating lease $m 82 3 (4) 1 82 43 8 (2) 49 39 33 33 1 (1) - 33 24 2 - 26 9 7 34 - - - 34 30 1 - 31 4 3 1 4 - (1) 4 - - - - 1 4 16 5 (7) - 14 12 5 (8) 9 4 5 Total $m 166 13 (12) - 167 109 16 (10) 115 57 52 52 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 505.4 CASH EPS CALCULATIONS Basic EPS Diluted EPS Year End Performance Half Year Performance (cents) (cents) Aug-19 Aug-18 79.6 74.0 94.7 89.3 Aug-19 vs Aug-18 (16%) (17%) Aug-19 Feb-19 37.8 35.3 41.8 39.0 Aug-19 vs Feb-19 (10%) (9%) Reconciliation of cash earnings for EPS Cash earnings available for ordinary shareholders Add: Convertible Preference Shares dividend Add: WCN Add: Capital Notes Cash diluted earnings available for ordinary shareholders Weighted average number of shares (WANOS) Basic WANOS Add: Effect of award rights Add: Effect of CPS Add: Effect of WCN Add: Effect of Capital Notes Diluted WANOS for cash earnings EPS ($ million) ($ million) ($ million) ($ million) ($ million) (million) (million) (million) (million) (million) (million) 5.5 ISSUED CAPITAL Ordinary shares 320 - 7 14 341 402 1 - 17 39 372 (14%) 153 167 (8%) 7 7 9 (100%) - 56% - 4 7 - 3 7 395 (14%) 164 177 393 2% 2 12 14 21 (50%) (100%) 21% 86% 4% 404 1 - 17 39 461 399 2 - 16 38 455 459 442 - 33% - (7%) 1% (50%) - 6% 3% 1% Movements during the year Balance at the beginning of the year – fully paid Dividend reinvestment plan (1) Balance at the end of the year – fully paid (1) Amounts taken up by shareholders as part of the dividend reinvestment plan: • • 28 per cent of the dividend paid on 14 November 2018, equating to $43 million; and 26 per cent of the dividend paid on 22 May 2019, equating to $35 million. Consolidated 2019 Number 397,311,850 8,472,959 405,784,809 53 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 505.6 AVERAGE BALANCE SHEET AND MARGIN ANALYSIS $ million INTEREST EARNING ASSETS Gross loans & advances at amortised cost Investments & other securities Total interest earning assets Non-interest earning 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 Shareholders’ funds Total liabilities & shareholders’ funds INTEREST MARGIN & INTEREST SPREAD Interest earning assets Interest bearing liabilities Net interest spread Benefit of net interest-free assets, liabilities and equity NIM - on average interest earning assets August 2019 (Full Year) August 2018 (Full Year) Average balance $m Interest $m Average rate % Interest $m Average rate % Average Rate % 43,616 6,226 1,913 145 49,842 2,058 4.39 2.33 4.13 54 1,594 (215) 1,433 51,275 29,236 17,303 576 521 46,539 1,097 1.97 3.01 2.36 876 47,415 3,860 51,275 42,763 6,055 48,818 59 1,555 (220) 1,394 50,212 28,729 16,928 45,657 755 46,412 3,800 50,212 1,927 142 2,069 4.52 2.35 4.25 578 526 1,104 2.02 3.12 2.42 49,842 46,539 2,058 1,097 49,842 961 4.13 2.36 1.77 0.16 1.93 48,818 45,657 2,069 1,104 48,818 965 4.25 2.42 1.83 0.15 1.98 54 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 505.6 AVERAGE BALANCE SHEET AND MARGIN ANALYSIS (CONTINUED) $ million INTEREST EARNING ASSETS Gross loans & advances at amortised cost Investments & other securities Total interest earning assets Non-interest earning 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 Shareholders’ funds Total liabilities & shareholders’ funds INTEREST MARGIN & INTEREST SPREAD Interest earning assets Interest bearing liabilities Net interest spread Benefit of net interest-free assets, liabilities and equity NIM - on average interest earning assets August 2019 (six month period) February 2019 (six month period) Average balance $m Interest $m Average rate % Interest $m Average rate % Average Rate % 43,781 6,439 952 71 50,220 1,023 4.31 2.19 4.04 52 1,625 (224) 1,453 51,673 29,485 17,328 46,813 1,000 47,813 3,860 51,673 285 253 538 1.92 2.90 2.28 961 74 1,035 4.46 2.49 4.22 291 268 559 2.03 3.12 2.44 43,455 5,986 49,441 56 1,535 (207) 1,384 50,825 28,927 17,305 46,232 734 46,966 3,859 50,825 50,220 46,813 1,023 538 50,220 485 4.04 2.28 1.76 0.16 1.92 49,441 46,232 1,035 559 49,441 476 4.22 2.44 1.78 0.16 1.94 55 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 505.7 DISTRIBUTION FOOTPRINT BOQ has evolved its Customer in Charge strategic pillar to support customers in engaging through the channel of their choice. This could be directly through BOQ’s Owner Managed and corporate branches, a preferred broker (aligned to BOQ or VMA), via online channels such as digital, social media and mobile banking, or on the phone. Branch numbers reduced by 16 during 2019 as closures, conversions and portfolio mergers occurred. The franchise network remains a key differentiator for BOQ and is pivotal to the Bank’s deposit raising capabilities. A new revenue share remuneration structure is on track to be introduced early in the new financial year. This will better align outcomes for the Bank and Owner Managers, whilst being more attractive to potential new franchisees. In a market where many customers prefer using third party channels, BOQ has continued to build its broker presence during 2019 with 29 per cent of housing settlements being originated through the VMA and BOQ branded accredited brokers. The majority of these brokers are domiciled outside of Queensland, which continues to accelerate the geographic diversification of the portfolio and provide deeper access to the Sydney and Melbourne markets where BOQ has traditionally been under represented. WA 12 6 583 554 89 47 NT 1 1 15 16 4 SA 145 266 201 AS AT 31 AUGUST 2019 QLD 34 58 688 791 240 296 7 NSW & ACT 10 18 1119 1458 124 372 VIC 9 10 633 65 95 CORPORATE BRANCHES 572 BOQ BRANDED ATM’S 1311 104 78 OWNER MANAGED BRANCHES 1033 REDI ATM’s 3201 BROKERS ACCREDITED WITH BOQ 4446 BROKERS ACCREDITED WITH VMA 56 7 TRANSACTION CENTRES TAS 17 14 2 51 35 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 505.7 DISTRIBUTION FOOTPRINT (CONTINUED) As at Aug-19 QLD NSW / ACT VIC WA NT TAS SA Total Corporate branches OMB Transaction centres 34 58 7 99 10 18 - 28 As at Aug-18 QLD NSW / ACT Corporate branches OMB Transaction centres 42 62 7 111 11 18 - 29 9 10 - 19 VIC 10 10 - 20 12 6 - 18 - 1 - 1 - 2 - 2 - - - - 65 95 7 167 WA NT TAS SA Total 13 6 - 19 - 1 - 1 - 2 - 2 1 - - 1 77 99 7 183 Corporate, Owner Managed Branches (OMB) & Transaction Centres 106 (3) (6) 5 102 99 7 FY18 OMB closures/ mergers OMBs converted to corporate branches Corporate branches converted to OMB 95 7 FY19 (13) 6 (5) 77 FY18 Corporate closures OMBs converted to corporate branches Corporate branches converted to OMB 65 FY19 OMBs Transaction centres Corporate branches 5.8 CREDIT RATING The Bank monitors rating agency developments closely. Entities in the Group are rated by Standard & Poor’s (S&P), Moody’s Investor Service and Fitch Ratings. BOQ’s current debt ratings are shown below. There have been no changes to the credit ratings from FY18. Rating Agency S&P Fitch Moody’s Short Term Long Term Outlook A2 F2 P2 BBB+ A- A3 Stable Stable Stable 5.9 REGULATORY DISCLOSURES The APS 330 Public Disclosure capital disclosure template, regulatory capital reconciliation, LCR, NSFR (included in the relevant Pillar 3 disclosures document) and capital instrument disclosures are available at the regulatory disclosures section of the Bank’s website at the following address: https://www.boq.com.au/regulatory_disclosures 57 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTHighlights and strategy 15 | Group performance analysis 27 | Business settings 35 | Divisional performance 45 | Appendices 50CONTENTS 59 62 63 Section 1 Remuneration Summary Section 2 Key Management Personnel (KMP) Section 3 Remuneration Outcomes Dear Shareholder, 67 Section 4 Remuneration Strategy & Structure 73 Section 6 Non-Executive Director Remuneration 70 Section 5 Remuneration Governance 74 Section 7 Statutory Tables Introduction On behalf of the Board I have pleasure in presenting the 2019 Remuneration Report. This Report is provided in an environment of some uncertainty and considerable change for the sector as a whole. Regulatory, Statutory and other industry requirements include the Sedgwick Recommendations, BEAR, APRA’s draft Prudential Standard CPS 511 Remuneration (CPS 511) and outcomes from the Hayne Royal Commission. These are challenging our thinking about fundamental remuneration structure and policy as we seek to balance the interests of customers, shareholders, the community and employees. Over the past year we have again consulted widely with regulators, customers, shareholders and their representatives, employees and the community. Additionally we have met with regulators, banks and their advisors outside of Australia. The feedback from stakeholders and others continues to influence our remuneration structure and policy. In 2018 whilst we made some changes consistent with the BEAR requirements, our remuneration structure was retained. In 2019 we refined and clarified several parts of the remuneration framework but have refrained from any significant changes until the latest regulatory requirements are better understood. 2019 Outcomes Fixed increases across BOQ will on average be no greater than inflation. This includes a 3% increase for employees covered by our collective agreement. No KMP will receive an increase in fixed remuneration as a result of the 2019 review. The BOQ Short Term Incentive (STI) Plan has financial and behavioural gateways and for 2019 the financial gateways have not been met. The Board has not awarded any STI to KMP and the most senior leaders of BOQ. The Board has also considered the importance of our customer facing and support employees to the continued systems, risk and control work being undertaken by a number of our people. Having regard for this, the Board has determined to use its discretion as provided under the plan, and make an incentive pool available for select employees. On average, individual awards will reduce by more than 40% relative to the prior year. The BOQ Long Term Incentive (LTI) Plans are awarded on the basis of potential and retention. These have 3 and 4 year vesting periods, are issued at face value, are hurdled for senior executives and are subject to malus and clawback. The Board will award KMP LTI in accordance with plan guidelines at 100% of fixed remuneration with a 4 year vesting period. The Board has explicitly considered risk events, behaviours and outcomes with input from the Chief Risk Officer and Chair of the Risk Committee. On balance, taking into account both positive and negative outcomes together with cancellations and forfeitures which occurred during the year, the Board has determined no further adjustments will be made at this time. Finally the Board will not be seeking any increase to the directors’ fee pool and is not proposing to increase individual directors’ fees. Separately the Board has considered the external and internal challenges facing BOQ over the next three years and the importance of key senior employees to the significant transformation required over this period. In this context the Board has determined to offer conditional equity to select senior employees with 50% vesting after eighteen months and the remainder after three years. These awards will be subject to continued employment and earnings growth or specific transformation projects. The pool for this is capped at $5 million and will not be offered to KMP including the Managing Director and Chief Executive Officer (MD & CEO). Governance The principles by which remuneration is governed have not changed in the 2019 year and are included in the body of the report. We have been considering the impact of the APRA proposed Prudential Standard CPS 511 on our remuneration structures and believe if these remain in the final standard changes will be necessary to our existing structure. Any changes will be disclosed in future Remuneration Reports. Conclusion The BOQ Board remains committed to designing remuneration structures which balance stakeholders’ interests in the short and long term. In doing so we will ensure compliance with the regulatory and legal obligations under which we operate. In the current climate the Board has been very conscious of the environment, stakeholders and regulators in determining appropriate outcomes for the 2019 year. It is the Board’s view that the remuneration outcomes for the 2019 year are appropriate. This is my final report presented to you as Chair of the Human Resources and Remuneration Committee (HRRC). I retire at the 2019 AGM after three terms and nearly 10 years with BOQ. It has been a privilege to fulfill this role as a director and Chair of the HRRC, and I have been very appreciative of the level of shareholder advice and support for our remuneration process. Thank you. Yours sincerely, David Willis Chairman, BOQ HRRC 58 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORTThis Remuneration Report has been prepared for consideration by the Bank’s shareholders at the 2019 AGM. It outlines the overall remuneration strategy, framework and practices adopted by the Consolidated Entity for the period 1 September 2018 to 31 August 2019 (FY19). It has been prepared in accordance with Section 300A of the Corporations Act 2001 and has been audited in accordance with section 308(3C). This report comprises the following sections: • Section One: A summary of FY19 remuneration highlights and changes for FY20. • Section Two: A list of the FY19 KMP including changes. • Section Three: FY19 Remuneration Outcomes. • Section Four: Remuneration Strategy and Structure. • Section Five: Remuneration Governance policies and principles. • Section Six: Non-Executive Directors’ remuneration. • Section Seven: Statutory tables required by the Corporations Act. SECTION 1. REMUNERATION SUMMARY This section provides a summary of how remuneration worked at BOQ for the FY19 year covering both the structure in place and the associated outcomes. Changes made during FY19 are highlighted. 1.1 REMUNERATION STRUCTURE IN PLACE FOR FY19 (SEE SECTION 4) Remuneration at BOQ comprises three components being: Fixed Remuneration, STI and LTI. The STI and LTI together constitute Variable Remuneration. Together Fixed and Variable components comprise Total Remuneration. Figure 1 below illustrates the components of remuneration at the target/performing level and are expressed as a percentage of Total Remuneration: Figure 1 - Remuneration Mix (at Performing level) Managing Director & CEO Group Executive (Line) 34% 36% 16% 16% 14% 14% 34% 36% Group Executive (Functional) 40% 10% 10% 40% Fixed Remuneration STI - Cash STI - Deferred LTI In Figure 1 the LTI value has been presented at 100% of Fixed Remuneration. LTI grants are made within the range of 80% to 120% of Fixed Remuneration. Remuneration is awarded by way of cash and equity. Fixed Remuneration and a portion of the STI is delivered as cash with the remaining STI and the full LTI awarded in equity and deferred to a future period. Figure 2 below illustrates the delivery profile of the different components of KMP remuneration. It shows the time period over which performance is measured, when each component is awarded and when the deferred elements vest. The deferred STI and LTI awards for FY19 will not fully vest until after year end results are announced in October 2022 (FY23). 59 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORTFigure 2 - Remuneration Components Delivery Financial Year 19 Nov-19 Dec-19 Dec-20 Dec-21 Dec-22 Fixed Remuneration (Cash and Superannuation) STI Performance Year 50% paid in cash LTI Granted December 2018 50% deferred into equity 20% vests 15% vests 15% vests LTI vests subject to relative TSR & EPS Performance STI performance is assessed by way of financial and non-financial measures separately at the group and individual level under four distinct pillars. These are set at the beginning of the financial year with KMP sharing the same group scorecard and individual scorecards tailored to each KMP’s role. LTI vests subject to comparative financial measures, Total Shareholder Return (TSR) and Earnings Per Share (EPS). STI is subject to financial, risk and behaviour gateways. The financial gateway requires basic cash EPS to be above 90% of budget. Where awarded, STI is paid 50% in cash and 50% in equity deferred over three years. 20% vests after one year, 15% after two years, and 15% after three years, subject to specified employment conditions. Figure 3 below illustrates the four STI pillars, each of which contains a number of measures. Outcomes are calculated by scoring the measures and multiplying the group and individual scores. Final awards are subject to Board discretion. Figure 3 - KMP STI Pillars Culture 25% Customer 25% Pillar Culture Examples of Measures Employee engagement, diversity and risk management Shareholder 25% Strategy 25% Shareholder Financial measures e.g. NPAT, divisional expenditure Customer Customer Advocacy and Net Promoter Score (NPS) Strategy Implementation of Board approved strategy including divisional projects LTI consists of annual equity grants, which vest at the end of four years subject to relative TSR (80%), relative EPS (20%) and continued employment. 1.2 ACTUAL OUTCOMES FOR FY19 (SEE SECTION 3) 1.2.1 Fixed Remuneration During FY19, Anthony Rose and Doug Snell were appointed to interim roles as Chief Executive Officer (CEO) and Group Executive, BOQ Business respectively. For the period they held these roles, they received temporary increases in remuneration. In addition, Adam McAnalen was appointed to the role of Chief Risk Officer. All three received fixed remuneration increases which were below that of their predecessors. Permanent replacements have been subsequently appointed for both of the interim roles. 1.2.2 STI EPS performance did not meet the financial gateway under the STI plan and the Board chose not to exercise its discretion to pay incentives to KMP. As a result no KMP received an STI for FY19. 1.2.3 LTI The 2015 grant of LTI was subject to relative TSR and EPS and was tested in FY19 with 16% of the grant vesting. The Board has approved LTI grants to be made to KMP in FY20 at 100% of fixed remuneration with unchanged performance conditions. The MD & CEO grant of 100% of fixed remuneration will be subject to shareholder approval at the 2019 AGM. 60 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORT1.3 CHANGES MADE IN FY19 AND THOSE APPLYING FOR FY20 During 2019 the following changes were made to BOQ’s remuneration structure and policy: 1. Changes were made to STI plan measures to better align with BOQ’s strategic pillars (customer, shareholder, strategy and culture). These changes were made bearing in mind the plan’s overarching financial gateway. 2. Grants of LTI made from FY19 onwards have a performance/vesting period of four years (previous grants were based on performance/vesting periods of three years) which aligns with the BEAR legislation. 3. As part of the implementation of the BEAR legislation during FY19, the Board reviewed and updated the BOQ Executive Service 4. Agreement (ESA). BOQ is in the process of changing KMP notice periods, excluding the MD & CEO. These are being increased to six months (from three months) following an assessment of market practice. 5. The LTI plan Good Leaver policies were updated to provide further clarity. 6. Implementation of a Non-Executive Director (NEDs) Fee Sacrificed Rights Plan (NED Plan) allowing NEDs to sacrifice a portion of their Board fees to acquire BOQ shares. The equity under this plan is not subject to any conditions apart from a disposal restriction for a minimum of three years. 7. The Bank has made continued progress towards implementing the Sedgwick Recommendations within its business. In addition, the outcomes of the Banking Royal Commission and APRA’s draft Prudential Standard CPS 511 are being actively contemplated. For the FY20 year the following changes are being implemented or considered: 1. George Frazis commenced with BOQ on 5 September 2019 as MD & CEO. The Board received independently sourced benchmarking, and his remuneration package is consistent with that of the previous MD & CEO. This information was disclosed to the ASX on 6 June 2019 and is presented in Figure 4 below: Figure 4 - MD & CEO Remuneration: FY20 Potential 4,550 1,300 975 975 $ S D N A S U O H T 3,770 1,300 585 585 1,300 1,300 LTI - Performance Award Rights (PARs) STI - Deferred Shares STI - Cash Fixed Remuneration 1,300 1,300 Minimum Performing Maximum 2. Remuneration for KMP is independently benchmarked against both the external market and internal relativities. No KMP will receive an increase in fixed remuneration as a result of the FY19 review. KMP have not received an increase to fixed remuneration since 2016. 3. The Board has considered the criticality of key senior employees to the changing operating environment and the transformation challenge for the Bank over the next three years. In light of these factors the Board has determined to offer a Transformation Incentive with the objective of retaining, aligning and rewarding select employees for achieving BOQ’s transformation strategy. Grants will be subject to conditions including continued employment and earnings growth or specific transformation projects, with vesting occurring after 18 months and three years. This plan will be capped at $5 million and offered to those senior employees below KMP level who are considered critical talent and core to the implementation of the strategy. The MD & CEO and other KMP will not be eligible to participate in the Transformation Incentive. 4. Following the Hayne Royal Commission and the release of draft CPS 511, the Board has consulted with advisers and regulators. Subject to finalisation of the prudential standard it is the Board’s view that there are a number of changes which should be considered as part of a redesign of BOQ variable remuneration. These changes will focus on both the STI and LTI plans as well as the overarching framework. Further details of any changes will be provided in future Remuneration Reports. 61 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORT Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67 SECTION 2. KMP This section outlines those directors and executives who are the focus of this report. There were several changes to KMP over FY19. The table below identifies Directors and Group Executives who are KMP and sets out the changes that have occurred in FY19 and up until the date of this report. TABLE 1 - DIRECTORS AND GROUP EXECUTIVES Directors (Executive and Non-Executive) Senior Executives Roger Davis Patrick Allaway Chairman (Non-executive) Ceased as Chairman 17 October 2019 Will retire as a Director on 31 October 2019 Director (Non-executive) Chair-Elect (Chair from 18 October 2019) Appointed effective from 1 May 2019 Kathleen Bailey-Lord Director (Non-executive) Appointed effective from 1 May 2019 Bruce Carter Director (Non-executive) George Frazis MD & CEO Appointed effective from 5 September 2019 Richard Haire Director (Non-executive) John Lorimer Director (Non-executive) Warwick Negus Director (Non-executive) Karen Penrose Director (Non-executive) Anthony Rose Chief Operating Officer from 1 September to 5 December 2018 Interim CEO from 6 December 2018 to 4 September 2019 Matthew Baxby Chief Financial Officer Peter Deans Debra Eckersley Adam McAnalen Chief Risk Officer Retired effective 31 May 2019 Group Executive, People and Culture from 3 September 2018 Chief Risk Officer from 1 June 2019 Lyn McGrath Group Executive, Retail Banking Peter Sarantzouklis Group Executive, BOQ Business from 12 August 2019 Doug Snell Interim Group Executive, BOQ Business from 21 December 2018 to 11 August 2019 Donna-Maree Vinci Chief Digital and Information Officer Group Executive, BOQ Business Resigned 6 December and ceased in role on 20 December 2018 Jon Sutton MD & CEO Resigned effective 5 December 2018 Brendan White Michelle Tredenick Director (Non-executive) David Willis Director (Non-executive) In addition to the above table the following is relevant to KMP changes: • Anthony Rose was not a BOQ director in the period that he was Interim CEO. Consistent with the previous permanent MD & CEO, George Frazis is a director of BOQ. Upon his commencement, Anthony ceased being KMP and will leave BOQ on 31 December 2019. • Adam McAnalen was not a KMP in his previous role as CEO of BOQ Finance prior to his permanent appointment as Chief Risk Officer. • Doug Snell was not a KMP in his previous role of General Manager, BOQ Business prior to his appointment as Interim Group Executive, BOQ Business. Upon the appointment of Peter Sarantzouklis, Doug moved back into his previous role and ceased to be KMP. • Brendan White resigned on 6 December 2018 and ceased in the role of Group Executive, BOQ Business on 20 December 2018. His notice period lasted until 6 March 2019. • Peter Deans’ retirement was notified to the ASX on 8 March 2019 and he entered into a consultancy agreement effective from his retirement on 31 May 2019 for a period of seven months to ensure continuity, provide transitional support and access to organisational knowledge with respect to risk at BOQ. • The Chief Operating Officer role was held vacant while Anthony Rose was Interim CEO. • Matthew Baxby’s resignation as Chief Financial Officer was notified to the ASX on 20 June 2019 and he will remain with BOQ until the end of October 2019. • Roger Davis’ retirement as Chairman was announced on 29 May 2019 and is effective 17 October 2019. Patrick Allaway will assume the chair role from 18 October 2019. Roger will retire from the Board on 31 October 2019. • David Willis announced his retirement as a director and Chair of the HRRC on 8 August 2019 with effect from the 2019 AGM on 10 December 2019. He will retain his role as a director of St Andrews Insurance Group. • On 10 October 2019 it was announced that Ewen Stafford will be appointed to the role of Chief Financial Officer and Chief Operating Officer. Ewen will commence with BOQ later in FY20. 62 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORTSECTION 3. REMUNERATION OUTCOMES This section provides further information concerning remuneration outcomes for the FY19 year. 3.1 LINKING PERFORMANCE & REWARD OUTCOMES – VARIABLE REMUNERATION The Consolidated Entity’s financial performance is summarised in Table 2 below together with its relationship to the aggregate amount of Short Term Incentive paid to KMP. TABLE 2 - BOQ CONSOLIDATED ENTITY PERFORMANCE 5 Year Company Performance Statutory net profit/(loss) after tax Cash net profit after tax (NPAT) (1) Cash Basic earnings per share (EPS) (1) Cash cost to income ratio (CTI) (1) Share price at balance sheet date Total Shareholder Return (TSR) (1) Value of Dividends paid KMP STI Awarded ($m) (1) Non-statutory measures are not subject to audit 2019 2018 2017 2016 2015 $298m $320m 79.6c 50.5% $9.17 -13.9% $288m - $336m $352m $338m $318m $372m $378m $360m $357m 94.7c 47.5% $11.49 97.6c 95.6c 97.3c 46.6% 46.8% 46.0% $12.59 $10.55 $12.67 -2.70% 26.5% -10.7% 6.3% $341m $308m $300m $272m $2.73 $4.02 $3.55 $3.73 Figure 5 - KMP STI Awarded in Comparison to NPAT The below graph compares the total STI awarded to KMP with BOQ’s Cash NPAT over the past 5 years: $ S N O L L M I I 390 380 370 360 350 340 330 320 310 300 6 5 4 3 2 1 0 FY15 FY16 FY17 FY18 FY19 $ S N O L L M I I Cash NPAT KMP STI Awarded 63 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORT 3.2 FY19 STI OUTCOMES Cash Basic EPS achieved for FY19 did not meet the financial gateway at 90% of budget. As a result no KMP were eligible to receive an award under the STI Plan and the Board elected not to exercise its discretion in the award of STI for FY19. Whilst no FY19 STI is payable, the Board reviewed each KMP’s performance in accordance with their STI measures. This included a review of risk behaviours as well as performance against group and individual scorecards. The table below provides outcomes against the group scorecard measures. Each measure is assessed individually and overall performance is determined by the averaged outcome. For FY19 the overall performance against the Group Scorecard was below expectations. TABLE 3 - SUMMARY OF GROUP PERFORMANCE OUTCOMES Pillar Weighting Measure Outcome NPS Ranking Customer 25% Customer Advocacy Main Financial Institution (MFI) Ranking Improvement Strategy 25% Implementation of Board approved strategy Shareholder 25% NPAT ROE CTI Loan Impairment Expense / Gross Loans & Advances (GLA) Employee Engagement & Enablement Culture 25% Diversity & Inclusion Risk Management Scorecard outcomes for individual KMP were no higher than performing. 3.3 FY19 LTI OUTCOMES 3.3.1 FY19 LTI Awards Vesting ACTUAL MAX TARGET ACTUAL MAX TARGET ACTUAL MAX TARGET ACTUAL MAX TARGET PARs awarded to KMP in 2015 were tested after year end results were announced in October 2018 consistent with plan terms. The 2015 LTI grant had two performance hurdles being relative TSR with an 80% weighting and relative EPS with a 20% weighting. At the date of vesting, qualifying KMP had to be employed, not serving out a notice period or subject to performance review due to any adverse risk behaviours. The statutory tables in Section 7 set out the detail of LTI awards vesting to individual qualifying KMP. The results of the testing is presented in Table 4 below. Vesting outcomes for the 2015 PARs grant are as follows: TABLE 4 - LTI VESTING OUTCOMES LTI VESTING OUTCOMES – 2015 Grant Grant Date Performance Period Vesting Hurdle Performance Outcome 15/12/2015 8 October 2015 to 4 October 2018 TSR ranking of at least 50th percentile BOQ TSR achieved ranking of 34th percentile, which was below the threshold level of performance, resulting in none of the TSR tranche vesting Relative EPS ranking of at least 60th Percentile BOQ EPS achieved ranking of 77th percentile resulting in 78%of the EPS tranche vesting Overall 16% of the PARs granted in 2015 vested in 2018. 64 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORT3.3 FY19 LTI OUTCOMES (CONTINUED) Figure 6 shows the proportion of LTI which has vested over the past 5 years: Figure 6 - Percentage of LTI vesting over the last five years 100% 100% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 65% 55% 16% FY15 FY16 FY17 FY18 FY19 3.3.2 FY20 LTI (Granted December 2019) Grants are made on the basis of potential and retention, following the FY19 Remuneration Review. The Board has determined that FY20 LTI grants will be awarded in December 2019. Grants are subject to unchanged performance conditions, a four year vesting period and are made at face value. FY20 grants have been made within guidance at 100% of Fixed Remuneration. Table 5 below summarises KMP LTI grants (PARs) proposed for FY20: TABLE 5 - LTI GRANTS PROPOSED FOR FY20 Name Position Title George Frazis Managing Director & CEO Debra Eckersley Group Executive, People & Culture Adam McAnalen Chief Risk Officer Lyn McGrath Group Executive, Retail Banking Peter Sarantzouklis Group Executive, BOQ Business Donna-Maree Vinci Chief Digital & Information Officer FY20 Fixed Remuneration LTI% of Fixed Remuneration $1,300,000 $525,000 $600,000 $635,000 $690,000 $580,000 100% 100% 100% 100% 100% 100% LTI Grant at Face Value $ $1,300,000 $525,000 $600,000 $635,000 $690,000 $580,000 Awards for the MD & CEO are subject to shareholder approval at the 2019 AGM. 3.4 KMP TOTAL REWARD OUTCOMES FOR FY19 (NON-STATUTORY DISCLOSURE) This section provides a summary of the total benefit earned by KMP with respect to performance over the FY19 period. As with previous years this non-statutory table is provided to show what KMP actually received in FY19 including the value of any other benefits plus deferred STI and LTI which has vested. It excludes unvested STI and LTI. The table below includes a breakdown of the following components of KMP remuneration: • FY19 fixed remuneration which includes base salary plus superannuation; • The value of non-monetary and other short-term benefits provided in FY19; and • Variable remuneration which comprises: - The value of the cash component of the STI relating to performance in FY19 (Nil in FY19); and - The value of previously granted deferred STI and LTI which vested. In addition we have provided the value of deferred STI or LTI which lapsed or forfeited during the period. 65 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORTRemuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67 ’ s r a e Y r o i r P y t i u q E / d e t i e f r o F ) 6 ( d e s p a L I T L f o e u a V l f o e u a V l y t i u q E d e r r e f e D d r a w e R l a t o T d o i r e P n i d e t s e V n o i t a n m r e T i d o i r e P n i d e t s e V f o e u a V l d e x F i ) 5 ( l e u a V ) 4 ( s t i f e n e B ) 3 ( h s a C I T S ) 2 ( s t i f e n e B ) 1 ( n o i t a r e n u m e R r a e Y e l t i T n o i t i s o P e m a N , ) 1 0 4 9 2 6 2 ( , , 7 8 6 3 9 0 2 , 6 3 4 0 5 1 , 0 0 0 5 7 9 , 0 3 6 5 3 4 , - ) 4 4 2 , 1 2 6 ( , 2 1 9 7 0 1 , 3 2 8 2 9 5 7 , ) 5 8 6 0 1 4 ( , , 9 8 8 3 5 1 , 1 5 2 2 8 7 , , ) 5 1 6 0 1 3 ( , 1 8 8 3 7 4 , 1 , 1 4 6 9 7 3 ) 0 8 9 6 5 3 ( , 3 5 6 3 1 9 , 3 9 9 7 6 , , ) 6 1 9 0 6 2 ( , 8 5 3 0 1 4 , 1 8 0 9 8 1 3 , , ) 5 2 7 2 8 4 , 1 ( 2 2 9 0 2 7 , 7 3 2 , 1 8 ) 7 4 0 3 2 3 ( , , 1 9 9 0 5 4 , 1 8 2 8 4 9 3 , - 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P M K s a w n e a n A c M l r M d o i r e p e h t o t e t a e r l . 9 1 Y F n i i d e t s e v t o n e v a h h c h w s r a e y s u o v e r p n i i d e t n a r g s d r a w a y t i u q e d e r r e f e d s e d u c x e s h T i l . 9 1 Y F 9 1 0 2 t s u g u A 2 1 o t 8 1 0 2 r e b m e c e D 1 2 m o r f s s e n s u B Q O B i , e v i t u c e x E p u o r G m i r e t n I l f o e o r e h t d e h l l l e n S g u o D ) 4 1 ( . d o i r e P n i d e t s e V I l T L f o e u a V d n a s t i f e n e B . 9 1 0 2 t s u g u A 2 1 n o s s e n s u B Q O B i , e v i t u c e x E p u o r l G f o e o r e h t d e m u s s a s i l k u o z t n a r a S r e t e P ) 3 1 ( n o i t a n m r e T i , d o i r e P n i d e t s e V y t i u q E d e r r e f e D f o e u a V l , h s a c I T S , n o i t a r e n u m e r d e x i f f o e u a v $ l l a t o t e h t s i i s h T . 8 1 0 2 t s u g u A 1 n o g n k n a B i l i a t e R , e v i t u c e x E p u o r l G f o e o r e h t d e m u s s a h t a r G c M n y L ) 2 1 ( . ) e t a d g n i t s e v n o e c i r p e r a h s g n s o c ( i l r a e y l i a c n a n i f e h t g n i r u d d e t s e v t a h t s R A P o t s e t a e r s h T i l . P M K s a w l l e n S r l M d o i r e p e h t o t e t a e r n w o h s s t n u o m a e h T . l 9 1 0 2 h c r a M 6 n o t n e m y o p m e d e s a e c e t i h W n a d n e r B ) 5 1 ( l i f o t l u s e r a s a r o / d n a t e m g n e b t o n s e d r u h f o t l u s e r a s a r a e y e h t g n i r u d d e s p a l i h c h w s R A P o t s e t a e r s h T i l . ) e t a d d e s p a l n o e c i r p e r a h s g n s o c ( i l l t n e m y o p m e g n s a e c i ) 4 ( ) 5 ( ) 6 ( ) I D E U N T N O C ( I ) E R U S O L C S D Y R O T U T A T S - N O N ( 9 1 Y F R O F S E M O C T U O D R A W E R L A T O T P M K . 4 3 I E R U S O L C S D Y R O T U T A T S - N O N - 6 E L B A T 66 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORT 3.5 TREATMENT FOR DEPARTING KMP Departing KMP are subject to plan rules and Board policy in relation to any unvested equity. Payments provided for all departing KMP were within the termination benefit limit under the Corporations Act and are made in accordance with their individual employment agreements. Any restricted shares or PARs from previous years retained by departing KMP are held on foot and remain subject to the clawback and malus provisions of the associated plan rules. Upon his resignation Jon Sutton received a payment of 9 months fixed remuneration in lieu of notice and was not eligible for either the FY19 STI award or LTI grant. He retained his restricted shares granted under the FY17 and FY18 STI and a portion of his PARs for testing at future dates, with the remainder of his PARs being forfeited. Brendan White was on leave for his three month notice period and was not eligible for either the FY19 STI award or LTI grant. Brendan retained his restricted shares from the deferred FY17 STI and forfeited any entitlement to FY18 restricted shares along with all PARs. Peter Deans forfeited his previously granted PARs but retained his FY17 and FY18 restricted shares for future vesting. Peter did not receive any FY19 STI award or LTI grant. SECTION 4. REMUNERATION STRATEGY & STRUCTURE This section provides an overview of the remuneration strategy and framework covering employees within BOQ. The Board’s remuneration strategy is supported by objectives that are common to all employees and are consistent with prior years, these include: • Attraction and retention of appropriately skilled and experienced employees through the provision of market competitive remuneration; • No distinction or difference in pay between genders for those that are performing the same role, other than where this is a difference as a result of performance, skill and experience; • Provide opportunities for executives and employees to earn incentives linked to achievement of BOQ’s objectives and performance, performance of their business unit and their individual contribution within an appropriate risk control framework; • Align executive and employee interests with those of the Bank’s stakeholders; • Ensure that remuneration structures and their operation encourage behaviours that are consistent with the Bank’s values and deliver good customer outcomes; and • Provide remuneration structures that remain current and keep pace with the prevailing remuneration trends, practice and governance frameworks. 4.1 FIXED REMUNERATION Fixed remuneration, which comprises salary, superannuation and other benefits is determined based upon the following factors: 1. Benchmarking using companies exhibiting similar characteristics and dynamics as BOQ. 2. Comparative fixed remuneration within BOQ for roles at a similar level. 3. The competitive dynamics of the hire. 4. The candidate’s existing or most recent remuneration. 5. Any regulatory considerations concerning quantum. 6. Changing market trends and expectations. 67 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORT4.2 BOQ STI PLAN Purpose The STI Plan aims to reward KMP’s contribution to specific annual BOQ Group and individual performance objectives. Performance Period BOQ’s financial year, i.e. the 12 months from 1 September to 31 August. Award Opportunity - expressed as a % of Fixed Remuneration (FR) Target/Performing: MD & CEO – 90%; Line KMP – 75%; Functional KMP – 53% Exceptional/Maximum: MD & CEO – 150%; Line KMP – 140%; Functional KMP – 100% Gateway To be eligible for an STI award two gateway hurdles must be satisfied: 1. 