Commonwealth Bank of Australia
Annual Report 1999

Plain-text annual report

of Australia Annual Report 1999 This Annual Report includes the disclosure requirements for both the United States Securities and Exchange Australia and Commission (SEC). It will be lodged with the SEC as an Annual Report on Form 20F. If as a shareholder you wish to continue to receive this Annual Report please complete the enclosed form. All shareholders will receive a Report to Shareholders (Concise Financial Report), unless they request otherwise. Commonwealth Bank of Australia ACN 123 123 124 1 Financial Information and Analysis For the year ended 30 June 1999 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Form 20-F Cross Reference Index.............................................................................................................................. 3 Review of Operations .................................................................................................................................................. 4 Strategic Vision and Business Goals ........................................................................................................................ 5 Description of Business.............................................................................................................................................. 6 Financial Review........................................................................................................................................................ 19 Selected Consolidated Financial Data ................................................................................................................ 19 Management’s Discussion and Analysis of Financial Condition and Results of Operations................................ 25 Overview ............................................................................................................................................................. 25 Integrated Risk Management .............................................................................................................................. 26 Capital Management ........................................................................................................................................... 27 Credit Rating ....................................................................................................................................................... 27 Expansion ........................................................................................................................................................... 27 Guarantee ........................................................................................................................................................... 28 Year 2000 Systems Compliance ......................................................................................................................... 28 Net Interest Income............................................................................................................................................. 29 Bad and Doubtful Debts ...................................................................................................................................... 31 Non Interest Income............................................................................................................................................ 31 Operating Expenses............................................................................................................................................ 32 Occupancy and Equipment Expenses ................................................................................................................ 33 Information Technology Services ........................................................................................................................ 33 Income Tax Expense .......................................................................................................................................... 33 Abnormal Items ................................................................................................................................................... 33 Net Income.......................................................................................................................................................... 34 Capital Adequacy ................................................................................................................................................ 34 Funding and Liquidity .......................................................................................................................................... 35 Cross Border Outstandings by Industry Category ............................................................................................... 36 Corporate Governance.............................................................................................................................................. 37 Directors’ Report ....................................................................................................................................................... 40 Selected Financial Data for Five Years .................................................................................................................... 46 Financial Statements................................................................................................................................................. 48 Statements of Profit & Loss................................................................................................................................. 49 Balance Sheets ................................................................................................................................................... 50 Changes in Shareholders’ Equity ........................................................................................................................ 51 Statements of Cash Flows .................................................................................................................................. 52 Notes to and Forming Part of the Accounts......................................................................................................... 53 Directors’ Declaration.............................................................................................................................................. 151 Independent Audit Report....................................................................................................................................... 152 Shareholding Information ....................................................................................................................................... 153 2 Form 20-F Cross Reference Index (for purpose of filing with US Securities and Exchange Commission) Page Currency of Presentation Exchange Rates And Certain Definitions..................................................................... 157 Part I Description Of Business..................................................................................................................... 6-18 Item 1 Description Of Property ........................................................................................................................ 12 Item 2 Legal Proceedings ................................................................................................................................ 18 Item 3 Control Of Registrant .......................................................................................................................... 154 Item 4 Nature Of Trading Market ................................................................................................................... 155 Item 5 Exchange Controls Affecting Security Holders ................................................................................... 158 Item 6 Taxation.............................................................................................................................................. 158 Item 7 Selected Consolidated Financial And Operating Data ..................................................................... 19-22 Item 8 Item 9 Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.......... 25-36 Item 9A Quantitative and Qualitative Disclosures About Market Risk ............................................. 26-27,113-125 Directors And Officers of Registrant ................................................................................................... 156 Item 10 Item 11 Compensation Of Directors And Executive Officers ........................................................................... 157 Item 12 Options To Purchase Securities From Registrant Or Subsidiaries ......................................... 44,100-102 Item 13 Interests Of Management In Certain Transactions ................................................................. 44,130-132 Part II Item 14 Part III Item 15 Item 16 Part IV Item 17 Item 18 Item 19 Signatures............................................................................................................................................................ 160 Financial Statements (4) Financial Statements ..................................................................................................................... 49-151 Financial Statements And Exhibits (4) Defaults Upon Senior Securities (2) Changes In Securities And Changes In Security For Registered Securities (3) Description Of Securities To Be Registered (1) Consolidated Statements of Income for years ended 30 June 1999, 1998 and 1997............................................ 49 Consolidated Balance Sheets as at 30 June 1999 and 1998................................................................................. 50 Consolidated Statements of Changes in Shareholders’ Equity for years ended 30 June 1999, 1998 and 1997.... 51 Consolidated Statements of Cash Flows for years ended 30 June 1999, 1998 and 1997 ..................................... 52 Notes to and Forming Part of the Accounts ........................................................................................................... 53 Report of Independent Auditors ........................................................................................................................... 152 (1) (2) (3) (4) Not required in this Annual Report. (a)(b) None. (a)(b) none (c) not applicable (d) no changes. Not applicable as item 18 complied with. Special Note Regarding Forward-Looking Statements (Required in the context of filings with the US Securities and Exchange Commission.) the under Certain statements captions ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’, ‘Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial and Derivative Instruments, Commodity Instruments’ and elsewhere in this Annual Report constitute ‘forward-looking statements’ within the meaning of the US Private Securities Litigation Reform Act of 1995. Such forward-looking statements including economic forecasts and assumptions and business and financial projections involve known and unknown risks, uncertainties and other factors that results, performance or may cause the actual factors in competitive conditions achievements of the Bank to be materially different from any future results, performance or achievements expressed or forward-looking implied by such include demographic statements. Such changes, changes in Australia, New Zealand, Asia, United States or United Kingdom, changes in the regulatory structure of the banking industry in Australia, New Zealand or Asia, changes in political, social and economic conditions in Australia, legislative proposals for reform of the banking industry in Australia, and various other factors beyond the Bank’s control. Given these risks, uncertainties and other factors, potential investors are cautioned not to place undue reliance on such forward-looking statements. 3 Review of Operations COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Profits $1,422 million after tax and before abnormal items, up 14% on 1997/98, and up 30% on 1997/98 after abnormal items. Return on equity 20.54% before abnormal items, up from 18.48% in 1997/98. 1422 Shareholders The result reflects: • • • increased lending volumes across all products; strong growth in financial services business; a one off profit on the sale of infrastructure assets; continued cost containment and productivity gains; increased coverage for impaired assets; and a strong performance by ASB Bank in New Zealand. • • • Net Profit ($m) 1206 1251 1422 1078 1090 1997 1998 1999 after tax but before abnormal items after tax and abnormal items Earnings per Share 153.4 cents before abnormal items, up 14% on 1997/98 of 134.5 cents. 1996/97 earnings per share before abnormal items was 131.2 cents. Assets $138.1 billion, up 6% on 1997/98 of $130.5 billion, which was up from $120.1 billion for 1996/97. The Group showed strong growth in its key lending products; Home Loans up 11% to $52.6 billion, Term Loans up 13% to $34.9 billion and Credit Cards up 13% to $2.7 billion. Balance sheet growth interest earnings by $363 million, however, this was offset by a decline in interest margins reducing net interest income growth to $130 million. increased net Dividends The Bank continues to maintain its record of strong payout ratios with a 1998/99 dividend payout ratio of 75%. A final dividend of 66 cents per share, fully franked brought the total dividend for 1998/99 to 115 cents, up 11 cents from 104 cents for 1997/98. 1996/97 total dividend was 102 cents. 4 Return on Equity (%) before abnormal items 20.5 18.5 18.2 1997 1998 1999 Combining dividends and the appreciation in the value of the Bank’s shares, total shareholder return for the year was 34.3% compared with 25.3% in 1998. The dividend yield based on 30 June 1999 share price of $24.05 and calculated on the 1998/99 dividends of 49 cents and 66 cents was 4.78%. Over the last five years, the Bank has produced an annual return to shareholders in the top quartile of all banks within the Banks and Finance Index. Going forward, the aim is to retain this position. Credit Ratings Standard & Poor’s Corporation Moody’s Investors Service, Inc. Fitch IBCA Moody’s Bank Financial Strength Rating Fitch IBCA Individual Rating Capital Management Short Term Long Term A-1+ P-1 F1+ AA- Aa3 AA B A/B As part of its capital management program, the Bank also conducted a successful off market share buyback in March 1999. The Bank bought back 2.9% of its ordinary shares for $650 million. This brings the total of share buybacks to $2.3 billion since 1996. Year 2000 Compliance The Bank’s Year 2000 compliance program is progressing to plan. Goods and Services Tax The Goods and Services Tax (GST) legislation was enacted on 8 July 1999, and will apply from 1 July 2000. The Bank has commenced a program to implement GST. With the exception of the areas of the Bank involved in general insurance and leasing services, the GST will not directly impact the Bank’s services until 1 July 2000. Strategic Vision And Business Goals Strategic Vision: Commonwealth Bank aims to help customers manage and build wealth. We will achieve this by: Retaining our lowest cost structure Competitive pressure from existing and new market entrants, together with new distribution technology innovations, will continue to impact on the margins traditional core businesses. Our strategic initiatives will remain focused on ensuring we retain our low unit cost structure advantage. in our • • • • Key achievements Cost to Asset ratio has improved to 2.22%. Cost to Income ratio has improved to 55.6%. The Woolworths Ezy Banking initiative is being implemented to provide an alternative low cost distribution channel to meet the needs of our existing and new customers looking for a simple, fresh banking solution. Focus on telephone and online banking and financial solutions that provide more efficient service for a lower cost to the customer and the Bank. Expanding our share of customers through online and direct leadership Maintaining a competitive cost structure means growing our customer base for greater scale advantage. Internet-based products and services will be key growth businesses of the future, providing customers with superior offerings at lower cost. The Bank these developments and is determined to continue to lead the way. is currently at forefront of the Key achievements The number of customers registered for Share Direct grew by 71%. NetBank customers more than doubled to over 89,000. The number of customers registered for our direct (telephone) operations increased by almost 50% to 2.7 million. Establishment of eComm and development of detailed strategies for growing our online and direct businesses. Vodafone alliance for mobile phone banking. • • • • • Providing more of the financial services our customers need Our customer base is the largest of any financial institution in Australia (7.7 million including 2 million young Australians) and we’re continuing to grow. We can provide more of financial services our the customers need through a wider variety of products. improving our This will be achieved understanding of the needs of each customer, focusing on improving service quality and efficiency, and developing new products and services that are better attuned to meeting these needs. through Key achievements Growth in funds under management to over $27 billion. Restructure of the retail Bank to support a customer-led business focus. Customer information management programme to provide a better understanding of customer needs. Listing of Commonwealth Property Office Fund. • • • • Building offshore value Our business has been focused on Australia and New Zealand. To maximise returns for shareholders we need to supplement this business with new revenue streams from larger and faster growing markets. As online communication technologies gather pace, financial services are increasingly becoming global in their reach and accessibility. Our analysis suggests that the Bank is well placed in the technology revolution globally. As such, we are exploring options to leverage this ‘know how’ into emerging high growth online markets. Our long term goal is to derive 25% of our market value from offshore businesses. • • Key achievements ASB Bank, our presence in New Zealand, has continued to grow as a full service bank. During the year the life insurance and financial services company Sovereign Limited was acquired. Online entry strategies markets are under consideration. for other overseas Implementing Best Practice People Management Meeting the needs of our many customers and shareholders requires strong leadership, shared vision and a ‘Make it happen’ determination by our people. Our Best-Practice People Management strategy is about ensuring our people and business models are mutually self-reinforcing through: • • • line-management leadership and accountability; fair treatment and safe work; appropriately recognising contribution; and attracting the right people and developing their talent. Key achievements During the year a significant investment has been made in the rollout of a leadership program to establish a common leadership (over 3,000 behaviour across executives and senior executives have participated in these training programmes). the organisation framework rewarding and for • 5 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES line delivery services. Commonwealth Bank has Australia’s most accessed financial services internet sites. The Institutional Banking division focuses on Australasia’s largest corporations, government bodies institutions and has banking and other major relationships with over 1,000 of these entities. Through a partnership approach to relationship banking, Institutional Banking delivers innovative and tailored financial solutions to its institutional clients. The Technology, Operations and Property division operates as a discrete business unit to ensure that Bank staff dealing directly with customers are provided with best in class technology, infrastructure and support services and are able to focus on understanding and fulfilling customers’ needs. Over the last five years, the Group’s return on equity has increased from 15.69% for Financial Year 1995 to 20.54% for Financial Year 1999. Over the same period the Group’s return on average assets has increased from 1.01% to 1.06%. The Group has remained capitalised at over 9% of total risk weighted assets for the last five years, which is above the Reserve Bank regulatory requirement of 8%. The Group’s net interest margin has gradually contracted from 4.03% for Financial Year 1995 to 3.09% for Financial Year 1999. The outlook for the net interest margin to ‘Management’s Discussion And Analysis Of Financial Condition And Results Of Operations’. subdued. Refer remains The re-engineering of the Bank’s processes has seen branch and service centre numbers fall from 1,474 at 30 June 1995 to 1,162 at 30 June 1999, and staff numbers, on a full time equivalent basis, fall from 34,383 to 28,964 over the same period. Staff productivity (total operating income per full time equivalent employee) has increased by 46% between Financial Year 1995 and Financial Year 1999 and total operating expenses versus total operating income has fallen from 61.3% in Financial Year 1995 to 55.6% in Financial Year 1999. The following table sets forth a summary of the Group’s key ratios for Financial Years 1995, 1996, 1997, 1998 and 1999. Description of Business Overview finance company activities, and Commonwealth Bank of Australia provides a wide range of banking, financial and related services primarily in Australia. These services include general life banking, insurance and funds management. The Bank is Australia’s largest bank in terms of housing loans and retail deposits and is the second largest in terms of Australian assets. The Group is one of the four major banking groups that collectively control approximately two-thirds of total assets within the Australian banking total industry. At 30 June 1999, consolidated assets of $138 billion and loans outstanding of $102 billion. The Group’s net profit after tax was $1,422 million for Financial Year 1999. the Group had The Group’s banking operations contributed approximately 88% of its total net profit for Financial Year 1999 and represented approximately 95% of the Group’s total assets at 30 June 1999. The Group’s banking operations consist of the operations of the Bank, ASB Bank and Commonwealth Development Bank. The operations of the core business functions of the Bank are carried out by Banking and Financial Services, Customer Service Division and Institutional Banking. Banking and Financial Services is responsible for understanding the needs of our personal and business customers and the marketing and development of products and services. Products and services include banking, insurance and financial services, and are distributed to our customers by Customer Service Division. The Customer Service Division is responsible for providing quality sales and service to the Bank’s customers and managing the most extensive financial services distribution network in Australia. Services are provided to over 7.7 million customers through a national network of almost 100,000 service points, including the largest branch and agency network in the country (over 1,150 branches and 3,900 agencies and over 100 business banking centres as at 30 June 1999), 115 mobile bankers, over 2,600 teller machines (‘ATMs’), over 90,000 automatic EFTPOS terminals and expanding telephone and on- 6 Key Financial Data Return on average shareholders’ equity (1) Return on average total assets (1) Capital adequacy Net interest margin Full time staff equivalent Branches/service centres (Australia) Total operating income per full time (equivalent) employees (A$) Total operating expenses/total operating income (2) Y E A R E N D E D 3 0 J U N E 1999 1998 1997 1996 1995 20.54% 1.06% 9.38% 3.09% 28,964 1,162 16.10% 0.87% 10.49% 3.33% 30,743 1,218 16.39% 0.94% 10.89% 3.53% 33,543 1,334 16.27% 1.06% 12.71% 4.01% 34,518 1,390 15.69% 1.01% 11.15% 4.03% 34,383 1,474 190,720 55.6% 170,120 58.1% 145,515 59.9% 137,667 59.4% 130,995 61.3% (1) (2) Calculations based on operating profit after tax and outside equity interests applied to average shareholders’ equity. Total operating expenses excluding goodwill amortisation. Y E A R E N D E D 3 0 J U N E Geographic segments Revenue (1) Australia New Zealand Other Countries Net Profit Australia New Zealand Other Countries Assets (at year end) Australia New Zealand Other Countries US$M 5,818 645 436 6,899 838 53 48 939 8,801 976 660 10,437 1,270 80 72 1,422 76,364 8,625 6,306 91,295 115,510 13,046 9,540 138,096 1999 1998 (A$ millions, except where indicated) % % 84.3 9.4 6.3 100.0 89.3 5.6 5.1 100.0 83.6 9.5 6.9 100.0 9,514 1,115 657 11,286 1,044 73 (27) 1,090 110,120 10,846 9,578 130,544 84.3 9.9 5.8 100.0 95.8 6.7 (2.5) 100.0 84.4 8.3 7.3 100.0 9,484 977 448 10,909 990 63 25 1,078 101,202 9,994 8,907 120,103 1997 % 86.9 9.0 4.1 100.0 91.9 5.8 2.3 100.0 84.3 8.3 7.4 100.0 (1) Revenue for this table represents total interest income plus total non interest income and proceeds from disposal of assets, refer Note 2 to Financial Statements for details. The address of the Bank’s principal executive office is 48 Martin Place, Sydney, New South Wales, 1155, Australia is and (612) 9378 2000. telephone number its History and Ownership The origins of the Bank lie in the former Commonwealth Bank of Australia which was established in 1911 by Act of Parliament to conduct commercial and savings banking business. Its functions were later expanded to encompass those of a central bank. Subsequent legislative amendment in 1959 created a separate Reserve Bank of Australia to take over the central bank functions. In December 1990, the Commonwealth Banks Restructuring Act 1990 was passed, which provided for: • • the Bank into a public the conversion of company with a share capital, governed by its Memorandum and Articles of Association but subject to certain overriding provisions of the Banking Act - this conversion occurring on 17 April 1991; the Bank to become the successor in law of the State Bank of Victoria (SBV) - this occurring on 1 January 1991; and the issue of shares in the Bank to the public. An offer of just under 30% of the issued shares in the Bank was made to members of the Australian public and staff of the Bank in July/August 1991 to strengthen the Bank’s capital base its acquisition of SBV and to provide a sound foundation for further development of the Bank’s business. following • 7 Description of Business In October 1993, the Commonwealth sold a portion of its shareholding in the Bank, thereby reducing its shareholding to 50.4% of the total number of issued voting shares. • in In shares June/July June/July the public offer of the Commonwealth of Australia, agreed the Commonwealth 1996, Government made a public offer of its remaining 50.4% shareholding in the Bank. The offer was fully subscribed. In conjunction with this offer, the Bank, pursuant to a buyback Agreement between the Bank and to buyback 100 million shares in the Bank from the Commonwealth. The public offer and buyback were completed on 22 July 1996. In connection with the Commonwealth’s 1996, transitional arrangements were implemented which provide that: • all demand and term deposits will be guaranteed for a period of three years from 19 July 1996, when the Commonwealth of Australia ceased to hold more than 50% of the total voting shares in the Bank, with term deposits outstanding at the end of that three year period being guaranteed until maturity; and all other amounts payable under a contract that was entered into before, or under an instrument executed, issued, endorsed or accepted by the Bank and outstanding at 19 July 1996, would be guaranteed by the Commonwealth Government until their maturity. Under the terms of an agreement reached between the Commonwealth and the Bank, the Bank will report to the Commonwealth annually on the level and maturity profile of outstanding liabilities which are subject the Commonwealth’s guarantee. The agreement also includes an undertaking from the Bank that it will not seek to extend the maturity profile of its deposit liabilities beyond that required in the normal course of business during the three years following the effective time. The liabilities of the Bank’s subsidiary Commonwealth Development Bank Limited will continue to remain guaranteed by the Commonwealth. For full details of all guarantee arrangements the Financial Statements. refer Note 25 to in Australian Banking Operations The overall structure of the Australian Banking operations is comprised of three main operating segments: Retail Financial Services, Institutional Banking and Corporate. Retail Financial Services is comprised of two divisions, Customer Services Division and Banking and Financial Services. Institutional Banking is a stand alone division, while Corporate comprises the divisions of Financial and Risk Management, Technology, Operations and Property, Group Human Resources and Group Planning and Development. Banking and Financial Services The Banking and Financial Services division is product for marketing services, responsible 8 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES development and brand management for the retail and small and medium business segments. The division focuses on assessing customer needs and servicing those needs for banking, insurance, funds management and related products and services. The Bank provides a full range of financial services to over 7.7 million customers throughout Australia, including savings and cheque accounts, demand and term deposits, credit cards, personal loans and housing loans, superannuation, and investment and life insurance products. The Bank offers a full range of commercial products including equipment and rural and agribusiness products. A team of trained and licensed investment advisers, conveniently located throughout the branch network, provide information and advice on financial and retirement planning. finance, and trade Home lending forms a major part of the Bank’s business and the Bank continues to be Australia’s leading home loan provider. As the market leader the Bank offers a variety of home loan products to meet the requirements of over 900,000 Australians. The One Year Guaranteed Home Loan has proved very popular. This was complemented during the year by a series of zero establishment fee and interest rate offers that maintained our competitive position. The Bank’s leading position in the Personal Loan market was maintained during the year following rates and processing a improvements to increase the competitiveness of the product. reduction interest in has The Bank approximately 544,000 relationships with small to medium enterprises, serviced through its branch and Business Banking Centre networks. Around 70% are very small businesses serviced through the branch network, while the larger enterprises are serviced by the network of 104 Business Banking Centres. Commercial lending approvals to these clients were up 8.2% in Financial Year 1999 and the Bank has total commercial assets of $27.3 billion as at 30 June 1999. the year, reinforcing A full range of products is offered to meet the diverse needs of the Bank’s business customers. The Better Business Package offers reduced overdraft rates and an innovative range of product solutions, transaction accounts and business planning software. New features were added to the Commonwealth Bank Business Card during the product’s unique positioning in the business finance market. Business customers can now choose between two types of revolving credit facility in addition to the standard purchasing card offering. Quickline users grew by 91% during the year, attesting to the fact that the software product provides business customers with the convenience and ease of completing banking transactions from their home or office, 24 hours a day, 7 days a week. A range of rural and agribusiness products along with equipment and trade finance is offered to meet various business needs. The Commonwealth Bank was named 1999 Bank of the Year in the Personal Investor awards announced on 28 July 1999. The Bank has increased its focus on Internet and online financial services through the formation of eComm, an e-commerce centre of excellence that manages the Bank’s online activities from strategy through to marketing. its The Commonwealth Bank already has around 200,000 online customers utilising its NetBank, Share Direct, Funds Direct, Quickline and Diammond online services. Since inception, eComm has also launched Dot.comm, an internet site designed to meet the needs of the youth market, and signed a partnership with Vodafone to provide a banking transaction service via Short Messaging Service direct to mobile digital handsets. eComm will drive further development of Commonwealth Bank’s online services and develop and manage partnerships in the online world. It will work across the Bank integrating the Group’s banking, investment and broking services the Bank’s 7.7 million personal and business customers. to Housing Loans The Bank’s principal retail lending product is housing loans, most of which consist of financing the purchase of owner occupied housing. The Bank is Australia’s housing with lender approximately 900,000 home loan customers and $45.5 billion in outstanding balances as at 30 June 1999. largest for Historically in Australia, housing loans have been subject to a variable interest rate for a term from five to thirty years, secured by way of a first mortgage over the property being purchased. In more recent years the Bank has sought to provide its customers with additional choices in connection with its housing loans. In 1989, the Bank introduced a fixed rate represents loan product which now housing approximately 30% ($13.7 billion) of total housing loan outstandings. In December 1995 a Basic Variable Rate Home loan option (known as ‘Economiser’) was also introduced (September 1997 for Investment Home Loans). This allowed clients who did not require a full range of options (ie, split loans, portability, the ability to make unlimited special repayments) to reduce their interest rate. The Economiser now represents approximately 7% ($3.4 billion) of total housing loan balances. The Home Equity Facility (HEF) was relaunched in July 1997 to compete in the growing line of credit market. HEF has been very successful with balances of $1.4 billion as at 30 June 1999. Investment Home Loans total $9.0 billion as at 30 June 1999, following strong growth of 36% in the year to 30 June 1999. The Bank in October 1998 released an interactive CD ROM ‘Investment Place’, a new step by step guide to all aspects of residential property investment. It assists clients throughout the decision, purchasing, maintenance and sales stages of an investment property and