90% of budgeted cash basic EPS 2. Behavioural and risk measures If either gateway is not achieved the KMP will not be eligible for a STI regardless of performance under the Group or Individual scorecards. Pillars/Measures The Group and individual KPI Score is based upon four equally weighted pillars aligned to BOQ’s strategy. The same pillars are used for all participants with the exception of the Chief Risk Officer (CRO), these are: • Customer (measures cover customer satisfaction and advocacy) – 25% • Strategy (measures progress towards the Board’s yearly strategy) - 25% • Shareholder (covers financial performance including NPAT, ROE, CTI and Loan Impairment Expense / GLA) - 25% • Culture (including both people and risk measures) – 25% The Board approves financial and non-financial measures for the year. The Customer, Strategy and Culture measures are designed to provide a focus on non-financial performance and to achieve the BOQ’s long term objectives in areas such as customer satisfaction and advocacy, employee engagement and risk management. The financial measures are designed to provide a direct link with shareholders, to encourage prudent cost management and to ensure asset quality. The financial measures are supplemented by the STI Plan’s financial gateway. Individual scorecards include financial and non-financial measures specific to the participant’s division. For the revenue generating divisions (Retail and BOQ Business) measures include divisional NPAT, CTI and Loan Impairment Expense / GLA along with divisional customer satisfaction, strategic, employee engagement and risk measures. For the functional division heads, scorecards include reporting, project, strategic, cost management, and stakeholder specific measures. All scorecards include cultural, risk and compliance measures. For the CRO, objectives are set by the Board Risk Committee, due to the need to maintain the independence of Adam McAnalen’s role. His Individual Scorecard does not include profitability or financial measures. Award Determination Performance intervals are provided across a range of outcomes with Performing/Target being aligned to the yearly budget. STI may be earned across the performance range up to a capped maximum at the exceptional level of performance. HRRC and the Board approve KMP scorecard outcomes. The amount of an STI award which a participant may receive is calculated by multiplying the Group KPI and Individual KPI score for each KMP by using the following formula: Participant’s Fixed Remuneration x STI Target Opportunity % x Group KPI Score % x Individual KPI Score % = STI Award The multiplicative design results in the Individual KPI score serving as a modifier on the Group KPI score and can result in the STI award being scaled up to the maximum opportunity or down to zero. The Board approves all KMP STI awards and retains overarching discretion to pay or withhold any STI award. When reviewing STI awards the Board is able to view performance retrospectively having regard for factors which may not have been foreseen when the measures were set at the beginning of the financial year. STI Awards are paid in cash where the value is $100,000 or less. Where the value of the STI award is above $100,000, 50% is paid in cash and the remaining 50% is deferred over three years in the form of Restricted Shares. The cash component of any STI award is generally paid in November following release of the full year results. The Restricted Shares are subject to forfeiture under certain conditions and vest 40% after 1 year, 30% after 2 years and 30% after 3 years subject to specified employment conditions. Board Discretion/Overlay Delivery 68 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORT4.3 BOQ LTI PLAN Purpose Instrument The LTI Plan’s purpose is to align executive’s interests with stakeholders over the medium to long term. LTI is granted to executives on the basis of retention and potential. LTI is provided to KMP under the BOQ Group Award Rights Plan, which includes ability to grant: • Deferred Award Rights (DARs), subject to service related vesting conditions (not currently offered to KMP); and • PARs, subject to both performance and service related vesting conditions. Each PAR confers the right to one ordinary share in BOQ upon vesting. Shares delivered upon vesting are either issued or procured on market at the Board’s discretion. Opportunity Grants to KMP of LTI are typically made in the range of 80% to 120% of Fixed Remuneration. The number of PARs granted is determined by dividing the Participant’s dollar denominated grant by a Volume Weighted Average Price (VWAP) of the five trading days after the announcement of BOQ’s full year results. Accordingly PAR grants are made at face value. The FY20 LTI allocation for George Frazis (MD & CEO) has a performance period starting on his commencement date of 5 September 2019, with the VWAP calculation on the five trading days immediately prior to that date. PARs have a four year measurement/vesting period. The measurement period generally begins in October following the announcement of BOQ’s full year results. A participant must remain employed during the measurement period or be considered a good leaver for PARs to vest. Vesting is also subject to the performance conditions: • 80% of the PARs are subject to a relative TSR condition; and • 20% of the PARs are subject to a relative cash EPS condition. TSR is the measurement of the entire return (including dividends) a shareholder would obtain from holding an entity’s securities over the period. The LTI plan uses relative TSR which compares the TSR of BOQ with the performance of a Peer Group comprising the companies in the S&P/ASX 200 excluding resources, real estate investment trusts, telecommunications (offshore headquartered), energy and utilities. Vesting of the TSR tranche is tested independently and is subject to the following scale: BOQ's TSR vs ASX 200 Peer Group % of TSR Tranche Vesting At or above 75th Percentile 100% Between 50th and 75th Percentile Pro-rata on a straight-line basis between 50% and 100% At 50th Percentile Below 50th Percentile 50% 0% Cash EPS is the measure of financial performance of cash flow generated by the company on a per share basis. It is calculated by dividing cash NPAT by the total number of ordinary shares on issue. BOQ’s EPS is measured against a Peer Group comprising five Financial Services companies: Australia & New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank, Westpac Banking Corporation and Bendigo & Adelaide Bank. Vesting of the EPS tranche is tested independently and is subject to the following scale: BOQ's EPS vs Financial Services Peer Group % of EPS Tranche Vesting At or above 90th Percentile 100% Between 60th and 90th Percentile Pro-rata on a straight-line basis between 50% and 100% At 60th Percentile Below 60th Percentile 50% 0% There is no retesting of any of the vesting conditions and any PARs which do not vest on the testing date lapse. The Board has discretion to reduce the vesting of any LTI award to zero where the Board feels it would be inappropriate for the PARs to vest such as where there has been a material misstatement of financial results or serious misconduct by an individual. The exercise price of each PAR is nil. Once the PARs vest, participants can exercise them at any time before the 7th anniversary of the grant. Participants may not dispose of PARs prior to exercise. The Board has the discretion to specify any disposal restrictions to be applied to any shares received on exercise of PARs. Any restrictions will be included in the offer provided to Participants. Current unvested PARs on foot do not have any specific disposal restrictions as part of their offers apart from complying with BOQ’s Securities Trading Policy. Measurement Period Vesting Conditions Total Shareholder Return Cash Earnings per share Retesting Board Discretion Exercise Disposal Restrictions 69 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORTSECTION 5. REMUNERATION GOVERNANCE Remuneration is governed by principles, policy and oversight of the HRRC in accordance with its charter and on behalf of the Board. The HRRC and Board may exercise discretion in accordance with parameters described below. The remuneration strategy and the principles adopted to support this were described in Section 4. In accordance with the HRRC Charter, the remuneration policy was updated during the period, and was approved by the Board. The remuneration strategy and policy will be reviewed regularly as developments and changes in the regulatory environment become known. This includes the outcomes of APRA’s proposed prudential standard CPS 511. A report was provided by the CRO in assessing executive performance in FY19. The Chair of the Risk Committee attended the HRRC meeting to discuss the CRO’s report. This is supplemented by a meeting of the HRRC to which the full Risk Committee was invited when reviewing and finalising STI amounts for FY19 and LTI grants for FY20. 5.1 REGULATORY CHANGES/IMPLEMENTATION During FY19 further progress was made towards implementing the Sedgwick recommendations across BOQ and in particular at replacing commission based sales plans with balanced scorecards incorporating a mixture of financial and non-financial measures. FY19 marked the second year of the new scorecard across BOQ’s Corporate Branch network staff. Further work was undertaken during FY19 in incorporating the principles of the Sedgwick recommendations within the BOQ Business Division by reviewing the plans covering these employees with the first new balanced scorecard coming into effect on 1 September 2019. Further work will be undertaken in FY20 focusing on replacing the remaining commission plans within BOQ Business as well as moving the existing scorecards to a majority weighting on non-financial performance. BOQ is on track to meet the Sedgwick deadline of 1 September 2020. The BEAR legislation came into effect on 1 July 2019 and BOQ’s remuneration governance framework and policies were updated accordingly. Work will be undertaken during FY20 with regards to APRA’s draft prudential standard CPS 511. This may require banks to implement changes to both remuneration design and remuneration governance. The Board and the HRRC are working with all stakeholders including APRA to determine the appropriate changes. 5.2 REMUNERATION PRINCIPLES The below principles govern how remuneration works at BOQ: • Total reward is linked to performance and reflects stakeholder interests; • Fixed and total remuneration for each KMP is periodically benchmarked to the market to ensure it remains competitive; • Key performance measures apply to all executives, covering both financial and non-financial measures; • The Bank’s LTI is awarded on the basis of a VWAP (face value) and not a risk adjusted value (fair value); • Total remuneration for KMP is targeted to achieve a balanced mix between fixed, short term and long term variable at risk remuneration; • Variable remuneration is capped and subject to deferral and/or clawback/malus of unvested deferred STI and LTI; • Cash payments are not made to executives joining BOQ; and • The Board has discretion over the outcomes under both the STI and LTI plans. 5.3 HRRC CHARTER Under the Consolidated Entity’s HRRC charter, the Committee undertakes to conduct regular reviews and provide advice to the Board with regard to the following: • • • • • • Review the Consolidated Entity’s Remuneration Policy, at least on a biennial basis, to ensure compliance with the Consolidated Entity’s objectives including the risk management framework and to reflect changes in the regulatory environment; Reviewing and making recommendations to the Board on the design and terms of all employee equity plans; Provide recommendations to the Board on remuneration, recruitment, succession, retention and termination policies for Group Executives; An annual review of the individual remuneration arrangements for Group Executives (MD & CEO and his direct reports), any other Accountable Persons under BEAR and all other Responsible Persons (as defined by the APRA Prudential Standard CPS 520); Reviewing and making recommendations to the Board on diversity at all levels below the Board and overseeing execution of the Consolidated Entity’s People & Culture strategy; and Recommending NED remuneration, including ensuring that the structure of NED remuneration is clearly distinguished from that of Group Executives. 70 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORT5.4 SECURITIES TRADING POLICY The Securities Trading Policy regulates dealing by Directors, Employees and Contractors in BOQ securities. Under the policy, Prescribed Persons (those employees with the authority, responsibility or a participatory role in the planning, directing or controlling of the activities of the Consolidated Entity) are prohibited from trading in BOQ securities during certain blackout periods: • • The period commencing 1 March and ending at the close of trading on the ASX one trading day after the announcement of BOQ’s half year results; The period commencing 1 September and ending at the close of trading on the ASX one trading day after the announcement of BOQ’s full year results; or • Any other period of time nominated from time-to-time by the Chairman, the MD & CEO or the Chief Financial Officer of BOQ. If a Director, Employee or Contractor has inside information about the BOQ Group, they must not trade in BOQ securities at any time whilst in possession of such information, including outside of a Blackout period. 5.5 USE OF REMUNERATION CONSULTANTS Where necessary, the Board seeks advice from independent experts and advisors, including remuneration consultants. The remuneration consultants are engaged by the Chairman of the HRRC which ensures, upon engagement, that the appropriate level of independence exists from the Consolidated Entity’s Management. Reports provided by independent consultants are submitted directly to the Chairman of the HRRC. Where the consultant’s engagement requires a recommendation, the recommendation is provided to, and discussed directly with the HRRC Chairman in accordance with the requirements of the Corporations Act. During FY19 the HRRC engaged independent advisors from PricewaterhouseCoopers (PwC), Ernst & Young (EY) and Egan Associates to assist with the decision making process. None of the advisors provided a remuneration recommendation as defined under the Corporations Act. 5.6 BOARD DISCRETION Group Executives’ remuneration is determined by the remuneration strategy, policy and plans such as STI and LTI. Remuneration outcomes are assessed against a range of performance measures and awarded in accordance with the plan design and plan rules. The Board and HRRC recognise that there are a number of factors which are specific to the current and forward years and these may be taken into account when considering the overall remuneration outcomes for each year. To account for these factors, the HRRC and Board may make discretionary adjustments to the outcomes for Group Executives (as well as those employees classified as Responsible Persons) that may impact their remuneration negatively or positively. Through this process, remuneration outcomes have been adjusted both positively and negatively in previous years. Criteria used by the HRRC 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 environment and market 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 Consolidated Entity 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 values have been consistently demonstrated throughout the year; and • Any other matters that the Board and the HRRC deem to be relevant and which are not outlined above. 5.7 CLAWBACK AND MALUS Clawback and malus provisions are set out in plan rules. In circumstances where it becomes evident there was a material misstatement of financial results or serious misconduct by an individual where this may result in reputational damage to the Bank, the Board can exercise discretion to reduce or forfeit (malus) a pro-rated amount or the full value of any unvested awards or compel the participant to pay back any award or vested equity (clawback). The Board has reviewed the clawback and malus provisions of the incentive plan rules as part of its overarching review into risk and consequence management and intends to broaden these policies in part to better align with BEAR and APRA’s CPS 511 standard. 71 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORT5.8 GOOD LEAVER AND CHANGE OF CONTROL PROVISIONS Group Executives are not eligible to receive an STI or LTI if they resign or are terminated for misconduct or poor performance. However the Board has discretion to consider a pro-rated retention based on circumstances where they meet the “good leaver” definition. Commonly good leaver status is granted in the case of redundancy, retirement, Total and Permanent Disablement, death in service or the divestment of a portion of BOQ. Under the STI Plan rules if a participant is deemed a good leaver, their award for the year will be pro-rated and subject to the same performance testing as if their employment had not ended. Restricted Shares granted as deferred STI will be forfeited if the employee ceases employment to work for a competitor or if they are terminated for misconduct. PARs granted under the LTI Plan will be pro-rated based on the number of days elapsed in the vesting period with the remaining PARs being retained for testing at the end of the original performance period. The Board retains the discretion to classify an employee as a Good Leaver and to determine the treatment of their award including forfeiture in full in accordance with plan rules. The Board retains discretion to determine the treatment of an STI award in the case of a Change of Control including the early payment for the whole or part of a performance period. This covers both the cash STI award and the removal of the restrictions on deferred STI. With respect to the LTI the Board’s policy is that a pro-rata number of PARs will vest depending on the proportion of the vesting period elapsed and the likelihood (at the Board’s discretion) that the performance conditions would have been satisfied. 5.9 MINIMUM SHAREHOLDING REQUIREMENTS NEDs are currently required to hold shares equal in value to one times their base fee within three years of their appointment to the Board or within 12 months of the adoption of the policy (whichever is the latter). There is currently no holding policy in place for executives as they receive equity under the deferred STI and LTI plans. 5.10 EXECUTIVE CONTRACTS The remuneration and terms of Group Executives are formalised in their ESA. Each of these agreements provide for the payment of fixed and performance-based variable remuneration, superannuation and other benefits such as statutory leave entitlements. During FY19 the Board updated the BOQ ESA to bring it in line with the BEAR legislation. As part of this the notice period for executives other than the MD & CEO are being increased to 6 months. This change is being implemented for all current Group Executives and will be used for all future contracts. Employment terms being implemented are governed by employment contracts as set out in the table below TABLE 7 - EXECUTIVE CONTRACT TERMS Name Position Title George Frazis Donna-Maree Vinci Managing Director & Chief Executive Officer Chief Digital & Information Officer Notice Period by Executive Employer Notice Period Termination Payments (includes Notice Periods) 6 months 9 months 9 months fixed remuneration in lieu of notice 3 months 3 months 6 months fixed remuneration Lyn McGrath Group Executive Retail Banking 3 months 3 months 3 months fixed remuneration in lieu of notice Debra Eckersley Group Executive People & Culture 6 months 6 months 6 months fixed remuneration in lieu of notice Adam McAnalen Chief Risk Officer 6 months 6 months 6 months fixed remuneration in lieu of notice Peter Sarantzouklis Group Executive BOQ Business 6 months 6 months 6 months fixed remuneration in lieu of notice Doug Snell Interim Group Executive BOQ Business 3 months 3 months 3 months fixed remuneration Anthony Rose Interim Chief Executive Officer 3 months 3 months 6 months fixed remuneration Matthew Baxby Chief Financial Officer 3 months 3 months 6 months fixed remuneration Jon Sutton Managing Director & Chief Executive Officer 9 months 9 months No benefit in addition to notice Brendan White Group Executive BOQ Business 3 months 3 months 6 months fixed remuneration Peter Deans Chief Risk Officer 3 months 3 months 3 months fixed remuneration 72 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORTRemuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74 REMUNERATION REPORT SECTION 6. NON-EXECUTIVE DIRECTOR REMUNERATION 6.1 FEE POOL NED fees are determined within an aggregate fee pool limit. The pool currently stands at $2,800,000 (inclusive of superannuation) and was approved by shareholders on 30 November 2016. The fee pool allows the Board flexibility in dealing with changes to its size and composition. The Board will not be seeking any increase to the fee pool at the 2019 AGM. 6.2 REMUNERATION FRAMEWORK Non-Executive Director fees are set to attract and retain individuals of appropriate calibre to the BOQ Board and Committees. Fees are reviewed annually by the HRRC having regard to external benchmarking information provided by independent remuneration consultants, principally to ensure market comparability. The Chairman’s fees are determined independently to the fees of other Directors and are also based upon information provided periodically by independent remuneration consultants. The Chairman is not present at any discussions relating to the determination of their own remuneration. In order to maintain independence and impartiality, NEDs do not receive any performance-related remuneration including share options or rights subject to a performance condition in addition to their prescribed fees. NEDs are not provided with retirement benefits apart from statutory superannuation. 6.3 NED FEES In FY19 the Board implemented a new NEDs Fee Sacrifice Rights Plan, the details of which are provided in the table below: Purpose Value Vesting Period The plan’s purpose is to provide an opportunity for NEDs to increase their shareholding in a tax effective manner. The Plan meets regulatory and tax requirements. Directors can nominate at the beginning of the participation period, a percentage of their pre-tax fees (up to 100%) to receive in rights to shares in BOQ. Rights vest and convert to shares following the completion of the participation period. For FY19 the participation period was the six months from 1 March to 31 August 2019. The rights do not have any performance conditions in order to preserve the directors’ independence. Disposal Restrictions Shares received on exercise will be subject to a disposal restriction of at least three years or longer as nominated by the director (up to a maximum of 15 years). Cessation of Employment If a participant ceases to be a NED prior to the rights vesting, they will retain a number of their rights based on the period they were a NED. If employment ceases during the restriction period, any disposal restrictions on the shares will be lifted subject to a minimum trading restriction of 12 months. 73 For the year ended 31 August 2019Annual Report 20196.3 NED FEES (CONTINUED) The table below sets out the current Board and Committee membership fee structure (exclusive of superannuation). There are no planned changes to fees for FY20. TABLE 8 - DIRECTORS’ ANNUAL FEES (1) Directors’ Annual Fees Fixed component of remuneration for Directors (2) Chairman (3) Additional remuneration is paid to Non-Executive Directors for Committee work: St Andrews’ Board of Directors (4) (5) Audit Committee Risk Committee Nomination & Governance Committee Human Resources & Remuneration Committee Investment Committee (6) Due Diligence Committee (6) Information Technology Committee 01/09/18 - 31/08/19 Chairman/Committee Chair $ 01/09/18 - 31/08/19 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 1,500 1,500 17,500 (1) Fees remain unchanged since FY14. (2) Directors receive one fee for serving on Bank and subsidiary Committees. A separate fee is received for serving on St Andrew’s Board. (3) The Chairman receives no additional remuneration for involvement with Committees. (4) David Willis is also a member of the St Andrew’s Board of Directors. (5) This fee is payable to St Andrews’ directors who are also BOQ directors. Different fees are payable to other St Andrews’ NEDs. (6) Per meeting. SECTION 7. STATUTORY TABLES 7.1 STATUTORY DISCLOSURES The following tables include details of the nature and amount, as required by the Corporations Act 2001, of each major element of the remuneration of each Director and Group Executive of the Group, calculated in accordance with accounting standards. 74 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORTs t n e m y a P d e s a B e r a h S m r e T - g n o L n o i t a r e n u m e r d e t a e r l f o n o i t r o p o r p e c n a m r o f r e p f o e u a V l s a s t h g i r f o n o i t r o p o r P n o i t a r e n u m e r % % l a t o T $ ) 6 ( s t i n u d n a ) 5 ( s t h g R i n o i t a n m r e T i ) 4 ( m r e t g n o l $ $ s t i f e n e B $ ) 3 ( $ s t i f e n e b s t i f e n e b $ $ s e r a h S r e h t O t n e m y o p m e l m r e t t r o h s m r e t t r o h s t s o P l a t o T r e h t O ) 1 ( k s i r t a I T S $ y r a a S l s e e f d n a $ : l l w o e b e b a t e h t n i d e n i l t u o s a e r a y t i t n E d e t a d i l o s n o C e h t f o r o t c e r i D h c a e f o n o i t a r e n u m e r e h t l j f o t n e m e e r o a m h c a e f o t n u o m a d n a e r u t a n e h t f o s l i a t e D ’ I N O T A R E N U M E R S R O T C E R D - 9 E L B A T I ) I D E U N T N O C ( I S E R U S O L C S D Y R O T U T A T S 1 . 7 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - % 4 2 ) % 8 3 ( ) % 7 ( % 4 5 , 6 1 5 2 6 2 3 9 1 , 8 3 2 6 6 2 9 6 2 , 0 5 0 8 0 2 , 3 3 7 7 0 2 , 2 8 1 , 1 8 1 0 0 8 0 1 2 , 9 0 6 5 4 2 , 3 3 7 8 1 2 , 8 4 7 , 5 5 2 , 6 1 6 4 5 2 5 6 3 , 4 8 2 , 7 6 2 3 8 2 - - - - - - - - - - - - - , 2 8 2 8 3 4 9 6 1 , 0 2 4 7 3 1 , 1 6 7 3 1 , 1 6 - - - - 0 8 2 , 1 6 2 6 4 0 3 3 1 , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 4 8 3 , 4 7 2 , 1 , 5 7 8 6 9 3 ) 6 1 3 , 4 8 4 ( 0 0 0 5 7 9 , - - - - - - - - - - - - - - - - - - - 9 4 6 0 2 , 3 3 6 7 1 4 , 9 6 1 , 0 2 0 0 0 0 0 4 , 4 0 3 , 5 4 0 3 , 5 4 3 2 , 4 8 0 3 9 1 , 3 4 4 9 1 , 8 0 3 9 1 , 3 3 8 5 5 , 3 3 8 5 5 , 0 0 0 4 2 1 , 8 0 2 3 4 2 , 0 5 7 8 1 2 , 8 5 9 9 4 2 , 0 5 0 8 1 , 0 0 0 0 9 1 , 3 3 7 7 1 , 0 0 0 0 9 1 , 0 0 8 7 1 , 9 4 8 5 1 , 9 5 3 0 2 , 3 3 2 8 1 , 8 4 7 0 2 , 6 1 6 9 1 , 5 6 8 , 1 2 6 1 6 9 1 , 0 0 0 3 9 1 , 3 3 3 5 6 1 , 0 5 2 , 5 2 2 0 0 5 0 0 2 , 0 0 0 5 3 2 , 0 0 0 5 3 2 , 0 0 5 , 2 6 2 , 1 5 6 3 6 2 - - - - - - - - - - - - - - - - - - m r e T - t r o h S - n o N y r a t e n o m ) 2 ( s t i f e n e b $ 3 3 6 7 1 , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 0 0 0 0 0 4 , 9 1 0 2 0 0 0 0 0 4 , 8 1 0 2 ) 8 ( s i v a D r e g o R 3 3 8 5 5 , 9 1 0 2 ) 9 ( y a w a l l A k c i r t a P 3 3 8 5 5 , 9 1 0 2 ) 0 1 ( d r o L - y e l i a B n e e h t a K l ) 7 ( t n e r r u C - s r o t c e r i D e v i t u c e x E - n o N 0 0 0 4 2 1 , 8 0 2 3 4 2 , 0 5 7 8 1 2 , 8 5 9 9 4 2 , 0 0 0 0 9 1 , 0 0 0 0 9 1 , 0 0 0 3 9 1 , 3 3 3 5 6 1 , 0 5 2 , 5 2 2 0 0 5 0 0 2 , 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 r e t r a C e c u r B e r i a H d r a h c R i r e m i r o L n h o J s u g e N k c w r a W i e s o r n e P n e r a K 0 0 0 5 3 2 , 9 1 0 2 i k c n e d e r T e l l e h c M i 0 0 0 5 3 2 , 8 1 0 2 0 0 5 , 2 6 2 , 1 5 6 3 6 2 9 1 0 2 8 1 0 2 s i l l i i W d v a D ) 7 ( r e m r o F - s r o t c e r i D e v i t u c e x E r e c i f f O e v i t u c e x E f e h C i & r o t c e r i D g n g a n a M i - ) 1 1 ( n o t t u S n o J , 0 9 4 2 1 2 3 , 8 5 4 , 1 1 5 9 8 2 7 5 7 , - 6 5 0 6 2 , 9 6 1 , 0 2 , 8 1 5 7 9 8 , 1 8 0 8 9 4 , 9 6 6 0 2 , 0 0 0 5 7 4 , , 1 4 0 2 5 3 , 1 8 1 0 2 3 3 1 , 5 2 9 6 , 1 8 3 8 1 2 , 3 1 1 2 4 7 2 , 3 5 0 , 1 4 3 9 1 0 2 t o n s i i h c h w e c n a r u s n I y t i l i b a L i ’ s r e c ffi O d n a s ’ r o t c e r i D f o t c e p s e r n i i s m u m e r p e c n a r u s n i l i d a p o s a s a h k n a B e h T . n o i t a c o l l a r o f s i s a b e t a i r p o r p p a o n s i l e r e h t s a e b a t e v o b a e h t n i d e t c e l f e r . i p i r t s s e n s u b d e d n u f y n a p m o c a o t t n e c a d a j l e v a r t e t a v l i r p o t d e t a e r s t n u o m a s t i f e n e b e g n i r f e b a t r o p e R l . 9 1 0 2 y a M 1 n o d r a o B Q O B e h t o t d e t n o p p a s a w y a w a i l l A k c i r t a P ) 7 ( ) 8 ( ) 9 ( e c i t o n s h s i i i h c h w ( i t n e m y a p n o i t a n m r e t a d e v e c e r n o t t u S r i M . 8 1 0 2 r e b m e c e D 5 e v i i t c e ff e d e n g s e r n o t t u S n o J ) 1 1 ( . 9 1 0 2 y a M 1 n o d r a o B Q O B e h t o t d e t n o p p a s a w d r o L - y e i l i l a B n e e h t a K ) 0 1 ( i d e v e c e r s t f i g s e d u c n l i i s h t , n o i t i d d a n I . s D E N d n a s e v i t u c e x E o t g n i t a e r l l e v a r t d n a n o i t a c o e r l r o n o i t a d o m m o c c a . r a e y l i a c n a n i f e h t g n i r u d d e s i l i t u r o d e u r c c a e v a e l i e c v r e s g n o l s e s i r p m o C . s t i f e n e b n o i t a u n n a r e p u s s e d u c n l i l t n e m y o p m e - t s o P . s e v i t u c e x E r e m r o f r o f Q O B g n v a e i l n o , i i g n k r a p r a c s a h c u s ) T B F d e t a c o s s a d n a ( s t i f e n e b d e d n u f - y n a p m o c o t e t a e r s t i f e n e b y r a t e n o m - n o N l . 9 1 Y F f o t c e p s e r n i i d e u r c c a r o d a p s t n u o m a e h t f o t n e c r e p 0 5 s t c e l f e r k s i r t a I T S s t h g i r e h T . l s n a p s t h g ’ i r d r a w a s Q O B r e d n u d e v e c e r s t h g i i i r d e n a t e r d n a ) t c a r t n o c s h h t i w e c n a d r o c c a n i i d o i r e p d n a l e d o m g n c i i r p n o i t p o d e t p e c c a y r t s u d n i i n a g n s u t n a r g f o e t a d e h t t a d e t a u c a c s l l i s t h g i r e h t l f o e u a v r i a f e h T ) 1 ( ) 2 ( ) 3 ( ) 4 ( ) 5 ( y t i u q e d e n a t e r i f o e u a v l l l u f e h T . s d o i r e p n o i t c l i r t s e r d n a s e d r u h e c n a m r o f r e p t n a v e e r e h t o t l j t c e b u s n a m e r i n O . s t n e m y a P d e s a b - e r a h S 2 B S A A h t i w e c n a d r o c c a n i n o i t a r e n u m e r 9 1 0 2 s n o t t u S r ’ M n i d e d u c n l i n e e b s a h . d e s r e v e r n e e b s a h e s n e p x e d e t a c o s s a e h t d n a d e s p a i l s t h g i r d r a w a f o r e b m u n a , n o i t a r a p e s e c i f i r c a S e e F r o t c e r i D e v i t u c e x E - n o N r o s t n e m y a p I T S d e r r e f e d h g u o r h t d e d r a w a s e r a h s d e t c i r t s e r s t n e s e r p e R ) 6 ( . e t a d g n i t s e v o t e t a d t n a r g m o r f d o i r e p e h t l r e v o y n e v e d o i r e p g n i t r o p e r h c a e o t d e t a c o l l a . l n a P s t h g R i 75 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORT n o i t a r e n u m e r d e t a e r l f o n o i t r o p o r p e c n a m r o f r e p f o e u a V l s a s t h g i r f o n o i t r o p o r P n o i t a r e n u m e r % % : s t n e m y a P d e s a B e r a h S m r e T - g n o L m r e T - t r o h S l a t o T $ ) 7 ( s t i n u d n a ) 6 ( s t h g R i n o i t a n m r e T i ) 5 ( m r e t g n o l $ $ s t i f e n e B $ ) 4 ( $ s t i f e n e b s t i f e n e b $ $ s e r a h S r e h t O t n e m y o p m e l m r e t t r o h s m r e t t r o h s t s o P l a t o T r e h t O - n o N y r a t e n o m ) 3 ( s t i f e n e b $ ) 2 ( k s i r t a I T S ) 1 ( s e e f d n a $ $ y r a a S l l l w o e b e b a t e h t n i d e n i l t u o s a e r a y t i t n E d e t a d i l o s n o C e h t f o e v i t u c e x E p u o r G h c a e f o n o i t a r e n u m e r e h t l j f o t n e m e e r o a m h c a e f o t n u o m a d n a e r u t a n e h t f o s l i a t e D I I N O T A R E N U M E R E V T U C E X E P U O R G - 0 1 E L B A T % 9 2 % 5 2 % 8 % 9 % 4 - % 5 2 % 7 2 - % 9 1 % 1 3 % 4 3 % 9 3 % 3 5 - % 8 - % 7 5 % 1 3 % 0 5 - - % 8 3 % 3 6 , 9 6 2 0 4 1 , 1 7 1 9 2 1 1 , 3 6 4 9 2 3 , , 6 7 8 4 2 4 , 1 4 8 5 4 1 2 , , 2 2 3 5 5 3 2 6 9 , 1 6 - - , 0 9 9 0 0 6 , 4 7 6 2 4 2 - - 2 3 1 , 7 4 5 7 3 , 2 2 0 9 1 , 9 7 3 , 1 2 0 2 , 4 2 7 7 0 0 7 5 , , 3 2 6 8 4 4 , 1 2 4 0 6 9 , 2 3 8 7 5 3 , 3 4 1 , 5 7 4 , 1 2 4 5 8 7 1 , 0 2 2 3 9 3 , 7 8 8 2 4 , 2 5 5 , 2 0 4 - - - 1 8 6 4 7 , 5 5 1 , 6 2 0 , 1 7 6 6 6 8 , 0 5 4 7 1 3 , , 8 4 9 7 2 4 , 1 5 2 6 0 6 1 , 8 0 0 , 1 9 4 % 7 2 % 0 5 , 2 6 2 4 7 4 , 1 5 2 6 0 8 1 , , 5 4 7 8 9 3 ) % 0 2 1 ( ) % 0 7 ( 2 1 1 , 6 7 2 5 2 1 , 8 3 1 ) 4 4 3 , 1 3 3 ( ) % 8 8 1 1 ( ) % 7 2 3 1 ( 6 1 0 7 2 , ) 0 0 5 7 3 ( , ) 6 7 0 , 1 2 3 ( % 5 2 % 4 5 , 8 6 7 5 5 5 , 1 3 8 5 4 3 2 , , 5 3 7 5 8 3 - - - - - - - - - - - - - - - - 9 1 2 8 1 , 9 4 6 0 2 , , 1 2 0 9 5 6 6 4 0 3 1 , 9 6 1 , 0 2 5 5 7 , 1 2 8 5 8 4 , 1 8 3 1 , 4 2 , 5 3 2 8 2 5 - - - 8 6 9 9 6 , 4 0 2 8 , 7 2 1 , 2 4 1 7 7 1 2 6 0 2 , 2 0 9 0 2 , , 7 1 0 5 7 5 9 4 1 0 8 8 4 , 3 3 9 6 5 , 0 8 7 7 4 , 9 4 6 0 2 , 0 2 3 , 6 2 9 3 8 9 3 1 , 9 6 1 , 0 2 , 9 2 2 9 6 8 3 0 1 9 0 4 3 , 5 7 3 9 3 , 0 0 5 9 , 8 3 2 , 3 1 3 3 1 , 5 0 3 1 8 2 7 , 2 4 2 , 5 9 4 6 0 2 , 8 0 1 , 4 9 5 9 6 1 , 0 2 4 0 9 0 5 7 , - - - - - - - - 3 0 8 7 4 , 0 0 0 0 5 1 , 1 0 1 , 3 5 5 8 1 0 2 - - - - - 6 7 2 , 1 6 9 1 , 7 3 2 2 7 , 1 0 5 4 2 8 2 , 3 0 0 8 6 5 , 0 0 0 0 9 1 , 5 5 7 , 1 3 6 8 1 0 2 - , 1 2 0 9 5 6 9 1 0 2 y b x a B w e h t t a M t n e r r u C - s e v i t u c e x E - - - - - 1 1 2 , 5 5 8 1 0 2 , 5 3 2 8 2 5 9 1 0 2 ) 8 ( l y e s r e k c E a r b e D 4 7 6 0 4 1 , 9 1 0 2 ) 9 ( l n e a n A c M m a d A 1 2 8 7 3 5 , 9 1 0 2 h t a r G c M n y L 0 2 3 , 6 2 9 9 1 0 2 e s o R y n o h t n A 0 0 0 5 6 1 , 9 2 2 4 0 7 , 8 1 0 2 - - - 5 2 9 8 3 , 9 1 0 2 ) 0 1 ( s i l k u o z t n a r a S r e t e P 1 5 8 , 1 0 3 9 1 0 2 ) 1 1 ( l l e n S g u o D 8 0 3 7 3 5 , 9 1 0 2 i i c n V e e r a M - a n n o D r e m r o F - s e v i t u c e x E - 9 9 3 , 5 1 , 2 3 9 3 5 4 8 4 5 7 3 , 6 2 6 3 1 , 7 5 1 , 5 1 9 0 1 , 6 6 8 8 0 8 9 4 , - - 0 0 0 5 6 1 , 1 0 3 , 1 5 6 8 1 0 2 - 4 8 3 , 6 1 4 9 1 0 2 ) 2 1 ( s n a e D r e t e P - 6 6 2 0 1 , 6 2 3 , 5 7 3 6 1 9 3 1 , 9 6 1 , 0 2 5 6 3 , 1 0 9 - - 9 6 6 0 2 , 0 0 0 0 2 2 , , 6 9 6 0 6 6 8 1 0 2 8 6 6 0 1 , - , 8 5 6 4 6 3 9 1 0 2 ) 3 1 ( e t i h W n a d n e r B ) I D E U N T N O C ( I S E R U S O L C S D Y R O T U T A T S 1 . 7 76 s t h g i r e h T . l s n a p s t h g ’ i r d r a w a s Q O B r e d n u d e v e c e r s t h g i i i r d e n a t e r s n a e D r . M 9 1 0 2 y a M 1 3 n o d e r i t e r s n a e D r e t e P ) 2 1 ( . e v o b a d e s o c s d s e v i l e h T . 9 1 0 2 t s u g u A 2 1 o t 8 1 0 2 r e b m e c e D 1 2 d o i r e p e h t i r o f s s e n s u B Q O B , e v i t u c e x E p u o r G m i r e t n I s a w l l e n S g u o D ) 1 1 ( . 9 1 Y F f o t c e p s e r n i i d e u r c c a r o d a p s t n u o m a e h t f o t n e c r e p 0 5 s t c e l f e r k s i r t a I T S . P M K s a w l l e n S r M d o i r e p e h t o t e t a e r n w o h s s t n u o m a l , i i g n k r a p r a c s a h c u s ) T B F d e t a c o s s a d n a ( s t i f e n e b d e d n u f - y n a p m o c o t e t a e r s t i f e n e b y r a t e n o m - n o N l . 9 1 0 2 t s u g u A 2 1 n o e v i t u c e x e n a s a d e t n o p p a s a w s i i l k u o z t n a r a S r e t e P ) 0 1 ( . r a e y e h t g n i r u d d e u r c c a e v a e l l a u n n a g n d u c n i l i , n o i t a r e n u m e r d e x i f e d u c n l i s e e f d n a y r a a S l , n o i t a r a p e s n O . s t n e m y a P d e s a b - e r a h S 2 B S A A h t i w e c n a d r o c c a n i n o i t a r e n u m e r 9 1 0 2 s n a e D r ’ M n i d e d u c n l i n e e b . d e s r e v e r n e e b s a h e s n e p x e d e t a c o s s a e h t d n a d e s p a i l s t h g i r d r a w a f o r e b m u n a s a h y t i u q e d e n a t e r i f o e u a v l l l u f e h T . s d o i r e p n o i t c l i r t s e r d n a s e d r u h e c n a m r o f r e p t n a v e e r e h t o t l j t c e b u s n a m e r i e u a v l l l u f e h T . s d o i r e p n o i t c l i r t s e r d n a s e d r u h e c n a m r o f r e p t n a v e e r e h t o t l i j t c e b u s n a m e r s t h g i r e h T . l s n a p s t h g i r d e s a b - e r a h S 2 B S A A h t i w e c n a d r o c c a n i n o i t a r e n u m e r 9 1 0 2 s e t i h W ’ r M n i d e d u c n l i n e e b s a h y t i u q e d e n a t e r i f o . d e s r e v e r n e e b s a h e s n e p x e d e t a c o s s a e h t d n a d e s p a i l s t h g i r d r a w a f o r e b m u n a , n o i t a r a p e s n O . s t n e m y a P ’ d r a w a s Q O B r e d n u d e v e c e r s t h g i i i r d e n a t e r e t i h W r . l M 9 1 0 2 h c r a M 6 n o t n e m y o p m e d e s a e c e t i h W n a d n e r B ) 3 1 ( s a w e h d o i r e p e h t l m o r f e t a e r n w o h s s t n u o m a e h T . 9 1 0 2 e n u J 1 n o e v i i t u c e x e n a s a d e t n o p p a s a w n e a n A c M m a d A l . s e v i t n e c n i e n o g r o f f o u e i l n i r o s t n e m y a p I T S d e r r e f e d h g u o r h t d e d r a w a s e r a h s d e t c i r t s e r s t n e s e r p e R . e t a d g n i t s e v o t e t a d t n a r g m o r f d o i r e p e h t l r e v o y n e v e d o i r e p g n i t r o p e r h c a e o t d e t a c o l l a . 8 1 0 2 r e b m e t p e S 3 n o e v i i t u c e x e n a s a d e t n o p p a s a w y e s r e k c E a r b e D l . P M K e m a c e b d n a d e t n o p p a i d n a l e d o m g n c i i r p n o i t p o d e t p e c c a y r t s u d n i i n a g n s u t n a r g f o e t a d e h t t a d e t a u c a c s l l i s t h g i r e h t l f o e u a v r i a f e h T i t u c e x E r e m r o f r o f Q O B g n v a e i l i n o d e v e c e r s t f i g d n a l e v a r t , n o i t a c o e r l r o n o i t a d o m m o c c a . r a e y l i a c n a n i f e h t g n i r u d d e s i l i t u r o d e u r c c a e v a e l i e c v r e s g n o l s e s i r p m o C . s t i f e n e b n o i t a u n n a r e p u s s e d u c n l i l t n e m y o p m e - t s o P ) 1 ( ) 2 ( ) 3 ( ) 4 ( ) 5 ( ) 6 ( ) 7 ( ) 8 ( ) 9 ( Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORT 7.2 EQUITY HELD BY GROUP EXECUTIVES The movement during FY19 in the number of rights over ordinary shares held by each Group Executive as part of their remuneration, are as follows: TABLE 11 - MOVEMENT IN RIGHTS HELD BY GROUP EXECUTIVES DURING THE FINANCIAL YEAR 2019 Movements during the 2019 Financial Year Share Price at Grant Date $ Balance at 1 Sep 2018 Other (2) Granted (3) Exercised Lapsed Balance at 31 Aug 2019 (3) (4) Vested during the Year (5) (%) Group (1) Executive Current Type Grant Date 6,931 37,263 - Matthew Baxby 2015 PARs 15/12/2015 13.02 44,194 2016 PARs 23/12/2016 11.95 54,399 Restricted Shares 23/12/2016 11.95 10,653 2017 PARs 13/12/2017 12.71 50,002 Restricted Shares 13/12/2017 12.71 19,085 2018 PARs 11/12/2018 Restricted Shares 11/12/2018 Debra Eckersley 2018 PARs 11/12/2018 Adam McAnalen 2016 PARs 23/12/2016 2016 DARs 23/12/2016 2017 PARs 13/12/2017 2017 DARs 2018 PARs 13/12/2017 11/12/2018 2018 DARs 11/12/2018 9.74 9.74 9.74 11.95 11.95 12.71 12.71 9.74 9.74 Lyn McGrath Restricted Shares 17/10/2018 10.56 2018 PARs 11/12/2018 Restricted Shares 11/12/2018 9.74 9.74 - - - - - - - - - - - - Anthony Rose 2015 PARs 15/12/2015 13.02 50,843 Donna-Maree Vinci 2016 PARs 23/12/2016 11.95 58,932 Restricted Shares 23/12/2016 11.95 8,500 2017 PARs 13/12/2017 12.71 54,200 Restricted Shares 13/12/2017 12.71 15,649 2018 PARs 11/12/2018 Restricted Shares 11/12/2018 9.74 9.74 - - 2015 PARs 15/12/2015 13.02 44,585 2016 PARs 29/02/2016 10.55 52,076 2016 PARs 23/12/2016 Restricted Shares 23/12/2016 11.95 11.95 51,679 7,707 2017 PARs 13/12/2017 12.71 44,276 Restricted Shares 13/12/2017 12.71 13,932 2018 PARs 11/12/2018 Restricted Shares 11/12/2018 9.74 9.74 - - - - - - - - - - - - - - - 61,695 17,897 49,450 9,067 1,814 7,634 3,054 10,361 3,768 - - - - - - - 10,653 - 9,542 - - - - - - - - - 56,068 51,460 59,811 14,129 - - - - - - - - - - - - - - - - - - 54,399 - 50,002 9,543 61,695 17,897 49,450 9,067 1,814 7,634 3,054 10,361 3,768 4,608 59,811 14,129 - - - - - 66,876 15,542 - - - - - - 57,362 14,129 7,974 42,869 - - 8,500 - 7,824 - - - - - - - - 6,993 37,592 8,168 43,908 - 7,707 - 6,966 - - - - - - - - 58,932 - 54,200 7,825 66,876 15,542 - - 51,679 - 44,276 6,966 57,362 14,129 - - - - - - - - - - - - - - - - - - 16% 0% 50% 0% 50% 0% 0% 0% 0% 0% 0% 0% 0% 0% 92% 0% 0% 16% 0% 50% 0% 50% 0% 0% 16% 16% 0% 50% 0% 50% 0% 0% (1) Group Executives with nil shareholding movements while KMP have been excluded from the table above. (2) Other is the balance at the date an executive became KMP. Adam McAnalen was appointed as an executive on 1 June 2019. (3) This represents the maximum number of award rights that may vest to each Executive. (4) Balance amounts as at 31 August 2019 are unvested and not yet exercisable. (5) Percentage of initial rights granted. 