its financing. It seeks to position the Bank as the leading provider of information and advice on residential property investment. The Bank provides housing finance up to 80% of the value of the property. Above this level (to a 95% insurance would maximum), normally be the Housing Loan Insurance Corporation (‘HLIC’). In June 1999, loans with total balances of $7 billion were covered by HLIC insurance, being 16% of the total portfolio. lenders’ mortgage taken out with Through Commonwealth Insurance Limited, a wholly owned subsidiary of the Bank, customers (not only Bank customers) can purchase home, contents and personal valuables cover at competitive premiums. In the year to May 1999, the Bank increased its lead in market share (All Lenders) for home loan outstandings by 0.6% to be 4.0% ahead of its nearest competitor. Market share for May 1999 stands at 20.2% (All Lenders). Intense competition is expected to continue to place pressure on the Bank’s margin on housing loan products. Increased competition is expected also from new entrants to the rapidly growing online market. Margin income in 1998/99 has been affected by very aggressive fee discounting. This is expected to continue during 1999/00. including widespread pricing Deposit Products to maintain By continuing the broadest representation network of any bank in Australia, the Bank has a relative advantage over competitors in sourcing retail deposit funds. As at 30 June 1999, the Bank’s retail deposit base stood at approximately $67 billion, making the Bank the largest holder of deposits in Australia, with a market share of 22% (RBA, May 1999). Term, demand and non interest bearing deposits accounted for 23.7%, 70.0% and 6.3% of this total respectively. There was a 3% shift in this deposit mix during the year towards lower interest cost products away from term deposits. This was a function of increased demand for the Award Saver product and a reduction in carded term deposits. Customer preferences caused a shift from fixed term to more flexible current accounts. Over the past five years the Bank’s reliance on funding from domestic retail sources has remained relatively stable while its market share in this sector has fallen from over 24% to increased competition within the banking industry and from the funds management industry. the current 22.5%, reflecting the Credit Cards The Bank is the largest issuer of credit cards in Australia with approximately 2.34 million credit account holders (Visa, MasterCard and Bankcard) at 30 June 1999, approximately 50% more than the nearest competitor. The Bank’s cardholder base grew by 3.7% during Financial Year 1999. Credit card outstandings grew by 13.2% to stand at $2.5 billion at 30 June 1999. 9 Description of Business COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES in Competition the credit card market has increased as it has become more segmented and niche driven by new entrants and the diversification by mortgage originators In addition, into existing card issuing banks have continued to seek third party co-brand and alliance opportunities, adding to competition in credit card based loyalty reward programs. The Bank’s own credit card loyalty program, ‘True Awards’, was launched during 1997 and has over 820,000 members to date. this area. In addition to its card offerings to the broader market, the Bank targets specific high net worth market segments through a range of ‘affinity’ card programs, including arrangements with several professional associations, such as the Australian Medical Association, and the Law Societies of NSW, Victoria and Queensland. By virtue of its shareholding in Mondex Australia Pty Limited, the Bank is an original global founder in the Mondex smart card scheme and participated in MasterCard and Visa pilots of stored value cards in 1996. These are microchip based smart cards offering an electronic alternative for small transactions. Management believes that smart card to offer significant technology has benefits transmission processing efficiencies via the potential integration of customer information within the microchip, it also offers wider opportunities relationship development. terms of customer the potential terms of to cash in in Financial Services The Group provides funds management and life insurance products to a broad range of customers through its Commonwealth Financial Services (CFS) group of companies. Commonwealth Financial Services is the registered business name used by Commonwealth Life Limited (CLL), Commonwealth Funds Management Limited and Commonwealth Custodial Services Limited. Retail products are sold through to over the Bank’s distribution network 557,000 customers (as at 30 June 1999). The Bank is continuing its distribution system. integrate CFS products into to The Group is the fifth largest funds manager and second largest retail funds manager in Australia. Funds under management totalled $27.2 billion as at 30 June 1999, comprising retail funds of $15.6 billion and wholesale funds of $11.6 billion. Commonwealth Investment Management manages wholesale funds on behalf of major Australian companies, government funds, the Bank’s staff superannuation fund. In addition, the group manages the funds of individual investors in the life company’s statutory fund and through CFS’ retail unit trust product range. friendly societies and trained and Approximately 800 licensed investment advisers, located throughout the branch network, are available to meet the investment needs of clients. In Financial Year 1999 gross sales of $8.3 billion in managed products, superannuation and other investment products were achieved. 10 CLL offers insurance policies, term superannuation/pensions, annuities and investment products to the retail market. CLL is the sixth largest life insurance company in Australia and is the second largest rollover and personal superannuation manager as well as being the leading allocated pension fund provider. Annual life insurance premiums have grown by 19% over 1998/99, following growth of 24% in 1997/98. Due to the fee based nature of the business, the main profit driver for the funds management company is the ability to increase funds under management while controlling operating costs. The Bank is well under way in converting its unit trust business into managed investment schemes as required by the Managed Investments Act 1998. All fund managers must comply with the new law by 30 June 2000, however, it is our intention that the retail funds will be compliant with new law by October 1999. Commonwealth (CIL) (previously Commonwealth Connect Insurance Limited), is a wholly owned subsidiary of the Bank, specialising in general insurance. Insurance Limited CIL has been ranked 18 out of top 20 Private Direct General Insurers. This is the first time that the company has (analysis in undertaken by Deloitte Touche Tohmatsu, based on 1997 and 1998 Net Premium Revenue). Net Premium Income for 1999 increased by 16.4%. top 20 ranked the CIL currently provides buildings, contents and personal valuables cover. CIL’s customer base is predominantly comprised of Bank customers who have purchased insurance at a branch or as part of a home loan interview. Two thirds of new business is generated through the network in this manner; the remainder is generated directly with CIL’s centralised call centre. Initiatives undertaken during 1998/99 include expansion of flexible payment options to include automated monthly payment by credit card, ‘Honeymoon’ prices for new policyholders, as well as extending contents coverage to stand alone policies for owner occupiers and for renters. Simplified policy documents were introduced in November 1998 in conjunction with the company’s name change to Commonwealth Insurance Limited. Business Services CBFC Limited (‘CBFC’), a wholly owned subsidiary of the Bank, is a specialist provider of vehicle and equipment finance. CBFC’s primary focus is on the business sector. Hire purchase, finance leases and operating leases, including fleet leasing arrangements, are the dominant product groups. The primary product distribution channel is the Bank’s branch and business banking centre network throughout Australia. CBFC has total assets of $5.5 billion principally loan receivables, representing a comprising net growth of 12% compared with 30 June 1998. Equipment finance receivables are well spread with the maturity of outstanding receivables averaging less than three years. CBFC finances its asset portfolio through the issue of secured debentures to retail investors (and wholesale investors to a lesser extent), and related party borrowings from within the Group. Commonwealth Development Bank of Australia Limited (‘CDBL’) to manage CDBL was established the outstanding assets of the former Commonwealth Development Bank of Australia (‘CDB’), a statutory corporation of the Commonwealth of Australia whose initial share capital was 92% owned by the Bank and the Commonwealth. The Bank 8% owned by purchased the Commonwealth’s 8% share of CDB in July 1996. Principal activities of CDB were the provision of finance and advice to the small business market in Australia, including primary producers. CDBL is not writing new business and its assets have decreased progressively due to maturity and repayment. As at 30 June 1999, CDBL has total assets of $342 million and shareholders’ equity of $84 million. Operating profit after tax for the year was $11 million. Alliances In December 1998, the Bank signed a 10 year strategic alliance agreement with a major Australian retailer, Woolworths Limited, to deliver co-branded financial services products through its 640 retail outlets. Woolworths has the largest share of the Australian retail grocery market and the alliance will further enhance the Bank’s position as Australia’s most accessible bank. The co-branded products will be developed and serviced by the Bank and distributed through Woolworths’ outlets. Customer financial contracts arising via the alliance will be obligations of the Bank, and the Bank will maintain all customer information. The Bank also has a number of existing in-store branches with Franklins Ltd, another major Australian retailer. The Bank has also entered into an alliance with Vodafone to supply financial services information via the Vodafone network to mobile telephony. The Bank has entered into a two year agreement with ninemsn as a preferred supplier of financial services to their sites. The ninemsn sites are the most visited Internet sites in Australia. Customer Service Division the largest Customer Service Division is responsible for providing quality sales and service to the Bank’s financial customers and managing services distribution network in the country. The network includes the largest number of branches and agencies, proprietary ATMs and EFTPOS terminals as well as an expanding array of telephone and direct/online services. The distribution network provides sales and service related to customers embracing full range of financial the products and services such as savings and cheque accounts, demand and term deposits, credit card services, personal loans and housing loans as well as functions life insurance investment and superannuation, products. The sale of various commercial products – Electronic Services (such as EFTPOS, Diammond, BPayTM), Equipment Finance (CBFC, Leaseway, Fleetcare), Commercial Products (Factoring, Trade and Finance, Rural/Agribusiness products/services also fall under the responsibility of Customer Service Division. Business Finance) Asset Within the Division, Direct Banking operates one of the largest call centre and help desk operations in Australia handling over 6.4 million calls per month. Approximately 1,300 telephone service and support staff are employed to answer customer enquiries and to promote and sell a range of financial products and services. Customer Service Division operates through an Australia wide network of over 1,150 branches, approximately 100 business banking centres, over 2,600 ATMs, over 90,000 EFTPOS terminals, 115 mobile bankers and expanding telephone and online delivery services. The Bank’s branch and service centre network is complemented by over 3,900 agencies (primarily Australia Post offices) offering a more limited range of banking services. The majority of the Bank’s branches and agencies are located in the eastern states of Australia. Electronic Banking: Over recent years the Bank has made good progress in reducing the costs of providing retail transaction services by migrating customer transactions out of the more costly branch network to electronic and telephone channels. The ratio of customer to electronic transactions has improved from 40/60 in June 1995 to 22/78 in June 1999. initiated branch in the country, with The Bank continues to invest in the development and expansion of its electronic distribution network. The Bank operates the largest proprietary ATM network terminal numbers increasing by 4% during Financial Year 1999 to over 2,600 as at 30 June 1999. The ATM network currently handles approximately 680,000 transactions a day, an increase of 8% since 30 June 1998. In addition to this terminal reciprocal arrangements with banks, credit unions and building societies allowing our customers access to almost all ATM’s in Australia. the Bank network, has to directly debit The Bank maintains an extensive EFTPOS the Bank’s debit and credit network allowing their cardholders purchases from retailers such as supermarkets, service stations and fast food chains. Cash withdrawal facilities are also available through the EFTPOS network. The Bank’s EFTPOS terminal population continues to grow rapidly with terminal numbers increasing 10% over the year, to over 90,000. the cost of EFTPOS in Australia permits customers of any of the country’s banks to utilise the system. At 31 March 1999 the total domestic EFTPOS terminal population numbered over 250,000 with the Bank accounting for some 35% of all terminals at that time. 11 Description of Business COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES the Bank In addition to its domestic ATM and EFTPOS networks, the international MasterCard, Cirrus/Maestro and VISA Plus International networks providing its customers with access to over 460,000 ATMs and 4.1 million EFTPOS terminals worldwide. is also a member of Telephone Banking: The Bank provides a comprehensive range of services via the telephone, offering customers access to account and product details and the ability to transfer funds seven days per week. The Bank’s telephone-based Customer Service Centres averaged more than 1.4 million calls per week during Financial Year 1999, an increase of almost 50% over the previous twelve months. Sales increased through significantly during the year. telephone channel also the Mobile Banking: As at 30 June 1999 the Bank had 115 Mobile Bankers, providing customers with the flexibility to apply for a home loan at a time and location convenient to them. Internet Banking: Customers can also access the Bank’s internet banking service – NetBank (at www.commbank.com.au) to transfer funds between accounts, pay bills, view statements and apply for home loans or credit cards. The number of customers using NetBank more than doubled over the year to over 89,000 and the annual number of transactions increased to 13.8 million. Technology, Operations and Property The Group functions of Group Technology, Banking Operations and Commonwealth Property operate as a discrete business unit to ensure that Bank staff dealing directly with customers are provided with best in class technology, infrastructure and support services and are able to focus on understanding and fulfilling customers’ needs. future The Bank’s Group Technology area facilitates the delivery of current and information technology and telecommunications services for the Group. Its activities are focused on the management of the relationship with our technology partner EDS Australia, with the objective of ensuring that the Group’s business units continue to be provided with flexible and cost efficient the most responsive, service. The Group outsourced information its technology requirements to EDSA for an initial ten year period in October 1997, and acquired a 35% equity position in EDSA. To date the outsourcing arrangement with EDS has reduced costs, improved service levels and opened up a number of new joint business opportunities. is to Banking Operations’ primary purpose provide a full service item processing and back office/operational support function. Specialist centres across Australia process cheques, vouchers, financial services transactions, home, personal and business loans, credit cards and international payment/trade transactions, and manage the prevention of fraud and arrears. The focus across all processing centres is to continually improve productivity using economies of improvement, scale, site consolidation, process benchmarking practice comparisons, management techniques and improved technology. best 12 An emerging opportunity has seen several external organisations outsourcing their processing work to the Bank, enabling internal efficiencies through increasing scale. The vision is to be, by measure and reputation, the best practice processor in terms of cost, speed and quality. improvement further in At 30 June 1999, Banking Operations comprised 10 operations processing centres, 5 loan processing centres, 5 international trade processing centres, a cards operations centre and employed approximately 4,200 staff. Description of