77 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORT 7.2 EQUITY HELD BY GROUP EXECUTIVES (CONTINUED) TABLE 11 - MOVEMENT IN RIGHTS HELD BY GROUP EXECUTIVES DURING THE FINANCIAL YEAR 2019 (CONTINUED) Group Executive (1) Type Grant Date Movements during the 2019 Financial Year Share Price at Grant Date $ Balance at 1 Sep 2018 Opening Balance (2) Granted (3) Exercised Lapsed Balance at 31 Aug 2019 (3) (4) Vested during the Year (5) (%) 16% 0% 50% 0% 50% 0% 16% 0% 50% 0% 50% 0% 0% 16% 0% 50% 0% 50% Former Jon Sutton 2015 PARs 2016 PARs 15/12/2015 13.02 97,774 23/12/2016 11.95 117,865 Restricted shares 23/12/2016 2017 PARs 13/12/2017 Restricted shares 13/12/2017 Restricted shares 05/12/2018 11.95 12.71 12.71 9.74 22,667 99,239 45,803 - - - - - - - - - - 15,335 82,439 - 117,865 22,667 - - - - - 77,547 21,692 22,901 - - 22,902 44,741 - - 44,741 - Peter Deans 2015 PARs 15/12/2015 13.02 52,798 2016 PARs 23/12/2016 Restricted shares 23/12/2016 2017 PARs 13/12/2017 Restricted shares 13/12/2017 2018 PARs 11/12/2018 Restricted shares 11/12/2018 11.95 11.95 12.71 12.71 9.74 9.74 61,199 8,500 51,528 16,031 - - Brendan White 2015 PARs 15/12/2015 13.02 50,061 2016 PARs 23/12/2016 11.95 58,026 Restricted shares 23/12/2016 11.95 10,767 2017 PARs 13/12/2017 12.71 52,673 Restricted shares 13/12/2017 12.71 20,611 - - - - - - - - - - 8,281 44,517 - 61,199 8,500 - - 51,528 - - - - 8,015 - 8,016 - - 60,400 15,542 - - 60,400 - - 15,542 - - - - - - - - - - 7,852 42,209 - 58,026 10,767 - - 52,673 - - - - 10,305 - 10,306 (1) Group Executives with nil shareholding movements while KMP have been excluded from the table above. (2) Opening balance is the balance at the date an executive became KMP. Adam McAnalen was appointed as an executive on 1 June 2019. (3) This represents the maximum number of award rights that may vest to each Executive. (4) Balance amounts as at 31 August 2019 are unvested and not yet exercisable. (5) Percentage of initial rights granted. 78 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORT7.2 EQUITY HELD BY GROUP EXECUTIVES (CONTINUED) The table below shows the total value of any rights that were granted, exercised or lapsed to Group Executives. TABLE 12 - VALUE OF RIGHTS HELD BY GROUP EXECUTIVES DURING THE FINANCIAL YEAR 2019 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 Group Executive Current Matthew Baxby 2013 PARs 2013 DARs 16/12/2013 16/12/2013 7.63 10.38 344,433 24/10/2016 52,720 30/12/2014 31/12/2015 27/01/2017 2014 PARs 16/12/2014 Restricted Shares 16/12/2014 6.13 11.70 267,041 29/10/2017 266,982 16/12/2015 2015 PARs 15/12/2015 7.67 338,968 16/04/2019 Restricted Shares 15/12/2015 13.02 239,334 15/12/2016 16/12/2016 2016 PARs 23/12/2016 Restricted Shares 23/12/2016 2017 PARs 13/12/2017 Restricted Shares 13/12/2017 2018 PARs 11/12/2018 6.80 11.95 7.14 13.10 4.91 Restricted Shares 11/12/2018 10.62 190,066 250,014 30/04/2019 8.89 84,828 16/12/2027 15/12/2017 369,913 - 254,607 15/12/2017 30/04/2019 357,014 - 302,922 242,800 - - - 53,997 16/01/2019 27,483 22/12/2016 19/12/2017 13/12/2018 61,656 - 41,529 19/12/2017 13/12/2018 54,507 - 42,178 13/12/2018 50,873 30,935 - - 611,702 30/04/2019 15/08/2019 293,672 150,050 - - 410,036 21/10/2016 62,757 8/01/2015 26/02/2016 9/01/2017 Debra Eckersley 2018 PARs Adam McAnalen 2015 PARs 2015 DARs 11/12/2018 15/12/2015 15/12/2015 2016 PARs 2016 DARs 2017 PARs 2017 DARs 2018 PARs 2018 DARs 23/12/2016 23/12/2016 13/12/2017 13/12/2017 11/12/2018 11/12/2018 Lyn McGrath Restricted Shares 17/10/2018 2018 PARs 11/12/2018 Restricted Shares 11/12/2018 Anthony Rose 2013 PARs 2013 DARs 16/12/2013 16/12/2013 4.91 7.67 11.71 6.80 11.45 7.14 11.05 4.91 8.21 10.91 4.91 10.62 7.63 10.38 (1) Represents rights held at 1 September 2018 or granted during FY19. (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. 11.20 12.20 13.94 12.21 13.47 13.31 11.50 8.99 11.50 12.61 - 12.61 8.89 - 326,603 16/12/2018 12,383 16/12/2018 21,231 16/12/2018 31,026 16/12/2018 322,741 16/12/2019 151,854 16/12/2024 131,215 16/12/2024 62,310 16/12/2020 105,697 16/12/2025 115,899 16/12/2025 - 16/12/2021 134,334 16/12/2026 94,705 16/12/2026 - 13/12/2022 - - - 10.34 12.00 12.66 9.56 - 12.66 9.56 - 9.56 - - 8.89 8.85 - - 11.14 11.94 10.55 12.40 - - - 11/12/2025 11/12/2028 11/12/2025 11,426 16/12/2020 5,640 16/12/2020 8,913 16/12/2020 11,214 16/12/2020 - 16/12/2021 9,179 23/12/2021 10,401 23/12/2021 - 13/12/2022 7,294 13/12/2022 - - 11/12/2025 11/12/2025 348,746 17/10/2028 108,244 17/10/2028 - - 11/12/2025 11/12/2028 386,736 16/12/2018 14,435 16/12/2018 19,127 16/12/2018 37,498 16/12/2018 79 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORT7.2 EQUITY HELD BY GROUP EXECUTIVES (CONTINUED) TABLE 12 - VALUE OF RIGHTS HELD BY GROUP EXECUTIVES DURING THE FINANCIAL YEAR 2019 (CONTINUED) 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 2014 PARs 16/12/2014 6.13 317,902 27/10/2017 13.31 379,641 16/12/2019 Group Executive Current Anthony Rose (continued) Restricted Shares 16/12/2014 11.70 249,982 16/12/2015 2015 PARs 15/12/2015 Restricted Shares 15/12/2015 2016 PARs 23/12/2016 Restricted Shares 23/12/2016 2017 PARs 13/12/2017 Restricted Shares 13/12/2017 2018 PARs 11/12/2018 7.67 13.02 6.80 11.95 7.14 13.10 4.91 Restricted Shares 11/12/2018 10.62 165,056 Doug Snell 2015 PARs 2015 DARs 15/12/2015 15/12/2015 7.67 11.71 65,993 24/04/2019 54,955 22/12/2016 16/12/2016 389,966 30/04/2019 239,334 15/12/2016 15/12/2017 400,738 - 203,150 15/12/2017 30/04/2019 386,988 - 205,002 30/04/2019 328,361 - - 21/12/2017 20/12/2018 67,816 - 62,288 21/12/2017 20/12/2018 65,410 - 59,051 20/12/2018 50,873 54,137 - - 27/07/2017 399,423 1/05/2019 351,417 - 184,185 15/12/2017 30/04/2019 316,131 - 182,509 30/04/2019 281,647 - - 13.31 11.50 8.89 11.50 12.61 - 12.61 8.89 - 8.89 - - 9.42 12.00 12.67 9.42 - 12.67 9.42 - 9.42 - - 142,191 16/12/2024 122,855 16/12/2024 70,889 16/12/2020 105,697 16/12/2025 115,899 16/12/2025 - 16/12/2021 107,185 16/12/2026 75,565 16/12/2026 - 13/12/2022 69,555 16/12/2027 - - 11/12/2025 11/12/2028 12,708 16/12/2020 11,280 16/12/2020 17,827 16/12/2020 22,099 16/12/2020 - 16/12/2021 13,785 23/12/2021 15,373 23/12/2021 - 13/12/2022 10,070 13/12/2022 - - 11/12/2025 11/12/2025 11.33 12.20 8.88 - 12.61 8.89 - 8.89 - - 71,345 16/12/2025 76,811 16/12/2025 72,532 16/12/2020 - 16/12/2021 97,173 16/12/2026 68,515 16/12/2026 - 13/12/2022 61,928 16/12/2027 - - 11/12/2025 11/12/2028 2016 PARs 2016 DARs 2017 PARs 2017 DARs 2018 PARs 2018 DARs 2015 PARs 23/12/2016 23/12/2016 13/12/2017 13/12/2017 11/12/2018 11/12/2018 15/12/2015 6.80 11.45 7.14 11.05 4.91 8.21 7.67 Donna-Maree Vinci 2016 PARs 2016 PARs 29/02/2016 23/12/2016 Restricted Shares 23/12/2016 2017 PARs 13/12/2017 Restricted Shares 13/12/2017 2018 PARs 11/12/2018 7.67 6.80 11.95 7.14 13.10 4.91 Restricted Shares 11/12/2018 10.62 150,050 (1) Represents rights held at 1 September 2018 or granted during FY19. (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. 80 Restricted Shares 15/12/2015 13.02 163,961 6/12/2016 341,967 1/05/2019 8.88 62,098 16/12/2020 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORT7.2 EQUITY HELD BY GROUP EXECUTIVES (CONTINUED) TABLE 12 - VALUE OF RIGHTS HELD BY GROUP EXECUTIVES DURING THE FINANCIAL YEAR 2019 (CONTINUED) 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 Group Executive Former Jon Sutton 2013 PARs 16/12/2013 7.63 459,242 24/10/2016 2013 DARs 16/12/2013 10.38 93,711 02/01/2015 18/12/2015 22/12/2016 2014 PARs 16/12/2014 Restricted Shares 16/12/2014 6.13 11.70 635,810 27/10/2017 388,335 16/12/2015 16/12/2016 2015 PARs 15/12/2015 7.67 749,927 31/01/2019 Restricted Shares 15/12/2015 13.02 611,055 15/12/2016 15/12/2017 2016 PARs 23/12/2016 Restricted Shares 23/12/2016 6.80 11.95 801,482 - 541,729 15/12/2017 2017 PARs 13/12/2017 7.14 708,566 - 31/01/2019 11.20 12.20 13.55 12.00 13.31 13.31 11.50 10.17 11.50 12.61 - 12.61 10.17 - 435,478 16/12/2018 22,021 16/12/2018 36,693 16/12/2018 54,180 16/12/2018 759,282 16/12/2019 220,879 16/12/2024 190,854 16/12/2024 155,957 16/12/2020 269,859 16/12/2025 295,906 16/12/2025 - 16/12/2021 285,818 16/12/2026 230,523 16/12/2026 - 13/12/2022 600,019 31/01/2019 10.17 232,903 16/12/2027 Restricted Shares 13/12/2017 Restricted Shares 05/12/2018 Peter Deans 2013 PARs 2013 DARs 16/12/2013 16/12/2013 13.10 10.62 7.63 10.38 475,149 - 393,639 24/10/2016 60,246 28/01/2015 18/12/2015 27/12/2016 15/12/2017 416,153 - 203,150 15/12/2017 10/12/2018 367,910 - 210,006 10/12/2018 296,564 - - 2014 PARs 16/12/2014 Restricted Shares 16/12/2014 6.13 11.70 330,622 28/10/2017 242,705 16/12/2015 2015 PARs 15/12/2015 7.67 404,961 14/01/2019 Restricted Shares 15/12/2015 13.02 239,334 15/12/2016 16/12/2016 2016 PARs 23/12/2016 Restricted Shares 23/12/2016 2017 PARs 13/12/2017 Restricted Shares 13/12/2017 2018 PARs 11/12/2018 6.80 11.95 7.14 13.10 4.91 Restricted Shares 11/12/2018 10.62 165,056 (1) Represents rights held at 1 September 2018 or granted during FY19. (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. - 11.20 12.37 13.55 11.95 13.31 13.31 11.50 10.27 11.50 12.61 - 12.61 9.56 - 9.56 - - - 05/12/2028 373,262 16/12/2018 14,349 16/12/2018 23,591 16/12/2018 34,691 16/12/2018 394,828 16/12/2019 138,051 16/12/2024 119,278 16/12/2024 85,046 16/12/2020 105,697 16/12/2025 115,899 16/12/2025 - 16/12/2021 107,185 16/12/2026 81,260 16/12/2026 - 13/12/2022 76,623 16/12/2027 - - 11/12/2025 11/12/2028 81 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORT7.2 EQUITY HELD BY GROUP EXECUTIVES (CONTINUED) TABLE 12 - VALUE OF RIGHTS HELD BY GROUP EXECUTIVES DURING THE FINANCIAL YEAR 2019 (CONTINUED) 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 Group Executive Former Brendan White 2013 PARs 2013 DARs 16/12/2013 16/12/2013 7.63 10.38 393,639 24/10/2016 60,246 23/12/2014 18/12/2015 05/04/2017 2014 PARs 16/12/2014 Restricted Shares 16/12/2014 6.13 11.70 305,188 02/11/2017 330,080 16/12/2015 2015 PARs 15/12/2015 7.67 383,968 08/01/2019 Restricted Shares 15/12/2015 13.02 310,618 15/12/2016 16/12/2016 2016 PARs 23/12/2016 Restricted Shares 23/12/2016 2017 PARs 13/12/2017 Restricted Shares 13/12/2017 15/12/2017 394,577 - 257,319 15/12/2017 30/04/2019 376,085 - 270,004 30/04/2019 6.80 11.95 7.14 13.10 (1) Represents rights held at 1 September 2018 or granted during FY19. (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. 11.20 12.08 13.55 12.12 12.49 13.31 11.50 9.97 11.50 12.61 - 12.61 8.89 - 8.89 373,262 16/12/2018 14,013 16/12/2018 23,591 16/12/2018 35,184 16/12/2018 341,864 16/12/2019 187,751 16/12/2024 162,219 16/12/2024 78,284 16/12/2020 137,184 16/12/2025 150,412 16/12/2025 - 16/12/2021 135,759 16/12/2026 95,719 16/12/2026 - 13/12/2022 91,611 16/12/2027 82 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORT7.3 EQUITY INSTRUMENTS - HOLDINGS AND MOVEMENTS Movement in shares The number of shares held directly, indirectly or beneficially by each Director, Group Executive or related party is as follows: Ordinary shares (1) Directors - Current Roger Davis Patrick Allaway Kathleen Bailey-Lord Bruce Carter Richard Haire John Lorimer Warwick Negus Karen Penrose Michelle Tredenick David Willis Executive Director - Former Jon Sutton Executives - Current Matthew Baxby Adam McAnalen (3) Lyn McGrath Anthony Rose Donna-Maree Vinci Executives - Former Peter Deans Brendan White Held at 1 September 2018 Purchases / (Sales) Received on Exercise of Award Rights / Restricted Shares Held at 31 August 2019 18,043 - - - 17,503 16,603 17,000 15,000 13,591 15,635 11,932 177,616 30,000 3,132 14,909 (2) - - - - - 88 - - - - - - - - - - - - 105,310 (72,582) 27,126 39,901 - - 20,299 - - - - 34,026 3,330 (30,281) - - 51,460 24,298 29,834 24,796 7,852 18,043 30,000 3,132 32,412 16,603 17,000 15,000 13,591 15,635 12,020 n/a 59,854 39,901 51,460 24,298 50,133 n/a n/a (1) Directors and Group executives with nil shareholding balances as at 31 August 2019 have been excluded from the table above. (2) Rights granted under Non-Executive Director Fee Sacrifice Rights Plan and vest on 2 September 2019. (3) Opening balance as at 1 June 2019. 83 Remuneration Governance 70 | Non-Executive Director Remuneration 73 | Statutory Tables 74Annual Report 2019For the year ended 31 August 2019REMUNERATION REPORT7.4 TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL (DIRECTORS AND GROUP EXECUTIVES) Loan transactions Loans to KMP and their related parties (including close family members of the KMP and entities over which the KMP and/or their close family members have control, joint control or significant influence) are provided in the ordinary course of business. Normal commercial terms and conditions are applied to all loans. Any discounts provided to KMP 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 FY19. Details of loans held by KMP and their related parties during the financial year, where the individual’s aggregate loan balance exceeded $100,000 at any time in this period, are as follows: Executives Matthew Baxby Debra Eckersley (1) Doug Snell (2) Executive - Former Brendan White Other Related Parties Richard Haire related parties Other Related Parties - Former Balance at 1 September 2018 $ Interest charged during the year $ Balance at 31 August 2019 $ Highest balance during the year $ 1,106,608 - - 45,720 4,869 6,683 789,747 19,230 1,179,029 350,000 n/a n/a 1,833,252 351,304 283,717 793,295 191,000 8,428 186,543 191,728 Jon Sutton related parties 1,269,422 12,534 n/a 1,269,992 (1) Debra Eckersley’s account was opened during the financial year on 11 April 2019. (2) Doug Snell was appointed Interim Group Executive, BOQ Business on 21 December 2018. Details regarding the aggregate of loans made, guaranteed or secured by any entity in the economic entity to all Group Executives and their related parties, and the number of individuals in each group are as follows: Executives Executives - Former Other Related Parties Other Related Parties - Former Balance at 1 September 2018 $ Interest charged during the year $ Balance at 31 August 2019 $ Number in group at 31 August 2019 # 1,139,156 789,747 191,000 1,269,422 59,594 19,230 8,428 12,534 1,536,789 n/a 186,543 n/a 3 - 1 - Other transactions Transactions with KMP and their related parties (other than loans and shares) during the financial year were related to personal banking, investment, finance leasing, insurance policy and deposit transactions. These transactions are on normal commercial terms and conditions, in the ordinary course of business and are considered trivial or domestic in nature. On 26 May 2015, the Bank issued 15,000 Wholesale Capital Notes (1) at a price of $10,000 per note. On 28 December 2017, the Bank issued 3,500,000 million Capital Notes (1) at a price of $100 per note. Details of those notes issued to BOQ Directors are set out below: Roger Davis David Willis Roger Davis Roger Davis related parties Total (1) Capital notes are classified as non-current. 84 Wholesale Capital Notes Wholesale Capital Notes Capital Notes Capital Notes Balance at 31 August 2019 $ Interest earned for the year $ 200,000 70,000 50,000 50,000 370,000 8,785 3,075 1,537 1,537 14,934 Remuneration Summary 59 | Key Management Personnel 62 | Remuneration Outcomes 63 | Remuneration Strategy & Structure 67Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019REMUNERATION REPORTAudit and non-audit services 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 compatible with, and did not compromise, the auditor’s independence requirements of the Corporations Act 2001 (Cth) 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 or acting as an advocate for the Bank or jointly sharing risks and rewards. Indemnification of officers The Bank’s Constitution supported by a Deed of Indemnity, Insurance and Access provides an indemnity in favour of all directors and officers of the Bank against liabilities incurred by them in the capacity as officer to the maximum extent permitted by law. 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 officer (as defined in the Corporations Act 2001 (Cth)) 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: Roger Davis Patrick Allaway Kathleen Bailey-Lord Bruce Carter Richard Haire John Lorimer Warwick Negus Karen Penrose Michelle Tredenick David Willis Ordinary shares 18,043 30,000 3,132 32,412 16,603 17,000 15,000 13,591 15,635 12,020 Capital Notes 1,000 Wholesale Capital Notes 20 - - - - - - - - - - - - - - - - - 7 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 and in the Note 6.7 Auditor Remuneration: KPMG AUSTRALIA Audit services - Statutory audits and reviews of the financial reports - Regulatory audits and reviews as required by regulatory authorities Total audit services Audit related services - Other assurance services - Regulatory assurance services Total audit related services Non-audit services - Taxation services - Other Total non-audit services Consolidated Bank 2019 $000 1,773 462 2,235 534 94 628 169 333 502 2018 $000 1,737 346 2,083 532 235 767 171 103 274 2019 $000 2018 $000 1,324 325 1,649 397 - 397 169 263 432 1,279 244 1,523 399 235 634 171 103 274 85 Annual Report 2019For the year ended 31 August 2019DIRECTORS’ REPORTLead Auditor’s Independence Declaration The lead auditor’s independence declaration is set out on page 87 and forms part of the Directors’ report for the year ended 31 August 2019. Director and management changes Director changes during the year: • On 5 December 2018, Jon Sutton resigned from his role as Managing Director & CEO. • Non-Executive Directors, Patrick Allaway and Kathleen Bailey- Lord, were appointed to the BOQ board on 1 May 2019. • On 29 May 2019, Roger Davis announced his retirement as Chairman on 17 October 2019 and from the Board on 31 October 2019. Mr Allaway will move into the Chairman role from 18 October 2019. • On 8 August 2019, David Willis announced his retirement as a Director and Chair of the Human Resources & Remuneration Committee, with effect from the 2019 AGM on 10 December 2019. He will retain his role as a Director of St Andrew’s Australia Services Pty Ltd, St Andrew’s Insurance (Australia) Pty Ltd and St Andrew’s Life Insurance Pty Ltd. Management changes during the year: • On 6 December 2018, Brendan White resigned from his role as Group Executive, BOQ Business with his notice period ending 6 March 2019. • Doug Snell moved from General Manager BOQ Business to Interim Group Executive, BOQ Business from 21 December 2018 to 12 August 2019. • Anthony Rose moved from Chief Operating Officer to Interim CEO from 6 December 2018 to 4 September 2019. Mr Rose was not a Director in the period that he was Interim CEO and the role of Chief Operating Officer was held vacant while Mr Rose was Interim CEO. He will remain with BOQ until the end of December 2019. • On 8 March 2019, Peter Deans announced his retirement from his role as Chief Risk Officer on 31 May 2019. • Adam McAnalen was appointed to the role of Chief Risk Officer from 1 June 2019. Mr McAnalen was previously CEO of BOQ Finance. Management attestation The Board has been provided with a written statement from the Group’s Managing Director & CEO, former Interim CEO and Chief Financial Officer, confirming the accompanying financial statements and notes are in accordance with the Corporations Act 2001 (Cth) and they present a true and fair view in all material respects of the Consolidated Entity’s financial position and performance as at and for the year ended 31 August 2019. The Directors’ Declaration can be found on page 170 of the financial statements. Environmental regulation The Consolidated Entity’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 2019. The financial effect of the dividends has not been brought to account in the financial statements for the year ended 31 August 2019. Further details with respect to the dividend amounts per share, payment date and dividend reinvestment plan can be obtained from Note 2.4 Dividends of the consolidated financial statements. Other than as disclosed below, no matters or circumstances have arisen since the end of the financial year and up until the date of this report which significantly affect the operations of the Bank, the results of those operations, or the state of affairs of the Bank in subsequent years. On 11 October 2019, the Bank entered into a Subscription Agreement in relation to a debt for equity swap for the purchase of 8,128 fully paid ordinary shares issued by its subsidiary, St Andrew’s Australia Services Pty Ltd, for the value of $30,000,000. Rounding of amounts The Bank is a company of a kind referred to in ASIC Corporations Instrument 2016/191 dated 24 March 2016 and in accordance with that Instrument, amounts in this financial report and Directors’ report have been rounded off to the nearest million dollars, unless otherwise stated. • On 20 June 2019, Matt Baxby announced his resignation as Signed in accordance with a resolution of the Directors: Chief Financial Officer. He will remain with BOQ until the end of October 2019. • Peter Sarantzouklis was appointed Group Executive, BOQ Business from 12 August 2019. • On 5 September 2019, George Frazis was appointed Managing Director & CEO. • On 10 October 2019 it was announced that Ewen Stafford will be appointed to the role of Chief Financial Officer and Chief Operating Officer. Ewen will commence with BOQ later in FY20. Roger Davis Chairman 16 October 2019 86 George Frazis Managing Director & CEO 16 October 2019 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. 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 of Bank of Queensland Limited for the financial year ended 31 August 2019 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. KPM_INI_01 KPMG Robert Warren Partner Sydney 16 October 2019 Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019DIRECTORS’ REPORTLEAD AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 87 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. 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 of Bank of Queensland Limited for the financial year ended 31 August 2019 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. KPM_INI_01 KPMG Robert Warren Partner Sydney 16 October 2019 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. 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 of Bank of Queensland Limited for the financial year ended 31 August 2019 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. KPM_INI_01 KPMG Robert Warren Partner Sydney 16 October 2019 Annual Report 20192019 FINANCIAL STATEMENTS Interest income: Effective interest income Other Interest expense Net interest income Other operating income Net banking operating income Net insurance operating income Total operating income before impairment and operating expenses Expenses Impairment on loans and advances Profit before income tax Income tax expense Profit for the year Profit attributable to: Equity holders of the parent Earnings per share (EPS) Basic EPS - Ordinary shares (cents) Diluted EPS - Ordinary shares (cents) Consolidated Bank 2019 (1) $m 1,913 145 ( 1,097) 961 126 1,087 9 1,096 (587) (74) 435 (137) 298 2018 $m 2019 (1) $m 2018 $m 1,927 142 (1,104) 965 137 1,102 19 1,121 (587) (41) 493 (157) 336 1,884 165 (1,319) 730 227 957 - 957 (566) (37) 354 (109) 245 1,760 289 (1,311) 738 228 966 - 966 (545) (23) 398 (121) 277 298 336 245 277 74.2 69.2 85.5 81.2 Note 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.2 2.3 2.6 2.6 (1) The August 2019 financial results reflect the adoption of AASB 9 Financial Instruments (AASB 9) and AASB 15 Revenue from contracts with customers (AASB 15) on 1 September 2018. As permitted by AASB 9 and AASB 15, the Consolidated Entity and the Bank have not restated previously reported financial periods. Refer to Note 1.5 for the impact from the initial adoption of AASB 9 and AASB 15. The Income Statements should be read in conjunction with the accompanying notes. 90 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019INCOME STATEMENTSProfit for the year Other comprehensive income, net of income tax Items that may be reclassified subsequently to profit or loss Cash flow hedges: Net movement taken to equity Net movement transferred to profit or loss Debt instruments at fair value through other comprehensive income (FVOCI): Net change in fair value Net movement transferred to profit or loss Financial assets available-for-sale: Net change in fair value Net movement transferred to profit or loss Items that will not be reclassified subsequently to profit or loss Equity instruments at FVOCI: Net change in fair value Other comprehensive income, net of income tax Total comprehensive income for the year Consolidated Bank 2019 (1) $m 298 2018 $m 336 2019 (1) $m 245 2018 $m 277 (79) 20 (3) (13) - - (1) (76) 222 (11) 22 - - 6 (14) - 3 339 (74) 20 (3) (13) - - (1) (71) 174 (12) 22 - - 6 (14) - 2 279 Total comprehensive income attributable to: Equity holders of the parent 222 339 174 279 (1) The August 2019 financial results reflect the adoption of AASB 9 and AASB 15 on 1 September 2018. As permitted by AASB 9 and AASB 15, the Consolidated Entity and the Bank have not restated previously reported financial periods. Refer to Note 1.5 for the impact from the initial adoption of AASB 9 and AASB 15. The Statements of Comprehensive Income should be read in conjunction with the accompanying notes. 91 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019STATEMENTS OF COMPREHENSIVE INCOMEASSETS Cash and cash equivalents Due from other financial institutions Derivative financial assets Financial assets at fair value through profit or loss (FVTPL) Financial assets held for trading Debt instruments at FVOCI Equity instruments at FVOCI Financial assets available-for-sale Debt instruments at amortised cost (3) Loans and advances Other assets Current tax assets Property, plant and equipment Assets held for sale (2) Shares in controlled entities Deferred tax assets Intangible assets Investments in joint arrangements and associates Total assets LIABILITIES Due to other financial institutions - accounts payable at call Deposits Derivative financial liabilities Accounts payable and other liabilities Current tax liabilities Liabilities held for sale (2) Provisions Amounts due to controlled entities (3) Insurance policy liabilities Borrowings Total liabilities Net assets EQUITY Issued capital Reserves Retained profits Total equity Note 3.1 3.8 3.2 3.2 3.2 3.2 3.2 3.2 3.3 6.5 6.5 2.3 4.1 6.6 3.4 3.8 6.5 4.2 5.1 3.5 Consolidated Bank 2019 (1) $m 1,274 708 229 2,586 - 3,569 6 - - 45,983 158 7 52 - - 85 924 16 2018 $m 2019 (1) $m 2018 $m 1,212 6 135 - 1,385 - - 3,946 - 45,078 169 - 57 57 - 45 875 15 685 668 145 2,586 - 3,569 6 - 5,468 40,836 1,541 8 46 - 522 79 848 3 840 6 80 - 1,385 - - 3,975 4,867 40,571 940 - 51 - 522 46 798 - 55,597 52,980 57,010 54,081 285 38,337 687 394 - - 40 - 9 11,986 51,738 3,859 3,497 213 149 3,859 315 38,017 294 360 5 22 34 - - 10,077 49,124 3,856 3,418 38 400 3,856 285 38,528 687 302 - - 26 6,086 - 7,372 53,286 3,724 3,503 222 (1) 3,724 315 38,266 293 304 5 - 30 4,595 - 6,503 50,311 3,770 3,425 42 303 3,770 (1) The August 2019 financial position reflects the adoption of AASB 9 and AASB 15 on 1 September 2018. As permitted by AASB 9 and AASB 15, the Consolidated Entity and the Bank have not restated previously reported financial periods. Refer to Note 1.5 for the impact from the initial adoption of AASB 9 and AASB 15. (2) The St Andrew’s Group was classified as held for sale as at 31 August 2018 but has ceased to be held for sale as at 31 August 2019. Refer to Note 6.5(d) for presentation of the comparatives. (3) The Bank’s 2018 balances have been reclassified for comparison purposes. Refer to Note 3.2 for further details. The Balance Sheets should be read in conjunction with the accompanying notes. 92 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesAs at 31 August 2019BALANCE SHEETSConsolidated YEAR ENDED 31 AUGUST 2019 Ordinary shares $m Employee benefits reserve $m Equity reserve for credit losses $m Cash flow hedge reserve $m FVOCI reserve (1) $m Profit reserve (2) $m Retained profits $m Total equity $m Balance at beginning of the year Change on adoption of new accounting standards (3) 3,418 - Restated balance at beginning of the year 3,418 26 - 26 59 - 59 (106) - (106) Total comprehensive income for the year Profit for the year Transfers to profit reserve Other comprehensive income, net of income tax: Cash flow hedges: Net movement to equity Net movement transferred to profit or loss Debt instruments at FVOCI: Net change in fair value Net movement transferred to profit or loss Equity instruments at FVOCI Net change in fair value Transfer 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 Treasury shares (4) Dividend reinvestment plan Dividends to shareholders Total contributions by and distributions to owners - - - - - - - - - - 1 78 - 79 - - - - - - - - - - - - - - - - - - - - - 3 3 3 - - - - - - (79) 20 - - - - (59) (59) - - - - 59 3 62 - - - - (3) (13) (1) - (17) (17) - - - - - - - 400 3,856 (13) (10) 387 3,846 - 298 298 245 (245) - - - - - - - - 245 - - - - - - - - - - (3) (3) 50 - - (79) 20 (3) (13) (1) - (76) 222 1 78 (288) (288) (288) (209) Balance at the end of the year 3,497 26 62 (165) 45 245 149 3,859 (1) On initial application of AASB 9 from 1 September 2018, the available-for-sale assets including the corresponding reserve have been reclassified to debt and equity securities measured at FVOCI with a corresponding FVOCI reserve. Refer to Note 1.5 for the impact from the initial adoption of AASB 9. (2) Profit reserve was established during the current financial year. (3) The August 2019 financial results reflect the adoption of AASB 9 and AASB 15 on 1 September 2018. The carrying amounts of assets and liabilities impacted by the adoption were adjusted through opening retained profits and reserves on 1 September 2018 as if the Consolidated Entity and the Bank had always applied the new requirements. As permitted by AASB 9 and AASB 15, the Consolidated Entity and the Bank have not restated previously reported financial periods. Refer to Note 1.5 for the impact from the initial adoption of AASB 9 and AASB 15. (4) 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. 93 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019STATEMENTS OF CHANGES IN EQUITYConsolidated YEAR ENDED 31 AUGUST 2018 Ordinary shares $m Employee benefits reserve $m Equity reserve for credit losses $m Cash flow hedge reserve $m Available- for-sale reserve $m Retained profits $m Total equity $m Balance at beginning of the year 3,360 26 81 (117) 67 371 3,788 Total comprehensive income for the year Profit for the year Other comprehensive income, net of income tax: Cash flow hedges: Net movement to equity Net movement transferred to profit or loss Financial assets available-for-sale: Net change in fair value Net movement transferred to profit or loss Transfer from 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 Total contributions by and distributions to owners - - - - - - - - 11 47 - 58 - - - - - - - - - - - - - - - - - (22) (22) (22) - - - - - (11) 22 - - - 11 11 - - - - - - - 6 (14) - (8) (8) - - - - Balance at the end of the year 3,418 26 59 (106) 59 336 336 - - - - 22 22 (11) 22 6 (14) - 3 358 339 - - (329) (329) 400 11 47 (329) (271) 3,856 (1) On 26 October 2017, 850,000 ordinary shares were issued at $13.28 and on 17 May 2018, 2,809 ordinary shares were issued at $10.02 to the trustee of the Bank of Queensland Limited 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. 94 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019STATEMENTS OF CHANGES IN EQUITYOrdinary shares $m Employee benefits reserve $m Equity reserve for credit losses $m Cash flow hedge reserve $m FVOCI reserve (1) $m Profit reserve (2) $m Retained profits $m Total equity $m Bank YEAR ENDED 31 AUGUST 2019 Balance at beginning of the year Change on adoption of new accounting standards (3) 3,425 - Restated balance at beginning of the year 3,425 Total comprehensive income for the year Profit for the year Transfers to profit reserve Other comprehensive income net of income tax: Cash flow hedges: Net movement to equity Net movement transferred to profit or loss Debt instruments at FVOCI: Net change in fair value Net movement transferred to profit or loss Equity instruments at FVOCI Net change in fair value Transfer 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 Dividend reinvestment plan Dividends to shareholders Total contributions by and distributions to owners - - - - - - - - - - 78 - 78 26 - 26 60 - 60 (103) - (103) - - - - - - - - - - - - - - - - - - - - 3 3 3 - - - - - (74) 20 - - - - (54) (54) - - - 59 3 62 - - - - (3) (13) (1) - (17) (17) - - - - - - 303 3,770 (13) (10) 290 3,760 - 245 245 245 (245) - - - - - - - - 245 - - - - - (3) (3) (3) (74) 20 (3) (13) (1) - (71) 174 - - - - 78 (288) (288) (288) (210) Balance at the end of the year 3,503 26 63 (157) 45 245 (1) 3,724 (1) On initial application of AASB 9 from 1 September 2018, the available-for-sale assets including the corresponding reserve have been reclassified to debt and equity securities measured at FVOCI with a corresponding FVOCI reserve. Refer to Note 1.5 for the impact from the initial adoption of AASB 9 (2) Profit reserve was established during the current financial year. (3) The August 2019 financial results reflect the adoption of AASB 9 and AASB 15 on 1 September 2018. The carrying amounts of assets and liabilities impacted by the adoption were adjusted through opening retained profits and reserves on 1 September 2018 as if the Consolidated Entity and the Bank had always applied the new requirements. As permitted by AASB 9 and AASB 15, the Consolidated Entity and the Bank have not restated previously reported financial periods. Refer to Note 1.5 for the impact from the initial adoption of AASB 9 and AASB 15. The Statements of Changes in Equity should be read in conjunction with the accompanying notes. 95 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019STATEMENTS OF CHANGES IN EQUITYBank YEAR ENDED 31 AUGUST 2018 Balance at beginning of the year Total comprehensive income for the year Profit for the year Other comprehensive income, net of income tax: Cash flow hedges: Net movement to equity Net movement transferred to profit or loss Financial assets available-for-sale: Net change in fair value Net movement transferred to profit or loss Transfer from 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 Total contributions by and distributions to owners Ordinary shares $m Employee benefits reserve $m Equity reserve for credit losses $m Cash flow hedge reserve $m Available- for-sale reserve $m Retained profits $m Total equity $m 3,367 26 68 (113) 67 347 3,762 - - - - - - - - 11 47 - 58 - - - - - - - - - - - - - - - - - (8) (8) (8) - - - - - (12) 22 - - - 10 10 - - - - - - - 6 (14) - (8) (8) - - - - 277 277 - - - - 8 8 (12) 22 6 (14) - 2 285 279 - - (329) (329) 303 11 47 (329) (271) 3,770 Balance at the end of the year 3,425 26 60 (103) 59 (1) On 26 October 2017, 850,000 ordinary shares were issued at $13.28 and on 17 May 2018, 2,809 ordinary shares were issued at $10.02 to the trustee of the Bank of Queensland Limited 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. 96 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019STATEMENTS OF CHANGES IN EQUITYConsolidated Bank Note 2019 $m 2018 $m 2019 $m 2018 $m CASH FLOWS FROM OPERATING ACTIVITIES Interest received Fees and other income received Interest paid Cash paid to suppliers and employees Income tax paid Increase in operating assets: Loans and advances Other financial assets Increase / (decrease) in operating liabilities: Deposits Net cash inflow / (outflow) from operating activities 3.1 CASH FLOWS FROM INVESTING ACTIVITIES Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Payments for intangible assets Proceeds / (payments) for investments in joint arrangements and associates Dividends received from controlled entities Net cash inflow / (outflow) from investing activities CASH FLOWS FROM FINANCING ACTIVITIES 2,064 131 (1,083) (473) (153) 486 (996) (1,263) 294 (1,479) (13) 4 (98) (3) - (110) 2,085 160 (1,102) (500) (147) 496 (1,529) 449 901 317 (14) 8 (73) - - (79) 3.5 3.5 4,021 (2,159) 3,308 (2,959) Proceeds from borrowings Repayments of borrowings Proceeds for foreign exchange instruments Net movement in other financing activities Proceeds from issue of ordinary shares Payments for treasury shares Dividends paid Net cash inflow / (outflow) from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year (1) Cash and cash equivalents at end of year 3.1 Cash and cash equivalents included in assets held for sale (1) Cash and cash equivalents as presented in the Balance Sheets - - - (7) (210) 1,645 56 1,218 1,274 - 1,274 (1) - 11 (11) (282) 66 304 914 1,218 (6) 1,212 1,948 193 (1,309) (469) (150) 213 (261) (1,274) 236 (1,086) (6) - (96) (4) 12 (94) 1,757 (937) - 422 - (7) (210) 1,025 (155) 840 685 - 685 1,958 192 (1,311) (453) (143) 243 (1,235) 499 808 315 (10) 1 (71) - 22 (58) 2,022 (1,824) (1) 131 11 (11) (282) 46 303 537 840 - 840 (1) The St Andrew’s Group was classified as held for sale as at 31 August 2018 but has ceased to be held for sale as at 31 August 2019. Refer to Note 6.5(d) for presentation of the comparatives. The Statements of Cash Flows should be read in conjunction with the accompanying notes. 97 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019STATEMENTS OF CASH FLOWSNote 1 Basis of preparation 1.1 1.2 1.3 1.4 1.5 Reporting entity Basis of preparation Use of estimates and judgements New Australian accounting standards Implementation of new Australian accounting standards Note 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 Note 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 cash equivalents Financial assets and liabilities Loans and advances Deposits Borrowings Risk management Fair value of financial instruments Derivative financial instruments and hedge accounting Capital management 3.10 Capital and reserves Note 4 Other assets and liabilities 4.1 4.2 Intangible assets Provisions Note 5 Insurance business 5.1 Insurance business Note 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 Investments in joint arrangements and associates Auditor’s remuneration Events subsequent to balance date Significant accounting policies 98 Page 99 99 99 99 99 101 105 105 106 107 110 111 113 114 114 115 117 124 124 127 138 142 148 149 150 150 152 153 153 158 158 159 160 160 163 166 167 167 168 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTSNOTE 1. BASIS OF PREPARATION 1.1 REPORTING ENTITY The Bank is a for-profit company domiciled in Australia. The address of the Bank’s registered office is Level 6, 100 Skyring Terrace, Newstead QLD 4006. The consolidated financial statements of the Bank for the financial year ended 31 August 2019 comprise the Consolidated Entity and the Consolidated Entity’s interest in equity accounted investments. The principal activity of the Bank is the provision of financial services to the community. 1.2 BASIS OF PREPARATION (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 (Cth). 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 statements were authorised for issue by the Directors on 16 October 2019. (b) Basis of measurement The consolidated financial statements are prepared on a historical cost basis, with the exception of the following assets and liabilities which are stated at their fair value: • Derivative financial instruments; • Financial assets at fair value through other comprehensive income; and 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 accounting 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 throughout 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: • Loans and advances - Expected credit losses – Note 3.3(a); • Financial instruments – Notes 3.2 and 3.7; • Carrying value of goodwill and other intangible assets – Note 4.1. 1.4 NEW AUSTRALIAN ACCOUNTING STANDARDS (a) New accounting standards applicable this • Financial assets at fair value through profit or loss. financial year (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 Corporations Instrument 2016/191 dated 24 March 2016 and in accordance with that instrument, amounts in this financial report and Directors’ report have been rounded off to the nearest million dollars, unless otherwise stated. The Consolidated Entity has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 September 2018. • AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions; • AASB 2016-6 Amendments to Australian Accounting Standards – Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts; • AASB 2017-1 Amendments to Australian Accounting Standards – Transfers of Investment Property, Annual Improvements 2014–2016 Cycle and Other Amendments; • AASB 2017-3 Amendments to Australia Accounting Standards – Clarifications to AASB 4; • AASB Interpretation 22 Foreign Currency Transactions and Advance Consideration; • AASB 9 Financial Instruments - The impact of implementing this new standard is disclosed in Note 1.5; and • AASB 15 Revenue from Contracts with Customers - The impact of implementing this new standard is disclosed in Note 1.5. The Consolidated Entity has reviewed the impact of the aforementioned standards and, apart from AASB 9 and AASB 15, determined there to be no material impact. 99 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS1.4 NEW AUSTRALIAN ACCOUNTING STANDARDS (CONTINUED) (b) New accounting standards applicable in future financial years The following standards and amendments have been identified as those which may impact the Consolidated Entity in future financial years: AASB 16 Leases (AASB 16) AASB 16 introduces a single on-Balance Sheet accounting model for lessees for recognising and measuring lease arrangements and will replace AASB 117 Leases (AASB 117). The standard will become mandatory for the Group for the financial year commencing 1 September 2019. Lessor accounting under AASB 16 remains largely unchanged from AASB 117. On transition, the standard requires identification of leases that provide the right to control the use of an identified asset for a period of time. For these leases, the Group is required to recognise on Balance Sheet a right-of-use (ROU) asset, representing the right to use the underlying asset, and a lease liability, representing the future lease payment obligations. Exemptions exist for leases of less than 12 months or of low value. Operating lease obligations which were previously recognised as a straight line operating expense will be replaced by interest expense on the lease liability and depreciation expense on the ROU asset. This will result in higher interest expenses weighted to the earlier periods of each lease term. The Group has performed an assessment of the impact of AASB 16 which has included a review of the Group’s contracts to identify all leases which are applicable under AASB 16 and calculation of the ROU asset and lease liability for each lease. The most significant impacts identified relate to property, vehicle and equipment leases held by the Group. The Group has elected to apply the modified retrospective approach on transition. The calculation has been made using the Group’s incremental borrowing rate and by making judgements as to whether extension and termination options will be taken up. The Group expects to recognise a lease liability of approximately $190 million and ROU assets of approximately $130 million in the Group’s 2020 Annual Report. After adjusting for lease liabilities currently recorded on balance sheet and recognising finance lease receivables for subleases, this results in a retained earnings reduction of approximately $10 million following relevant tax adjustments. AASB 17 Insurance Contracts (AASB 17) This standard will replace AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. It will become mandatory for the Consolidated Entity in the financial year commencing 1 September 2022. This standard introduces new measurement approaches to be used in valuing insurance contract liabilities. Under the new model, insurance contract liabilities will represent the present value of future cash flows including a provision for risk. The potential effects of this standard are yet to be determined. 100 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS1.5 IMPLEMENTATION OF NEW AUSTRALIAN ACCOUNTING STANDARDS AASB 9 Financial Instruments (AASB 9) The standard became mandatory for the Consolidated Entity in this financial year commenced 1 September 2018 and replaces the guidance under AASB 139 Financial Instruments: Recognition and Measurement (AASB 139). AASB 9 introduces changes in the classification and measurement of financial assets and liabilities, in addition to a new Expected Credit Loss (ECL) model for impairment and requirements with respect to hedge accounting. The Consolidated Entity has elected, as a policy choice permitted under AASB 9, to continue to apply hedge accounting in accordance with AASB 139. Classification and measurement AASB 9 introduced new requirements, which determine how financial assets are classified and measured. Financial assets, except equity instruments and derivatives, are classified according to their contractual cash flow characteristics and the business model in place for managing the financial asset. The AASB 139 measurement categories of financial assets (fair value through profit or loss, available-for-sale, held-to-maturity and loans & receivables) have been replaced by: • Amortised cost - From 1 September 2018, the Consolidated Entity only classifies amounts due from other financial institutions and loans and advances when both of the following conditions are met: • The financial asset is held within a business model where the objective is to hold them in order to collect contractual cash flows; and • The contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest (SPPI). • Fair value through other comprehensive income (FVOCI) – a financial asset is classified at FVOCI when both of the following conditions are met: • The financial asset is held within a business model where the objective is achieved by holding them in order to collect contractual cash flows and selling the financial assets; and • The contractual terms of the financial asset give rise to cash flows that meet the SPPI test. These instruments largely comprise assets that had previously been classified as financial assets available-for-sale under AASB 139. Debt instruments at FVOCI are subsequently measured at fair value with gains and losses arising from changes in fair value recognised in other comprehensive income. Interest income and foreign exchange gains and losses are recognised in profit or loss in the Income Statement. On derecognition, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the Income Statement. AASB 9 requires equity financial assets to be classified and measured at FVTPL, but there is an option to make an irrevocable election to designate non-traded equity investments as FVOCI. This election is made on an instrument by instrument basis and the Consolidated Entity has made this election for its equity instruments. Gains or losses cannot be reclassified to profit or loss in the Income Statement, but can be reclassified to retained profits. • Fair value through profit or loss (FVTPL) - Financial assets in this category are those that are held for trading and have been designated by management upon initial recognition or are mandatorily required to be measured at fair value under AASB 9. These instruments largely comprise assets that had previously been classified as financial assets held for trading under AASB 139. Financial liabilities Financial liabilities continue to be measured at amortised cost, except for derivative financial liabilities that are designated at FVTPL. Hedging The new accounting standard requirements allow for broader application of hedge accounting and to align it more closely with risk management. While the new model does not fundamentally change the types of hedging relationships, it simplifies the effectiveness testing by removing the 80 – 125 per cent thresholds. Adoption of the hedge accounting requirements under AASB 9 is currently optional. The Consolidated Entity has elected to continue applying the hedge accounting requirements under AASB 139. Impairment The adoption of AASB 9 has resulted in a change in the Consolidated Entity’s impairment methodology by replacing AASB 139’s incurred loss approach with a forward-looking ECL approach. The impairment requirements have been adopted from 1 September 2018 and an allowance for ECL has been recorded for all loans, advances and debt financial assets not held at FVTPL. Equity instruments are not subject to impairment under AASB 9. Refer to Note 3.3 for further information on the ECL methodology and the reconciliation of ECL on transition to AASB 9 on 1 September 2018. Transition As permitted by AASB 9, the Consolidated Entity has not restated its comparative financial statements and has recorded a transition adjustment to its opening Balance Sheet, retained profits and OCI at 1 September 2018 for the impact of the adoption of AASB 9’s classification and measurement and impairment accounting requirements. The following table summarises the impact on classification and measurement to the Consolidated Entity’s financial assets on 1 September 2018. There are no changes in the classification and measurement of financial liabilities of the Consolidated Entity. 101 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS1.5 IMPLEMENTATION OF NEW AUSTRALIAN ACCOUNTING STANDARDS (CONTINUED) Consolidated As at 31 August 2018 As at 1 September 2018 AASB 139 measurement category AASB 9 measurement category Carrying amount under AASB 139 Carrying amount under AASB 9 (1) (2) Cash and cash equivalents Loans and receivables Amortised cost Due from other financial institutions Loans and receivables Amortised cost Derivative financial assets (trading derivatives) Derivative financial assets (hedging derivatives) FVTPL FVTPL Hedging derivatives Hedging derivatives Financial assets held for trading FVTPL Financial assets available-for-sale (debt instruments) Financial assets available-for-sale (equity instruments) Available-for-sale FVTPL FVOCI (3) Available-for-sale FVOCI option (4) Loans and advances (5) Loans and receivables Amortised cost Other assets Loans and receivables Amortised cost $m 1,212 6 25 110 1,385 3,943 3 45,078 169 $m 1,212 256 25 110 1,385 3,693 7 45,068 169 (1) The carrying amount does not reflect AASB 15 changes. (2) The impact on the Bank is not materially different from the impact on the Consolidated Entity, except for the REDS EHP Securitisation notes held by the Bank. $30 million (3) of opening balance financial assets available-for-sale relating to the REDS EHP Securitisation notes were reclassified to debt instruments at amortised cost on transition to AASB 9. There was no re-measurement impact associated with this reclassification. As of 1 September 2018, the Consolidated Entity has assessed its liquidity portfolio which had previously been classified as financial assets available-for-sale (debt instruments). The Consolidated Entity concluded that these instruments are managed within a business model of collecting contractual cash flows and selling the financial assets. Accordingly, the Consolidated Entity has classified these investments as debt instruments measured at FVOCI. (4) The Consolidated Entity has elected the option to irrevocably designate some of its previous financial assets available-for-sale (equity instruments) as equity instruments at FVOCI with no subsequent recycling of realised gains or losses permitted. (5) As part of transition to AASB 9, all products offered by the Group were reviewed to determine if they are loans within the scope of AASB 9 or finance leases within the scope of AASB 117. The current year finance lease receivables disclosure in Note 3.3 has been updated to reflect finance lease receivables within the scope of AASB 117. Refer to Transition impacts of adopting AASB 9 and AASB 15 for the Consolidated Entity’s quantitative impact arising from the adoption of AASB 9 and AASB 15 on 1 September 2018. 102 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS• Trail commissions: Trail commission income on distribution of general insurance products that was previously recognised by the Consolidated Entity over time, is now recognised at a point in time when the Consolidated Entity’s performance obligation in respect of this income is considered to be met. This has resulted in the Consolidated Entity recognising the net present value of expected future trail commission income on sale of these products. The receivable in respect of the Consolidated Entity’s entitlement to future payments of trail commission is recognised in “Other assets”. The amount of trail commission revenue is dependent on assumptions about the behavioural life of the underlying transaction generating the commission. Trail commission income is only recognised to the extent it is highly probable it will not reverse in future periods. Refer to Transition impacts of adopting AASB 9 and AASB 15 on the next page for the Consolidated Entity’s quantitative impact arising from the adoption of AASB 9 and AASB 15 on 1 September 2018. 1.5 IMPLEMENTATION OF NEW AUSTRALIAN ACCOUNTING STANDARDS (CONTINUED) AASB 15 Revenue from Contracts with Customers (AASB 15) AASB 15 was adopted by the Consolidated Entity on 1 September 2018, replacing the previous guidance under AASB 118 Revenue, AASB 111 Construction Contracts and related interpretations. Revenue arising from items such as financial instruments, insurance contracts and leases is outside the scope of AASB 15 and continues to be accounted for in accordance with the relevant applicable standard. AASB 15 establishes a five step revenue recognition and measurement model to account for revenue arising from contracts with customers. The five steps of the revenue model include: 1. Identification of the contract with a customer; 2. Identification of the separate performance obligations in the contract; 3. Determination of the transaction price under the contract; 4. 5. Allocation of the transaction price to each performance obligation identified in Step 2; and Recognition of revenue when a performance obligation is satisfied. Where there is variable consideration in calculating a transaction price, revenue will only be recognised if it is highly probable that a significant revenue reversal will not occur in future periods. Transition The Consolidated Entity has applied the modified retrospective transition approach in adopting AASB 15 which recognises the cumulative effect of initial application through adjustment to opening retained profits as at 1 September 2018, with no restatement of comparatives. Under this transition method, the Consolidated Entity applied AASB 15 retrospectively only to contracts that are not completed contracts at the date of initial application of 1 September 2018. The significant changes to the Consolidated Entity as a result of adopting AASB 15 are: • Annual and upfront fees: Annual fees in relation to housing and business lending packages, as well as annual fees on credit card products, are no longer recognised upfront but over the annual period in line with the performance obligation delivered to the customers. Annual fees will be deferred on the Balance Sheet in “Accounts payable and other liabilities” when received and recognised in “Customer fees and charges” on a straight- line basis throughout the year. Similarly, certain upfront fees in relation to loan contracts are no longer recognised upfront but when the performance obligation to the customers is delivered, which is over the life of these contracts. 103 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTSs t n e m t s u d a e h T j . i s t i f o r p d e n a t e r s y t i t n E d e t a d ’ i l o s n o C e h t o t n o i l l i m 3 1 $ f o e s a e r c e d a s a w s e g n a h c e h t f o t c a p m i l l a r e v o e h T . 8 1 0 2 r e b m e t p e S 1 t a s a s e v r e s e r d n a s t i f o r p d e n a t e r i ’ i g n n e p o s y t i t n E d e t a d i l o s n o C e h t i i t s n a g a d e s n g o c e r n e e b e v a h s t n e m t s u d a e h T j . i 5 1 B S A A d n a 9 B S A A f o n o i t p o d a n o g n s i r a s t n e m t s u d a e h t s e s i r a m m u s e b a t g n w o j i l l l o f e h T l l g n i t a e r e a s - r o f - e b a l l i a v a s t e s s a l l i a c n a n i f e c n a a b g n n e p o f o n o i i l l i m 0 3 $ . l k n a B e h t y b d e h s e t o n n o i t a s i t i r u c e S P H E S D E R e h t r o f t p e c x e , k n a B e h t r o f y l l a i r e t a m r e f f i d t o n o d w o e b l i s h t h t i w d e t a c o s s a t c a p m i i t n e m e r u s a e m - e r o n s a w e r e h T . 9 B S A A o t n o i t i s n a r t n o t s o c d e s i t r o m a t a s t n e m u r t s n i l t b e d o t d e i f i s s a c e r e r e w s e t o n n o i t a s i t i r u c e S P H E S D E R e h t o t r e b m e t p e S 1 t a t n u o m a g n y r r a C i d n a l a u n n A s t n e m e r u s a e m e R t a s t n e m u r t s n i s t e s s a l i a c n a n i f f o s t e s s a l i a c n a n i f f o t n u o m a g n y r r a C i y t i u q e n i s t n e m e r u s a e m e R n o i t a c i f i s s a c e R l n o i t a c i f i s s a c e R l s e g n a h c 5 1 B S A A 9 B S A A t n e m r i a p m I t n e m e r u s a e M d n a n o i t a c l i f i s s a C 9 B S A A m $ 8 1 0 2 - 6 5 2 5 8 3 , 1 3 9 6 3 , 7 - 4 6 0 5 4 , 1 7 1 0 5 1 5 3 , 2 7 7 9 2 5 , 7 6 3 4 6 7 8 4 , 1 3 1 , 9 4 6 4 8 3 , 1 4 7 8 3 8 1 4 3 , 6 4 8 3 , - - - - - - - 2 - - 2 - - - 2 - - 2 2 - - - - - - ) 4 ( - 3 - ) 1 ( 7 - 7 ) 8 ( - - ) 8 ( ) 8 ( - - - - - - ) 0 1 ( - 3 - ) 7 ( - - - ) 7 ( - - ) 7 ( ) 7 ( - - - - 4 - - - ) 1 ( - 3 - - - 3 - 3 - 3 m $ m $ m $ n o i s i m m o c l i a r T s e e f t n o r f p u L C E n i m $ ) 1 ( I C O V F m $ 0 5 2 - - 3 3 9 6 3 , ) 6 4 9 3 ( , - - - - - - - - - - - - - m $ - 5 8 3 , 1 ) 5 8 3 , 1 ( - - - - - - - - - - - - - - - - m $ 6 - - - 5 8 3 , 1 9 6 1 5 4 6 4 9 3 , 8 7 0 5 4 , 1 5 3 2 , 0 8 9 2 5 , 0 6 3 4 6 7 8 4 , 4 2 1 , 9 4 6 5 8 3 , 8 1 4 3 , 8 3 0 0 4 6 5 8 3 , l e a s - r o f - e b a l l i a v a i g n d a r t r o f d e h l 8 1 0 2 t s u g u A 1 3 t a s n o i t u t i t s n i l i a c n a n i f r e h t o m o r f e u D S T E S S A . n o i t a c i f i s s a c e r l d e t a d i l o s n o C i g n d a r t l r o f d e h s t e s s a l L P T V F t a s t e s s a l i a c n a n F i i a c n a n F i I C O V F t a s t n e m u r t s n i t b e D I C O V F t a s t n e m u r t s n i y t i u q E l e a s - r o f - e b a l l i a v a s t e s s a l i a c n a n F i s t e s s a l i a c n a n i f - n o n d n a l i a c n a n i f r e h t O s t e s s a l a t o T S E I T I L I B A I L s e i t i l i b a i l l i a c n a n i f - n o n d n a l i a c n a n i f r e h t O s e i t i l i b a i l l r e h t o d n a e b a y a p s t n u o c c A s e c n a v d a d n a s n a o L s t e s s a x a t d e r r e f e D s t e s s a r e h t O s e i t i l i b a i l l a t o T s t e s s a t e N Y T I U Q E l a t i p a c d e u s s I s e v r e s e R s t i f o r p d e n a t e R i y t i u q e l a t o T . 9 3 1 B S A A r e d n u t s o c t a d e s n g o c e r y i l i s u o v e r p s t n e m u r t s n i y t i u q e f o e u a v r i a f n l i e s a e r c n I ) 1 ( ) I D E U N T N O C ( I I S D R A D N A T S G N T N U O C C A N A L A R T S U A W E N F O N O T A T N E M E L P M I I 5 . 1 104 5 1 B S A A d n a 9 B S A A g n i t p o d a f o s t c a p m i n o i t i s n a r T Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS NOTE 2. FINANCIAL PERFORMANCE 2.1 OPERATING INCOME Consolidated Bank INTEREST INCOME Effective interest income Other: 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 Customer fees and charges (1) Share of fee revenue paid to Owner Managed branches Commissions Foreign exchange income – customer based Net profit / (loss) on sale of property, plant and equipment Net income / (loss) from financial instruments and derivatives at fair value Securitisation income Dividend income Management fee – controlled entities Other income Total income from operating activities INCOME FROM INSURANCE ACTIVITIES Premiums from insurance contracts Investment revenue Claims and policyholder liability expense from insurance contracts Net insurance operating income Total operating income (1) Customer charges on lending, banking and leasing products. 2019 $m 1,913 145 2,058 (576) (521) (1,097) 961 72 (7) 36 12 5 2 - - - 6 126 55 2 (48) 9 1,096 2018 $m 1,927 142 2,069 (578) (526) (1,104) 965 85 (7) 34 12 7 (4) - - - 10 137 66 2 (49) 19 1,121 2019 $m 1,884 165 2,049 (575) (744) (1,319) 730 73 (7) 13 12 (1) 1 95 12 26 3 227 - - - - 2018 $m 1,760 289 2,049 (580) (731) (1,311) 738 110 (7) 14 12 - (4) 56 22 23 2 228 - - - - 957 966 Interest income and expense 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. Interest income on finance lease receivables is recognised progressively over the life of the lease, reflecting a constant periodic rate of return on the net investment. Other operating income Other operating income and expenses that are considered an integral part of the effective interest rate on a financial instrument are included in the measurement of the effective interest rate. Non-yield related application and activation lending fee revenue is recognised over the contract period in line with the performance obligation delivered to the customers. Customer service fees that represent the recoupment of the costs of providing the service are recognised on an accrual basis when the service is provided. Commissions are recognised as income when performance obligations in respect of those commissions have been satisfied. Dividends are recognised when control of a right to receive consideration is established. 105 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS2.2 EXPENSES OPERATING EXPENSES Advertising Commissions to Owner Managed Branches Communications and postage Printing and stationery Processing costs Other ADMINISTRATIVE EXPENSES Professional fees Directors fees Other IT EXPENSES Data processing Amortisation – computer software 4.1 Depreciation – IT equipment OCCUPANCY EXPENSES Lease rentals Depreciation – plant, furniture, equipment and leasehold improvements Other EMPLOYEE EXPENSES Salaries, wages and superannuation contributions Payroll tax Equity settled transactions Other OTHER Amortisation – acquired intangibles 4.1 Total expenses Consolidated Bank Note 2019 $m 2018 $m 2019 $m 15 5 18 3 15 60 (1) 116 20 2 12 34 80 38 1 119 27 10 3 40 224 12 7 9 252 5 566 2018 $m 14 5 17 3 15 26 80 27 2 9 38 72 57 1 130 31 9 3 43 219 12 8 9 248 6 545 26 5 19 3 15 36 104 23 2 7 32 85 41 1 127 30 10 4 44 244 13 8 10 275 5 587 22 5 17 3 15 24 86 30 2 5 37 77 60 1 138 32 9 4 45 240 13 10 10 273 8 587 (1) Other operating expenses include impairment of the intercompany loan from the Bank to St Andrew’s Australia Services Pty Ltd of $24 million. 106 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS2.3 INCOME TAX EXPENSE AND DEFERRED TAX Income tax expense The major components of income tax expense along with a reconciliation between pre-tax profit and tax expense are detailed below: Consolidated Bank 2019 $m 2018 $m 2019 $m 2018 $m CURRENT TAX EXPENSE Current year Adjustments for prior years DEFERRED TAX EXPENSE Origination and reversal of temporary differences Total income tax expense DEFERRED TAX RECOGNISED IN EQUITY Cash flow hedge reserve Retained profits (1) Other NUMERICAL RECONCILIATIONS BETWEEN TAX EXPENSE AND PRE-TAX PROFIT Profit before tax Income tax using the domestic corporate tax rate of 30% (2018: 30%) Increase in income tax expense due to: Non-deductible expenses Decrease in income tax expense due to: Non-assessable income Other (2) Income tax expense on pre-tax net profit 139 1 140 (3) 137 (25) (6) (6) (37) 435 131 7 - (1) 137 147 (1) 146 11 157 1 - (3) (2) 493 148 9 - - 157 106 1 107 2 109 (23) (6) (6) (35) 354 106 7 - (4) 109 113 (1) 112 9 121 1 - (3) (2) 398 119 9 - (7) 121 (1) The August 2019 financial results reflect the adoption of AASB 9 and AASB 15 on 1 September 2018. The carrying amounts of assets and liabilities impacted by the adoption were adjusted through opening retained profits and reserves on 1 September 2018 as if the Consolidated Entity and the Bank had always applied the new requirements. As permitted by AASB 9 and AASB 15, the Consolidated Entity and the Bank have not restated previously reported financial periods. Refer to Note 1.5 for the impact from the initial adoption of AASB 9 and AASB 15. (2) In the Bank, this includes the impact of dividends received from subsidiary members in the tax consolidated group which are eliminated at a group level, and the dilutionary impact to prima-facie tax expense relating to franking credits on external dividends received on investments. 107 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS2.3 INCOME TAX EXPENSE AND DEFERRED TAX (CONTINUED) Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: CONSOLIDATED Accruals Capitalised expenditure Provisions for impairment Other provisions Equity reserves Leasing Other Total tax assets / (liabilities) (1) BANK Accruals Capitalised expenditure Provisions for impairment Other provisions Equity reserves Leasing Other Total tax assets / (liabilities) Assets Liabilities Net 2019 $m 2018 $m 3 - 70 15 37 - 7 132 2 - 49 13 33 - 7 104 3 - 60 16 6 - 7 92 1 - 46 16 4 - 7 74 2019 $m - (6) - - - (36) (5) (47) - (2) - - - (19) (4) (25) 2018 $m - (8) - - - (34) (5) (47) - (5) - - - (21) (2) (28) 2019 $m 3 (6) 70 15 37 (36) 2 85 2 (2) 49 13 33 (19) 3 79 2018 $m 3 (8) 60 16 6 (34) 2 45 1 (5) 46 16 4 (21) 5 46 (1) The St Andrew’s Group was classified as held for sale as at 31 August 2018 but has ceased to be held for sale as at 31 August 2019. Net deferred tax assets of $1 million were classified as held for sale and excluded in the above table as at 31 August 2018. Refer to Note 6.5(d) for presentation of the comparatives. 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 (1) Gross capital gains tax losses (1) Income tax losses are subject to utilisation over an expected 10-15 year period. 2019 $m 25 51 2018 $m 26 51 108 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS2.3 INCOME TAX EXPENSE AND DEFERRED TAX (CONTINUED) Accounting for income tax 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. 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 are 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 Agreement (TFA) amounts. 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 TFA which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The TFA 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 TFA 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. 109 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS2.4 DIVIDENDS ORDINARY SHARES Special 2017 dividend paid 23 November 2017 Final 2018 dividend paid 14 November 2018 (2017: 23 November 2017) Interim 2019 dividend paid 22 May 2019 (2018: 17 May 2018) CONVERTIBLE PREFERENCE SHARES (CPS) Second half 2017 CPS dividend paid on 16 October 2017 Pro-rata CPS dividend paid on 28 December 2017 Final 2018 CPS dividend paid on 16 April 2018 (1) 2019 Cents per share - 38 34 - - - Bank $m - 151 137 288 - - - - 2018 Cents per share 8 38 38 245 98 244 $m 31 149 149 329 7 2 3 12 (1) In accordance with the ASX announcement dated 5 March 2018, BOQ confirmed the redemption of all outstanding CPS on the optional conversion/redemption date of 16 April 2018 with the redemption price of $102.44 per CPS, comprising the face value of $100 per CPS and a final dividend of $2.44 per CPS for the period from (and including) 16 October 2017 to (but excluding) the redemption date of 16 April 2018. The ASX announcement on 16 April 2018 confirmed the removal of CPS from official quotation at close of trading on 16 April 2018. All dividends paid on ordinary and preference shares have been fully franked. Since the end of the financial year, the Directors have determined the following dividends: Final ordinary share dividend Cents per share 31 $m 126 The final dividend payment will be fully franked and paid on 27 November 2019 to owners of ordinary shares at the close of business on 7 November 2019 (record date). Shares will be quoted ex-dividend on 6 November 2019. 30% franking credits available to shareholders of the Bank for subsequent financial years Bank 2019 $m 177 2018 $m 172 The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The profits accumulated in the profit reserve are available for dividend payments in future years. All franked dividends paid or declared by the Bank since the end of the previous financial year were franked at the tax rate of 30 per cent. The balance of the Bank’s 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 proposed dividends relating to the year ended 31 August 2019, is $120 million calculated at the 30 per cent tax rate (2018: $105 million). 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 The dividend reinvestment plan (DRP) provides ordinary shareholders with the opportunity to reinvest all or part of their entitlement to a dividend into new ordinary shares. The price for shares issued or transferred under the DRP is an amount 1.5 per cent (2018: 1.5 per cent) less than 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 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 DRP will be fully-paid and rank equally in all respects with existing shares. The calculation of the daily volume weighted average price shall not include certain transactions, as outlined in the DRP terms and conditions. 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 2019 final dividend is 8 November 2019. 110 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS2.5 OPERATING SEGMENTS Segment information The Consolidated Entity determines and presents operating segments based on the information that is provided internally to the Managing Director & CEO, the Bank’s chief operating decision maker. An operating segment is a component of the Consolidated Entity 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 Consolidated Entity’s other components. All operating segments’ operating results are regularly reviewed by the Consolidated Entity’s Managing Director & CEO 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 & CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The Consolidated Entity’s operating segments comprise the following: Retail Banking - retail banking solutions to customers managed through our Owner Managed and Corporate branch network, third party intermediaries’ and Virgin Money distribution channels; BOQ Business - includes the BOQ branded commercial lending activity, BOQ Finance and BOQ Specialist businesses. The division provides tailored business banking solutions including commercial lending, equipment finance and leasing, Cashflow finance, foreign exchange, interest rate hedging, transaction banking and deposit solutions for commercial customers; and Other - Treasury, St Andrew’s Insurance and Group Head Office. 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, reflecting the Bank’s external cost of funds, in a manner similar to transactions with third parties. Major customers No revenue from transactions with a single external customer or counter party amounted to 10 per cent or more of the Consolidated Entity’s total revenue in 2019 or 2018. Geographic information While the Consolidated Entity does have some operations in New Zealand, the business segments operate principally in Australia. Goodwill For goodwill allocation between segments, refer to Note 4.1. Presentation The following table presents income, profit and certain asset and liability information regarding the Consolidated Entity’s operating segments. Inter-segment revenue and expenses and transfer pricing adjustments are reflected in the performance of each operating segment. All inter-segment profits are eliminated on consolidation. 111 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS2.5 OPERATING SEGMENTS (CONTINUED) INCOME Net interest income (1) Non interest income Total income Operating expenses Underlying profit / (loss) Loan impairment expense Cash profit / (loss) before tax Income tax expense Segment cash profit / (loss) after tax (2) Statutory basis adjustments: Amortisation of acquisition of fair value adjustments Hedge ineffectiveness Integration / transaction costs Regulatory / compliance Software changes (3) Legacy items Statutory net profit / (loss) after tax INCLUDED IN THE RESULTS: Depreciation and amortisation Loan impairment expense Segment assets Segment liabilities Retail Banking BOQ Business Other Segment Total 2019 $m 432 63 495 (287) 208 (14) 194 (61) 133 - - - - - - 133 (34) (14) 2018 $m 458 67 525 (281) 244 (15) 229 (72) 157 - - - - (7) - 150 (49) (15) 2019 $m 2018 $m 2019 $m 2018 $m 2019 $m 527 50 577 514 59 573 (242) (228) 335 (60) 275 (86) 189 - - - - - - 189 (17) (60) 345 (26) 319 (100) 219 - - - - (4) - 215 (26) (26) 2 15 17 (21) (4) - (4) 2 (2) (6) (8) (1) (6) - (1) (24) (1) - (7) 19 12 (18) (6) - (6) 2 (4) (7) (3) (1) (9) - (5) (29) (2) - 961 128 1,089 (550) 539 (74) 465 (145) 320 (6) (8) (1) (6) - (1) 298 (52) (74) 2018 $m 965 145 1,110 (527) 583 (41) 542 (170) 372 (7) (3) (1) (9) (11) (5) 336 (77) (41) 25,820 15,779 25,826 15,226 22,329 8,410 20,588 8,105 7,448 27,549 6,566 25,793 55,597 51,738 52,980 49,124 (1) Interest income and interest expenses are disclosed in this note on a net interest income basis. This is in line with the information provided internally to the Managing Director & CEO. (2) This excludes a number of items that introduce volatility and / or one-off distortions of the Group’s performance. (3) Software changes include a non-recurring adjustment due to a prior year reassessment of the useful lives of existing assets relative to the Bank’s investment roadmap and a change to the capitalisation policy. 112 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS2.6 EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing the relevant earnings attributable to ordinary shareholders 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. EARNINGS RECONCILIATION Profit for the year Basic earnings Effect of CPS Effect of wholesale capital notes Effect of capital notes Diluted earnings Consolidated 2019 $m 298 298 - 7 14 319 2018 $m 336 336 7 7 9 359 Weighted average number of shares used as the denominator 2019 Number 2018 Number 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 wholesale capital notes Effect of capital notes EARNINGS PER SHARE Basic earnings per share - Ordinary shares (cents) Diluted earnings per share - Ordinary shares (cents) 401,554,707 393,417,739 401,554,707 393,417,739 1,454,170 1,523,277 - 12,129,338 17,020,105 13,750,181 39,350,887 21,408,589 459,379,869 442,229,124 74.2 69.2 85.5 81.2 113 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTSNOTE 3. CAPITAL AND BALANCE SHEET MANAGEMENT 3.1 CASH AND CASH EQUIVALENTS Components of cash and cash equivalents Cash and cash equivalents 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 and withdrawals from deposit accounts; and • Loan drawdowns and repayments. Consolidated Bank Notes, coins and cash at bank Remittances in transit Reverse repurchase agreements maturing in less than three months Cash and cash equivalents as presented in the Balance Sheets Cash and cash equivalents included in assets held for sale (1) Total 2019 $m 1,051 223 - 1,274 - 1,274 2018 $m 815 297 100 1,212 6 1,218 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 298 336 Add / (less) non-cash items or items classified as investing / financing: Depreciation Amortisation Software amortisation and impairment (Profit) / loss on sale of property, plant and equipment Impairment of intercompany loan (2) Equity settled transactions Dividends received from controlled entities Add / (less) changes in operating assets and liabilities: (Increase) / decrease in due from other financial institutions (Increase) / decrease in financial assets (Increase) in loans and advances Increase / (decrease) in provision for impairment Decrease in derivatives Decrease in deferred tax asset Decrease in amounts due to / from controlled entities (Increase) / decrease in other assets (Increase) in current tax assets Increase / (decrease) in due to other financial institutions Increase in deposits Increase / (decrease) in accounts payable and other liabilities (Decrease) in current tax liabilities Increase / (decrease) in provisions Increase / (decrease) in deferred tax liabilities (Decrease) in insurance policy liabilities 11 5 45 1 - 8 - (656) (608) (943) 22 19 - - 16 (7) (30) 314 39 (5) (5) (2) (1) Net cash (inflow) / outflow from operating activities (1,479) 11 6 62 (1) - 10 - 6 443 (1,461) (26) 35 9 - 41 - 54 824 (29) (1) 3 1 (6) 317 2019 $m 463 222 - 685 - 685 245 11 5 42 1 24 7 (12) (662) (608) (223) - 18 6 455 (601) (8) (30) 252 5 (5) (4) (4) - (1,086) 2018 $m 443 297 100 840 - 840 277 11 5 59 - - 8 (22) 2 506 (1,195) (28) 26 9 322 (426) - 54 740 (27) (1) (2) (3) - 315 (1) The St Andrew’s Group was classified as held for sale as at 31 August 2018 but has ceased to be held for sale as at 31 August 2019. Refer to Note 6.5(d) for presentation of the comparatives. (2) This includes the impairment of the intercompany loan from the Bank to St Andrew’s Australia Services Pty Ltd of $24 million. 