Property The Bank operates a large retail based network extending throughout Australia and, as a result, it has a substantial holding of freehold land and buildings. These premises, which include major owned commercial properties, other properties, including branches and other administration centres and residences, had a carrying value at 30 June 1999 of (1998: $1,337 million). This carrying $709 million value is established by the Directors based on an annual revaluation of the portfolio to assessed values into account prevailing economic and conditions. the independent market valuation amount. is established at or below taking It is The Commonwealth Property Division responsible for the management of the Group’s freehold and leasehold properties and all aspects of facilities management. The Group also includes the property investment funds management operation, making it one of the leading funds management groups in Australia. The Group manages both listed and unlisted funds for wholesale and retail property investors. Commonwealth Property investment and corporate is a highly skilled property real estate services group. Its focus is on improving returns to investors and corporate owners of real estate. The group also provides facilities management services to the Bank, with an emphasis on achieving reduced occupancy costs for the Bank. The Commonwealth Property Office Fund, with total assets of $633 million, was the Australian Stock Exchange. Certain properties previously owned by the Bank were sold into the Fund. The Bank does not hold any ownership interest in the Fund. listed on As at 30 June 1999 Commonwealth Property had $3.4 billion property funds under management. Institutional Banking The Institutional Banking division focuses on Australasia’s largest corporations, government entities and other major institutions. In addition, Institutional Banking provides specific products to the Banking and Financial Services’ customers of the Bank. The products offered by Institutional Banking facilitate the linking of providers and users of capital. Products financial markets, securities underwriting, include trading and distribution, corporate finance, equities, payments and investment management and custody. transaction services, its Using international network, the Bank provides Financial Markets products on a 24 hour basis. These include the structuring and delivery of foreign exchange, money market and short term trading, trading, and securities derivatives international thereon. The Division’s strategy is to maintain the Bank’s presence in major financial centres and financial markets business through contact with clients and major investors, including multinational corporations with interests in Australasia. facilitate interest fixed overall Financial Markets’ income was $370 million of which 78% was non interest income. Underlying trading income increased by 13% over the prior corresponding year. A provision for market and liquidity risks has been raised. The increase was broadly based across interest rate and currency markets. Trading activities capitalised on the global decline in interest rates over most of the year. The introduction of the Euro in January went without incident. Whilst some European countries experienced payment problems initially, the Bank’s payments the start. Many corporations also began utilising the new currency immediately. ran smoothly from During the year, the range of Currency and Interest Rate Option products the Bank is able to offer has been expanded. We have also extended the range of currency pairs where we are prepared to make option prices. This has substantially improved our ability to develop customised solutions specifically tailored to individual client requirements. They have enhanced our core revenue streams and helped to build our image in the minds of clients as an innovative bank capable of providing unique solutions to the most complex of financial problems. The Bank has also introduced an FX Margin product, which provides clients with the ability to deal in Foreign Exchange, whilst ensuring the Bank’s credit exposure is fully collateralised. The Bank has achieved leading arranger and underwriter status in the Australian bond market. The largest corporate bond transaction for the year was the Australia Post $530 million offering which was lead managed by the Bank. The 5 and 10 year financing was highly successful, setting new benchmarks for duration, credit quality and liquidity in the local bond market. The Bank’s pioneering work on the Kangaroo bond market continued, with a key lead management role in the first $1 billion issue by Asian Development Bank. Lead manager and arranger roles were also the AAA/Aaa rated mandated Kreditanstalt fur Wiederaufbau (KfW), Frankfurt and Bayerische Landesbank of Munich. the Bank by to In September 1998, the Bank arranged and lead managed a $303 million mortgage backed securities issue through the Medallion Trust, a master trust structure managed by the Bank’s subsidiary, Securitisation Advisory Services Pty Limited. The securities are secured over a portfolio of residential mortgages owned by the trust and originated by the Bank. In June 1999, the Bank launched a $1.5 billion securitisation of Australian and offshore corporate issue of credit exposures. This $180 million credit institutional investors. The transaction involved the Bank entering into a credit swap with the Medallion Trust. This innovative transaction is a first for the Australian market and demonstrates the Bank’s capital management capabilities. involved linked notes the to Another initiative is the Coupon TIC synthetic instrument which securitises the yields available in the swap market. It has been developed as a service to our institutional clients looking for higher yields in the short term fixed interest market. During the year to provide the Bank established a commodities and energy desk risk management capabilities for clients in these markets. A key feature of this initiative is the establishment of an alliance with ScotiaMocatta (a member of Canada’s Scotiabank Group). Under this arrangement ScotiaMocatta provides hedging facilities to the Bank in the precious and base metals markets. ScotiaMocatta is a global leader in bullion banking and base metals trading. The Bank recently announced that it was the first Australian bank to obtain a full Japanese Securities registration to strengthen its ability to offer Japanese investors’ access to Australian and NZ debt markets. The dual banking and securities presence will facilitate the development of the Bank’s financial markets business to a wider range of Japanese investors under recent deregulated requirements. The Bank has continued to operate successfully in the increasingly competitive infrastructure and privatisation markets, completing a number of deals in Australia and New Zealand for property development and financing as well as significant utilities funding. IB Transaction Services is looking to the latest Internet technologies to significantly enhance the way information is transmitted between the Bank and its clients. This will encompass payment instructions and other activities where traditional forms of communication currently dominate, in further enhancing eCommerce. the Bank’s positioning transactional/information Credit Lyonnais In July 1999 the Bank acquired Credit Lyonnais Holding Australia Limited. Within this group, Credit (a money market Lyonnais Australia Limited corporation) is the only operating entity. Whilst a modest acquisition for the Bank, value will derive from the existing loan portfolio and niche activities including securitisation and various structured finance activities. 13 Description of Business Infrastructure Sales the year During as as well construction the Bank sold its equity investments in Statewide Roads (M4 Tollroad) and Interlink (M5 Tollroad). This sale represents the conclusion of the Bank’s joint sponsorship role in developing these landmark private sector transport projects. As joint sponsor, the Bank took an innovative role by participating in the initial tender, the design and the phase commencement of successful operations. The Bank sold its interests to institutional investors, including Hastings Fund Management with whom an ongoing relationship is maintained. Computer Fleet In October 1998 the Bank established a 15 year exclusive alliance with Computer Fleet Management Pty Ltd to provide information technology leasing and asset management services to corporate and government organisations throughout Australia and New Zealand. The alliance combines the Bank’s strength leasing solutions with Computer Fleet’s world leading technology and value added services. Computer Fleet employs a unique management tool, AssetXpress, which enables clients to keep an online register of their technology assets. Success has been substantial and the business is expected to continue to grow. in cost effective Commonwealth Securities Limited Commonwealth Securities, known as ComSec, continued to grow strongly, achieving the number one ranking out of 90 brokers in terms of trading activity in May 1999. It currently employs 255 full time staff, which is an increase of 126 over the comparable date last year. This is due to the growth in the business requiring additional staff for client inquiries. The share the ASX of total number of in June 1999 was 7.1% to 4.1% in June 1998. For the year, ComSec processed almost 800,000 transactions, split evenly between telephone and Internet orders. The Internet represents an increasing proportion of total trades. In June 1999, the total average daily number of trades was 3,200 with the Internet representing 51.7% of the total. transactions on compared ComSec has developed a fledgling Advisory business, which currently has 12 advisers, 8 based in Sydney and 4 in Melbourne. Funds Direct This initiative was launched on 24 February 1999 as an Internet site providing clients with a sophisticated tool to analyse, compare and purchase investments in more than 250 managed funds from 28 leading Australian fund managers. Investors utilising this Internet facility pay little or no entry fees if they choose to invest in one of the funds. The Funds Direct site receives an average of 800 visitors per day. Since launch, over 14,000 prospectuses have been ordered and over 2,000 investments made. Margin Lending Launched in January 1999 to continue to provide our clients with access to debt funding of equities and unit trust investments, this initiative has had an excellent response. 14 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES US Share Trading To meet the demands of clients for international investment opportunities, Commonwealth Securities launched a 24 hour service for trading shares on the major US Stock Exchanges including the New York Stock Exchange and NASDAQ. It was launched on 30 March 1999 and already over 500 clients have registered to use the service. It also provides a stock custody service in co-operation with the Bank of New York. Commonwealth Direct Investment Account On 21 June 1999, the Bank launched a new and enhanced investment account designed to meet the special needs of investors who trade securities, particularly those who trade on the Internet. Banking. Institutional Investment Management and Administration The Commonwealth Bank Group’s investment management activities are a separate business unit within Commonwealth Investment Management is one of the top five institutional investment managers in Australia. Client funds under management as at 30 June 1999 total $27.2 billion of which $11.6 billion are wholesale funds. Over the 12 months to June, the business experienced significant success in attracting new business with growth in funds under management of almost $5.2 billion. The business was awarded first place in the Global Unit Trusts category of Money Management’s 1998 Fund Manager of the Year award, and third place overall. to to custody services external funds and offshore Fund Services provides wholesale investment administration and the Commonwealth Bank investment management business and fund managers, in superannuation Australia. As at 30 June 1999, Fund Services administered over $41 billion of assets. The group is poised for growth over the coming year with the implementation of the Managed Investments Act, the growing trend for investment managers to outsource their back office processes and an increase in the use of master custodians by superannuation funds. investors New Zealand Banking Operations The Bank’s operations in New Zealand have been restructured with the formation of the ASB Group Limited comprising the primary operating entities of ASB Bank Limited and Sovereign Limited. ASB Group Limited is a 75% owned subsidiary of the Bank with the remaining 25% held by the ASB Bank Community Trust, an independent entity within New Zealand. An arrangement exists between the Bank and the Trust giving each preemptive rights over the other’s shareholding in the event of a desire to sell by either party. ASB Bank is New Zealand’s longest established bank. It was founded in 1847 and for most of its history was a regional savings bank servicing the Auckland and Northland areas of New Zealand. ASB Bank now provides personal, business and rural banking services through a network of 122 branches throughout New Zealand. ASB Bank employs approximately 2,700 people on a full time equivalent basis. ASB Bank’s primary business is retail banking with lending for housing, its largest single line of business. ASB Bank accounts for approximately 4.9% of Group net income in Financial Year 1999 and 9.3% of total assets. Compared with the Bank’s operations in Australia, ASB Bank has a larger proportion of its business in retail banking and correspondingly less in corporate and institutional banking. At 30 June 1999, ASB Bank had total assets of NZ$14.8 billion ($11.9 billion) and total advances of NZ$12.5 billion ($10.1 billion). ASB Bank’s net profit for the year to 30 June 1999 was NZ$116.9 million ($94.1 million), an increase of 8.3% compared with the NZ$107.9 million ($93.7 million) net profit for the year to 30 June 1998. life listed New Zealand On 4 December 1998, the Group acquired the insurance and publicly financial services provider Sovereign Limited for NZ$238.4 million ($205 million). Sovereign Limited operates as a stand alone company maintaining its own brand profile. The acquisition of Sovereign will complement the operations of ASB Bank through innovative life assurance activities. total premium superannuation, Sovereign is a leading provider of personal risk income, assurance business with NZ$397 million including ($320 million) fifteen months ending 30 June 1999. Sovereign currently accounts for 15% of all new personal life insurance business generated by the New Zealand insurance industry. This includes a 19% share of the term life assurance market. Other business activities include funds management. the for of Competition is highly The Australian banking market life transparent and competitive. The banks, companies and non bank institutions compete for customer deposits, the provision of lending, funds management, life insurance and other services. financial Banks in Australia can be divided into three broad categories: major banks, regional banks and foreign-owned banks. CBA, NAB, Westpac and ANZ are typically referred to as Australia’s major banks. Each of the major banks offers a full range of financial through branch networks products and services across Australia. their domestic In addition operations, two of the major banks have significant operations and investments offshore. to The regional banks had their origins as either State government-owned banks or building societies whose operations were largely state-based. significant At present, rationalisation the regional banking sector is undergoing and consolidation. Reflecting their state-origins, the small regional banks have typically limited their operations to servicing customers in a particular state or region. Increasingly, however, they are targeting interstate customers and expanding their operations across state borders. Some of the larger regional banks operate in several States. Typically their competitive advantage has been their local community focus. At 30 June 1999, there were 31 foreign-owned banking groups operating in Australia through either a branch or locally incorporated bank subsidiary. Most of the foreign-owned banks initially focused their activities on the provision of banking services to the Australian clients of their overseas parent bank. Today most have now diversified their operations offering local clients a broad range of financial products and services. The Bank also faces competition from non bank financial institutions, which compete vigorously for customer investments, deposits and the provision of lending and other services. Non bank financial intermediaries such as building societies and credit unions compete strongly in the areas of accepting deposits and residential mortgage lending, mainly for owner-occupied State-based institutions are making headway in achieving multi- state coverage partly encouraged by a more conducive regulatory environment. Specialist non bank mortgage originators have acquired some prominence in the residential lending market. housing. These A recent the development establishment of local single branch banks collectively referred to as ‘community banks’. Their presence adds another dimension