114 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.2 FINANCIAL ASSETS AND LIABILITIES Financial instruments measured at amortised cost Financial assets that are held to collect the contractual cash flows and that contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest, are measured at amortised cost. In addition, most financial liabilities are measured at amortised cost. Financial assets or financial liabilities are initially recognised at fair value, inclusive of any directly attributable costs. They are subsequently measured at each reporting date at amortised cost using the effective interest method. Included in this category is loans and advances at amortised cost included in Loans and advances – refer to Note 3.3 for further information. The Bank invests in debt securities at amortised cost that are issued by 100 per cent owned securitisation vehicles within the Consolidated Group. During the year, the Bank reviewed the treatment of the securitisation notes issued under the REDS Securitisation and Impala Securitisation programs and purchased by the Bank. The programs’ underlying pool of financial instruments are recorded within the Bank’s Loans and advances. In prior years, the balances relating to these internally held securitisation notes were netted off within the financial statements. The balances are now disclosed separately within financial assets and the associated liability on the Bank’s Balance Sheet. For comparison purposes, the prior year balances have been reclassified throughout the Bank’s 2019 financial statements. There is no effect on net assets or total comprehensive income at 31 August 2018. There is no change to the Consolidated Entity Balance Sheet. Also included in this category are loans and advances at amortised cost (refer to Note 3.3 Loans and advances) and receivables due from other financial institutions recognised and measured at amortised cost. For financial liabilities at amortised cost: refer to Note 3.4 for further information on Deposits and Note 3.5 for further information on Borrowings. Financial assets measured at fair value through other comprehensive income (FVOCI) Financial assets held in a business model that is achieved by both collecting and selling contractual cash flows that contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at FVOCI. Gains or losses arising from changes in the fair value of these financial instruments are recognised in other comprehensive income. Interest income and foreign exchange gains and losses are recognised in profit or loss in the Income Statement, as are cumulative gains or losses previously recognised in other comprehensive income upon derecognition of the financial instruments. Equity instruments that are not held for trading are measured at FVOCI, where an irrevocable election has been made by management. Amounts presented in other comprehensive income are not subsequently transferred to profit or loss, but can be reclassified to retained profits. Dividends on such investments are recognised in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Financial instruments at fair value through profit or loss (FVTPL) Financial assets that do not meet the criteria to be measured at amortised cost or FVOCI are measured at FVTPL, with all changes in fair value recognised in the Income Statement. Financial assets in this category are those that are held for trading and have been designated by management upon initial recognition or are mandatorily required to be measured at fair value under AASB 9. Where a financial liability is designated at fair value through profit or loss, the movement in fair value are recognised in profit or loss in the Income Statement. Modification of financial instruments A financial instrument is modified when its original contractual cash flows are modified. A financial instrument that is modified is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms or if the existing terms of the financial instrument are substantially modified. Where the modification results in derecognition of the original financial instrument, a new financial instrument is recorded initially at fair value and the difference is recorded in profit or loss in the Income Statement. When the modification does not result in derecognition, the difference between the financial instrument’s original contractual cash flows and the modified cash flows, discounted at the original effective interest rate, are recognised as a gain or loss in the Income Statement. Reclassification of financial instruments The Consolidated Entity reclassifies financial assets when, and only when, it changes its business model for managing those assets. Reclassified financial assets are subsequently measured based on the new measurement category. The Consolidated Entity does not reclassify financial liabilities. Derecognition of financial instruments Financial assets are derecognised when, and only when, the contractual rights to receive cash flows from the assets have expired, or where the Consolidated Entity has transferred its contractual rights to receive the cash flows of the financial assets or 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. 115 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.2 FINANCIAL ASSETS AND LIABILITIES (CONTINUED) Financial assets recognised and measured at fair value are listed below. For other financial assets and liabilities refer to Note 3.1 for Cash and cash equivalents, Note 3.3 for Loans and advances, Note 3.4 for Deposits, Note 3.5 for Borrowings and Note 3.8 for Derivative financial instruments and hedge accounting. Consolidated Bank Derivative financial assets Current Non-current Total derivative financial assets Financial assets at FVTPL Floating rate notes and bonds Negotiable certificates of deposit Reverse repurchase agreements Total financial assets at FVTPL Current Financial assets held for trading Floating rate notes and bonds Negotiable certificates of deposit Total held for trading Current Financial assets at FVOCI Debt instruments Equity instruments Total financial assets at FVOCI Current Non-current Financial assets available-for-sale Debt instruments Unlisted equity instruments Total available-for-sale Current Non-current Debt instruments at amortised cost (1) Current Non-current 2019 $m 47 182 229 954 619 1,013 2,586 2,586 - - - - 3,569 6 3,575 192 3,383 - - - - - - - - 2018 $m 48 87 135 - - - - - 430 955 1,385 1,385 - - - - - 3,943 3 3,946 817 3,129 2019 $m 47 98 145 954 619 1,013 2,586 2,586 - - - - 3,569 6 3,575 192 3,383 - - - - - - - - 216 5,252 5,468 2018 $m 49 31 80 - - - - - 430 955 1,385 1,385 - - - - - 3,972 3 3,975 846 3,129 187 4,680 4,867 (1) During the year, the Bank reviewed the treatment of the securitisation notes issued under the REDS Securitisation and Impala Securitisation programs and purchased by the Bank. The balances were previously netted off within the Bank’s Balance Sheet, and thus disclosed as nil in the Bank’s 2018 Balance Sheet. The balances are now disclosed separately within financial assets and the associated liability (Amounts due to controlled entities) on the Bank’s Balance Sheet. For comparison purposes, the prior year balances have been reclassified throughout the Bank’s 2019 financial statements. 116 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS 3.3 LOANS AND ADVANCES Loans and advances at amortised cost Loans and advances are originated by the Consolidated Entity and are recognised upon cash being advanced to the borrower. Loans and advances are initially recognised at fair value, plus incremental directly attributable transaction costs. They are subsequently measured at each reporting date at amortised cost using the effective interest method. Finance lease receivables Loans and advances include finance lease receivables. Finance lease receivables, accounted for under AASB 117, are also originated by the Consolidated Entity and are recognised upon cash being advanced to the borrower. Finance leases are those products where substantially all the risks and rewards of the leased asset have been transferred to the lessee. Finance lease receivables are initially recognised at amounts equal to the lower of fair value of the leased asset or the present value of the minimum lease repayments. Subsequently, lease repayments are apportioned between the finance charge and the reduction of the finance lease liability. Consolidated Bank Residential property loans – secured by mortgages Personal loans Overdrafts Commercial loans Credit cards Asset finance and leasing Gross loans and advances Less: Unearned finance lease income Specific provision for impairment Collective provision for impairment Total loans and advances 2019 $m 30,647 223 228 9,816 76 5,332 46,322 (106) (85) (148) 2018 $m 30,506 222 223 9,626 75 5,020 45,672 (393) (86) (115) 2019 $m 30,647 223 228 9,626 76 222 2018 $m 30,506 222 223 9,466 75 263 41,022 40,755 (22) (65) (99) (28) (74) (82) 45,983 45,078 40,836 40,571 (a) Loans and advances - Expected credit losses (ECL) The adoption of AASB 9 from 1 September 2018 has resulted in a change in the Consolidated Entity’s impairment methodology by replacing AASB 139’s incurred loss approach with a forward-looking ECL approach. The ECL allowance is based on the credit losses expected to arise over the next 12 months of the financial asset, unless there has been a significant increase in credit risk (SICR) since origination. In this case, the allowance is based on the ECL for the life of the financial asset. The 12 months ECL is the portion of lifetime ECLs that represent the ECLs that result from default events on a financial asset that are possible within the 12 months after the reporting date. At the end of each reporting period, the Consolidated Entity performs an assessment of whether a financial asset’s credit risk has increased significantly since initial recognition. This is done by considering the change in the risk of default occurring over the remaining life of the financial asset. The Consolidated Entity applies a three stage approach to measuring the ECL, as described below: • • Stage 1 – For financial assets where there has not been a SICR since initial recognition and that are not credit impaired upon origination, the portion of the lifetime ECL associated with the probability of default (PD) occurring within the next 12 months is recognised as the 12 month ECL, adjusted for forward-looking information. Stage 1 includes facilities where the credit risk has improved and the loan has been reclassified from Stage 2 or Stage 3. Stage 2 – When there has been a SICR, the lifetime ECL is determined with reference to the financial asset’s lifetime PD and the lifetime losses associated with that PD, adjusted for forward-looking information. The Consolidated Entity assesses whether there has been a SICR since initial recognition based on qualitative, quantitative, and reasonable and supportable forward-looking information that includes significant management judgement. Use of alternative criteria could result in significant changes to the timing and amount of ECL to be recognised. Lifetime ECL is generally determined based on the behavioural maturity of the financial asset , which is generally less than or equal to the contractual maturity. Stage 2 also includes facilities where the credit risk has improved and the loan has been reclassified from Stage 3. 117 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.3 LOANS AND ADVANCES (CONTINUED) (a) Loans and advances - Expected credit losses (ECL) (continued) • Stage 3 - This includes financial assets that are deemed to be credit impaired, which generally correspond to the APRA definition of default, and include exposures that are at least 90 days past due. The provision is also equivalent to the lifetime ECL. Financial assets in Stage 3 will have a collective provision determined by the ECL model, although some loans are individually covered by a specific provision. A specific provision is calculated based on estimated future cash flows discounted to their present value, net of any collateral held against that financial asset. Transition impact On transition to AASB 9 on 1 September 2018 the Consolidated Entity’s total credit impairment allowances increased by $10 million as a result of the following principle differences between AASB 139’s incurred credit loss requirements and AASB 9’s ECL impairment requirements: • Forward looking information (FLI): AASB 9 requires the calculation of the ECL to include FLI, which incorporates macro-economic information. Previously AASB 139 required the consideration of historical information that was updated to reflect current conditions at the reporting date. • A 12-month minimum ECL requirement (stage 1): AASB 9 requires a 12-month ECL impairment allowance to be held on all exposures, unless the contractual period is shorter. • SICR (stage 2): AASB 9 requires the Consolidated Entity to determine whether there has been a SICR since initial recognition, and in such instances, to classify the exposure as stage 2 and recognise a lifetime expected credit loss. • Off balance sheet exposures: AASB 9’s scope includes certain off balance sheet exposures such as undrawn credit commitments, financial guarantee contracts and letters of credit for which an ECL is required to be recognised. No impairment allowance was specifically required to be recognised under AASB 139. Write-offs Financial assets are written off, either partially or in full, against the related provision when the Consolidated Entity concludes that there is no reasonable expectation of recovery and all possible collateral has been realised. Recoveries of financial assets previously written off are recognised in profit or loss based on the cash received. Significant increase in credit risk SICR for financial assets are assessed by comparing the risk of a default occurring over the expected life of a financial asset at the reporting date compared to the corresponding risk of default at origination. In determining what constitutes a significant increase in credit risk, the Consolidated Entity considers qualitative and quantitative information. For the majority of the Consolidated Entity’s Retail portfolio, a statistical model has been developed to identify where a facility’s recent behaviour has deteriorated significantly from its origination behaviour. For most of the Consolidated Entity’s Commercial portfolio the primary indicator of a significant increase in credit risk is a change in the internal customer risk rating between origination and reporting date. For all loan portfolios, the primary indicator is in addition to the secondary SICR indicator, which is based on 30 days past due arrears information. Calculation of ECL Both 12 months ECLs and lifetime ECLs are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial assets. When calculating the ECL, portfolios of financial assets are grouped as follows: • • Retail lending: Home loans model, Personal loans model and BOQ Specialist model, Commercial lending: Commercial risk rated model and Equipment Finance model. Where ECL is modelled collectively for portfolios of exposures, it is modelled primarily as the product of the PD, the loss given default (LGD) and the exposure at default (EAD). These parameters are generally derived from internally developed statistical models combined with historical, current and forward- looking information, including macro-economic data: • The 12-months and lifetime PD, for accounting purposes, represent the estimation of the point-in-time probability of a default over the next 12 months and remaining lifetime of the financial instrument, respectively, based on conditions existing at the balance sheet date and future economic conditions that affect credit risk; • The EAD represents the expected exposure at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdown of a facility; and • The LGD represents the expected loss conditional on default, taking into account the mitigating effect of collateral, its expected value when realised, and the time value of money. 118 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.3 LOANS AND ADVANCES (CONTINUED) Incorporation of forward-looking information The credit risk factors described above are at a point in time estimates based on the probability weighted forward-looking economic scenarios. The inclusion of a forward-looking component in the model anticipates changes in the economic outlook, which will likely increase the volatility of the provision. The Consolidated Entity considers four forward-looking macro-economic scenarios (boom, recovery, slow down and recession) over time horizons ranging from one year to over four years to ensure a sufficient unbiased representative sample is included in estimating the forward-looking ECL. Sensitivity analysis is also performed on each of the macro- economic scenarios and if conditions warrant, this could result in a management overlay for economic uncertainty which is included in the ECL. The scenarios, including its underlying indicators, are developed using a combination of publicly available data, internal forecasts and third party information to form the initial baseline. The scenarios are refined through consultation with internal specialists and benchmarking to external data from reputable sources, which includes forecasts published from a range of market economists and official data sources, including major central banks. Economic outlook factors that are taken into consideration include, but are not limited to, unemployment, interest rates, gross domestic product, inflation, commercial and residential property price indexes, and require an evaluation of both the current and forecast direction of the macro-economic cycle. Incorporating forward looking information, including macro-economic forecasts, increases the degree of judgement required to assess how changes in these data points will affect ECLs. The methodologies and assumptions, including any forecasts of future economic conditions, are reviewed regularly. Governance The Executive Credit Committee has the delegation for reviewing and approving the methodology, including any judgements and assumptions. The Consolidated Entity holds a semi-annual Economic Forum to discuss and approve future economic forecasts, and the associated probability weights and economic scenarios. Where applicable, management adjustments or overlays may be made to account for situations where known or expected risks and information have not been considered in the modelling process. The Consolidated Entity’s provision for impairment on loans and advances, and key areas of judgement are reported to the Group’s Audit Committee and Board at each reporting period. 119 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.3 LOANS AND ADVANCES (CONTINUED) The following table discloses the reconciliation of the ECL model of the Consolidated Entity for the year ended 31 August 2019. Collective Provision Stage 1 – 12 month ECL $m Stage 2 – Lifetime ECL $m Stage 3 – Lifetime ECL $m Stage 3 – Specific provision $m Specific provision $m Collective provision $m - 69 69 8 (4) (1) 41 (32) - - 81 - 38 38 (7) 4 (5) 29 (15) - - 44 - 18 18 (1) - 3 13 (10) - - 23 - 86 86 - - 3 44 (1) (44) (3) 85 86 (86) - - - - - - - - - 115 (115) - - - - - - - - - Consolidated Balance as at 31 August 2018 Change on adoption of AASB 9 Balance as at 1 September 2018 Transfers during the year to: Stage 1 Stage 2 Stage 3 New/increased provisions Write-back of provisions no longer required Amounts written off, previously provided for Unwind discount Balance as at 31 August 2019 Total $m 201 10 211 - - - 127 (58) (44) (3) 233 The table below discloses the effect of movements in the gross carrying value of loans and advances in the different stages of the ECL model of the Consolidated Entity during the year ended 31 August 2019. Consolidated Stage 1 – 12 month ECL $m Stage 2 – Lifetime ECL $m Stage 3 – Lifetime ECL $m Stage 3 – Specific provision $m Total (1) $m Gross carrying amount as at 1 September 2018 42,337 2,500 274 168 45,279 Transfers during the year to: Stage 1 Stage 2 Stage 3 New loans and advances originated or purchased Loans and advances derecognised during the year including write-offs Balance as at 31 August 2019 Provision for impairment Net carrying amount as at 31 August 2019 636 (1,220) (169) 11,055 (9,406) 43,233 (81) 43,152 (625) 1,236 (128) 72 (630) 2,425 (44) 2,381 (6) (14) 193 6 (102) 351 (23) 328 (5) (2) 104 6 (64) 207 (85) 122 - - - 11,139 (10,202) 46,216 (233) 45,983 (1) The amounts presented above are inclusive of unearned finance lease income. 120 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.3 LOANS AND ADVANCES (CONTINUED) The following table discloses the reconciliation of the new ECL model of the Bank for the year ended 31 August 2019. Collective Provision Stage 1 – 12 month ECL $m Stage 2 – Lifetime ECL $m Stage 3 – Lifetime ECL $m Stage 3 – Specific provision $m Specific provision $m Collective provision $m - 44 44 6 (1) - 14 (16) - - 47 - 31 31 (5) 2 (5) 21 (11) - - 33 - 17 17 - (1) 3 9 (9) - - 19 - 74 74 (1) - 2 28 (7) (28) (3) 65 74 (74) - - - - - - - - - 82 (82) - - - - - - - - - Bank Balance as at 31 August 2018 Change on adoption of AASB 9 Balance as at 1 September 2018 Transfers during the year to: Stage 1 Stage 2 Stage 3 New/increased provisions Write-back of provisions no longer required Amounts written off, previously provided for Unwind discount Balance as at 31 August 2019 Total $m 156 10 166 - - - 72 (43) (28) (3) 164 The table below discloses the effect of movements in the gross carrying value of loans and advances in the different stages of the ECL model of the Bank during the year ended 31 August 2019. Bank Stage 1 – 12 month ECL $m Stage 2 – Lifetime ECL $m Stage 3 – Lifetime ECL $m Stage 3 – Specific provision $m Total (1) $m Gross carrying amount as at 1 September 2018 37,983 2,313 271 160 40,727 Transfers during the year to: Stage 1 Stage 2 Stage 3 New loans and advances originated or purchased Loans and advances derecognised during the year including write-offs Balance as at 31 August 2019 Provision for impairment Net carrying amount as at 31 August 2019 593 (1,052) (147) 8,509 (7,620) 38,266 (47) 38,219 (582) 1,068 (123) 63 (527) 2,212 (33) 2,179 (6) (14) 186 4 (100) 341 (19) 322 (5) (2) 84 1 (57) 181 (65) 116 - - - 8,577 (8,304) 41,000 (164) 40,836 (1) The amounts presented above are inclusive of unearned finance lease income. 121 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.3 LOANS AND ADVANCES (CONTINUED) As stated in Note 1.5, comparatives have not been restated and are shown below. Consolidated Bank 2018 $m 2018 $m Specific provision: Balance at the beginning of the year Add: Expensed during the year Less: Bad debts written off Unwind of discount Balance at the end of the year Collective provision: Balance at the beginning of the year Add: Released during the year Balance at the end of the year Total provisions for impairment 106 44 (61) (3) 86 121 (6) 115 201 (b) Lease receivables Asset finance and leasing include the following finance lease receivables for leases where the Consolidated Entity is the lessor. Consolidated Bank Gross investment in finance lease receivables: Less than one year Between one and five years More than five years Unearned finance lease income Net investment in finance leases The net investment in finance leases: Less than one year Between one and five years More than five years 2019 (1) $m 373 725 61 1,159 (106) 1,053 333 667 53 1,053 2018 $m 1,909 3,015 96 5,020 (393) 4,627 1,740 2,805 82 4,627 2019 $m 24 161 37 222 (22) 200 24 145 31 200 90 31 (44) (3) 74 92 (10) 82 156 2018 $m 23 192 48 263 (28) 235 22 173 40 235 (1) As part of transition to AASB 9, all products offered by the Group were reviewed to determine if they are loans within the scope of AASB 9 or finance leases within the scope of AASB 117. The current year finance lease receivables disclosure has been updated to reflect finance lease receivables within the scope of AASB 117. 122 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.3 LOANS AND ADVANCES (CONTINUED) (c) Transfer of financial assets Securitisation program Through its REDS Securitisation (RMBS Trusts), REDS EHP Securitisation (REDS EHP Trusts) and Impala Securitisation programs, the Consolidated Entity packages loans and advances through a series of securitisation vehicles from which debt securities are issued to investors. The Consolidated Entity is entitled to any residual income from the vehicles after all payments to investors and costs of the programs have been met. The securitised loans and advances are included in Loans and advances and the securitisation liabilities are included in Borrowings on the Bank’s Balance Sheet. The note holders have recourse only to the loan pool of assets. Refer to Note 6.9 (a) (ii) for further information. Covered bond program The Bank issues covered bonds for funding and liquidity purposes. The bonds are issued to external investors and are secured against a pool of the Bank’s housing loans. Housing loans are assigned to a bankruptcy remote structured entity to provide security for all obligations payable on the covered bonds issued by the Bank. The covered bond holders have dual recourse to the Bank and the cover pool of assets. The Bank is required to maintain the cover pool at a level sufficient to cover the obligations of the bonds. The Bank is entitled to any residual income of the covered bond structured entity after all payments due to the covered bond holders and any costs related to the program have been met. The housing loans are included in Loans and advances and the covered bonds issued are included in Borrowings on the Bank’s Balance Sheet. The following table sets out the transferred financial assets and associated liabilities of the securitisation and covered bond programs that did not qualify for derecognition under AASB 9 and typically result in the transferred assets continuing to be recognised in full. TRANSFERRED FINANCIAL ASSETS Securitisation - Loans and advances (1) Covered Bonds - Loans and advances ASSOCIATED FINANCIAL LIABILITIES Securitisation Liabilities - External investors Covered Bonds - External investors Amounts due to controlled entities (1) FOR THOSE LIABILITIES THAT HAVE RECOURSE ONLY TO TRANSFERRED ASSETS (2) Fair value of transferred assets Fair value of associated liabilities Net position Consolidated Bank 2019 $m 4,532 2,776 7,308 4,623 1,652 - 6,275 2018 $m 3,400 1,382 4,782 3,580 806 - 4,386 2019 $m 8,906 2,776 11,682 - 1,652 8,900 10,552 7,341 (6,275) 1,066 4,785 (4,386) 399 11,716 (10,552) 1,164 2018 $m 8,158 1,382 9,540 - 806 8,326 9,132 9,543 (9,132) 411 (1) During the year, the Bank reviewed the treatment of the securitisation notes issued under the REDS Securitisation and Impala Securitisation programs and purchased by the Bank. The balances were previously netted off within the Bank’s Balance Sheet. The balances are now disclosed separately within financial assets and the associated liability on the Bank’s Balance Sheet. For comparison purposes, the prior year balances have been reclassified throughout the Bank’s 2019 financial statements. (2) The fair values of transferred assets and liabilities that reprice within 6 months are assumed to equate to the amortised cost. All other fair values are calculated using a discounted cash flow model. 123 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.4 DEPOSITS Deposits are initially recognised at fair value, net of any directly attributable transaction costs. Subsequent to initial measurement, they are measured at amortised cost using the effective interest method. Deposits at call Term deposits Certificates of deposit Total deposits CONCENTRATION OF DEPOSITS Customer deposits Wholesale deposits Consolidated Bank 2019 $m 16,343 18,061 3,933 38,337 32,428 5,909 38,337 2018 $m 14,786 18,747 4,484 38,017 31,325 6,692 38,017 2019 $m 16,488 18,107 3,933 38,528 32,573 5,955 38,528 2018 $m 14,991 18,791 4,484 38,266 31,530 6,736 38,266 3.5 BORROWINGS Borrowings are initially recognised at fair value, net of any directly attributable transaction costs. Subsequent to initial measurement, they are measured at amortised cost using the effective interest method. The Consolidated Entity recorded the following movements on borrowings: Securitisation liabilities (1) $m Covered bonds liabilities (2) $m EMTN ECP Subordinated unsecured program program $m $m notes $m notes $m Capital Notes (3) $m Total $m Senior YEAR ENDED 31 AUGUST 2019 Balance at beginning of year Proceeds from issues Repayments Deferred establishment costs Amortisation of deferred costs (4) Foreign exchange translation (4) 3,576 2,264 (1,222) (3) 2 - 804 811 - (2) 1 35 Balance at end of the year 4,617 1,649 276 20 (46) - - 13 263 93 - (90) - - (3) - 349 4,486 493 10,077 - - - - - 926 (801) - 2 - - - - 2 - 4,021 (2,159) (5) 7 45 349 4,613 495 11,986 124 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.5 BORROWINGS (CONTINUED) Securitisation liabilities (1) $m Covered bonds liabilities (2) $m EMTN ECP Subordinated unsecured program program $m $m notes $m notes $m Senior CPS and Capital Notes (3) $m Total $m YEAR ENDED 31 AUGUST 2018 Balance at beginning of year Proceeds from issues Repayments Deferred establishment costs Amortisation of deferred costs (4) Foreign exchange translation (4) Balance at end of the year 3,424 1,288 (1,135) (2) 1 - 3,576 749 - - - 1 54 804 172 93 - - - 11 276 321 88 (322) - - 6 93 200 200 (50) (1) - - 4,338 1,459 (1,311) (1) 1 - 447 191 9,651 3,319 (141) (2,959) (7) 3 - (11) 6 71 349 4,486 493 10,077 Securitisation liabilities are secured by a floating charge over securitised assets for amounts owing to note holders and any other secured creditors of the securitisation vehicles. (1) (2) Covered bonds liabilities are secured by a charge over a pool of loans and advances and guaranteed by the covered bond guarantor. (3) Wholesale Capital Notes 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, fully paid and are issued by the Bank on a perpetual and subordinated basis. They are not guaranteed or secured. As at 31 August 2019, 15,000 WCN were outstanding with accrued distributions of $2 million. WCN must convert to ordinary shares on a mandatory conversion date of 26 May 2022 if certain mandatory conversion conditions are satisfied. Upon conversion, WCN holders will receive a number of ordinary shares based on the value weighted average price during a specified period. The WCN must also convert to ordinary shares of the Bank with the occurrence of a non-viability event, a capital trigger event or an acquisition event. BOQ may elect to redeem or resell the WCN on 26 May 2020 or following a regulatory or tax event. These options are subject to APRA’s prior written approval and certain conditions being satisfied. In a winding up of the Bank, if the WCN have not been converted or written off on account of a non-viability trigger event or capital trigger event, the 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. Capital Notes On 28 December 2017, the Bank issued 3,500,000 Capital Notes at a price of $100 per note. Capital Notes are perpetual and convertible notes issued by BOQ, with preferred, discretionary, non-cumulative distributions. They are not guaranteed or secured. As at 31 August 2019, 3,500,000 Capital Notes were outstanding with accrued distributions of $1 million. Capital Notes must convert into ordinary shares on 15 August 2026 if certain mandatory conversion conditions are satisfied, unless they are converted or redeemed earlier. Where the mandatory conversion conditions are satisfied, a holder will receive a number of ordinary shares per Capital Note based on the value weighted average price of ordinary shares during a specified period. The Capital Notes must also convert to ordinary shares of the Bank with the occurrence of a loss absorption event or an acquisition event. BOQ may elect to convert, redeem or resell Capital Notes on 15 August 2024 or following a regulatory or tax event. BOQ may also elect to convert all Capital Notes following a potential acquisition event. These options are subject to APRA’s prior written approval and certain conditions being satisfied. In a winding up of the Bank, Capital Notes will rank for payment of capital ahead of ordinary shares, equally with CPS, WCN and other equal ranking instruments, but behind the claims of all senior ranking creditors, including depositors and unsubordinated and subordinated creditors. CPS On 24 December 2012, the Bank issued 3,000,000 CPS. CPS were fully paid, perpetual and convertible preference shares with preferred, discretionary, non-cumulative dividends. They were not guaranteed or secured. In accordance with the ASX announcement dated 5 March 2018, BOQ confirmed the redemption of all outstanding CPS on the optional conversion/redemption date of 16 April 2018 with the redemption price of $102.44 per CPS, comprising the face value of $100 per CPS and a final dividend of $2.44 per CPS for the period from (and including) 16 October 2017 to (but excluding) the redemption date of 16 April 2018. The ASX announcement on 16 April 2018 confirmed the removal of CPS from official quotation at close of trading on 16 April 2018. (4) Amortisation of deferred costs and foreign exchange translation are non-cash movements. Foreign exchange translation movements are 100 per cent hedged. 125 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS 3.5 BORROWINGS (CONTINUED) The Bank recorded the following movements on borrowings: YEAR ENDED 31 AUGUST 2019 Balance at beginning of year Proceeds from issues Repayments Deferred establishment costs Amortisation of deferred costs (3) Foreign exchange translation (3) Balance at end of the year YEAR ENDED 31 AUGUST 2018 Balance at beginning of year Proceeds from issues Repayments Deferred establishment costs Amortisation of deferred costs (3) Foreign exchange translation (3) Balance at end of the year Covered bonds liabilities(1) $m EMTN program $m ECP program $m Subordinated notes $m Senior unsecured notes $m Capital Notes (2) $m Total $m 806 811 - - - 35 1,652 276 20 (46) - - 13 263 93 - (90) - - (3) - 349 4,486 493 6,503 - - - - - 926 (801) - 2 - - - - 2 - 1,757 (937) - 4 45 349 4,613 495 7,372 Covered bonds liabilities(1) $m EMTN program $m ECP program $m Subordinated notes $m Senior unsecured notes $m CPS and Capital Notes (2) $m 752 - - - - 54 806 172 93 - - - 11 276 321 88 (322) - - 6 93 Total $m 6,230 2,031 (1,824) (9) 4 71 200 200 (50) (1) - - 4,338 1,459 (1,311) (1) 1 - 447 191 (141) (7) 3 - 349 4,486 493 6,503 (1) Covered bonds liabilities are secured by a charge over covered pool of loans and advances and guaranteed by the covered bond guarantor. (2) Wholesale Capital Notes On 26 May 2015, the Bank issued 15,000 WCN at a price of $10,000 per note. WCN are non-cumulative, fully paid and are issued by the Bank on a perpetual and subordinated basis. They are not guaranteed or secured. As at 31 August 2019, 15,000 WCN were outstanding with accrued distributions of $2 million. WCN must convert to ordinary shares on a mandatory conversion date of 26 May 2022 if certain mandatory conversion conditions are satisfied. Upon conversion, WCN holders will receive a number of ordinary shares based on the value weighted average price during a specified period. The WCN must also convert to ordinary shares of the Bank with the occurrence of a non-viability event, a capital trigger event or an acquisition event. BOQ may elect to redeem or resell the WCN on 26 May 2020 or following a regulatory or tax event. These options are subject to APRA’s prior written approval and certain conditions being satisfied. In a winding up of the Bank, if the WCN have not been converted or written off on account of a non-viability trigger event or capital trigger event, the 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. Capital Notes On 28 December 2017, the Bank issued 3,500,000 Capital Notes at a price of $100 per note. Capital Notes are perpetual and convertible notes issued by BOQ, with preferred, discretionary, non-cumulative distributions. They are not guaranteed or secured. As at 31 August 2019, 3,500,000 Capital Notes were outstanding with accrued distributions of $1 million. Capital Notes must convert into ordinary shares on 15 August 2026 if certain mandatory conversion conditions are satisfied, unless they are converted or redeemed earlier. Where the mandatory conversion conditions are satisfied, a holder will receive a number of ordinary shares per Capital Note based on the value weighted average price of ordinary shares during a specified period. The Capital Notes must also convert to ordinary shares of the Bank with the occurrence of a loss absorption event or an acquisition event. BOQ may elect to convert, redeem or resell Capital Notes on 15 August 2024 or following a regulatory or tax event. BOQ may also elect to convert all Capital Notes following a potential acquisition event. These options are subject to APRA’s prior written approval and certain conditions being satisfied. In a winding up of the Bank, Capital Notes will rank for payment of capital ahead of ordinary shares, equally with CPS, WCN and other equal ranking instruments, but behind the claims of all senior ranking creditors, including depositors and unsubordinated and subordinated creditors. CPS On 24 December 2012, the Bank issued 3,000,000 CPS. CPS were fully paid, perpetual and convertible preference shares with preferred, discretionary, non-cumulative dividends. They were not guaranteed or secured. In accordance with the ASX announcement dated 5 March 2018, BOQ confirmed the redemption of all outstanding CPS on the optional conversion/redemption date of 16 April 2018 with the redemption price of $102.44 per CPS, comprising the face value of $100 per CPS and a final dividend of $2.44 per CPS for the period from (and including) 16 October 2017 to (but excluding) the redemption date of 16 April 2018. The ASX announcement on 16 April 2018 confirmed the removal of CPS from official quotation at close of trading on 16 April 2018. (3) Amortisation of deferred costs and foreign exchange translation are non-cash movements. Foreign exchange translation movements are 100 per cent hedged. 126 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS 3.6 RISK MANAGEMENT The Consolidated Entity adopts a “managed risk” approach to its banking and insurance activities in which the articulation of a risk aware culture is prevalent throughout the Consolidated Entity’s credit, market, liquidity, insurance, operational 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 Consolidated Entity’s risk management function. The continued improvement of the Consolidated Entity’s risk management function focuses on a number of key areas, with particular emphasis on: 1. 2. the efficiency and effectiveness of the Consolidated Entity’s credit, market, liquidity, operational risk and compliance management process controls and policies to support the Bank’s customer proposition in line with its risk appetite; providing management and the Board with risk reporting that contributes to the further development of sound corporate governance standards; 3. maintaining regulatory compliance in line with regulators’ expectations; 4. providing a sound basis from which the Bank can progress to the required compliance level under the Basel II accord; and 5. contributing 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 needed 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; and 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 Consolidated Entity. The objective of market risk management is to manage and control market risk and to minimise its impact on the Consolidated Entity. (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 / (decrease) in net interest income for an ensuing 12 month period of a 1 per cent parallel shock increase to the yield curve. Consolidated 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 2019 $m (12) (1) 5 (12) 2018 $m 15 2 15 (8) It is the Bank’s policy not to carry material foreign exchange rate exposures, net of associated hedging instruments. At balance date, there are no net 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. 127 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) (a) Market risk (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. VaR is a statistical technique used to quantify the potential loss in earnings from adverse market movements and is calculated over a 1-day time horizon to a 99 per cent confidence level using 2 years of historical data. As an additional overlay to VaR, the individual market risks of interest rate, foreign exchange, credit and equity are managed using a framework that includes stress testing, scenario analysis, sensitivity analysis and stop losses. Risks are monitored and measured against limits delegated by the Asset-Liability Committee (ALCO) and approved by the Board’s 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 2019 $m 0.19 0.31 0.12 2018 $m 0.21 0.82 0.10 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 counter parties fail to meet contractual payment obligations to the Consolidated Entity as they fall due. The Board 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 the Executive Credit 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 which may include reassessment of the assigned risk grade; an automated scorecard approval model for the Bank’s retail portfolio inclusive of home loans, home equity lines of credit and personal loans. This model is supported by experienced risk assessment managers; and a series of management reports detailing industry concentrations, counter party 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 risk policies, the Consolidated Entity can hold derivative financial instruments for trading purposes. Credit risk on derivative contracts used for these purposes is minimised as counter parties are recognised financial intermediaries with acceptable credit ratings determined by a recognised rating agency. (i) 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 reporting date. 128 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) (i) Maximum exposure to credit risk (continued) The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Consolidated Entity Cash and cash equivalents 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 Total financial assets Customer commitments (2) Total potential exposure to credit risk 2019 2018 (1) Stage 1 $m 1,274 708 6,220 229 8,431 43,339 51,770 1,799 53,569 Stage 2 $m Stage 3 $m - - - - - 2,425 2,425 - 2,425 - - - - - 558 558 - 558 Total $m 1,274 708 6,220 229 8,431 46,322 54,753 1,799 56,552 Total $m 1,212 6 5,395 135 6,748 45,672 52,420 1,753 54,173 (1) As permitted by AASB 9, previously reported financial periods have not been restated. Refer to Note 1.5 for the impact from the initial adoption of AASB 9. (2) Refer to Note 6.2 for details of customer commitments. Bank Cash and cash equivalents 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 Total financial assets Customer commitments (2) Total potential exposure to credit risk 2019 2018 (1) Stage 1 $m 685 668 11,683 145 13,181 38,288 51,469 952 52,421 Stage 2 $m Stage 3 $m - - - - - 2,212 2,212 - 2,212 - - - - - 522 522 - 522 Total $m 685 668 11,683 145 13,181 41,022 54,203 952 55,155 Total $m 840 6 10,287 80 11,213 40,755 51,968 995 52,963 As permitted by AASB 9, previously reported financial periods have not been restated. Refer to Note 1.5 for the impact from the initial adoption of AASB 9. (1) (2) Refer to Note 6.2 for details of customer commitments. 