to the competitive dynamics of the market. been has funds management markets life companies) have expanded The Bank has for some time operated in the life in insurance and competition with a range of non bank financial institutions. Similarly, non bank financial institutions (including their operations into banking, with a view to offering their financial services. customers a broad suite of International fund managers (and global investment banks) are also increasing their presence in Australia. Changes in the financial needs of consumers, deregulation, and technology developments have also changed the mode of competition. In particular, the development of electronic delivery channels and the reduced reliance on a physical network facilitate the entry of new players from related industries, such as retailers, telecommunication companies and utilities. Technological change is encouraging new entrants with differing combinations of expertise and an unbundling of the value chain. Deregulation has led to further disintermediation in the Australian finance industry. Traditionally, the banking industry has been the major intermediary between the providers of funds (ie depositors) and the users of funds (ie borrowers). The factor within especially A significant in disintermediation in Australia has been the substantial growth in funds under management, the superannuation (pension funds) industry. Australian Government’s continued encouragement of through superannuation, by means of taxation concessions and a mandatory superannuation guarantee levy on employers, is expected to underpin strong growth in funds under management. This growth potential continues to attract new entrants to this market. term saving long 15 Description of Business Growth in the funds management industry has also contributed to disintermediation through the direct use of capital markets by borrowers as an alternative to bank finance. The corporate bond market in Australia has benefited from this growth with many of the major Australian corporates directly accessing capital markets in Australia and around the world. The Bank, in competition with numerous domestic and foreign banks, is actively involved as an originator of corporate debt in the capital markets especially in the Euro-AUD and Euro-NZD sector and in the creation of new financing structures including as arranger and underwriter infrastructure projects undertaken by the corporate sector. in major New Zealand banking activities are led by five financial services groups, all owned or largely owned by UK or Australian-based banks operating through nation-wide branch networks. Like Australia, the New Zealand banking system is characterised by strong competition. Banks in New Zealand are free to compete in almost any area of financial activity. As in Australia, there is strong competition with non bank financial institutions in the areas of funds management and the provision of insurance services. The Group’s major competitors in New Zealand are ANZ, Bank of New Zealand (a wholly owned subsidiary of NAB), National Bank of New Zealand (a wholly owned subsidiary of Lloyds Bank plc) and (a wholly owned subsidiary of Westpac Trust Westpac). In addition, there are several financial institutions operating largely in the wholesale banking sector including Bankers Trust New Zealand Limited (now part of the Deutsche Bank AG Group) and AMP (Australia’s largest insurance group). With the acquisition of Sovereign Group, ASB Bank Group now competes in the New Zealand insurance and investment market, where Colonial Group, Royal Sun Alliance and Tower Corporation are additional major competitors. By involving following a growth strategy, nationwide market expansion, a focused sales and service strategy and recruitment of additional specialist commercial and rural banking staff, the Bank’s New Zealand subsidiary, ASB Bank has been able to significantly increase its market share in retail, commercial and rural banking during the past five years. ASB Bank is also diversifying its income funds streams with management and insurance services. in direct banking, initiatives Employees The Group currently employs approximately 29,000 permanent full time equivalent employees. Between 30 June 1995 and 30 June 1999 employee numbers 5,400 by measured on a full time equivalent basis. approximately decreased In recent years, a significant change has occurred in the Australian labour market with a system of enterprise bargaining the centralised wage fixation system. replacing Three Enterprise Bargaining Agreements (EBAs) covering Bank staff were ratified by the Australian Industrial Relations Commission in April 1998. These 16 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES included a ‘core’ agreement covering the majority of staff, and separate agreements for the Bank’s Direct Banking and Technology Operations and Property areas. These agreements are effective until April 2000. • • flexibility future change Key outcomes of the agreements include: increased staffing to better meet customer needs through the removal of limits on the use of part time/casual staff, and through greater scope to redeploy staff in structural change; the establishment of an employment framework which supports through 3 separate EBAs, along with the potential to negotiate further site agreements as required. In addition, the current agreements provide scope to negotiate further changes to a range of employment systems to better align them with the Bank’s business systems; the variable proportion of maximisation of employment costs through greater use of part time/casual staff and through increased use of performance based pay targeted work groups; and containment of salary increases with a 3.5% increase in May 1998 and a further 4.5% in May 1999. The identification and implementation of cost efficiency and staff reduction opportunities provided is being progressively by implemented. the new agreements for • • The Bank continues to offer individual Australian Workplace Agreements to managerial staff and to targeted work groups. The number of agreements signed thus far is in excess of 1,300. Once approved by the Employment Advocate, these agreements override awards and collective agreements. In addition to the above, the Bank’s 850 Senior Executive and Executive staff and over 1,000 specialists are on contract arrangements. The Bank has made a significant investment in the rollout of a leadership program to establish a common framework for leadership behaviour across the organisation. Going forward, the Bank will continue to place a high priority on enhancing its leadership capability, redesigning its employment systems to better align them with its business systems and securing and developing its talent pool for current and future needs. Financial System Regulation (the ‘Wallis Inquiry’), introduced a new Australia has a high quality system of financial regulation by international standards. Following a comprehensive inquiry into the Australian financial the Australian system Government for framework regulating financial system. The previous framework, which applied regulations according to the type of institution being regulated, resulted in similar regulated differently. The new products being regulates products equally functional approach regardless of institutions providing them. the particular type of the • • for the new companies Since July 1998, these agencies has regulatory three separate arrangements have comprised agencies: The Reserve Bank of Australia, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. Each of system wide responsibilities the different objectives of government intervention in the financial system. A description of these agencies and their general responsibilities and functions is set out below: • Reserve Bank of Australia (RBA) - is responsible for monetary policy, financial system stability and regulation of the payments system; Australian Prudential Regulation Authority (APRA) - has comprehensive powers to regulate prudentially banks and other deposit-taking institutions, and insurance superannuation (pension funds). Unless an institution is authorised under the Banking Act 1959 or exempted by APRA, it is prohibited from engaging in the general business of deposit- taking; and Australian Investments for Commission (ASIC) - has responsibility market conduct, consumer protection and corporate the financial system investment, including insurance and superannuation products and the providers of these products. Within the powers vested in them by the new legislation, the regulators are developing policies and streamlining regulations to give effect to the objectives of the functional approach to regulation and other In particular, recommendations. Wallis guidelines for the regulation of conglomerates and access to the payments system are being developed in consultation with industry. Financial market in various emerging market economies, has led to intense scrutiny of global financial markets and highly leveraged institutions. There is some pressure for of fundamental financial future crises. Government architecture officials and industry practitioners in Australia are actively involved in international fora in furthering these reforms. functions across for instability, particularly reform to avert international Securities regulation Inquiry and Supervision of banks The Bank is an authorised deposit-taking institution under the Banking Act and is subject to prudential regulation by APRA as a bank. The prudential framework applied by APRA is embodied in a series of prudential standards including: Capital Adequacy Under APRA capital adequacy guidelines, Australian banks are required to maintain a ratio of capital (comprising Tier 1 and Tier 2 capital components) to risk weighted assets of at least 8%, of which at least half must be Tier 1 capital. These guidelines are generally consistent with those agreed upon by the Basle Committee on Banking Supervision. For information on the capital position of the Bank, see ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Adequacy’. Liquidity Management For an explanation of the Bank’s liquidity policies, refer to Note 37 to the Financial Statements. Large Credit Exposures APRA requires banks to ensure that, other than in exceptional circumstances, individual credit exposures to non bank, non-government clients do not exceed 30% of Tier 1 and Tier 2 capital. Prior notification must be given to APRA if a bank intends to exceed this limit. For information on the Bank’s large exposures, refer Note 14 to the Financial Statements. that the principle for authorised deposit Ownership and Control In pursuit of transparency and risk minimisation, (Shareholding) Act 1998 the Financial Sector embodies financial regulated institutions should maintain widespread ownership. The Act applies a common 15 per cent shareholding institutions, limit insurance companies and their holding companies. The Treasurer has the power to approve acquisitions exceeding 15 per cent where this is in the national interest, taking into account advice from the Australian Competition and Consumer Commission in relation to competition considerations and APRA on prudential matters. The Treasurer may also delegate approval powers to APRA where one financial institution seeks to acquire another. taking The Government’s present policy is that mergers among the four major banks will not be permitted until the Government is satisfied that competition from new and established participants in the financial industry, particularly in respect of small business lending, has increased sufficiently. Proposals for foreign acquisition of Australian banks are subject to approval by the Treasurer under the Foreign Acquisitions and Takeovers Act 1975. Banks’ Association With Non banks There are formal guidelines which control investments by banks in subsidiaries and associates. A bank’s equity associations with other institutions should normally be in the field of finance. APRA has expressed an unwillingness to allow subsidiaries of a bank to exceed a size which would endanger the stability of the parent. No bank can enter into any agreements or arrangements for the sale or disposal of its business, or effect a reconstruction or carry on business in partnership with another bank, without the consent of the Commonwealth Treasurer. In carrying out its prudential responsibilities, APRA closely monitors the operations of banks to ensure the prudential they operate within framework it has laid down and that they follow sound management practices. that 17 Description of Business APRA currently supervises banks by a system of off-site examination. It closely monitors the operations of banks through the collection of regular statistical returns and regular prudential consultations with each bank’s management. APRA also conducts a program of specialised on-site visits to assess the adequacy of individual banks’ systems for identifying, measuring and controlling risks associated with the conduct of these activities. In addition, APRA has established arrangements under which each bank’s external auditor reports to APRA regarding observance of prudential standards and other supervisory requirements. Supervision of non bank group entities The operations of Commonwealth Life Ltd and Commonwealth Insurance Ltd (the life insurance company company subsidiaries of the Group) also come within the supervisory purview of APRA. insurance general and APRA’s prudential supervision of both life insurance and general is exercised through the setting of minimum standards for solvency and to ensure obligations to policy holders can be met. insurance companies financial strength life The financial condition of insurance companies is monitored through regular financial lodgment of audited accounts and reporting, supervisory inspections. Compliance with APRA is regulation monitored through regular returns and lodgment of an audited annual return. insurance companies for general COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Goods and Services Tax The Goods and Services Tax (GST) legislation was enacted on 8 July 1999, and will apply from 1 July 2000. Sales tax will be abolished from that date, with delayed abolition of Financial Institutions Duty (FID) to follow from 1 July 2001 and debits taxes from 1 July 2005. The delay beyond 1 July 2000 in abolition of state taxes will result in estimated costs in 2000/01 of $190 million in FID and $200 million in debits tax. These costs are passed onto the Bank’s customers. The Bank will incur FID and debits tax costs of $8.5 million pa in its own right. taxes similar Consistent with in other jurisdictions, most of the Bank’s activities will be ‘input taxed’, meaning that GST will not be added to the charge for the services to the customer, but the Bank cannot claim back GST charged to it by suppliers. Apart from areas of the Bank involved in providing general insurance and leasing services (which either receive upfront payments or face other ‘transitional’ issues), the GST will not directly impact the Bank’s services until 1 July 2000. Legal Proceedings Neither the Commonwealth Bank nor any of its controlled entities is engaged in any litigation or claim which is likely to have a materially adverse effect on the business, financial condition or operating results of the Commonwealth Bank or any of its controlled entities. Where some loss is probable an appropriate provision has been made. 18 Financial Review Selected Consolidated Financial And Operating Data Selected Consolidated Income Statement Data US$M 1999 1999 1998 1997 1996 1995 (A$ millions, except where indicated) Y E A R E N D E D 3 0 J U N E Australian GAAP Interest income Interest expense Net Interest income Charge for bad and doubtful debts Non interest income Operating expenses (incl. Goodwill) Operating profit before income tax and abnormal items Income tax expense attributable to operating profit before abnormal items Operating profit after income tax and before abnormal items Abnormal (expense)/income before income tax Abnormal income tax (expense)/credit Operating profit after income tax and abnormal items Outside equity interest Net income Earnings per share before abnormal items (cents) Earnings per share after abnormal items (cents) Dividends per share (cents) Dividends payout ratio (%) (1) Adjusted for US GAAP Operating profit after income tax Earnings per share after abnormal items (cents) 5,120 (2,789) 2,331 (163) 1,320 (2,061) 7,745 (4,218) 3,527 (247) 1,997 (3,117) 7,605 (4,208) 3,397 (233) 1,833 (3,085) 7,989 (4,597) 3,392 (98) 1,489 (2,967) 7,716 (4,319) 3,397 (113) 1,355 (2,863) 6,609 (3,445) 3,164 (182) 1,340 (2,799) 1,427 2,160 1,912 1,816 1,776 1,523 (472) (714) (641) (588) (635) (493) 955 1,446 1,271 1,228 1,141 1,030 - - 955 (16) 939 - - 1,446 (24) 1,422 153.4 153.4 115 75.0 (570) 409 1,110 (20) 1,090 134.5 117.2 104 77.3 (200) 72 1,100 (22) 1,078 131.2 117.2 102 77.7 - - 1,141 (22) 1,119 115.2 115.2 90 78.1 - (28) 1,002 (19) 983 109.2 106.2 82 75.1 988 106.6 1,494 161.2 796 85.6 1,082 118.0 1,230 127.0 892 96.5 (1) Dividends per share divided by earnings per share (before abnormal items). Exchange Rates For each of the Bank’s financial years indicated, the year end, average, high and low Noon Buying Rates are set out below. At Period End Average Rate High Low Y E A R E N D E D 3 0 J U N E 1999 1998 1997 1996 1995 (expressed in US dollars per $1.00) 0.6611 0.6273 0.6712 0.5550 0.6208 0.6809 0.7537 0.5867 0.7550 0.7814 0.8180 0.7455 0.7856 0.7628 0.8026 0.7100 0.7108 0.7412 0.7778 0.7108 On 5 August 1999, the Noon Buying Rate was US$0.6545 = $1.00. 19 Financial Review Consolidated Balance Sheet Data (at year end) Australian GAAP Assets Cash and short term liquid assets Due from other banks Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Statutory deposits with Central Banks Property, plant and equipment Investments in associates Goodwill Other assets Total Assets Liabilities Deposits and other public borrowings Due to other banks Bank acceptances Provision for dividend Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan capital (1) Total liabilities and loan capital Total Shareholders’ Equity (2) Adjusted for US GAAP Total Assets Shareholders’ equity (3) Consolidated Operating Data (number) (at year end) Full time staff Part time staff Full time staff equivalent Branches/service centres (Australia) Agencies (Australia) COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 1999 US$M 1,199 797 3,112 4,751 67,324 6,394 630 662 186 325 5,915 91,295 61,765 2,148 6,394 312 932 532 7,115 5,624 84,822 1,870 86,692 4,603 1999 (A$ millions, except where indicated) 1998 1997 A T 3 0 J U N E 1996 1995 1,814 1,206 4,708 7,187 101,837 9,672 953 1,001 281 491 8,946 138,096 93,428 3,249 9,672 472 1,410 805 10,763 8,507 128,306 2,828 131,134 6,962 1,526 3,448 4,009 6,858 89,816 9,727 832 1,662 276 531 11,859 130,544 83,886 3,397 9,727 321 1,099 875 10,608 10,746 120,659 2,996 123,655 6,889 2,007 4,839 2,635 9,233 81,632 8,874 797 2,010 - 574 7,502 120,103 77,880 3,621 8,874 291 925 835 10,154 7,698 110,278 2,801 113,079 7,024 3,065 5,713 2,883 8,394 70,042 10,057 711 2,578 - 574 5,268 109,285 71,381 2,852 10,057 301 1,050 858 6,673 5,992 99,164 2,754 101,918 7,367 2,545 5,033 4,812 7,596 62,707 10,317 659 2,706 - 608 5,791 102,774 67,824 3,802 10,317 240 898 874 4,921 5,602 94,478 1,601 96,079 6,695 98,540 5,063 149,054 7,659 139,460 7,631 128,253 7,783 116,375 8,062 108,885 7,235 26,394 6,655 28,964 1,162 3,934 28,034 6,968 30,743 1,218 4,015 30,566 7,364 33,543 1,334 4,205 31,455 7,964 34,518 1,390 4,214 31,333 7,602 34,383 1,474 4,282 (1) (2) (3) Represents interest bearing liabilities qualifying as regulatory capital. Including minority interests. Exclusive of minority interests. 20 Consolidated Ratios and Operating Data US$M 1999 1999 1998 1997 1996 1995 (A$ millions, except where indicated) Y E A R E N D E D 3 0 J U N E Australian GAAP Profitability Net Interest Margin (%) (1) Interest Spread (%) (2) Return on average shareholders’ equity (3) before abnormal items (%) after abnormal items (%) Return on average total assets (3) before abnormal items (%) after abnormal items (%) Productivity Total operating income per full time (equivalent) employee ($) Staff expense/total operating income (%) (4) Total operating expenses excluding goodwill amortisation/total operating income (%) (4) Capital Adequacy (at year end) Risk weighted assets Tier 1 capital Tier 2 capital Total capital (5) Tier 1 capital/risk weighted assets (%) Tier 2 capital/risk weighted assets (%) Total capital/risk weighted assets (%) Average shareholders’ equity/average total assets (%) Adjusted for US GAAP Net income as a percentage of year end: Total assets Shareholders’ equity Dividends as a percentage of net income Shareholders’ equity as a percentage of total assets 3.09 2.69 3.33 2.85 3.53 2.92 4.01 3.33 4.03 3.45 20.54 20.54 18.48 16.10 18.16 16.39 16.27 16.27 16.13 15.69 1.06 1.06 1.01 0.87 1.05 0.94 1.06 1.06 1.04 1.01 126,085 190,720 170,120 145,515 137,667 130,995 29.0 55.6 31.0 58.1 34.0 59.9 33.3 59.4 33.8 61.3 65,816 4,642 2,055 6,176 99,556 7,021 3,109 9,342 7.05 3.12 9.38 5.14 94,431 7,617 2,666 9,902 8.07 2.82 10.49 5.70 86,468 7,468 2,437 9,418 8.64 2.82 10.89 5.79 77,246 7,764 2,297 9,822 10.05 2.97 12.71 6.63 70,383 7,212 917 7,847 10.25 1.30 11.15 6.64 1.00 19.51 71.15 5.14 0.57 10.43 119.97 5.47 0.84 13.90 86.97 6.07 1.06 15.26 67.64 6.93 0.08 12.33 86.64 6.65 (1) (2) (3) (4) interest interest income divided by average Net earning assets for the year. Difference between the average interest rate earned and the average interest rate paid on funds. Calculations based on operating profit after tax and outside equity average shareholders’ equity/average total assets. Total operating income represents net interest income before deducting charges for bad and doubtful debts plus non interest income. interests applied to (5) Represents Tier 1 capital and Tier 2 capital less deductions under statutory guidelines imposed by the include Reserve Bank of Australia. Deductions investment Limited, Commonwealth Insurance Limited, Commonwealth Funds Management Limited and IPAC Securities Limited and other banks’ capital instruments. in Commonwealth Life 21 Financial Review COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Y E A R E N D E D 3 0 J U N E 1999 US$M 379 389 182 715 207 (4) (5) (6) 1999 1996 (A$ millions, except where indicated) 1997 1998 (8) 574 589 275 1,081 314 0.9 0.2 0.4 4.5 230.2 1.1 742 742 279 1,076 466 1.0 0.2 0.5 6.8 182.6 1.1 797 797 241 690 556 0.8 0.1 0.6 7.9 116.8 0.8 997 1,062 318 613 744 0.9 0.1 0.9 10.1 87.7 0.8 1995 1,504 1,583 511 476 1,073 1.0 0.2 1.5 16.0 62.4 0.7 Total impaired assets comprise non accrual loans, restructured loans, Other Real Estate Owned (OREO) assets and Other Assets Acquired Through Security Enforcement (OAATSE). Specific provisions for impairment include provisions raised against off balance sheet credit risk. Average credit risk is based on gross credit risk less unearned income. Averages are based on current and previous year end balances. (7) Gross credit risk less unearned income. (8) Numbers and ratios for 30 June 1998 have been restated based on the amended definition of non accruals introduced with effect from 31 December 1998. When a client is experiencing difficulties the account is classified as a non accrual only where a loss is expected, taking into account the level of security held. Consolidated Ratios And Operating Data Australian GAAP Asset Quality Data (1) (2) Non accrual loans (3) Total impaired assets (net of interest reserved) (4) Specific provisions for impairment (5) General provisions for impairment Net impaired assets (net of interest reserved) Total provisions for impairment/average credit risk (%) (6) Charge for bad and doubtful debts/average credit risk (%) (6) Gross impaired assets/credit risk (%) (7) Net impaired assets/total shareholders’ equity (%) Total provisions for impairment/gross impaired assets (%) General provision for impairment/risk weighted assets (%) (1) (2) (3) The Bank adopted the disclosure requirements for Impaired Assets contained in AASB 1032 ‘Specific Disclosures by Financial Institutions’ with effect from the 1997 Financial Year. The policies introduced by the Bank with effect from 1 July 1994, incorporating the Reserve Bank guidelines issued in December 1993, meet the requirements of AASB 1032. Previous data for Financial Years 1995 and 1996 has been adjusted for comparative purposes with adoption of AASB 1032. All impaired asset balances and ratios are net of interest reserved. Non accrual facilities comprise any credit risk exposure where a specific provision for impairment has been raised, or is maintained on a cash basis because of significant deterioration in the financial position of the borrower, or where loss of principal or interest is anticipated. 22 Segment Performance Profit and Loss Net interest income Fees and commissions Trading income Life insurance and funds management Other income Internal charges (1) Total operating income Provisions for impairment Staff expenses Provisions (non cash) Other Total Staff expenses Occupancy and equipment expenses Depreciation Other Total Occupancy and equipment expenses Information technology services Other expenses Internal charges (1) Total operating expenses Amortisation of goodwill Abnormal items Profit before tax Income tax expense Outside equity interest Profit after tax Balance Sheet Total Assets Total Liabilities Y E A R E N D E D 3 0 J U N E 1 9 9 9 G R O U P Institutional Banking ASB Corporate Total A$M 273 240 253 16 75 167 1,024 62 4 212 216 8 42 50 104 48 171 589 - - 373 68 - 305 A$M A$M A$M US$M 279 94 18 7 9 - 407 11 1 124 125 25 27 52 21 47 - 245 - - 151 47 24 80 206 8 2 8 46 520 790 3,527 1,281 273 254 189 - 5,524 2,332 847 180 168 125 - 3,652 2 247 163 4 205 209 3 13 16 14 131 (2) 368 40 - 380 183 - 197 42 1,562 1,604 145 310 455 505 506 - 3,070 47 - 2,160 714 24 1,422 28 1,033 1,061 96 205 301 334 335 - 2,031 31 - 1,427 472 16 939 Retail Financial Services A$M 2,769 939 - 223 59 159 4,149 172 33 1,021 1,054 109 228 337 366 280 678 2,715 7 - 1,255 416 - 839 81,583 57,390 40,697 34,251 12,855 11,992 2,961 27,501 138,096 131,134 91,295 86,693 (1) Internal charges are eliminated on consolidation. 23 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Financial Review Segment Performance continued Profit and Loss Net interest income Fees and commissions Trading income Life insurance and funds management Other income Internal charges (1) Total operating income Provisions for impairment Staff expenses Provisions (non cash) Other Total Staff expenses Occupancy and equipment expenses Depreciation Other Total Occupancy and equipment expenses Information technology services Other expenses Internal charges (1) Total operating expenses Amortisation of goodwill Abnormal items Profit before tax Income tax expense Outside equity interest Profit after tax Balance Sheet Total Assets Total Liabilities Y E A R E N D E D 3 0 J U N E 1 9 9 8 G R O U P Institutional Banking ASB Corporate Total A$M A$M 242 223 229 17 99 140 950 132 4 191 195 5 48 53 101 30 168 547 - - 271 78 - 193 282 90 14 1 4 - 391 9 1 111 112 22 30 52 21 48 - 233 - - 149 50 25 74 A$M 143 3 - (1) 64 556 765 A$M US$M 3,397 1,150 243 205 235 - 5,230 2,109 714 151 127 146 - 3,247 (45) 233 145 (4) 248 244 (23) 29 6 32 95 (3) 374 45 570 (179) (270) (5) 96 25 1,597 1,622 132 341 473 476 468 - 3,039 46 570 1,342 232 20 1,090 16 991 1,007 82 212 294 296 291 - 1,888 29 354 831 144 12 675 Retail Financial Services A$M 2,730 834 - 188 68 141 3,961 137 24 1,047 1,071 128 234 362 322 295 672 2,722 1 - 1,101 374 - 727 75,329 56,894 41,622 35,928 10,793 10,147 2,800 20,686 130,544 123,655 81,042 76,765 (1) Internal charges are eliminated on consolidation. for the Segment information financial year ended 30 June 1997 is not available in the above classifications. The Group undertook a major restructuring program during the financial year ended 30 June 1998. As part of the restructuring program, the previous business units of Personal Banking, Business Banking and Commonwealth Financial Services were reorganised into two new divisions: the specialist areas of marketing, customer segmentation and product development became the Banking and the various Financial Services Division, while distribution arms were brought together to form the Customer Services Division. The Institutional Banking Division remained largely unchanged. Retail Financial Services is comprised of two divisions, Customer Services Division and Banking and Financial Services Division. Corporate comprises the various head office functions as well as Technology, Operations and Property. 24 Management’s Discussion And Analysis Of Financial Condition And Results Of Operations The is based on following discussion the Financial Statements as prepared under Australian GAAP and included on pages 49 through 151 of this Annual Report to Shareholders for the Financial Year ended 30 June 1999. A discussion of the differences between Australian GAAP and US GAAP, and the the Financial impact of Statements, is set out in Note 47 in the Financial Statements. those differences on Overview Business Description The Commonwealth Bank integrated financial services business, providing a full range of banking and financial services to over 7.7 million Australians and 800,000 New Zealanders via its 75% owned New Zealand subsidiary, ASB Group Limited. is an As at 30 June 1999, the Commonwealth Bank of Australia Group had: • • total consolidated assets of over $138 billion; and over $41 billion in assets under administration, including over $27 billion of funds under management. The Group’s operations are conducted primarily in Australia. For Financial Year 1999, Australia contributed 84% of revenue, 89% of net profit and at period end accounted for 84% of the Group’s assets. The Group is represented internationally through branches in London, New York, Singapore, Tokyo, Hong Kong and Grand Cayman and representative offices in Beijing, Shanghai, Hanoi and Jakarta. It also has a joint venture arrangement with Bank Internasional in Indonesia. The Group’s revenue and net profit are principally derived from its banking operations, which comprise 92% of revenue and 88% of net profit on a Group basis for Financial Year 1999. However, fee based funds including management and finance operations represent a growing proportion of the Group’s revenue and net profit (12% of net profit). insurance, activities In a recent study, the Commonwealth Bank of Australia was ranked 17th among the major financial institutions in the world on the basis of its total shareholder return/risk performance and 26th in terms of creation of shareholder value.1 Economy Being predominantly domiciled in Australia, the profitability of the Bank is significantly influenced by the state of the Australian economy, especially with regard to the level of interest rates, consumer and business confidence, and growth of the economy. The Bank’s exposure to Asia represents only 2.7% of total Credit Risk. (The Bank has no direct exposure to Russia or Latin America. In addition, the Bank’s exposures to Eastern Europe and the Middle East represent 0.1% of total Credit Risk.) 1 Oliver Wyman and Company (1999) growth consumer The current domestic economic outlook in Australia is for continued low inflation and low interest rates. The strong growth of the past year is currently forecast to continue but at a less buoyant pace. to be maintained by is expected Momentum respectable spending, in underpinned by moderate growth in employment and real wages (secured against a backdrop of low robust productivity gains). The inflation and international outlook has the finely balanced. There are some situation in Japan and other Asian encouraging signs economies. Together with a strengthening in European growth, these trends should help offset any possible slowdown in the US economy. However, actual results could differ from these expectations due to a number of risks, uncertainties and other factors. See ‘Special Note Regarding Forward – Looking Statements’. improved although is Relatively for low interest loans and deposit rates and strong competition funds within Australia have placed pressure on interest margins. The competitive outlook is likely to see margins remain under some pressure. In previous economic cycles, the interest rate environment had a beneficial impact on bank profitability through its effect on the overall level of economic activity. While the historically low levels to which interest rates have fallen has placed pressure on net interest margins, this has been accompanied by sound growth in financial assets and historically low levels of bad debts. Bank profitability has also been assisted by diversification into new fee based activities and material reductions in cost structures. Assuming continued strong economic growth, albeit with some easing, low inflation and continued gains in productivity, the business outlook for financial services looks generally favourable. The financial performance of the Bank is also influenced by government policies the taxation regime and the level of regulation in the banking and financial services industries. including Strategy The Group adopts a strong shareholder value driven focus. The Bank has a comprehensive and coordinated strategy in place to achieve its vision of helping its customers manage and build wealth. This vision is being pursued by leveraging its position as the leading distributor in Australia of a broad base of the largest financial products and services with customer base and to help customers migrate rapidly into the world of online and direct distribution. Brand Technological changes allow financial service customers their banking activities remotely from bank branches. This reduced reliance on branches for customer services enables non banks to offer products and services which were formerly the province of banks, potentially weakening banks’ existing customer relationships. to undertake many of lowest unit costs 25 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES infrastructure that can adapt as the online world evolves. Online options are being considered to increase the retail financial services revenues from offshore sources. Risk Management The • • of adjusted introduction of more sophisticated risk measurement disciplines has seen developments in risk/return management. In recent years, the Group has successfully grown profitability with low earnings volatility, assisted by: • strong portfolio management disciplines and application return risk methodologies; a domestic loan book with an emphasis on lower risk housing lending as opposed to higher-risk commercial lending; and a bottom up approach risk measurement which develops an increasingly risk-aware management culture. Best Practice People Management Success in this information based business means providing the very best creative solutions to meet