129 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) (i) Maximum exposure to credit risk (continued) The distribution of financial assets by credit quality at the reporting date was: Consolidated Neither past due or impaired Gross loans and advances Financial assets other than loans and advances Past due but not impaired Gross loans and advances Impaired Gross loans and advances Total financial assets 2019 $m 45,061 43,142 1,828 91 8,431 8,431 - - 1,064 197 597 270 197 - - 197 54,753 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 2018 (1) $m 44,653 - - - 6,748 - - - 855 - - - 164 - - - Bank 2019 $m 39,934 38,175 1,670 89 13,181 13,181 - - 917 113 542 262 171 - - 171 2018 (1) $m 39,851 - - - 11,213 - - - 756 - - - 148 - - - 52,420 54,203 51,968 (1) As permitted by AASB 9, previously reported financial periods have not been restated. Refer to Note 1.5 for the impact from the initial adoption of AASB 9. There is no individual exposure included in impaired assets which exceeds 5% of shareholders’ equity (2018: 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 collateral 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 where it is a requirement of a scheduled review or 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. Held against past due but not impaired assets Held against impaired assets Consolidated Bank 2019 $m 1,921 192 1,073 656 146 - - 146 2018 (1) $m 1,397 - - - 105 - - - 2019 $m 1,775 113 1,015 647 133 - - 133 2018 (1) $m 1,335 - - - 98 - - - Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 (1) As permitted by AASB 9, previously reported financial years have not been restated. Refer to Note 1.5 for the impact from the initial adoption of AASB 9. 130 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) (ii) Credit quality The credit quality categories of financial assets have been determined based on Standard & Poor’s credit ratings, APRA risk weightings and the Bank’s standard risk grading. The categories are classified as below: • High grade - generally corresponds to Standard & Poor’s credit ratings AAA+ to BBB-. • Satisfactory - generally corresponds to Standard & Poor’s credit rating BB+ to B. • Weak - generally corresponds to Standard & Poor’s credit ratings up to B. • Unrated - Loans and advances which have been classified as unrated are not secured, however these are not deemed to be weak. The table below presents an analysis of the credit quality of financial assets: Consolidated 2019 $m 2018 (1) $m Gross loans & advances Gross loans & advances Retail Commercial Gross loans & advances Other financial assets Retail Commercial Gross loans & advances Other financial assets High Grade Stage 1 Stage 2 Stage 3 Satisfactory Stage 1 Stage 2 Stage 3 Weak Stage 1 Stage 2 Stage 3 Unrated Stage 1 Stage 2 Stage 3 25,610 24,538 981 91 4,970 4,800 139 31 313 160 43 110 53 53 - - 4,571 4,083 438 50 9,688 8,872 620 196 902 629 200 73 215 203 5 7 30,181 28,621 1,419 141 14,658 13,672 759 227 1,215 789 243 183 268 256 5 7 8,425 8,425 - - - - - - 6 6 - - - - - - 25,294 4,388 29,682 6,745 - - - - - - - - - 5,114 8,967 14,081 - - - - - - - - - 330 1,327 1,657 - - - 65 - - - - - - - - - 187 252 - - - - - - - - - - - - - 3 - - - - - - - 30,946 15,376 46,322 8,431 30,803 14,869 45,672 6,748 (1) As permitted by AASB 9, previously reported financial years have not been restated. Refer to Note 1.5 for the impact from the initial adoption of AASB 9. 131 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) 2019 $m Bank 2018 (1) $m Gross loans & advances Gross loans & advances Retail Commercial 25,610 24,538 981 91 4,970 4,800 139 31 313 160 43 110 53 53 - - 3,865 3,377 438 50 5,853 5,088 571 194 143 58 40 45 215 214 - 1 Gross loans & advances 29,475 27,915 1,419 141 10,823 9,888 710 225 456 218 83 155 268 267 - 1 Other financial assets 12,149 12,149 - - 66 66 - - 6 6 - - 960 960 - - Retail Commercial Gross loans & advances Other financial assets 25,294 3,640 28,934 11,180 - - - - - - - - - 5,114 5,637 10,751 - - - - - - - - - 330 488 818 - - - 65 - - - - - - - - - 187 252 - - - - - - - - - 19 - - - 14 - - - - - - - High Grade Stage 1 Stage 2 Stage 3 Satisfactory Weak Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Unrated Stage 1 Stage 2 Stage 3 30,946 10,076 41,022 13,181 30,803 9,952 40,755 11,213 (1) As permitted by AASB 9, previously reported financial years have not been restated. Refer to Note 1.5 for the impact from the initial adoption of AASB 9. (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. Consolidated Less than 30 days - Retail - Commercial 30 to 89 days - Retail - Commercial 90 days or more - Retail - Commercial Consolidated Bank 2019 $m 303 262 132 56 213 98 1,064 2018 $m 224 162 161 48 150 110 855 2019 $m 303 150 132 29 213 90 917 2018 $m 224 85 161 30 150 106 756 132 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) (iv) Concentration of exposure for gross loans and advances Concentration of credit risk exists when a number of counter parties are engaged in similar activities, 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 Consolidated Entity 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 (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 2019 $m 19,963 13,105 6,900 272 341 2018 $m 20,221 12,026 7,044 287 323 2019 $m 18,170 11,729 5,728 256 310 4,333 4,463 3,981 802 229 377 771 230 307 645 203 - 2018 $m 18,526 10,687 6,012 277 300 4,143 611 199 - 46,322 45,672 41,022 40,755 133 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) (c) Liquidity risk Liquidity risk arises from the possibility that the Consolidated Entity is unable to meet its financial obligations as they fall due. Liquidity risk is managed through a series of detailed policies. This includes 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 sufficient cash balances and liquid assets, continuously monitoring forecast and actual cash flows, matching maturity profiles of financial assets and liabilities and monitoring liquidity scenario analysis. Carrying amount $m At Call $m 3 months or less $m 3 to 12 months $m 1 to 5 years $m Over 5 years $m Policy holder $m Total contractual cash flows $m - - - - - - 9 9 - - - - - - 285 38,629 44 394 4,978 7,741 9 52,080 3,986 (3,427) 559 301 1,498 1,799 Consolidated 2019 FINANCIAL LIABILITIES Due to other financial institutions Deposits Derivative financial instruments (1) Accounts payable and other liabilities Securitisation liabilities (2) Borrowings Insurance policy liabilities 285 285 - - 38,337 16,343 13,614 7,702 49 394 4,617 7,369 9 - - - - - 11 394 465 640 - 11 - 973 969 - - 969 20 - 2,397 6,132 - - 1 2 - 1,143 - - Total financial liabilities 51,060 16,628 15,124 9,655 9,518 1,146 DERIVATIVE FINANCIAL INSTRUMENTS (HEDGING RELATIONSHIP) Contractual amounts payable Contractual amounts receivable OFF BALANCE SHEET POSITIONS Guarantees, indemnities and letters of credit Customer funding commitments - - - 837 (817) 20 401 2,596 (302) (2,245) 99 351 461 301 1,498 1,799 - - - - - - - - - 152 (63) 89 - - - Derivative financial instruments other than those designated in hedge relationships. (1) (2) Repayment of securitisation bonds is forecast based on the expected repayment profile of the underlying assets of the Trusts. 134 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTSCarrying amount $m At Call $m 3 months or less $m 3 to 12 months $m 1 to 5 years $m Over 5 years $m Policy holder $m Total contractual cash flows $m 3.6 RISK MANAGEMENT (CONTINUED) (c) Liquidity risk (continued) Consolidated 2018 FINANCIAL LIABILITIES Due to other financial institutions Deposits Derivative financial instruments (1) Accounts payable and other liabilities Securitisation liabilities(2) Borrowings Liabilities held for sale (3) 315 315 - - 38,017 14,786 13,340 9,389 8 360 3,576 6,501 22 - - - - - 2 360 260 66 - 2 - 611 1,055 - - 893 6 - 2,117 5,901 - - - 1 - 659 - - Total financial liabilities 48,799 15,101 14,028 11,057 8,917 660 DERIVATIVE FINANCIAL INSTRUMENTS (HEDGING RELATIONSHIP) Contractual amounts payable Contractual amounts receivable OFF BALANCE SHEET POSITIONS Guarantees, indemnities and letters of credit Customer funding commitments 176 - - - 304 1,449 1,753 853 (846) 7 - - - 452 (404) 48 1,664 (1,457) 207 - - - - - - 211 (118) 93 - - - - - - - - - 22 22 - - - - - - 315 38,408 11 360 3,647 7,022 22 49,785 3,180 (2,825) 355 304 1,449 1,753 Derivative financial instruments other than those designated in hedge relationships. (1) (2) Repayment of securitisation bonds is forecast based on the expected repayment profile of the underlying assets of the Trusts. (3) The St Andrew’s Group was classified as held for sale as at 31 August 2018 but has ceased to be held for sale as at 31 August 2019. Refer to Note 6.5(d) for presentation of the comparatives. 135 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) (c) Liquidity risk (continued) Bank 2019 FINANCIAL LIABILITIES Carrying amount $m At Call $m 3 months or less $m 3 to 12 months $m 1 to 5 years $m Over 5 years $m Total contractual cash flows $m - 1 2 - - - 3 152 (63) 89 - - - 285 38,820 44 302 7,741 6,086 53,278 2,317 (1,832) 485 301 651 952 Due to other financial institutions 285 285 - - Deposits 38,528 16,488 13,660 7,702 Derivative financial instruments (1) Accounts payable and other liabilities Borrowings 49 302 7,372 - - - 11 302 640 - 969 20 - 11 - 969 6,132 Amounts due to controlled entities 6,086 6,086 - - - Total financial liabilities 52,622 22,859 14,613 8,682 7,121 DERIVATIVE FINANCIAL INSTRUMENTS (HEDGING RELATIONSHIP) Contractual amounts payable Contractual amounts receivable OFF BALANCE SHEET POSITIONS Guarantees, indemnities and letters of credit Customer funding commitments 546 - - - 301 651 952 834 (827) 7 - - - 397 (326) 71 934 (616) 318 - - - - - - (1) Derivative financial instruments other than those designated in hedge relationships. 136 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) (c) Liquidity risk (continued) Bank 2018 FINANCIAL LIABILITIES Carrying amount $m At Call $m 3 months or less $m 3 to 12 months $m 1 to 5 years $m Over 5 years $m Total contractual cash flows $m Due to other financial institutions 315 315 - - Deposits 38,266 14,991 13,384 9,389 Derivative financial instruments (1) Accounts payable and other liabilities Borrowings 8 304 6,503 - - - 2 304 66 2 - 1,055 Total financial liabilities 45,396 15,306 13,756 10,446 DERIVATIVE FINANCIAL INSTRUMENTS (HEDGING RELATIONSHIP) Contractual amounts payable Contractual amounts receivable OFF BALANCE SHEET POSITIONS Guarantees, indemnities and letters of credit Customer funding commitments 230 - - - 304 691 995 849 (848) 1 - - - 433 (399) 34 - - - - 893 6 - 5,901 6,800 852 (640) 212 - - - - - 1 - - 1 211 (118) 93 - - - 315 38,657 11 304 7,022 46,309 2,345 (2,005) 340 304 691 995 (1) Derivative financial instruments other than those designated in hedge relationships. (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 During the financial year, the Bank’s insurance subsidiaries issued a range of consumer credit insurance, life and general insurance products. 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 requirements to which the Consolidated Entity is subject. Prudential capital requirements Prudential capital requirements established by APRA are in place to safeguard policyholders’ interests, which are primarily the ability to meet future claim payments to policyholders. These require the Consolidated Entity’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. 137 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.6 RISK MANAGEMENT (CONTINUED) 3.7 FAIR VALUE OF FINANCIAL INSTRUMENTS (d) Insurance risk (continued) (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 subsidiaries’ 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 invest accordingly. Market risk is managed through investing in cash, deposits and bank issued commercial bills. No more than 35 per cent 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 Consolidated Entity aims to maintain a diversified profile of ages, genders, health statuses and geographic locations within its portfolio of policyholders. This policy maintains a balance between the current and future profitability of the life business, and exposure to any significant external events. The distribution channels and subsequent demographic mix of the population of policyholders is sufficiently spread so that the risk concentration in relation to any particular group is small. Specific processes for monitoring identified key concentrations include monitoring sales by product type, cover type and corporate partner type. (a) 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: • Derivatives; • Financial instruments designated at FVTPL; and • Financial instruments designated at FVOCI. The fair value estimates for instruments carried at amortised cost are based on the following methodologies and assumptions: Cash and cash equivalents, 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 impairment 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 and carrying values reflect changes in interest rates and creditworthiness of borrowers since loan or advance origination. Deposits The fair value of non-interest bearing, at 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 The fair values are calculated based on a discounted cash flow model using a yield curve appropriate to the remaining maturity of the instruments. 138 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.7 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) (b) Comparison of fair value to carrying amounts The tables below disclose 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 LIABILITIES CARRIED AT AMORTISED COST Deposits Borrowings ASSETS CARRIED AT AMORTISED COST Loans and advances Debt instruments at amortised cost LIABILITIES CARRIED AT AMORTISED COST Deposits Borrowings Note 3.3 3.4 3.5 Note 3.3 3.2 3.4 3.5 Consolidated Entity Carrying value Fair value 2019 $m 2018 $m 2019 $m 2018 $m 45,105 45,105 45,983 45,983 (38,337) (11,986) (50,323) 45,078 45,078 46,225 46,225 (38,017) (38,372) (10,077) (48,094) (11,981) (50,353) (38,020) (10,074) (48,094) Bank Carrying value Fair value 2019 $m 2018 $m 2019 $m 2018 $m 40,836 5,468 46,304 40,571 4,867 45,438 40,958 5,469 46,427 40,585 4,868 45,453 (38,528) (38,266) (38,563) (38,269) (7,372) (45,900) (6,503) (44,769) (7,372) (45,935) (6,504) (44,773) The estimated fair values disclosed do not include the assets and liabilities that are not financial instruments. 139 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.7 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) (c) Fair value hierarchy The Consolidated Entity measures fair values using the following fair value hierarchy and valuation techniques, which reflect the significance of the inputs used in making the measurements: • Level 1: This category includes assets and liabilities for which the valuation is determined from inputs based on unadjusted quoted market prices in active markets for identical instruments. • Level 2: This category includes assets and liabilities for which the valuation is determined from inputs other than quoted prices included within level 1, which are observable either directly or indirectly. This includes the use of discounted cash flow analysis, option pricing models and other market accepted valuation models. • Level 3: This category includes assets and liabilities for which the valuation includes inputs that are not based on observable market data. This includes equity instruments where there are no quoted market prices. The fair value hierarchy classification of instruments in Note 3.7 (b): • Loans and advances - Level 3 • Deposits and borrowings - Level 2 • Debt Instruments at amortised cost - Level 2 The table below analyses financial instruments carried at fair value, by valuation method: Consolidated Entity Financial instruments measured at fair value Derivative financial assets Financial assets at FVTPL Debt instruments at FVOCI Equity instruments at FVOCI Derivative financial liabilities Consolidated Entity Instruments carried at fair value Derivative financial assets Financial assets available-for-sale (1) Financial assets at fair value through profit or loss (1) Derivative financial liabilities 2019 Level 1 $m Level 2 $m Level 3 $m Total $m - 1,013 3,097 - 4,110 - 4,110 229 1,573 472 - 2,274 (687) 1,587 - - - 6 6 - 6 2018 Level 1 $m Level 2 $m Level 3 $m - 2,580 - 2,580 - 2,580 135 1,363 1,385 2,883 (294) 2,589 - 3 - 3 - 3 229 2,586 3,569 6 6,390 (687) 5,703 Total $m 135 3,946 1,385 5,466 (294) 5,172 (1) Due to the adoption of AASB 9 from 1 September 2019, there have been changes in the classifications of financial instruments. See Note 1.5 for more information on the Implementation of AASB 9. There were no transfers between level 1 and 2 during the period. Level 3 movements from the prior period include: • $4 million fair value increase on adoption of AASB 9. Refer to Note 1.5 for further information; and • $1 million current period fair value loss in other comprehensive income. 140 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.7 FINANCIAL INSTRUMENTS (CONTINUED) (c) Fair value hierarchy (continued) Bank Financial instruments measured at fair value Derivative financial assets Financial assets at FVTPL Debt instruments at FVOCI Equity instruments at FVOCI Derivative financial liabilities Bank Instruments carried at fair value Derivative financial assets Financial assets available-for-sale (1) Financial assets at fair value through profit or loss (1) Derivative financial liabilities 2019 Level 1 $m Level 2 $m Level 3 $m Total $m - 1,013 3,097 - 4,110 - 4,110 145 1,573 472 - 2,190 (687) 1,503 2018 - - - 6 6 - 6 145 2,586 3,569 6 6,306 (687) 5,619 Level 1 $m Level 2 $m Level 3 $m Total $m - 2,580 - 2,580 - 2,580 80 1,392 1,385 2,857 (293) 2,564 - 3 - 3 - 3 80 3,975 1,385 5,440 (293) 5,147 (1) Due to the adoption of AASB 9 from 1 September 2019, there have been changes in the classifications of financial instruments. See Note 1.5 for more information on the Implementation of AASB 9. 141 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.8 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING (a) Fair value of derivatives The following tables summarise 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 tables below set out the fair values of the derivative financial instruments. Consolidated 2019 2018 Notional Amount $m Fair Value Asset $m Liability $m Notional Amount $m Fair Value Asset $m Liability $m DERIVATIVES AT FAIR VALUE THROUGH PROFIT OR LOSS 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 Interest rate swaps DERIVATIVES DESIGNATED AS NET INVESTMENT HEDGES Foreign exchange forwards 11,500 139 2,308 13,947 26,636 2,183 687 29,506 2,637 26 50 2 - 52 41 125 11 177 - - (48) 14,729 (1) - (49) 120 2,364 17,213 (159) 29,731 (8) (1) 1,163 730 (168) 31,624 (470) 2,267 - 23 21 1 3 25 32 65 13 110 - - (7) (1) - (8) (33) (2) (1) (36) (250) - 46,116 229 (687) 51,127 135 (294) 142 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS 3.8 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING (CONTINUED) (a) Fair value of derivatives (continued) Bank 2019 2018 Notional Amount $m Fair Value Asset $m Liability $m Notional Amount $m Fair Value Asset $m Liability $m 11,500 165 2,308 13,973 27,596 463 687 28,746 50 3 - 53 59 22 11 92 (48) 14,729 (1) - (49) 144 2,364 17,237 (159) 29,864 (8) (1) 357 730 (168) 30,951 21 1 3 25 33 9 13 55 (7) (1) - (8) (32) (2) (1) (35) DERIVATIVES AT FAIR VALUE THROUGH PROFIT OR LOSS 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 Interest rate swaps 2,637 - (470) 2,267 - (250) 45,356 145 (687) 50,455 80 (293) (b) Hedging strategy The Consolidated Entity and Bank used derivative financial instruments for both hedging and trading purposes in the current year and prior year. Refer to Note 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. The Consolidated Entity’s hedging strategy is to protect Net Interest Income (NII) from variability in interest rates in Australian dollars. This requires the Consolidated Entity to enter into interest rate swaps allowing for the reduction in interest rate risk. Foreign currency exposures are swapped to Australian dollars using cross-currency interest rate swaps. These cross currency swaps will be matched to the underlying interest rate exposure of fixed or floating, respectively. The majority of exposures are managed under the above strategy. Where a risk is within agreed limits, the Consolidated Entity may decide not to apply hedge accounting to that risk. Instead, the Consolidated Entity will manage its exposure under broader risk management processes. (c) Accounting for derivatives In accordance with its treasury risk policies, 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 initially measured at fair value. Subsequent to initial recognition, gains or losses on derivatives are recognised in the Income Statement, unless they are entered into for hedging purposes. 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 current creditworthiness of the swap counter parties. 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. 143 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.8 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING (CONTINUED) (c) Accounting for derivatives (continued) 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. This includes 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 monitoring liquidity scenario analysis. The following table shows the maturity profile of hedging derivatives based on their notional amounts. 2019 2018 Consolidated Entity 0 to 12 months $m 1 to 5 years $m Over 5 years $m Total $m 0 to 12 months $m 1 to 5 years $m Over 5 years $m Total $m Interest rate swaps 29,908 8,999 1,866 40,773 35,620 9,090 2,017 46,727 Foreign exchange forwards Futures 852 2,308 - - Cross currency swaps 132 2,049 - - 2 852 2,308 2,183 873 2,364 45 - - 1,116 - - 2 873 2,364 1,163 (d) Hedging relationships 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 previously recognised directly in other comprehensive income are reclassified to 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, and 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 profit or loss in the Income Statement 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. 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. To the extent the hedge is ineffective, a portion is recognised immediately in the Income Statement within other income or other expenses. 144 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.8 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING (CONTINUED) (d) Hedging relationships (continued) The following table shows the executed rates for the most significant hedging instruments that have been designated in cash flow hedges and net investment hedges that are in place at the balance date. Hedging Instruments Currency 2019 2018 Consolidated entity Cash flow hedges Interest rate swaps AUD 0.863% - 4.145% 1.500% - 6.093% Cash flow hedges Cross currency swaps AUD/USD AUD/JPY AUD/HKD AUD/EUR NZD/AUD 0.761 - 0.793 0.761- 0.793 83.100 - 83.178 83.100 - 83.178 5.940 - 5.940 5.940 - 5.940 0.617 - 0.672 0.641 - 0.672 0.984 - 0.885 0.984 - 0.885 Net Investment hedges Foreign exchange forwards AUD/NZD 1.049 1.098 Fair value hedges Fair value hedges are used by the Consolidated Entity to manage exposure to changes in the fair value of an asset. Changes in fair values arise from fluctuations in interest rates. The Consolidated Entity principally uses interest rate swaps to protect against such fluctuations. Changes in the value of fair value hedges are recognised in the Income Statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. All gains and losses associated with the ineffective portion of fair value hedge relationships are recognised immediately in the Income Statement. If the hedge relationship no longer meets the criteria for hedge accounting, it is discontinued. The fair value adjustment to the hedged item is amortised to the Income Statement from the date of discontinuation over the period to maturity of the previously designated hedge relationship using the effective interest method. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the Income Statement. 145 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.8 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING (CONTINUED) (d) Hedging relationships (continued) The following table shows the carrying value of hedged items designated in fair value hedge accounting relationships and the cumulative fair value hedge accounting adjustment that has been recognised as part of that carrying value. These balances are being amortised to the Income Statement on an effective yield basis. The Consolidated Entity does not hedge its entire exposure to a class of financial instruments, nor does it apply hedge accounting in all instances, therefore the carrying amounts below will not equal the total carrying amounts disclosed in other notes to these financial statements. As noted in the Consolidated Entity’s accounting policies, since the hedged item is adjusted only for the hedged risk, the hedged item’s carrying value disclosed in the table will not be equivalent to its fair value as disclosed in other notes to these financial statements. The accumulated amount of fair value hedge adjustments remaining in the Balance Sheet for hedged items that have ceased to be adjusted for hedging gains and losses is a nil balance (2018: nil) for the Consolidated Entity. This amount will be amortised to the income statement as a gain on an effective interest rate basis. Consolidated Entity 2019 2018 Carrying value(1) $m Fair value hedge adjustments Debit/(Credit) $m Carrying value(1) $m Fair value hedge adjustments Debit/(Credit) $m ASSETS Debt instruments at FVOCI 3,085 (297) 2,529 (75) (1) The carrying amounts in the table above exclude accrued interest from the carrying amount of hedged items. 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. (e) Hedging ineffectiveness Hedge ineffectiveness, in the case of a fair value hedge, is the extent to which the changes in the fair value of the hedging instrument differ to that of the hedged item, and in the case of cash flow and net investment hedge relationships, the extent to which the change in the hedging instrument exceeds that of the hedged item. Sources of hedge ineffectiveness primarily arise from basis and timing differences between the hedged items and hedging instruments. The following table contains the hedge ineffectiveness associated with cash flow hedge and fair value hedge relationships during the period, as reported in Other operating income in the Income Statement: Consolidated 2019 2018 Gains/(losses) on hedge instruments $m Gains/(losses) on hedge items $m Hedge Ineffectiveness $m Gains/(losses) on hedge instruments $m Gains/(losses) on hedge items $m Hedge Ineffectiveness $m INTEREST RATE RISK Fair value hedges Interest rate swaps Cash flow hedges (231) 230 Interest rate swaps (114) 111 INTEREST RATE AND FOREIGN EXCHANGE RISK Fair value and cash flow hedges (1) (3) (23) (7) 23 11 Cross currency swaps 49 (49) - 63 (63) - 4 - 146 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.8 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING (CONTINUED) (f) 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 counter party 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 Sheet 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 as the right to offset is only enforceable 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 tables set out the effect of netting arrangements on derivative financial assets and derivative financial liabilities if they were to be applied. Consolidated Derivative financial assets Derivative financial liabilities Consolidated Derivative financial assets Derivative financial liabilities Bank Derivative financial assets Derivative financial liabilities Bank Derivative financial assets Derivative financial liabilities 2019 Gross amounts as presented in the Balance Sheet $m Net amounts of recognised assets and liabilities available for offset $m 229 (687) (82) 82 2018 Gross amounts as presented in the Balance Sheet $m Net amounts of recognised assets and liabilities available for offset $m 135 (294) (39) 39 2019 Gross amounts as presented in the Balance Sheet $m Net amounts of recognised assets and liabilities available for offset $m 145 (687) (82) 82 2018 Gross amounts as presented in the Balance Sheet $m Net amounts of recognised assets and liabilities available for offset $m 80 (293) (39) 39 Cash collateral $m - 609 Cash collateral $m (8) 250 Cash collateral $m - 609 Cash collateral $m (8) 250 Net amounts if offsetting applied in the Balance Sheet $m 147 4 Net amounts if offsetting applied in the Balance Sheet $m 88 (5) Net amounts if offsetting applied in the Balance Sheet $m 63 4 Net amounts if offsetting applied in the Balance Sheet $m 33 (4) 147 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.9 CAPITAL MANAGEMENT The Bank and Consolidated Entity’s capital management strategy aims to ensure adequate capital levels are maintained to protect deposit holders. 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 CET1 capital target range to be between 8.25 per cent and 9.5 per cent of risk weighted assets and the total capital range to be between 11.75 per cent and 13.5 per cent of risk weighted assets. Qualifying capital for Level 2 entities(1) 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 Common Equity Tier 1 Capital Net Tier 1 Capital ratio Total Capital Adequacy Ratio 2019 $m 3,497 171 132 3,800 (923) (183) 67 2018 $m 3,418 4 394 3,816 (875) (178) (1) (1,039) (1,054) 2,761 500 3,261 350 175 525 3,786 30,533 9.04% 10.68% 12.40% 2,762 500 3,262 350 174 524 3,786 29,669 9.31% 10.99% 12.76% (1) APRA Prudential Standard APS 001 Definitions defines Level 2 as the ADI and all of its subsidiary entities other than non-consolidated subsidiaries. The non-consolidated subsidiaries excluded from Level 2 are: • Bank of Queensland Limited Employee Share Plans Trust; • Home Credit Management Pty Ltd; • St Andrew’s Australia Services Pty Ltd; • St Andrew’s Life Insurance Pty Ltd; • St Andrew’s Insurance (Australia) Pty Limited; • Series 2012-1E REDS Trust; • Series 2013-1 REDS Trust; • Series 2015-1 REDS Trust; • Series 2017-1 REDS Trust; • Series 2018-1 REDS Trust; and • Series 2019-1 REDS Trust. 148 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS3.10 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 controlled entity of the Bank, pursuant to the Awards Right, Restricted Share and Employee Share Plans. 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. No profit or loss is recorded on purchase, sale, issue or cancellation of these shares. Consolidated Bank 2019 No of shares 2018 No of shares 2019 No of shares 2018 No of shares MOVEMENTS DURING THE YEAR Balance at the beginning of the year – fully paid 397,311,850 391,739,729 397,311,850 391,739,729 Dividend reinvestment plan Issues of ordinary shares (1) 8,472,959 - 4,719,312 852,809 8,472,959 - 4,719,312 852,809 Balance at the end of the year – fully paid 405,784,809 397,311,850 405,784,809 397,311,850 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 587,515 56,519 644,034 565,308 22,207 587,515 - - - - - - (1) On 26 October 2017, 850,000 ordinary shares were issued at $13.28 and on 17 May 2018, 2,809 ordinary shares were issued at $10.02 to the trustee of the Bank of Queensland Limited 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 by the Bank 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, wholesale capital note holders and creditors and are fully entitled to any residual proceeds of liquidation. (b) Nature and purpose of reserves Employee benefits reserve The employee 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 Note 6.1 for further details of these plans. Equity reserve for credit losses The Bank is required by APRA to maintain a general reserve for credit losses. Consistent with the requirements of APRA Prudential Standard APS 220 Credit Quality, the equity reserve for credit losses represents the difference between the accounting collective provisions for impairment and the estimate of credit losses across the credit cycle. 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. Profit reserve The profit reserve represents accumulated profits available for distribution as a dividend. Other reserves FVOCI - Changes in the fair value of financial assets classified as debt and equity instruments at FVOCI are recognised in other comprehensive income as described in Note 3.2 and accumulated in a separate reserve within equity. For debt instruments at FVOCI, amounts are reclassified to Other operating income in the Income Statement when the associated assets are sold or impaired. For equity instruments at FVOCI, amounts are not subsequently transferred to the Income Statement when the associated assets are sold or impaired, but can be reclassified to retained profits. 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 Note 3.8 (d). Amounts are reclassified to Other operating income in the Income Statement when the associated hedged transaction affects the Income Statement. There is $34 million (2018: $33 million) remaining in the hedging reserve from hedging relationships for which hedge accounting is no longer applied. 149 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTSNOTE 4. OTHER ASSETS AND LIABILITIES 4.1 INTANGIBLE ASSETS Consolidated Bank Customer related intangibles and brands $m Computer software (1) $m Goodwill $m Other $m Total $m Goodwill $m Customer contracts $m Computer software $m Other $m Total $m COST Balance as at 1 September 2017 Additions Disposals Reclassified to held for sale (2) Balance as at 31 August 2018 Balance as at 1 September 2018 Additions Impairment Reclassified from held for sale (2) Balance as at 31 August 2019 682 130 - - - 682 682 - - - - - (32) 98 98 - - 32 411 71 (1) - 481 481 95 (2) - 22 1,245 619 3 - - 25 25 3 - - 74 (1) (32) 1,286 1,286 98 (2) 32 - - - 619 619 - - - 89 - - - 89 89 - - - 389 68 (1) - 17 3 - - 1,114 71 (1) - 456 20 1,184 456 93 (2) - 20 1,184 3 - - 96 (2) - 682 130 574 28 1,414 619 89 547 23 1,278 AMORTISATION AND IMPAIRMENT LOSSES Balance as at 1 September 2017 Amortisation for the year Impairment Reclassified to held for sale (2) Balance as at 31 August 2018 Balance as at 1 September 2018 Amortisation for the year Impairment Reclassified from held for sale (2) Balance as at 31 August 2019 CARRYING AMOUNTS Carrying amount as at 1 September 2017 Carrying amount as at 31 August 2018 Carrying amount as at 31 August 2019 - - - - - - - - - - 114 238 21 373 6 - (32) 88 88 1 - 32 60 2 - 300 300 41 1 - 2 - - 23 23 4 - - 68 2 (32) 411 411 46 1 32 121 342 27 490 - - - - - - - - - - 75 229 5 - - 80 80 1 - - 57 2 - 288 288 38 1 - 17 1 - - 18 18 4 - - 321 63 2 - 386 386 43 1 - 81 327 22 430 682 682 682 16 10 9 173 181 232 1 2 1 872 619 875 924 619 619 14 9 8 160 168 220 - 2 1 793 798 848 (1) Included within the Computer software cost is $117 million of Assets under construction (2018: $69 million). Assets under construction are not amortised, amortisation only commences once the software is complete and is ready for use. (2) The St Andrew’s Group was classified as held for sale as at 31 August 2018 but has ceased to be held for sale as at 31 August 2019. Refer to Note 6.5(d) for presentation of the comparatives. 150 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS4.1 INTANGIBLE ASSETS (CONTINUED) 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. 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. Amortisation Except for goodwill, amortisation is charged to profit or 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 Years 3-15 3-12 Impairment testing of the cash generating units containing goodwill For the purpose of the annual impairment test, goodwill is allocated to groups of cash-generating units (CGUs) which represent the Controlled Entity’s operating segments - Retail Banking and BOQ Business (refer Note 2.5). The carrying amount of each CGU is compared to its recoverable amount. The recoverable amount is based on the CGU’s value in use. 