customers’ diverse needs. This will depend leadership and appropriately critically on sound skilled, well trained, motivated and rewarded staff willing to accept responsibility and accountability. To meet this requirement, the Group has in place comprehensive leadership, management and training levels. An programs to develop its staff at all increasing component of total remuneration is also being provided on the basis of performance linked to enhancing overall Bank profitability. to operating Integrated Risk Management • • • The Bank has implemented an Integrated Risk Management Framework, to measure risk and return on a consistent basis. The framework: Provides for all risk management policies to be coordinated within the Financial and Risk Management Division, with the oversight of the Risk Committee of the Board. Identifies and measures risk in the form of Economic Equity. Applies risk adjusted returns to allocated equity on a consistent basis to derive performance measures comparable between businesses. The management of risk and return is the responsibility of Business Units, operating within the Integrated Risk Management Framework policies. Overall compliance with policies is monitored by the Financial & Risk specialist areas within Management Division (including Group Audit). This Division also ensures is consistency that between risk policies and measurement processes. that are there Financial Review The need for the Group to retain a ‘top of mind’ relationship with customers is therefore paramount. The Group sees the consistent delivery of its brand vision as critical to its ongoing success, especially in an online environment. The Group has introduced a comprehensive brand strategy to align all its activities to deliver the Brand promise. Lowest Cost Structure The Commonwealth Bank’s distribution network has undergone significant reconfiguration over recent years. Outlets have been realigned to meet the needs of personal and business customers, while technology and changing customer preferences have caused a major increase in the proportion of transactions provided by electronic channels. The Group continues to assist customers to migrate to lower cost forms of distribution made possible by technological advances. Internally, the long term outsourcing/joint venture partnership with EDS is a key initiative aimed at reducing technology costs while remaining at the forefront of financial services business applications. The Group will continue to look for opportunities to enhance productivity through process-reengineering to maintain a productivity cost advantage. This will allow the maintenance of a low cost structure while it invests in the online business model. The Group continuously benchmarks its operations against world best practice to identify further efficiency gains. Financial Services Through a series of initiatives aimed at providing differentiated advice and decision support information together with a broader range of financial service offerings, the Group aims to better serve its large customer base to provide for the growing financial services needs of the Australian community. By enhancing collection and use of customer information and packaging products and services around customer needs and major events in their lives, the Group seeks to increase the average number of products per customer. This will enable the Group to increase the proportion of income from non bank businesses to assist in addressing the interest margin compression. Online Financial Services New technology is being embraced to provide more efficient and relevant services for clients, with an emphasis on online services. The goal is to enable customers to conduct a full range of financial services anywhere, anytime in a seamless global environment. Through online services, supplemented by direct channels, the objective is to increase market share and provide a broad range of cost effective financial services to each client segment. The Bank is developing its online banking as a new business model, not as just another distribution channel. The Bank’s internet banking and broking sites are amongst the most actively used of any sites in Australia. The online strategy is based on flexible 26 The composition of diversified Economic Equity of the Bank is currently: Operational 27% Market 13% Credit 60% Economic Equity is defined as: A risk measure, over a one year time horizon, consistent with a solvency standard equal to a AA debt rating (expected default frequency of 5 basis points). Economic Equity the underlying exposures to Credit Risk, Market Risk, and Operational Risk, allowing for inter-risk diversification. is derived from (i) Credit Risk The measurement of the Bank’s credit risk capital requirement is based on the Bank’s internal Credit Risk Rating system, and utilises techniques such as the KMV Portfolio Manager analytics to calculate Unexpected and Expected loss for the diversified portfolio. A description of the management of the Bank’s credit risk is set out in Note 14 to the Financial Statements. (ii) Market Risk Risk capital is measured separately for ‘Traded’ and ‘Non Traded’ (banking book) market risk. the Bank’s market risk for Traded market risk capital is measured by a market risk engine which has been approved by APRA for use to identify Regulatory Capital required to support traded market risk. Non traded market risk capital is calculated utilising the same methodology as for traded market risk, taking into account the different characteristics of this risk. A description of the management of market risk is set out in Note 37: Market Risk of the Financial Statements beginning on page 113. (iii) Operational Risk Operational Risk is defined broadly as all risks other than credit and market risk, which could cause volatility of the revenues, expenses and values of the Bank’s business. Potential volatility is quantified though both a bottom up indicative method, and top down deductive method. To measure operational risk, business divisions utilise a risk incident database to assess plausibility of risk scenarios. Probability of loss is estimated based on the mitigating effects of preventative and impact controls, and applied to a individual selected probability distribution. The risk and inherent operational risks are aggregated using a Monte Carlo simulation. The potential loss for individual risk is used to assess large operational risk exposures, while the aggregated loss amount is a portfolio measure of economic equity for operational risk. Operational risks are categorised as strategic and business risks (eg economic cycle, reputation, policy formulation, competitive environment, clients etc); external event risks (eg natural disasters and supplier risk); internal controls and compliance risks (regulatory, political, personnel, information etc); and technology risks. Capital Management The Bank’s capital management philosophy is to generate sustainable returns to maintain a buffer above the regulatory minimum capital in support of risk and to distribute excess capital back to shareholders. The decision to execute a further buyback of shares in March 1999 illustrated this philosophy in action. to shareholders, The buyback of shares from the Commonwealth in July 1996, as part of the Australian Government’s sale of its remaining shareholding in the Bank, reduced equity by approximately $1,000 million. A further buyback of 38.1 million shares occurred on 29 December 1997, which reduced shareholders’ equity by $650 million. In March 1999 the Bank bought back another 27.4 million shares which reduced further $650 million. shareholders’ equity by a Credit Ratings The Bank’s credit ratings at 30 June 1999 are: Standard & Poor’s Corporation Moody’s Investors Service, Inc. Fitch IBCA Moody’s Bank Financial Strength Rating Fitch IBCA Individual Rating Expansion Short Term Long Term A-1+ P-1 F1+ AA- Aa3 AA B A/B The Bank’s primary growth objective has been to maintain and, where commercially sustainable, face of vigorous in expand market share competition in the market. the In the Australian market, the Bank has expanded into growth areas primarily by organic means. The Bank was a pioneer in online services creating successful online businesses from the ground up. Its online site is Australia’s busiest online banking service. Commonwealth Securities, the Bank’s online broking arm, is Australia’s largest Internet broker. The Bank has supplemented organic growth by its to complement acquiring specific businesses existing financial services range. It acquired Commonwealth Funds Management in 1996; a 50% equity share in the financial planning the firm IPAC Securities Limited in 1997; and 27 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES be from factors external to the Bank. The risks to the Bank have been largely minimised due to ongoing communications and dialogue with key service providers and the strong focus on business continuity plan (BCP). These plans target all critical customer functions to ensure minimal disruption to the day to day operations of the Bank. In addition to the internal BCP planning, the Bank is working closely with other institutions and the Reserve Bank of Australia to put in place contingency plans at an industry level. The latter activity includes active follow up with the industry’s critical suppliers with regard to their Year 2000 readiness and contingency planning. These business continuity plans and disaster recovery plans will continue to be reviewed and refined beyond 2000 as part of the Bank’s overall risk management strategy. In addition to business continuity planning, the Bank is initiating a bank wide productions systems freeze commencing on 1 October 1999 until 3 March 2000. The aim of this freeze is to preserve the Bank’s Year 2000 readiness in our own internal production environments and also with systems that are essential to our participation in the industry wide payments systems. A number of other preservation strategies are also in place to ensure the ongoing Year 2000 readiness of the Bank’s systems. A comprehensive communication programme has commenced targeting both business and consumer client segments with the shared objectives of raising awareness and building confidence in the Bank’s ability to maintain normal banking services through the century change. This programme has included the sponsorship of a web site with the Institute of Engineers Australia containing details of to help suitably qualified engineers available businesses with remediation activities. their Year 2000 The Bank has previously estimated total rectification costs issues at $115 million. We expect to complete the overall program in line with this estimate. Expenditure to the end of June 1999 was $87 million. for Year 2000 The Bank has reported to the Australian Stock Exchange in March 1999 that depositors’ funds will not be at risk from Year 2000 issues. Financial Review Australian merchant banking operations of Credit Lyonnais in July 1999. The Bank has expanded strongly in New Zealand through its 75% owned subsidiary, ASB Bank, which has achieved significant organic growth and developed leading direct banking capabilities. ASB Bank expanded its activities in life insurance and funds management the acquisition of through Sovereign Ltd in 1998. Guarantee The of withdrawal progressive the Commonwealth’s guarantee has not had any significant impact on the Bank’s overall cost of funds. As at 30 June 1999, the weighted average term to maturity of that part of the wholesale borrowing program which remains guaranteed until maturity was approximately 5 years and 3 months (excluding the Undated Notes, which do not have a fixed maturity date). Year 2000 Systems Compliance to plan. The The Bank’s Year 2000 programme three phases of is the progressing in 1996, have been programme, commenced completed. They incorporated a disaster recovery phase which included a full inventory of hardware and software, a planning phase involving the compilation of remedial methods, cost strategies and remediation included plans and remediation and comprehensive testing of all critical applications. remedy phase which the in fully involved The Bank has been the interorganisational testing programme being managed by the Australian Payments Clearing Association. Testing of the five interorganisational clearing streams commenced in November 1998 and was successfully completed in June 1999. The Bank has also been an testing active Futures programmes, Exchange, SWIFT International and global payment system testing through the main New York clearing houses. in including the Sydney participant external other The Bank’s building management systems by achieved Year readiness 2000 project 30 June 1999. The Bank believes the most likely worst case scenario in respect of a Year 2000 breakdown would 28 Results of Operations for the Financial Year 1999 versus Financial Year 1998 and Financial Year 1998 versus Financial Year 1997 Net Interest Income The following table sets forth the Group’s net interest income for Financial Years 1997, 1998 and 1999. Interest income Interest expense Net interest income Y E A R E N D E D 3 0 J U N E 1999 $M 7,745 4,218 3,527 1998 $M 7,605 4,208 3,397 1997 $M 7,989 4,597 3,392 The following table sets forth the effect on the Group’s net interest income for Financial Year 1998 and Financial Year 1999 of changes in (i) the average volume of interest earning assets and interest bearing liabilities and (ii) their respective interest rates during the relevant years. Due to changes in average volume of interest earning assets and interest bearing liabilities Due to changes in average interest rates Change in net interest income Net interest income increased to $3,527 million in Financial Year 1999 compared with $3,397 million in Financial Year 1998. Increased interest earning assets, which increased by 11.8% to $114.3 billion in Financial Year 1999 from $102.2 billion in Financial Year 1998 more than offset the fall in Group interest margin. The increase in average interest earning assets of $12 billion contributed growth of $363 million in net interest income. This volume effect was partially offset by the $233 million impact of interest rate change which reduced net interest margin. Net to $3,397 million in Financial Year 1998 compared to increased slightly interest income F I N A N C I A L Y E A R 1 9 9 9 V S . 1 9 9 8 I N C R E A S E / ( D E C R E A S E ) $M F I N A N C I A L Y E A R 1 9 9 8 V S . 1 9 9 7 I N C R E A S E / ( D E C R E A S E ) $M 363 (233) 130 156 (151) 5 $3,392 million in Financial Year 1997. Increased interest earning assets, which increased by 6.2% to $102.2 billion in Financial Year 1998 from $96.2 billion in Financial Year 1997 more than offset the fall in Group interest margin. The increase in average interest earning assets of $6 billion contributed growth of $156 million in net interest income. This volume effect was partially offset by the $151 million impact of interest rate changes. following the Group’s table sets interest spread and net interest margin for the Financial Years 1997, 1998 and 1999. forth The Interest spread before deduction of interest forgone on non accrual and restructured loans Interest forgone on non accrual and restructured loans (1) Interest spread (2) Benefit of net interest free liabilities, provisions and equity (3) Net interest margin (4) (1) (2) Represents interest forgone on loans on which the Group earns no interest or interest at below market rates. Difference between the average interest rate earned and the average interest rate paid on funds. (3) (4) 1999 % 2.71 (0.02) 2.69 0.40 3.09 Y E A R E N D E D 3 0 J U N E 1998 % 2.89 (0.04) 2.85 0.48 3.33 1997 % 2.98 (0.06) 2.92 0.61 3.53 A portion of the Group’s interest earning assets is funded by net interest free liabilities and shareholders’ equity. The benefit to the Group of these interest free funds is the amount it would cost to replace them at the average cost of funds. Net earning assets for the period. income divided by average interest interest 29 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Financial Review The Group’s net interest margin has been compressed due to lowering of interest rates on assets and to a lesser extent on liabilities. The average interest rate on interest earning assets for Financial Years 1997, 1998 and 1999 was 8.3%, 7.4% and 6.8%, respectively. The average interest rate on interest bearing liabilities for Financial Years 1997, 1998 and 1999 was 5.4%, 4.6% and 4.1%, respectively. Changes in the average interest rate on interest earning assets and interest bearing in market liabilities primarily interest levels of competition. reflect movements rates and sustained high The impact of interest forgone on non accrual and restructured loans on the Group’s net interest margin declined from 0.06% in Financial Year 1997 to Australia Interest spread before deduction of interest forgone on non accrual and restructured loans Interest forgone on non accrual and restructured loans (1) Interest spread (2) Benefit of net interest free liabilities, provisions and equity (3) Net interest margin (4) Overseas Interest spread before deduction of interest forgone on non accrual and restructured loans Interest forgone on non accrual and restructured loans (1) Interest spread (2) Benefit of net interest free liabilities, provisions and equity (3) Net interest margin (4) 0.04% in Financial Year 1998 and 0.02% in Financial Year 1999. The reduction in interest forgone is in line with a general improvement in the Group’s asset quality. The benefit from net interest free liabilities, provisions and equity was 0.61% in Financial Year 1997, 0.48% in Financial Year 1998 and 0.40% in Financial Year 1999. The decrease in Financial Year 1999 reflects the effect of share buybacks and the lower interest rate environment. The decrease in Financial Year 1998 reflects the effect of the share buyback in December 1997 and the lower interest rate environment. On a geographical basis, the Group’s interest spreads and net interest margins are set forth in the following table. Y E A R E N D E D 3 0 J U N E 1999 % 1998 % 3.0 3.2 - - 3.0 0.4 3.4 3.2 0.4 3.6 1997 % 3.3 (0.1) 3.2 0.6 3.8 1.4 1.4 1.4 - - - 1.4 0.4 1.8 1.4 0.6 2.0 1.4 0.4 1.8 (1) (2) Represents interest forgone on loans on which the Group earns no interest or interest at below market rates. Difference between the average interest rate earned and the average interest rate paid on funds. (3) (4) A portion of the Group’s interest earning assets is funded by net interest free liabilities and shareholders’ equity. The benefit to the Group of these interest free funds is the amount it would cost to replace them at the average cost of funds. Net earning assets for the period. income divided by average interest interest The difference in margins and spreads between the Australian and overseas operations reflects the different nature of the Group’s business in each of these geographic areas. The overseas operations includes significant wholesale loans from a funding base that predominantly consists of raising funds in the wholesale markets. The resulting margins are much narrower. 