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 and business 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 Group’s Board approved budget (2018: three year projections); • Subsequent cash flows were extrapolated for a further nine years beyond the Board approved budget incorporating key growth rate assumptions; • A terminal growth rate of 2.7 per cent (2018: 2.7 per cent) was used to extrapolate long-term growth; and • A post-tax discount rate of 9.7 per cent (2018: 10.0 per cent) and a pre-tax discount rate of 13.6 per cent (2018: 14.3per cent) was used. The key assumptions described above may change as economic and market conditions change. The Group estimates that reasonably possible changes in these assumptions would not cause the recoverable amount of either CGU to decline below the carrying amount. The aggregate carrying amounts of goodwill for each CGU are: Retail Banking BOQ Business Total 2019 $m 288 394 682 2018 $m 288 394 682 151 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS4.2 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 Provision for non-lending loss Other Total provisions Consolidated Bank 2019 $m 27 2 3 8 40 2018 $m 24 1 7 2 34 2019 $m 24 2 - - 26 2018 $m 22 1 6 1 30 (1) Employee benefits provision consist of 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 Consolidated Entity expects to pay as at reporting date including related on-costs) and long service leave entitlements for employees (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 Australian 10 year corporate bonds at reporting date which most closely match the terms of maturity of the related liabilities. $22 million (2018: $ 20 million) of this provision balance is classified as current. Movements in provisions Movements in each class of provision during the year, other than employee benefits, are as follows: 2019 Carrying amount at beginning of year Additional provision recognised Amounts utilised during the year Release of provision Reclassification from liabilities held for sale Carrying amount at end of year Current Non-current Consolidated Leases $m Non- lending loss $m Other $m Leases $m Bank Non- lending loss $m Other $m 1 3 (2) - - 2 2 - 2 7 4 (2) (6) - 3 3 - 3 2 2 (1) (1) 6 8 8 - 8 1 3 (2) - - 2 2 - 2 6 1 (1) (6) - - - - - 1 1 (2) - - - - - - 152 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS NOTE 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 2019. The actuarial report was prepared by Mr Stephen Jones, Fellow of the Institute of Actuaries of Australia. This report indicates that Mr Jones is satisfied as to the accuracy of the data upon which life insurance policy liabilities have been determined. The amount of life insurance and general insurance 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. At the reporting date, the projection method was used to determine the life insurance policy liabilities of the level premium funeral cover business. Policy liabilities for all other business were determined using the accumulation method. The accumulation method values policy liabilities as the provision for unearned premium reserve less a deferred acquisition cost component. The projection method values life insurance policy liabilities as the net present value of projected policy cash flows (premiums, benefits, expenses and profit margins to be released in future periods), using best estimate assumptions about the future. Future cash flows are discounted at a risk-free discount rate derived from Government bond yields at the reporting date. Outstanding claims liabilities and Incurred But Not Reported (IBNR) liabilities are included in provisions. (b) Processes used to determine actuarial assumptions 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 have been based on recent St Andrew’s Life Insurance Pty Ltd (insurance company) experience, or where data was limited, on the experience of similar products issued by the insurance company. The disputed claims provision is based on individual claim estimates and an assumed 50 per cent probability of disputed claims being incurred. Future maintenance expenses For life insurance contracts valued using the projection method, maintenance unit costs are based on budgeted expenses in the year following the reporting date. Voluntary discontinuances For life insurance contracts valued using the projection method, voluntary discontinuance assumptions have been based on recent insurance company experience. These rates are derived from the overall discontinuance rate for the individual product group and then further adjusted for duration and premium structure. Variable Impact of movement in underlying variable Mortality 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. Morbidity rates 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. Discontinuance rates Higher than expected policy discontinuance rates reduces future premium income, however this is offset by reduced future claims costs, commissions and maintenance expenses. The likely impact would be to reduce future profit and shareholder equity. Maintenance expenses Higher than expected maintenance expenses would reduce future profit and shareholder equity. Risk-free discount rate For life insurance contracts valued using the projection method, changes in the risk-free discount rate, such as changes in market yields caused by changes in investment markets and economic conditions, impact both life insurance policy liabilities and asset values at the reporting date. 153 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS5.1 INSURANCE BUSINESS (CONTINUED) (b) Processes used to determine actuarial assumptions (continued) Risk-free discount rates For life insurance contracts valued using the projection method, a risk-free discount rate based on Government bond yields at the reporting date is used. Risk-free rates are term-dependent and as at 31 August 2019 varied from 0.681 to 0.908 per cent. (c) Sensitivity analysis Under Margin on Services (MoS) reporting, changes in assumptions for life insurance contracts valued using the projection method are generally recognised by adjusting the value of future profit margins in the life insurance policy liabilities. Therefore, where a change in assumptions does not result in loss recognition, there is no impact on the policy liabilities in the current period. As at 31 August 2019, no related product groups were in loss recognition. Changes in assumptions will however give rise to a difference in the emergence of profit margins in future periods. Changes in assumptions will not affect policy liabilities determined using the accumulation method, however, claims provisions would be affected in the current period. (d) Reconciliation of movements 2019 $m 2018 $m RECONCILIATION OF MOVEMENTS IN INSURANCE POLICY LIABILITIES Life insurance contract policy liabilities Gross life insurance contract liabilities at the beginning of the financial year Increase / (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 Increase 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 profit for the year 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 6 3 9 (2) (2) (4) 5 1 23 (18) 5 3 1 4 9 11 (5) 6 (1) (1) (2) 4 (6) 28 (24) 4 4 1 5 9 (1) (1) Total insurance policy liabilities were disclosed in Liabilities held for sale as at 31 August 2018. 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. 154 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS 5.1 INSURANCE BUSINESS (CONTINUED) (e) Life insurance regulatory capital requirements 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 insurance company. The methodology and basis for determining the capital base and regulatory capital requirements are in accordance with relevant prudential requirements. 2019 2018 Statutory Fund No. 1 $m Shareholders’ Fund $m Statutory Fund No. 1 $m Shareholders’ Fund $m CAPITAL BASE Net assets Add / (subtract) regulatory adjustments to net assets Total capital base Asset risk charge Insurance risk charge Operational risk charge Aggregation benefit Total prescribed capital amount Assets in excess of prescribed capital amount Capital adequacy multiple 30 (11) 19 1 2 2 (1) 4 15 5 1 - 1 - - - - - 1 73 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 insurance company minimum Total prescribed capital amount Assets in excess of prescribed capital amount Capital adequacy multiple 34 (15) 19 1 - 2 - 3 16 7 2019 $m 31 (11) 20 4 6 10 10 2 1 - 1 - - - - - 1 72 2018 $m 35 (15) 20 3 7 10 10 2 155 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS 2019 $m 2018 $m 44 1 45 39 9 48 (3) 1 (2) 3 (6) 1 42 5 47 5 11 16 31 31 52 1 53 37 7 44 9 (3) 6 7 (2) 1 50 4 54 4 14 18 36 36 5.1 INSURANCE BUSINESS (CONTINUED) (e) Life insurance regulatory capital requirements (continued) Disaggregated information on life insurance (before consolidation adjustments) is as follows: SUMMARISED INCOME STATEMENT Revenue Life insurance premium revenue Investment income Net life insurance revenue Expenses Net claims and other liability expense from insurance contracts Other expenses Profit / (loss) before income tax Income tax expense / (income) Profit / (loss) 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. (f) 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). 156 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. 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 Life Insurance Contracts, 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. Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS5.1 INSURANCE BUSINESS (CONTINUED) (f) Accounting policy (continued) Insurance contract liability Profits of the insurance contract business are brought to account on a 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 a projection approach or an accumulation approach where this does not result in a material difference to the projection approach. The insurance company’s Directors and the appointed actuary have deemed the projection approach appropriate for the level premium funeral cover portion of the business, and the accumulation approach appropriate for the remainder of the business. Under the accumulation 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. Under the projection approach, insurance contract liabilities are valued as the net present value of projected policy cash flows (premiums, benefits, expenses and profit margins to be released in future periods), using best estimate assumptions about the future. Future cash flows are discounted at a risk-free discount rate. 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. 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. 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 as: 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. Investment income is recognised on an accruals basis. Realised and unrealised gains and losses are included in the Income Statement as investment income. In addition, factors such as regulation, competition, interest rates, taxes, securities market conditions and general economic conditions affect the level of these liabilities. 157 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTSNOTE 6. OTHER NOTES 6.1 EMPLOYEE BENEFITS (a) Superannuation commitments Superannuation plan The Bank contributes to a number of 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 relevant superannuation guarantee legislation. (b) Share based payments The Consolidated Entity currently operates an Award Rights Plan for equity-settled compensation. The plan allows the Consolidated Entity’s 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 first introduced and approved by shareholders on 11 December 2008, the current Award Rights Plan was approved by shareholders on 30 November 2017. 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 employees under the plan are Performance Award Rights (PARs) and Deferred Award Rights (DARs). No amount is payable by employees for the grant or exercise of these award rights. PARs The vesting framework for PARs will depend upon when the issue has been granted. For PARs granted prior to December 2015 the vesting framework will be based on the Total Shareholder Return (TSR) of the Bank 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 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 per cent of the peer group. All of the PARs vest if the Bank’s TSR performance is in the top 25 per cent. For TSR performance between those targets, a relative proportion of the PARs between 50 per cent and 100 per cent would vest. If the Bank’s TSR performance is below 50 per cent of the Peer Group, no PARs vest. For issues granted from December 2015, the vesting framework will also contain an EPS component, with 80 per cent of the employee’s PARs to vest based on the Bank’s TSR performance measured against a peer group over a three year period. The remaining 20 per cent of PARs vest based on the Bank’s EPS performance, measured against a financial services peer group over a three year period. For issues granted from December 2018, the performance testing and vesting period for both the TSR and the EPS tranches was extended to four years. PARs may be exercised by the employee once they have vested. DARs There are no market performance hurdles or vesting conditions for DARs but the holder must remain an employee of the Bank. DARs vest over three years in the ratio of 20 per cent at the end of year one, 30 per cent at the end of year two and 50 per cent at the end of year three. DARs may be exercised by the employee once they have vested. 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. 158 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS6.1 EMPLOYEE BENEFITS (CONTINUED) (b) Share based payments (continued) (ii) Award rights on issue The number of award rights and restricted shares on issue for the Bank is as follows: Deferred award rights Performance award rights Restricted shares 2019 ’000 999 665 (108) (304) 1,252 2018 ’000 1,045 480 (159) (367) 999 2019 ’000 2,278 811 (1,203) (99) 1,787 2018 ’000 2,377 822 (610) (311) 2,278 2019 ’000 234 178 - (210) 202 2018 ’000 228 156 - (150) 234 Balance at beginning of the year Granted Forfeited / expired Exercised Outstanding at the end of the year (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 the Bank sold on the ASX during a 5 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 measurement of the long term incentive award rights grants during the year were as follows: Deferred award rights Performance award rights Restricted shares 2019 8.21 9.61 19.0 2.0 7.8 2018 11.05 12.63 22.5 1.9 6.6 2019 4.91 9.64 19.0 2.0 7.8 2018 7.14 12.66 22.5 1.9 6.6 2019 10.71 9.96 20.1 2.0 7.4 2018 13.03 12.68 22.5 1.9 6.6 Fair value at grant date ($) Share price at grant date ($) Expected volatility (%) Risk free interest rate (%) Dividend yield (%) 6.2 COMMITMENTS (A) LEASE COMMITMENTS 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 Consolidated 2019 $m 2018 $m Bank 2019 $m 2018 $m 38 85 72 195 301 1,498 1,799 39 118 43 200 304 1,449 1,753 38 85 72 195 301 651 952 39 118 43 200 304 691 995 In the normal course of business the Consolidated Entity 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 Consolidated Entity 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. 159 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS6.3 CONTINGENT LIABILITIES As at 31 August 2019, the Consolidated Entity does not have any contingent liabilities. 6.4 RELATED PARTIES INFORMATION (a) Controlled entities Details of interests in material controlled entities are set out in Note 6.5. During the year there have been transactions between the Bank and its controlled entities. The Bank conducted normal banking business with its operating controlled entities. Amounts owing to or from controlled entities generally attract interest on normal terms and conditions, except in respect of Virgin Money (Australia) Pty Limited, Virgin Money Financial Services Pty Ltd, BOQ Specialist Pty Ltd, BOQ Home Pty Limited, Home Credit Management Pty Ltd and dormant entities as set out in Note 6.5(a). The Bank receives management fees from its operating controlled entities except Virgin Money Financial Services Pty Ltd, BOQ Specialist Pty Ltd, BOQ Home Pty Limited, Home Credit Management Pty Ltd and dormant entities as set out in Note 6.5(a). The Bank has a related party relationship with equity accounted joint ventures and associates, refer to Note 6.6. (b) Key management personnel compensation KMP have authority and responsibility for planning, directing and controlling the activities of the Bank and the Consolidated Entity, including Directors and other Group Executives. KMP compensation included in ‘administrative expenses’ and ‘employee expenses’ (refer to Note 2.2) is as follows: Short term employee benefits Long term employee benefits Post employment benefits Share based employment benefits Termination benefits Consolidated and Bank 2019 $ 6,958,085 156,398 316,392 1,719,578 975,000 10,125,453 2018 $ 8,893,945 86,018 311,532 4,754,422 - 14,045,917 Individual Directors and Group Executives compensation disclosures Information regarding individual Directors and Group Executives compensation and some equity instruments disclosures as permitted by Regulation 2M.3.03 of the Corporations Regulations 2001 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’ interests existing at year end. 160 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS6.4 RELATED PARTIES INFORMATION (CONTINUED) (c) Other financial instrument transactions with key management personnel and personally-related entities A number of the KMP and their close family members hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. These entities, as well as the KMP and their close family members, are related parties to the Consolidated Entity. Financial instrument transactions with KMP and their related parties 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 entered into with KMP 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-related entities, on an arm’s length basis. No amounts have been written down or recorded as impaired during the year (2018: nil). The transactions undertaken between the Consolidated Entity and KMP or their related parties up to 31 August 2019 are: Term products (loans / advances) KMP Other related parties Total Balance as at For the period (1) 1 September 2018 $ 31 August 2019 $ Total loan drawdowns / (repayments) $ Total loan / overdraft interest $ Total fees on loans / overdraft $ 1,928,903 1,536,789 314,022 1,460,422 186,543 (33,809) 3,389,325 1,723,333 280,213 78,824 20,962 99,786 240 60 300 (1) Amounts are included only for the period that the Director/Executive is classified as a member of KMP. Jon Sutton resigned effective 5 December 2018 and Brendan White ceased employment 6 March 2019. On this basis, loans and advances between the Consolidated Entity and Mr Sutton and Mr White are not included in the closing balance as at 31 August 2019. Term products (loans / advances) KMP Other related parties Total Balance as at For the period (2) 1 September 2017 $ 31 August 2018 $ Total loan drawdowns / (repayments) $ Total loan / overdraft interest $ Total fees on loans / overdraft $ 1,788,768 1,928,903 2,004,249 140,768 1,487,199 1,460,422 (84,727) 57,711 3,275,967 3,389,325 1,919,522 198,479 600 240 840 (2) Amounts are included only for the period that the Director/Executive is classified as a member of KMP. Michelle Thomsen resigned as an Executive on 29 June 2018. On this basis, loans and advances between the Consolidated Entity and Ms Thomsen are not included in the closing balance as at 31 August 2018. 161 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS6.4 RELATED PARTIES INFORMATION (CONTINUED) (c) Other financial instrument transactions with key management personnel and personally-related entities (continued) Other transactions Transactions with KMP and their related parties (other than loans and shares) during the financial year were related to personal banking, investment, finance leasing, insurance policy and deposit transactions. These transactions are on normal commercial terms and conditions, in the ordinary course of business and are considered 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 Directors are set out below: Roger Davis David Willis Total 2019 2018 Balance $ 200,000 70,000 270,000 Interest earned $ 8,785 3,075 11,860 Balance $ 200,000 70,000 270,000 Interest earned $ 8,798 3,079 11,877 On 28 December 2017, the Bank issued 3,500,000 Capital Notes at a price of $100 per note. Details of those notes issued to Directors are set out below: Roger Davis Roger Davis’s related parties Total 2019 2018 Balance $ 50,000 50,000 100,000 Interest earned $ 1,537 1,537 3,074 Balance $ 50,000 50,000 100,000 Interest earned $ 1,317 1,317 2,634 162 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS6.5 CONTROLLED ENTITIES (a) Particulars in relation to material controlled entities The Group’s controlled entities at 31 August 2019 are set out below. Unless otherwise stated, they have share capital consisting solely of ordinary shares that are held directly by the Group. The country of incorporation or registration is also their principal place of business. Place of business/ country of incorporation Parent entity’s interest Controlled entities: Alliance Premium Funding Pty Ltd New Zealand Bank of Queensland Limited Employee Share Plans Trust Australia BOQ Asset Finance and Leasing Pty Ltd Australia BOQ Covered Bond Trust BOQ Credit Pty Limited BOQ Equipment Finance Limited BOQF Cashflow Finance Pty Ltd BOQ Finance (Aust) Limited Australia Australia Australia Australia Australia BOQ Finance (NZ) Limited New Zealand BOQ Funding Pty Limited BOQ Home Pty Ltd BOQ Share Plans Nominee Pty Ltd BOQ Specialist (Aust) Limited BOQ Specialist Pty Ltd B.Q.L. Management Pty Ltd B.Q.L. Nominees Pty Ltd Home Credit Management Pty Ltd Home Financial Planning Pty Ltd Impala Trust No. 1 - Sub-Series 2 Pioneer Permanent Pty Ltd Series 2008-1 REDS Trust Series 2009-1 REDS Trust Series 2010-1 REDS Trust Series 2010-2 REDS Trust Series 2012-1E REDS Trust Series 2013-1 REDS Trust Series 2015-1 REDS Trust Series 2015-1 REDS EHP Trust Series 2017-1 REDS Trust Series 2018-1 REDS Trust Series 2018-1 REDS EHP Trust Series 2019-1 REDS Trust Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 2019 % 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% 2018 % 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% - - Amount of investment Principal activities 2019 $m 2018 $m - - - - - 15 - 230 22 - 157 - 13 - - - - - - - - - - - 15 - Dormant Trust Asset finance & leasing Issue of covered bonds Asset finance & leasing Asset finance & leasing Professional finance 230 Asset finance & leasing 22 - Asset finance & leasing Dormant 157 Investment holding entity - 13 - - - - - - Dormant Professional finance and asset finance & leasing Professional finance Trust management Dormant Investment holding entity Dormant Securitisation 32 32 Dormant - - - - - - - - - - - - - - - - - - - - - - - - Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation Securitisation 163 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS6.5 CONTROLLED ENTITIES (CONTINUED) (a) Particulars in relation to material controlled entities (continued) Place of business/ country of incorporation Parent entity’s interest Controlled entities: St Andrew’s Australia Services Pty Ltd Australia St Andrew’s Insurance (Australia) Pty Ltd Australia St Andrew’s Life Insurance Pty Ltd Statewest Financial Planning Pty Ltd Virgin Money (Australia) Pty Limited Australia Australia Australia Virgin Money Financial Services Pty Ltd Australia Virgin Money Home Loans Pty Limited Australia 2019 % 100% 100% 100% 100% 100% 100% 100% 2018 % 100% 100% 100% 100% 100% 100% 100% Amount of investment Principal activities 2019 $m 2018 $m - - - - 53 - - 522 Insurance holding entity General insurance Life insurance Dormant Financial services Financial services Dormant - - - - 53 - - 522 (b) Significant restrictions In accordance with APS 222 Associations with related entities, the Bank and its subsidiaries that form part of the Extended Licensed Entity have various restrictions. This includes not having unlimited exposures to related entities, including general guarantees. (c) Acquisition of controlled entities (i) Accounting for business combinations All business combinations occurring on or after 1 July 2009 are accounted for by applying the acquisition method. 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 Transactions 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. (ii) Entities established during the year The following entities were established during the financial year: • Series 2018-1 REDS EHP Trust was opened on 13 November 2018; and • Series 2019-1 REDS Trust was opened on 29 August 2019. 164 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS6.5 CONTROLLED ENTITIES (CONTINUED) (d) Operations classified as held for sale On 17 April 2018, the Bank announced it had entered into an agreement to sell the Group’s controlled entities, St Andrew’s Australia Services Pty Ltd, St Andrew’s Insurance (Australia) Pty Ltd and St Andrew’s Life Insurance Pty Ltd (St Andrew’s Group). As at 31 August 2019, this agreement is no longer in place and the St Andrew’s Group has ceased to be held for sale on the Consolidated Balance Sheet. The St Andrew’s Group was classified as held for sale as at 31 August 2018. The assets and liabilities held for sale were measured at the lower of their carrying amount and fair value less costs of disposal, except for assets such as deferred tax assets, financial assets and contractual rights under insurance contracts, which are specifically exempt from this requirement. The comparative period balances are shown below. Cash and cash equivalents Due from other financial institutions - term deposits Other assets Total assets Insurance policy liabilities (1) Other liabilities Total liabilities (1) Refer to Note 5 for further information on insurance business disclosures. (e) Disposal of controlled entities The following entities were closed during the financial year: 2018 (1) $m 6 46 5 57 9 13 22 • Series 2015-1 REDS EHP Trust was closed on 24 May 2019. BQL Nominees Pty Ltd was deregistered during the year, effective 21 February 2019 (2018: 5 entities were deregistered). 165 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS6.6 INVESTMENTS IN JOINT ARRANGEMENTS AND ASSOCIATES The Consolidated Entity holds interests in a number of collectively and individually immaterial joint ventures and investments in associates that are accounted for using the equity method. (a) Accounting for joint arrangements and associates The Consolidated Entity’s investments in joint venture entities and associates are accounted for under the equity method of accounting in the consolidated financial statements. Joint ventures are entities in which the Consolidated Entity has joint control over all operational decisions and activities. Associates are entities in which the Consolidated Entity has significant influence over, but not control. (b) Details of joint venture and associates Set out below are the joint ventures and associates of the Consolidated Entity as at 31 August 2019 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 and associates. Joint arrangements (1) 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) Associates MiFund Pty Ltd (2) Total equity accounted investments Ownership Interest Carrying amount 2019 (%) 2018 (%) 2019 $m 2018 $m 9.31 17.08 25.00 5.81 25.00 9.31 17.08 25.00 5.81 25.00 35.00 - 6 7 - - - 3 16 6 8 1 - - - 15 (1) The principal activity of the joint venture entities is land subdivision, development and sale. These investments were acquired as part of the Home Building Society acquisition in 2007. (2) The investment in MiFund Pty Ltd is held by the Bank. Summary financial information for equity accounted joint ventures and associates, adjusted for the share of ownership held by the Consolidated Entity and the Bank, is contained below: Loss from continuing operations Total comprehensive loss 2019 $m (1) (1) 2018 $m - - 166 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS 6.7 AUDITOR’S REMUNERATION KPMG AUSTRALIA Audit services - Statutory audits and reviews of the financial reports - Regulatory audits and reviews as required by regulatory authorities Total audit services Audit related services - Other assurance services - Regulatory assurance services Total audit related services Non-audit services - Taxation services - Other Total non-audit services Consolidated Bank 2019 $000 1,773 462 2,235 534 94 628 169 333 502 2018 $000 1,737 346 2,083 532 235 767 171 103 274 2019 $000 1,324 325 1,649 397 - 397 169 263 432 2018 $000 1,279 244 1,523 399 235 634 171 103 274 6.8 EVENTS SUBSEQUENT TO BALANCE DATE Other than as disclosed below, the Directors are not aware of any matters or circumstances 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. On 11 October 2019, the Bank entered into a Subscription Agreement in relation to a debt for equity swap for the purchase of 8,128 fully paid ordinary shares issued by its subsidiary, St Andrew’s Australia Services Pty Ltd, for the value of $30,000,000. 167 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTSThe transferred assets are equitably assigned to the Trusts. The investors in the securities issued by the Trusts have full recourse to the assets transferred to the Trusts. Bank Interest rate risk from the Trusts is transferred back to the Bank by way of interest rate and basis swaps. Accordingly, under AASB 9 the original transfer of the mortgages from the Bank to the Trusts does not meet the derecognition criteria set out in AASB 9. The Bank continues to reflect the securitised loans in their entirety and also recognises a financial liability to the 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. (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 or 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 Note 3.8. (ii) Foreign operations The Consolidated Entity carries out its foreign operations in New Zealand through the wholly controlled subsidiary, BOQ Finance (NZ) Limited, and through the non-incorporated branch of BOQ Equipment Finance Limited. 6.9 SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements, 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 statements 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 Consolidated Entity conducts a loan securitisation program whereby mortgage loans are packaged and sold to the RMBS Trusts. The Consolidated Entity also securitises hire purchase, chattel mortgages and finance leases which are packaged and sold to the REDS EHP Trusts. The Bank acquired Impala Trust No. 1 - Sub-Series 2 (Impala Trust) through the acquisition of Investec Bank (Australia) Limited. Assets securitised to the Impala Trust are financed by the Bank through the BOQ Specialist channel and consist of medical finance equipment. Consolidated Entity The Consolidated Entity receives the residual income distributed by the RMBS and Impala Trust (Trusts) after all payments due to investors and associated costs of the program have been met. As a result, the Consolidated Entity is considered to retain the risks and rewards of the Trusts and they do not meet the derecognition criteria of AASB 9. The Trusts fund their purchase of the loans by issuing floating-rate debt securities. The securities are issued by the 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 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 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 provides 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. 168 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesFor the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTS6.9 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (iv) Depreciation (c) Operating Leases Operating leases, in which the Consolidated Entity is the lessor, are measured at cost less accumulated depreciation and accumulated impairment losses. Depreciation is calculated to write off the cost of operating lease assets less their estimated residual values using the straight-line basis over the term of the lease. This is generally recognised in profit or loss. Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Operating leases, in which the Consolidated Entity 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. (d) 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 current 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. (e) Property, plant and 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. 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. The estimated useful lives are as follows: IT equipment Plant, furniture and equipment Leasehold improvements (1) (1) Or term of lease if less. The useful lives are reassessed annually. Years 3-10 3-20 6-12 (f) 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 at the same time each year. 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 – a 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. 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. (ii) Subsequent costs (i) Calculation of recoverable amount 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 Consolidated Entity 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 Consolidated Entity 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. 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. 169 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019For the year ended 31 August 2019NOTES TO THE FINANCIAL STATEMENTSDIRECTORS’ DECLARATION 1. In the opinion of the Directors of Bank of Queensland Limited: (a) the consolidated financial statements and notes and the remuneration report included within the Directors’ Report set out on pages 58 to 169 , are in accordance with the Corporations Act 2001 (Cth), including: (i) giving a true and fair view of the financial position of the Bank and Consolidated Entity as at 31 August 2019 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 and Consolidated Entity will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 (Cth) from the Managing Director & CEO and Chief Financial Officer for the financial year ended 31 August 2019. The Directors draw attention to Section 1.2 (a) to the financial statements, which includes a statement of compliance with International Financial Reporting Standards. 2. 3. Signed in accordance with a resolution of the Directors: Roger Davis Chairman 16 October 2019 George Frazis Managing Director & CEO 16 October 2019 170 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled Entities 171 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. Independent Auditor’s Report To the shareholders of Bank of Queensland Limited Report on the audits of the Financial Reports Opinions We have audited the consolidated Financial Report of Bank of Queensland Limited (the Consolidated Entity Financial Report). We have also audited the Financial Report of Bank of Queensland Limited (the Bank Financial Report). In our opinion, each of the accompanying Consolidated Entity Financial Report and Bank Financial Report are in accordance with the Corporations Act 2001, including:  giving a true and fair view of the Consolidated Entity’s and of the Bank’s financial position as at 31 August 2019 and of its financial performance for the year ended on that date; and  complying with Australian Accounting Standards and the Corporations Regulations 2001. The respective Financial Reports of the Consolidated Entity and Bank comprise:  Balance Sheets as at 31 August 2019  Income Statements, Statements of Comprehensive Income, Statements of Changes in Equity, and Statements of Cash Flows for the year then ended  Notes including a summary of significant accounting policies  Directors’ Declaration. The Consolidated Entity consists of the Bank of Queensland Limited (the Bank) and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinions We conducted our audits in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audits of the Financial Reports section of our report. We are independent of the Consolidated Entity and Bank in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audits of the Financial Reports in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. 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. Independent Auditor’s Report To the shareholders of Bank of Queensland Limited Report on the audits of the Financial Reports Opinions We have audited the consolidated Financial Report of Bank of Queensland Limited (the Consolidated Entity Financial Report). We have also audited the Financial Report of Bank of Queensland Limited (the Bank Financial Report). In our opinion, each of the accompanying Consolidated Entity Financial Report and Bank Financial Report are in accordance with the Corporations Act 2001, including:  giving a true and fair view of the Consolidated Entity’s and of the Bank’s financial position as at 31 August 2019 and of its financial performance for the year ended on that date; and  complying with Australian Accounting Standards and the Corporations Regulations 2001. The respective Financial Reports of the Consolidated Entity and Bank comprise:  Balance Sheets as at 31 August 2019  Income Statements, Statements of Comprehensive Income, Statements of Changes in Equity, and Statements of Cash Flows for the year then ended  Notes including a summary of significant accounting policies  Directors’ Declaration. The Consolidated Entity consists of the Bank of Queensland Limited (the Bank) and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinions We conducted our audits in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audits of the Financial Reports section of our report. We are independent of the Consolidated Entity and Bank in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audits of the Financial Reports in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. Annual Report 2019INDEPENDENT AUDITOR’S REPORT172 Key Audit Matters The Key Audit Matters we identified for the Consolidated Entity and Bank are:  Expected Credit Loss (ECL) for loans and advances at amortised cost  Valuation of goodwill  Valuation of intangible computer software  Valuation of financial instruments at fair value  Information technology (IT) systems controls Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audits of the Financial Reports of the current period. These matters were addressed in the context of our audits of the Financial Reports as a whole, and in forming our opinions thereon, and we do not provide a separate opinion on these matters. Expected credit loss (ECL) for loans and advances at amortised cost- Consolidated Entity and Bank Refer to Note 3.3(a) to the Financial Reports The key audit matter How the matter was addressed in our audits On 1 September 2018, the Consolidated Entity and Bank adopted AASB 9 Financial Instruments (AASB 9). The accounting standards require ECLs to incorporate forward–looking assumptions, reflecting the Consolidated Entity’s and Bank’s view of future economic scenarios. ECL (collective provision for impairment) for loans and advances at amortised cost is a key audit matter due to the significance of loans and advances balances and judgement applied by the Consolidated Entity and Bank in determining the ECL, and the resulting judgement required by us in challenging these estimates. The Consolidated Entity and Bank has exercised judgement in developing ECL models and also in determining assumptions such as defining a significant increase in credit risk (SICR). This estimation is inherently challenging and uses complex models based on the Consolidated Entity’s and Bank’s ability to predict probability of default and loss given default. The ECL staging requirements in the models incorporate estimates of default on both a 12 month and Our procedures for ECL (collective provision for impairment) included:  Understanding the key controls on the Consolidated Entity’s and Bank’s estimate of the ECL, including:  review and approval by Management of key forward-looking assumptions used in the model;  review and approval by Management of key data elements used in the ECL models;  monitoring mechanisms to identify loans with a SICR or default event; and  review and approval mechanisms in place to assess the ECL output and out of model adjustments. With the assistance of our credit risk specialists, our further procedures included:  Assessing the appropriateness of the Consolidated Entity’s and Bank’s provisioning methodology against the requirements of the accounting standards and industry practice lifetime basis. We applied significant judgement to assess the impact of the forward-looking macroeconomic assumptions and factors outside of the control of the Consolidated Entity and Bank on their ECL models. Significant judgement is applied by the Consolidated Entity and Bank in determining the nature and level of out of model adjustments. It is the Consolidated Entity’s and Bank’s policy to use out of model adjustments where the underlying models may not represent emerging risks or trends in the loan portfolios. For credit–impaired loans, it is the Consolidated Entity’s and Bank’s policy to determine specific provision for impairment in addition to the collective provision based on their judgement. This focuses on estimating when an impairment event has occurred and the present value of expected future cash flows, which have high estimation uncertainty. We focused on the high degree of estimation uncertainty related to the business and agribusiness loans, as the forecast cash flows are dependent on future and uncertain events, for example, the timing and proceeds from the future sale of collateral. including estimates of default on both a 12 month and lifetime basis.  Testing the completeness and accuracy of relevant data elements used within ECL models for a sample of customers, such as checking year end balances to the general ledger, and repayment history and risk ratings to source systems.  Re-performing the ECL calculation for loan portfolios using the Consolidated Entity’s and Bank’s provisioning methodology and relevant data used within the ECL models, as tested above. We compared our results to the amount recorded by the Consolidated Entity and Bank.  Determining key assumptions within the ECL models including SICR and assessed the Consolidated Entity’s and Bank’s analysis over these assumptions including whether the methodology used in developing the assumption was appropriate and in line with accounting standards requirements.  Assessing the ECL assumptions against forward-looking publicly available macro-economic information, such as forecasts for Real-GDP, residential house price index and unemployment rates.  Assessing the out of model adjustments applied by the Consolidated Entity and Bank to the ECL estimates. We compared the loan portfolios’ underlying performance and characteristics to current market conditions, emerging risks and trends, using our knowledge of the industry and public views of commentators. Our procedures for specific provision for impairment for credit-impaired loans included:  Testing key credit risk monitoring controls, including controls for loan risk ratings, annual assessments of loans and security valuations.  Performing credit assessment, on a sample of loans and advances including business and agribusiness loans for which specific impairment provisions are held. This included:  Considering the latest developments in relation to the borrower by inspecting the Consolidated Entity’s and Bank’s latest loan strategy papers Bank of Queensland Limited and its Controlled EntitiesINDEPENDENT AUDITOR’S REPORT173 lifetime basis. We applied significant judgement to assess the impact of the forward-looking macroeconomic assumptions and factors outside of the control of the Consolidated Entity and Bank on their ECL models. Significant judgement is applied by the Consolidated Entity and Bank in determining the nature and level of out of model adjustments. It is the Consolidated Entity’s and Bank’s policy to use out of model adjustments where the underlying models may not represent emerging risks or trends in the loan portfolios. For credit–impaired loans, it is the Consolidated Entity’s and Bank’s policy to determine specific provision for impairment in addition to the collective provision based on their judgement. This focuses on estimating when an impairment event has occurred and the present value of expected future cash flows, which have high estimation uncertainty. We focused on the high degree of estimation uncertainty related to the business and agribusiness loans, as the forecast cash flows are dependent on future and uncertain events, for example, the timing and proceeds from the future sale of collateral. including estimates of default on both a 12 month and lifetime basis.  Testing the completeness and accuracy of relevant data elements used within ECL models for a sample of customers, such as checking year end balances to the general ledger, and repayment history and risk ratings to source systems.  Re-performing the ECL calculation for loan portfolios using the Consolidated Entity’s and Bank’s provisioning methodology and relevant data used within the ECL models, as tested above. We compared our results to the amount recorded by the Consolidated Entity and Bank.  Determining key assumptions within the ECL models including SICR and assessed the Consolidated Entity’s and Bank’s analysis over these assumptions including whether the methodology used in developing the assumption was appropriate and in line with accounting standards requirements.  Assessing the ECL assumptions against forward-looking publicly available macro-economic information, such as forecasts for Real-GDP, residential house price index and unemployment rates.  Assessing the out of model adjustments applied by the Consolidated Entity and Bank to the ECL estimates. We compared the loan portfolios’ underlying performance and characteristics to current market conditions, emerging risks and trends, using our knowledge of the industry and public views of commentators. Our procedures for specific provision for impairment for credit-impaired loans included:  Testing key credit risk monitoring controls, including controls for loan risk ratings, annual assessments of loans and security valuations.  Performing credit assessment, on a sample of loans and advances including business and agribusiness loans for which specific impairment provisions are held. This included:  Considering the latest developments in relation to the borrower by inspecting the Consolidated Entity’s and Bank’s latest loan strategy papers Annual Report 2019INDEPENDENT AUDITOR’S REPORT174 for evidence of occurrence of impairment events and inquiries with Management;  Examining the forecasts of future cash flows prepared by the Consolidated Entity and Bank, including key assumptions in relation to the amount and timing of recoveries, by: I. Checking the collateral valuation and other sources of repayment underlying the Consolidated Entity’s and Bank’s determination of the impairment to external evidence where available, including the Consolidated Entity’s and Bank’s external valuation expert reports; and II. Checking the consistency of methods applied by the Consolidated Entity and Bank in estimating the expected future cash flows, including timing, from the estimated sale proceeds from the collateral in calculating the recoveries.  Challenging the Consolidated Entity’s and Bank’s judgement with respect to estimated recoverable values by considering current economic conditions and specific areas of credit risk concentration (industries and geographies), which may impact security values.  Assessing the appropriateness of the Consolidated Entity’s and Bank’s disclosures in the financial reports using our understanding obtained from our testing against the requirements of the accounting standards. Valuation of goodwill – Consolidated Entity and Bank Refer to Note 4.1 to the Financial Reports The key audit matter How the matter was addressed in our audits The assessment of the valuation of goodwill is considered a key audit matter due to the significant forward-looking assumptions used in the Consolidated Entity’s and Bank’s value-in-use (VIU) model. We focused on the significant forward-looking assumptions applied in the VIU model, including: • Forecast operating cash flows, forecast growth rates and the terminal growth rates. Estimating the projected cash flow forecast is inherently uncertain. The sector in which the Consolidated Entity and Bank operates in is highly competitive and experiencing slower growth and regulatory change, which increases the risk of inaccurate forecasting; and • Discount rate – this is judgemental in nature and varies according to the specific conditions and environment of the relevant cash-generating unit (CGU). We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter. Our procedures included:  Considering the appropriateness of the VIU method applied by the Consolidated Entity and Bank to perform the annual test of goodwill for impairment against the requirements of the accounting standards.  Assessing the integrity of the VIU model used, including the accuracy of the underlying calculations.  Assessing the historical accuracy of the Consolidated Entity’s and Bank’s forecast operating cash flows by comparing to actual past performance, to inform our evaluation of forecasts incorporated in the VIU model.  Challenging the key forecast cash flow assumptions used in the VIU model using our knowledge of the Consolidated Entity and Bank, their past performance, and our inquiries with Management. We also compared key assumptions to the Consolidated Entity’s and Bank’s Board approved FY20 Budget.  Using our industry knowledge and published studies of industry trends and expectations, assessing the impact of the regulatory change and increased competition on the Consolidated Entity’s and Bank’s key assumptions, specifically growth rates and terminal growth rates, for indicators of bias and inconsistent application.  Working with our valuation specialists, using our knowledge of the Consolidated Entity and Bank and its industry, to independently develop a discount rate range considered comparable using publicly available market data for comparable entities adjusted by risk factors specific to the Consolidated Entity and the industry it operates in.  Performing sensitivity analysis by varying key assumptions, in particular discount rates, forecast growth rates and terminal growth rates, within a reasonably possible range, to identify those assumptions at a higher risk of bias or inconsistency in application and to focus our further procedures. Bank of Queensland Limited and its Controlled EntitiesINDEPENDENT AUDITOR’S REPORT175 Valuation of goodwill – Consolidated Entity and Bank Refer to Note 4.1 to the Financial Reports The key audit matter How the matter was addressed in our audits The assessment of the valuation of goodwill is considered a key audit matter due to the significant forward-looking assumptions used in the Consolidated Entity’s and Bank’s value-in-use (VIU) model. We focused on the significant forward-looking assumptions applied in the VIU model, including: • Forecast operating cash flows, forecast growth rates and the terminal growth rates. Estimating the projected cash flow forecast is inherently uncertain. The sector in which the Consolidated Entity and Bank operates in is highly competitive and experiencing slower growth and regulatory change, which increases the risk of inaccurate forecasting; and • Discount rate – this is judgemental in nature and varies according to the specific conditions and environment of the relevant cash-generating unit (CGU). We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter. Our procedures included:  Considering the appropriateness of the VIU method applied by the Consolidated Entity and Bank to perform the annual test of goodwill for impairment against the requirements of the accounting standards.  Assessing the integrity of the VIU model used, including the accuracy of the underlying calculations.  Assessing the historical accuracy of the Consolidated Entity’s and Bank’s forecast operating cash flows by comparing to actual past performance, to inform our evaluation of forecasts incorporated in the VIU model.  Challenging the key forecast cash flow assumptions used in the VIU model using our knowledge of the Consolidated Entity and Bank, their past performance, and our inquiries with Management. We also compared key assumptions to the Consolidated Entity’s and Bank’s Board approved FY20 Budget.  Using our industry knowledge and published studies of industry trends and expectations, assessing the impact of the regulatory change and increased competition on the Consolidated Entity’s and Bank’s key assumptions, specifically growth rates and terminal growth rates, for indicators of bias and inconsistent application.  Working with our valuation specialists, using our knowledge of the Consolidated Entity and Bank and its industry, to independently develop a discount rate range considered comparable using publicly available market data for comparable entities adjusted by risk factors specific to the Consolidated Entity and the industry it operates in.  Performing sensitivity analysis by varying key assumptions, in particular discount rates, forecast growth rates and terminal growth rates, within a reasonably possible range, to identify those assumptions at a higher risk of bias or inconsistency in application and to focus our further procedures. Annual Report 2019INDEPENDENT AUDITOR’S REPORT176  Assessing the disclosures in the financial report using our understanding of the information obtained from our testing and against the requirements of the accounting standards. Valuation of intangible computer software – Consolidated Entity and Bank Refer to Note 4.1 to the Financial Reports The key audit matter How the matter was addressed in our audits The assessment of the valuation of intangible computer software is considered a key audit matter due to the significant:  amount of costs capitalised during the year.  judgement applied by us to assess the Consolidated Entity’s and Bank’s determination of:  capitalised costs – the nature and amount of costs to be capitalised in accordance with the requirements of the accounting standards. This can be inherently subjective for internally generated computer software projects.  expected useful life – on completion of internally generated computer software, the accounting standards require the Consolidated Entity and Bank to estimate the useful life of the computer software and amortise the asset over this period. This assessment is based on the intended use of the asset. This can be judgemental and dependent upon future events, including advances in technology, thereby increasing the complexity in estimating useful life.  We also focused on the analysis of impairment indicators performed by the Consolidated Entity and Bank. Our procedures included:  Evaluating the Consolidated Entity’s and Bank’s intangible computer software capitalisation policy against the capitalisation criteria and guidance in the relevant accounting standards.  For a sample of internally generated computer software projects currently under development, challenging the Consolidated Entity’s and Bank’s application of the capitalisation policy. Specifically, we challenged:  the nature of project costs capitalised by testing a sample of capitalised costs to the project scope of work and underlying invoices and timesheets, as well as inquiries with Management; and  the Consolidated Entity’s and Bank’s assessment of projects not yet classified as ‘ready for-use’ for indicators of being in use, such as checking the phase of implementation with Project Managers, and hence being subject to amortisation.  For a sample of internally generated computer software classified as ‘in-use’, challenging the Consolidated Entity’s and Bank’s estimated period of economic benefit from the use of the software compared to the original project plan. We also specifically focused on the continuation of the original project feasibility for those projects behind schedule, considering emerging technology.  Considering the Consolidated Entity’s and Bank’s assessment of intangible computer software impairment indicators by using our knowledge of the Consolidated Entity and Bank, results of our testing and inquiring with Project Managers. Valuation of financial instruments at fair value – Consolidated Entity and Bank Refer to Note 3.7 and 3.8 to the Financial Reports The key audit matter How the matter was addressed in our audits The valuation of financial instruments measured at fair value is considered a key audit matter as determining the fair value of financial instruments involves a significant level of judgement by the Consolidated Entity and Bank. The level of judgement increases where key inputs to the valuation are not readily available in the market and require additional judgement. This increases the risk of error and adds complexity to our audit. We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter. Working with our valuation specialists, our procedures included:  Checking the Consolidated Entity’s and the Bank’s valuation of a sample of financial instruments (asset and liabilities), by comparing the observable inputs, including quoted prices, to independently sourced market data.  Using independent models, reperforming the valuation for a sample of derivative assets and liabilities where fair value was determined using observable inputs. This included comparing a sample of observable inputs in the Consolidated Entity’s and Bank’s valuations to independently sourced market data, such as interest rates, foreign exchange rates and volatilities.  Where the fair value of derivatives and other financial assets were determined using unobservable inputs (‘level 3’ instruments), challenging the Consolidated Entity’s and Bank’s valuation by testing the key inputs used to comparable data in the market, including the use of proxy instruments and available alternatives. We also checked the Consolidated Entity’s and Bank’s valuation methodology to industry practice and the criteria in the accounting standards.  Assessing the appropriateness of the Consolidated Entity’s and Bank’s disclosures in the financial reports using our understanding obtained from our testing against the requirements of the accounting standards. Bank of Queensland Limited and its Controlled EntitiesINDEPENDENT AUDITOR’S REPORT177 Bank, results of our testing and inquiring with Project Managers. Valuation of financial instruments at fair value – Consolidated Entity and Bank Refer to Note 3.7 and 3.8 to the Financial Reports The key audit matter How the matter was addressed in our audits The valuation of financial instruments measured at fair value is considered a key audit matter as determining the fair value of financial instruments involves a significant level of judgement by the Consolidated Entity and Bank. The level of judgement increases where key inputs to the valuation are not readily available in the market and require additional judgement. This increases the risk of error and adds complexity to our audit. We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter. Working with our valuation specialists, our procedures included:  Checking the Consolidated Entity’s and the Bank’s valuation of a sample of financial instruments (asset and liabilities), by comparing the observable inputs, including quoted prices, to independently sourced market data.  Using independent models, reperforming the valuation for a sample of derivative assets and liabilities where fair value was determined using observable inputs. This included comparing a sample of observable inputs in the Consolidated Entity’s and Bank’s valuations to independently sourced market data, such as interest rates, foreign exchange rates and volatilities.  Where the fair value of derivatives and other financial assets were determined using unobservable inputs (‘level 3’ instruments), challenging the Consolidated Entity’s and Bank’s valuation by testing the key inputs used to comparable data in the market, including the use of proxy instruments and available alternatives. We also checked the Consolidated Entity’s and Bank’s valuation methodology to industry practice and the criteria in the accounting standards.  Assessing the appropriateness of the Consolidated Entity’s and Bank’s disclosures in the financial reports using our understanding obtained from our testing against the requirements of the accounting standards. Annual Report 2019INDEPENDENT AUDITOR’S REPORT178 Information Technology (IT) systems and controls – Consolidated Entity and Bank Refer to Basis of Preparation in Note 1 to the Financial Reports The key audit matter How the matter was addressed in our audits The Consolidated Entity’s and Bank’s business utilises a number of complex, interdependent Information Technology (IT) systems to process and record a high volume of transactions. Controls over user access, change management, program development and other operational controls in IT systems are critical to the recording of financial information and the preparation of financial reports. The IT systems and controls, as they impact the financial recording and reporting of transactions, is a key audit matter, and significantly affect our audit approach. Our IT specialists were used throughout the engagement as a core part of our audit team. We tested the general controls over key IT applications (systems) used in processing significant transactions and recording balances in the general ledger. We also tested automated controls embedded within these systems. Working with our IT specialists, our procedures included:  Testing the governance controls used by the Consolidated Entity’s and Bank’s IT team to monitor system integrity, by checking matters impacting the operational integrity of core systems for escalation and action in accordance with the Consolidated Entity’s and Bank’s policies.  Testing the access rights (including privileged users) given to staff by checking them to approved records and inspecting the reports for granting and removal of access rights.  Testing preventative controls designed to enforce segregation of duties between users within particular IT systems.  Testing the change management controls related to code development and workflows approval.  Testing the automated controls, principally relating to the automated calculation of certain transactions and the generation of certain reports. For a sample of automated calculations, we tested the inputs used within the calculations to source data and also tested the accuracy of the calculations. Other Information Other Information is financial and non-financial information in Bank of Queensland Limited’s annual reporting which is provided in addition to the Financial Reports and the Auditor's Report. The Directors are responsible for the Other Information. Our opinions on the Financial Reports do not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audits of the Financial Reports, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Reports or our knowledge obtained in the audits, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Reports The Directors are responsible for:  preparing the Financial Reports that give a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001.  implementing necessary internal controls to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.  assessing the Consolidated Entity’s and Bank’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Consolidated Entity or Bank or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audits of the Financial Reports Our objective is:  to obtain reasonable assurance about whether each of the Financial Reports as a whole are free from material misstatement, whether due to fraud or error; and  to issue an Auditor’s Report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Reports. A further description of our responsibilities for the audits of the Financial Reports is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. Bank of Queensland Limited and its Controlled EntitiesINDEPENDENT AUDITOR’S REPORT179 In connection with our audits of the Financial Reports, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Reports or our knowledge obtained in the audits, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Reports The Directors are responsible for:  preparing the Financial Reports that give a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001.  implementing necessary internal controls to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.  assessing the Consolidated Entity’s and Bank’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Consolidated Entity or Bank or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audits of the Financial Reports Our objective is:  to obtain reasonable assurance about whether each of the Financial Reports as a whole are free from material misstatement, whether due to fraud or error; and  to issue an Auditor’s Report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Reports. A further description of our responsibilities for the audits of the Financial Reports is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. Annual Report 2019INDEPENDENT AUDITOR’S REPORT180 Report on the Remuneration Report Opinion In our opinion, the Remuneration Report of Bank of Queensland Limited for the year ended 31 August 2019, complies with Section 300A of the Corporations Act 2001. Directors’ responsibilities 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 responsibilities We have audited the Remuneration Report included in pages 58 - 84 of the Directors’ report for the year ended 31 August 2019. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPM_INI_01 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 KPMG Robert Warren Partner Sydney 16 October 2019 Bank of Queensland Limited and its Controlled EntitiesINDEPENDENT AUDITOR’S REPORTSHAREHOLDING DETAILS As at Thursday 26 September 2019, the following shareholding details applied: 1. TWENTY LARGEST ORDINARY SHAREHOLDERS SHAREHOLDER HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED MILTON CORPORATION LIMITED BNP PARIBAS NOMINEES PTY LTD BNP PARIBAS NOMS PTY LTD NATIONAL NOMINEES LIMITED AMP LIFE LIMITED CITICORP NOMINEES PTY LIMITED CS THIRD NOMINEES PTY LIMITED NAVIGATOR AUSTRALIA LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA CARLTON HOTEL LIMITED PRUDENTIAL NOMINEES PTY LTD KARATAL HOLDINGS PTY LTD THE MANLY HOTELS PTY LIMITED PACIFIC CUSTODIANS PTY LIMITED BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP No. of ordinary shares 68,742,849 33,021,389 18,537,408 14,890,010 7,306,078 3,245,708 2,528,756 1,500,189 1,119,548 1,062,511 1,051,790 1,018,524 949,885 886,042 767,873 750,000 692,344 655,540 622,840 559,232 % 16.94 8.14 4.57 3.67 1.80 0.80 0.62 0.37 0.28 0.26 0.26 0.25 0.23 0.22 0.19 0.18 0.17 0.16 0.15 0.14 Total 159,908,516 39.41 The above table includes shareholders that may hold shares for the benefit of third parties. Voting rights 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. 181 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019SHAREHOLDING DETAILS As at Thursday 26 September 2019, the following shareholding details applied: 2. TWENTY LARGEST CAPITAL NOTES SHAREHOLDERS SHAREHOLDER HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP DIOCESE DEVELOPMENT FUND - CATHOLIC DIOCESE OF PARAMATTA HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 JOHN E GILL TRADING PTY LTD NATIONAL NOMINEES LIMITED DOMER MINING CO PTY LTD TRUSTEES OF CHURCH PROPERTY FOR THE DIOCESE OF NEWCASTLE FEDERATION UNIVERSITY AUSTRALIA INVIA CUSTODIAN PTY LIMITED HAVENFLASH PTY LTD J P MORGAN NOMINEES AUSTRALIA PTY LIMITED NETWEALTH INVESTMENTS LIMITED CITICORP NOMINEES PTY LIMITED NAVIGATOR AUSTRALIA LTD PACIFIC DEVELOPMENT CORPORATION PTY LTD NETWEALTH INVESTMENTS LIMITED SIMPLY BRILLIANT PTY LTD NAVIGATOR AUSTRALIA LTD SEYMOUR GROUP PTY LTD Total No. of capital notes 154,365 88,304 65,000 57,123 54,593 52,040 32,200 27,499 21,935 21,310 21,000 20,726 18,058 17,179 16,097 15,500 15,154 15,000 14,161 14,000 % 4.41 2.52 1.86 1.63 1.56 1.49 0.92 0.79 0.63 0.61 0.60 0.59 0.52 0.49 0.46 0.44 0.43 0.43 0.40 0.40 741,244 21.18 The above table includes shareholders that may hold shares for the benefit of third parties. Voting rights Capital Notes 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 - 100,000 100,001 - and over Total Ordinary Shares Capital Notes 2019 57,361 31,527 6,764 4,017 93 99,762 2018 58,232 31,460 6,240 3,406 77 99,415 2019 5,148 403 30 26 1 2018 5,078 420 28 23 2 5,608 5,551 The number of ordinary shareholders holding less than a marketable parcel is 3,177. The number of capital notes holders holding less than a marketable parcel is 19. 182 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled EntitiesSHAREHOLDING DETAILS 4. PARTLY PAID SHARES There are no partly paid shares. 5. SUBSTANTIAL SHAREHOLDERS The names of substantial shareholders in the Bank, per the meaning within the Corporations Act 2001 (Cth), and the number of shares in which each has an interest as disclosed in substantial shareholder notices given to the Bank were: SUBSTANTIAL SHAREHOLDER The Vanguard Group Inc. BlackRock Group 6. SECURITIES EXCHANGE LISTING No. of ordinary shares in which interest is held (at date of notification) 19,929,774 23,980,966 Date of notification 9 July 2018 2 November 2018 The shares of Bank of Queensland Limited (BOQ) and Capital Notes (BOQPE) are quoted on the Australian Stock Exchange. BOQ’s medium-term notes and covered bonds are listed on the London Stock Exchange. 7. OPTIONS At 31 August 2019, there were no options over unissued ordinary shares. 8. ON MARKET BUY-BACK There is no current on market buy-back. 9. OTHER INFORMATION BOQ is a publicly listed company limited by shares and is incorporated and domiciled in Australia. 183 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019 CUSTOMER SERVICE Australia: 1300 55 72 72 International: +61 7 3336 2420 Postal address: GPO Box 898 Brisbane Qld 4001 SHAREHOLDER INFORMATION SHARE REGISTRY Link Market Services Limited Level 21, 10 Eagle Street Brisbane Qld 4000 Australia: 1800 779 639 International: +61 1800 779 639 Email: boq@linkmarketservices.com.au linkmarketservices.com.au COMPANY DETAILS Bank of Queensland Limited ABN 32 009 656 740 ACN 009 656 740 Registered office: Level 6, 100 Skyring Terrace Newstead Qld 4006 Telephone: +61 7 3212 3333 Investor Relations: +61 7 3212 3990 boq.com.au twitter.com/boq facebook.com.au/BOQOnline KEY SHAREHOLDER DATES Dividend dates for ordinary shares only are: 2019 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 31 August 2019 17 October 2019 6 November 2019 7 November 2019 27 November 2019 10 December 2019 184 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Bank of Queensland Limited and its Controlled Entities5 YEAR FINANCIAL SUMMARY $ millions (unless otherwise stated) FINANCIAL PERFORMANCE (1) Net interest income Non interest income Total income Operating expenses Underlying profit before tax (2) Loan impairment expense Cash earnings before tax Cash earnings after tax attributable to ordinary shareholders (3) Statutory net profit after tax FINANCIAL POSITION 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 ($) Cash basic earnings per share (cents) Cash diluted earnings per share (cents) Fully franked dividend per ordinary share (cents) Fully franked special dividend per ordinary share (cents) Cash 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 Total Capital Adequacy ratio 2019 $m 961 128 1,089 (550) 539 (74) 465 320 298 46,216 55,597 32,428 51,738 3,859 3,721 9.17 79.6 74.0 65 - 82% 1.93% 50.5% 8.3% 9.04% 12.40% 2018 $m 965 145 1,110 (527) 583 (41) 542 372 336 2017 $m 926 175 1,101 (513) 588 (48) 540 378 352 2016 $m 937 173 1,110 (520) 590 (67) 523 360 338 2015 $m 907 180 1,087 (500) 587 (74) 513 357 318 45,279 43,817 43,152 40,975 52,980 51,658 50,853 48,018 31,325 49,124 3,856 4,565 11.49 94.7 89.3 76 - 81% 1.98% 47.5% 9.9% 30,190 47,869 3,788 4,932 12.59 97.6 93.9 76 8 29,122 26,914 47,266 44,549 3,587 3,469 4,020 10.55 95.6 90.7 76 - 4,698 12.67 97.3 92.2 74 - 77% 78% (5) 80% 1.87% 46.6% 10.4% 1.94% 1.97% 46.8% 46.0% 10.3% 10.7% 9.31% 9.39% 9.00% 8.91% 12.76% 12.37% 12.29% 12.72% Cash earnings after tax exclude significant items (tax effected). All amounts disclosed are on cash basis except statutory net profit after tax. (1) (2) Underlying profit before tax is profit before impairment on loans and advances, significant items and tax. (3) (4) Before specific and collective provisions. (5) This ratio was 87 per cent including special dividend. (6) Excludes impact of significant items. (7) 2019 and 2018 NIM is net of offset accounts. 185 Financial Statements 90 | Signed Reports 170 | Shareholding Details 181 | 5 Year Summary 185Annual Report 2019GLOSSARY TERM DESCRIPTION APRA Prudential Standard (APS) Australian Accounting Standards Board (AASB) Australian Finance Industry Association (AFIA) Australian Prudential Regulation Authority (APRA) Australian Securities Exchange (ASX) Authorised deposit-taking institution (ADI) Available stable funding (ASF) Prudential standards issued by APRA which are applicable to ADIs. The AASB produces a series of technical pronouncements that set out the measurement and recognition requirements when accounting for particular types of transactions and events, along with the preparation and presentation requirements of an entity’s financial statements. AFIA is the national association for the equipment leasing and financing industry. Formerly Australian Equipment Lessors Association. APRA is the prudential regulator of the Australian financial services industry. APRA is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia. Australian Securities Exchange or ASX Limited (ABN 98 008 624 691) and the market activities operated by ASX Limited. A corporation which is authorised under the Banking Act 1959 and includes banks, building societies and credit unions. ASF is the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. Average interest earning assets Average balance over the period for a bank’s assets that accrue interest income. Bank of Queensland Limited (the Bank or BOQ) Basel II and III Basis points (bps) Capital Notes (BOQPE) Cash earnings Committed liquidity facility (CLF) Common equity tier 1 (CET1) Common equity tier 1 ratio (CET1 ratio) The Bank is a for-profit entity primarily involved in providing retail banking, leasing finance, and insurance products to its customers. A global regulatory framework to improve the regulation, supervision and risk management within the banking system developed by the Basel Committee on Banking Supervision. One per cent of one per cent (0.01 per cent). Capital Notes are perpetual, convertible, unguaranteed and unsecured notes issued by BOQ, with preferred, discretionary, non-cumulative distributions. Capital Notes may convert into common shares in certain circumstances as described in the offer documentation of the notes. Cash Earnings is a non-accounting standards measure commonly used in the banking industry to assist in presenting a clear view of underlying earnings. The RBA provides a CLF to certain ADIs as part of Australia’s implementation of the Basel III liquidity standards. The facility is designed to ensure that participating ADIs have enough access to liquidity to respond to an acute stress scenario, as specified under the relevant APS. Capital that is recognised as the highest quality component of capital under APS. CET1 capital divided by total RWA calculated in accordance with relevant APS. Consolidated Entity (the Group) BOQ and its subsidiaries Cost to income ratio (CTI) Corporations Act 2001 Covered bond guarantor Days past due (dpd) Dividend payout ratio Dividend reinvestment plan (DRP) Dividend yield Earnings per share (EPS) Effective tax rate Equipment hire purchase trust (EHP trust) Euro-Commercial Paper (ECP) Euro Medium Term Note (EMTN) Full time equivalent (FTE) Operating expenses divided by net operating income. The Corporations Act 2001 (Cth) Perpetual Corporate Trust Limited ABN 99 000 341 533, incorporated with limited liability in the Commonwealth of Australia and having its registered office at Level 18, 123 Pitt Street, Sydney, NSW 2000, as trustee of the BOQ Covered Bond Trust (the Trustee). A loan or lease payment that has not been made by a customer by the due date. Dividends paid on ordinary shares divided by earnings. A plan which provides shareholders with the opportunity to convert all or part of their entitlement to a dividend into new shares. Dividend shown as a percentage of the share price. Measure of earnings attributed to each equivalent ordinary share over a twelve month period. This is calculated by dividing the company’s earnings by the weighted average number of shares on issue in accordance with AASB 133 Earnings per share. Income tax expense divided by profit before tax. EHP trust under the REDS securitisation program, issuing asset backed securities to the term market. ECP is an offshore short term commercial paper program. EMTN is an offshore medium term note program. A calculation based on number of hours worked by full and part time employees as part of their normal duties. 186 Bank of Queensland Limited and its Controlled EntitiesGLOSSARY TERM DESCRIPTION General reserve for credit losses (GRCL) Gross loans and advances (GLA) High Quality Liquid Asset (HQLA1) Impaired assets Interest bearing liabilities International Financial Reporting Standards (IFRS) Issued capital Line of credit (LOC) Liquid assets Liquidity Coverage Ratio (LCR) Net interest margin (NIM) Net stable funding ratio (NSFR) Net tangible assets (NTA) Non-interest earning assets Owner Managed branch (OMB) REDS Reserve Bank of Australia (RBA) Residential mortgage backed securities (RMBS) Return on average equity (ROE) Return on average tangible equity (ROTE) Required stable funding (RSF) Risk weighted assets (RWA) Total capital adequacy ratio Treasury shares Virgin Money Australia (VMA or Virgin Money) Weighted average number of shares (WANOS) Wholesale Capital Notes (WCN) An estimate of the reasonable and prudent expected credit losses over the remaining life of the portfolio and on non-defaulted assets, not covered by provisions for impairment. 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. Comprises of the Bank’s notes and coins and marketable securities representing claims on or guaranteed by the Australian Government or Semi-Government authorities. Exposures that have deteriorated to the point where full collection of principal and interest is in doubt. The Bank’s liabilities that accrue interest expense. IFRS and interpretations issued by the International Accounting Standards Board. Value of securities allotted in a company to its shareholders. A flexible facility that allows a customer to draw down on their approved available credit at any time, as long as the customer does not exceed the approved credit limit. All unencumbered RBA repurchase eligible liquid assets including HQLA1 and assets able to be pledged as collateral to the RBA under the CLF. The ratio of HQLA1 that can be converted into cash easily and immediately in private markets, to total net cash flows required to meet the Group’s liquidity needs for a 30 day calendar liquidity stress scenario as determined in accordance with APS. Net interest income divided by average interest-earning assets. The NSFR is defined as the amount of ASF relative to the amount of required stable funding. This ratio should be equal to at least 100% on an on-going basis. ASF is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of such stable funding required of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance sheet exposures. Net tangible assets are calculated as the total assets of a company minus any intangible assets such as goodwill, less all liabilities and the par value of preferred stock. The Bank’s assets that do not accrue interest income. A branch which is run by a franchisee. Term to describe the BOQ securitisation programmes. The RBA is Australia’s central bank and derives its functions and powers from the Reserve Bank Act 1959 (Cth). Its stated duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. BOQ’s securitisation program which enables the trustee to issue debt securities backed by assets originated by the Group such as mortgages and equipment finance receivables. Net profit attributable to the owners of the Bank divided by average ordinary equity. Net profit attributable to the owners of the Bank divided by average ordinary equity less goodwill and identifiable intangible assets. RSF is an input to the calculation of the NSFR for bank prudential management purposes. A bank’s RSF is calculated from its assets, weighted according to their maturity, credit quality and liquidity, together with an amount in relation to off balance sheet commitments. A quantitative measure of various risks including credit, operational, market and securitisation as defined by APS. Total capital divided by total RWA calculated in accordance with relevant APS. Shares that the Bank has issued but are held by a trust included within the Bank’s consolidated results. Treasury shares are not considered shares outstanding and are not included in ‘per share’ calculations. Virgin Money (Australia) Pty Ltd and its subsidiaries. The VMA entities are subsidiaries of the Group that engage in the provision of financial services (e.g. insurance, superannuation and home lending) on behalf of business partners, including BOQ. Calculated in accordance with AASB 133 Earnings per share. WCNs are notes that may convert into common shares in certain circumstances as described in the offer documentation of the notes. 187 Annual Report 2019Bank of Queensland Limited ABN 32 009 656 740

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