30 Charge for Bad and Doubtful Debts The following table sets out the charge for bad and doubtful debts for Financial Years 1997, 1998 and 1999. Specific Provisioning New and increased provisioning Less provisions no longer required Net specific provisioning Provided from general provision Charge to profit and loss General provisioning Direct write offs Recoveries of amounts previously written off Movement in general provision Funding of specific provisions Charge of profit and loss Total Charge for Bad and Doubtful Debts Net charge for bad and doubtful debts increased by 6% to $247 million in Financial Year 1999 from $233 million in Financial Year 1998. Net charge for bad and doubtful debts increased by 138% to $233 million in Financial Year 1998 from $98 million in Financial Year 1997, largely due to increased provisioning for Asian exposures and continuing reduction in the level of writebacks and recoveries of bad debts. Included within abnormal items is a charge of $370 million relating to the general provision for bad and doubtful debts resulting from the introduction of Dynamic Provisioning – see Abnormal Items. for Financial Year 1998 The ratio of general provisions to risk weighted assets decreased to 1.09% in Financial Year 1999. The ratio of specific provisions to gross impaired assets increased from 37.6% at Financial Year end 1998 to 46.7% at Financial Year end 1999. The ratio of specific provisions to gross impaired assets increased from 30.2% at Financial Year end 1997 to 37.6% at Financial Year end 1998. Total Provisions for Impairment for the Group at 30 June 1999 are $1,356 million, no significant change Lending fees Commission and other fees Foreign exchange earnings Net gain/(loss) on investment securities Net profit on financing instruments - trading securities Life insurance surplus and funds management fees Other income Total non interest income The Group’s non interest income increased 9.0% over the prior year to $1,997 million in Financial Year 1999 and 23.1% over to from $1,833 million in Financial Year 1998 the prior year 1999 $M 284 (45) 239 (239) - 44 (51) 15 239 247 247 Y E A R E N D E D 3 0 J U N E 1998 $M 280 (57) 223 (155) 68 42 (48) 16 155 165 233 1997 $M 152 (90) 62 - 62 41 (80) 75 - 36 98 on the total at 30 June 1998 of $1,355 million. This level of provisioning is considered adequate for the Group given the credit risks identified in the Credit Portfolio. have Specific reduced provisions from $279 million to $275 million, a decrease of 1%, while gross impaired assets less interest reserved have reduced 21%. The increase in the coverage ratio from 37.6% to 46.7% is primarily the result of higher provisioning required on the Asia portfolio remaining after significant writeoff and realisation activity. The general provision has to $1,081 million at 30 June 1999 from $1,076 million at 30 June 1998, an increase of 0.5%. Total Assets have increased by 6% over the year. The lower increase in the general provision than total assets primarily reflects use of to meet special provisioning requirements, primarily Asia. the general provision increased Non Interest Income The following table sets forth the Group’s non interest income for Financial Years 1997, 1998 and 1999. Y E A R E N D E D 3 0 J U N E 1999 $M 474 807 155 79 118 254 110 1,997 1998 $M 472 678 161 101 82 205 134 1,833 1997 $M 439 541 70 4 104 197 134 1,489 $1,489 million in Financial Year 1997. The increase in Financial Year 1999 is principally due to higher fee income, improved trading income and higher levels of life insurance and funds management income. 31 Financial Review COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES and $2,967 million in Financial Year 1997. The ratio of operating expenses, excluding goodwill amortisation, to total operating income (before deducting the charge for bad and doubtful debts) was 55.6% in Financial Year 1999 compared to 58.1% in Financial Year 1998 and 59.9% in Financial Year 1997. This improvement in Financial Year 1999 was due to the growth in non interest income together with ongoing programmes to contain costs. Included within abnormal items for Financial Year 1998 is a charge of $200 million for restructuring costs, and for included within abnormal Financial Year 1997 is a charge of $200 million for write down of computer equipment. Further details are provided under discussion of Abnormal Items. items The following the Group’s table sets operating expenses for Financial Years 1997, 1998 and 1999. forth 1999 $M 1,604 455 505 112 394 3,070 47 3,117 Y E A R E N D E D 3 0 J U N E 1998 $M 1,622 473 476 116 352 3,039 46 3,085 1997 $M 1,663 547 255 92 367 2,924 43 2,967 implementation of the new organisational structure and reconfiguration of delivery systems. Full time equivalent staff numbers, on a Group basis, decreased from 33,543 employees as at 30 June 1997 to 30,743 employees at 30 June 1998 and 28,964 at 30 June 1999, an overall reduction of 13.6% over the two year period. Accompanying the overall reduction in the number of full time equivalent staff over the period Financial Year 1997 to Financial Year 1999, the Bank’s part time employees have increased to 20.1% of the Group’s work force as shown in the following table. Full time equivalent staff have been weighted for the lower costs per employee of staff on extended leave; for example, maternity leave, unpaid sick pay or career break. Comparatives have been similarly adjusted. 1999 1998 1997 A T 3 0 J U N E (number of employees, except percentages) 30,566 7,364 33,543 80.6% 19.4% 26,394 6,655 28,964 79.9% 20.1% 28,034 6,968 30,743 80.1% 19.9% the increase financial year whilst Lending fees have remained steady during the current in commission and other fees is due to changes made to fee structures in the previous financial year. Card fees have increased due to higher numbers of and activity by cardholders and merchants. The increase in foreign exchange earnings was due to continued volatility in foreign exchange markets, and higher levels of customer business. The higher levels of life insurance and funds management fees resulted from increased business volumes and higher funds under management balances. The increase in Financial Year 1998 included gains on sales of investment securities. Operating Expenses The Group’s total operating expenses (including the amortisation of goodwill but before abnormal items) for Financial Year 1999 were $3,117 million, as compared with $3,085 million in Financial Year 1998 Staff expenses Occupancy and equipment expenses Information Technology Services Fees and commissions Other expenses Total operating expenses Amortisation of Goodwill Total operating expenses and amortisation of goodwill Staff expenses decreased by 1.1% in Financial Year 1999 due to reductions in staff numbers, which were partially offset by increases in average staff costs. Staff numbers decreased by 1,779 net (with 400 staff acquired through Sovereign Ltd in December 1998) or 5.8% in Financial Year 1999 with the continuation of group wide reorganisation and rationalisation of processes. Staff expenses decreased by 2.5% in Financial Year 1998 largely due to reductions in staff numbers. in Staff numbers decreased by 2,800 or 8.3% Financial Year 1998. This reduction includes the transfer of 1,400 staff the outsourcing of technology and 800 redundancies which were part of the rationalisation of functions, processing administration information to EDSA following and Full time staff Part time staff Full time staff equivalent Full time staff/total staff Part time staff/total staff 32 The Group’s superannuation costs (post retirement benefits) were $1 million in Financial Year 1999, $1 million in Financial Year 1998 and $2 million in Financial Year 1997. This reflects actuarial advice that, having regard to the surplus in the principal superannuation fund, the Officers’ Superannuation Fund (OSF), the Bank may cease contributions. An actuarial assessment of the Officers’ Superannuation Fund (OSF) as at 30 June 1997 was completed during the Financial Year 1998. In line with the actuarial advice contained in this assessment, the Bank does not intend to make contributions to the OSF until after consideration of the next actuarial assessment of the OSF as at 30 June 2000. Occupancy and Equipment Expenses Occupancy and equipment expenses decreased by 4% in Financial Year 1999 due to rationalisation of premises occupied by the Group and the full year effect of the sale of computer and communications equipment to EDSA. During the year the Bank continued its property sale and leaseback program, including the sale of major office properties as part of the Commonwealth Office Property Fund listing as at 29 April 1999. This program increases rental costs which are offset by reduced depreciation and holding costs, and also assists in lowering the Bank’s risk profile and in its capital management program. Occupancy and equipment expenses decreased by 14% in Financial Year 1998 largely due to the fall in depreciation and repairs and maintenance costs on equipment following the sale of the Bank’s computer and communications equipment to EDSA as part of outsourcing of the information technology function to EDSA. This was partially offset by an increase in operating lease rental from the continuing property sale and lease back program. Information Technology Services functions Comparison with prior years is not meaningful. The outsourcing of most of the Bank’s information technology in October 1997 makes comparison with prior years difficult. This arrangement has increased costs in the information technology services category which are offset in all other expense categories. The scope of work performed by EDSA has remained similar to that performed by the Bank’s information technology division prior to outsourcing, with savings realised over what the Bank expected to spend had outsourcing not proceeded. Income Tax Expense Before abnormals, tax expense increased by 11.4% in Financial Year 1999 due to increased profit before tax partially offset by a reduction in the effective rate from 33.5% in Financial income Year 1998 to 33.1% in Financial Year 1999. Before abnormals income tax expense increased by 9.0%, in Financial Year 1998 compared with Financial Year 1997. Abnormal Items (including Abnormal Income Tax Expense) Abnormal items of revenue or expense are included in operating profit after income tax and considered abnormal by reason of size and effect on operating profit after income tax for the financial year. There were no abnormal items of income or expense in Financial Year 1999; however, following amounts were included in previous Financial Years. the Restructuring Costs (1998) Restructuring costs of $200 million ($128 million after tax) were charged to profit and loss in the Financial Year 1998. General Provision Charge for Bad and Doubtful Debts (1998) from With 1998 effect 1 January the methodology used to estimate the provisions for impairment has been refined by adopting a statistically based technique referred to as Dynamic Provisioning. This takes into account historical loss experience and current economic factors to assess the balance required in the general provision to cover expected losses in the credit portfolio. Initial adoption of this technique resulted in an abnormal expense for bad and doubtful debts of $370 million in respect of the general provision which was charged to profit and loss in the Financial Year 1998. Tax Effecting General Provision for Bad and Doubtful Debts (1998) The general provision for bad and doubtful debts was tax effected as at 1 January 1998. This reflects the adoption of a balance sheet risk based Dynamic Provisioning methodology which the recognition requirement that utilisation of the provision be assured beyond reasonable doubt. satisfies An abnormal credit tax expense of $337 million was booked to profit and loss in Financial Year 1998. to Information Technology Equipment Values (1997) For the Financial Year 1997, in anticipation of a restructuring of the Bank’s information technology processing, including investment in an information technology business, the carrying value of the Bank’s computer and communications equipment was reduced. This reduction was undertaken having regard to the sale of equipment to a global technology company. As a result, an abnormal expense of $200 million ($128 million after tax) was charged to profit and loss in Financial Year 1997. 33 Financial Review COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Net Income Capital Adequacy Net income increased 30.5% in Financial Year 1999 to $1,422 million from $1,090 million in Financial Year 1998. Net income increased 1.1% in Financial Year 1998 to $1,090 million from $1,078 million in Financial Year 1997. The increase in net income in the Financial Year 1999 was due to growth in both interest and non income coupled with containment of costs. The increase in net income in the Financial Year 1998 was due to a growth in fees, commissions, trading income and sale of investment securities offset by Abnormal Expenses of $161 million net of tax. interest In August 1988 the Reserve Bank established guidelines for the capital adequacy of Australian banks, to strengthen their soundness and stability. These guidelines are generally consistent with those proposed by the Committee on Banking Regulations and Supervisory Practices of for International Settlements. Full details of the Group’s capital adequacy position is disclosed in Note 30 to the Financial Statements. the Bank Risk Weighted Capital Ratios (percentages) Tier One Tier Two Less Deductions Total Tier One Capital Tier Two Capital Tier One and Tier Two Capital Less: Deductions Total Regulatory Capital Y E A R E N D E D 3 0 J U N E 1999 1998 1997 ($ millions, except percentages) 7.05 3.12 (0.79) 9.38 7,021 3,109 10,130 (788) 9,342 8.07 2.82 (0.40) 10.49 7,617 2,666 10,283 (381) 9,902 8.64 2.82 (0.57) 10.89 7,468 2,437 9,905 (487) 9,418 The maturity profile of eligible loan capital as at 30 June, 1999 was as follows: Tier One Tier Two (1) Total M A T U R I N G I N Y E A R 2000 $M 2001 $M After 2002 $M 270 - 270 78 - 78 290 2,335 2,625 Total $M 638 2,335 2,973 (1) For capital adequacy purposes Tier 2 loan capital is reduced each year by 20% of the original amount during the last five years to maturity. Total Tier 1 capital decreased by 7.8% to $7 billion at 30 June 1999 from $7.6 billion at 30 June 1998, primarily reflecting the $650 million off market share buyback in March 1999, and the maturity of approximately $574 million in Tier 1 loan capital. Total Tier 2 capital increased by $443 million to $3.1 billion at 30 June 1999 from $2.67 billion at 30 June 1998. Tier 2 eligible loan capital increased by $450 million to $2,335 million at 30 June 1999, from $1,885 million at 30 June 1998 primarily a result of the issuing of approximately $575 million in debt capital. The $40 million of ASB Bank preference shares is included as Tier 2 capital. to Total regulatory capital decreased 5.7% $9,342 million at 30 June 1999 from $9,902 million at 30 June 1998. The Group’s Tier 1 ratio also decreased to 7.05% at 30 June 1999 from 8.07% at 30 June 1998. The total capital ratio decreased to 9.38% at 30 June 1999 from 10.49% at 30 June 1998. 34 included eligible The Group’s Tier 1 and Tier 2 capital at 30 June 1999 loan capital of $638 million and $2,335 million, respectively. In the aggregate, such eligible loan capital at 30 June 1999 constituted 9.1%, 75.1% and 31.8% of the Group’s Tier 1, Tier 2 and Total Regulatory capital, respectively. Approximately $938 million of the Bank’s eligible the subject of separate agreements with the Commonwealth which provide, under certain circumstances, for the Bank to issue either the Commonwealth, or with the Commonwealth’s consent, rights to all shareholders to subscribe for fully paid Ordinary Shares of the Bank. Management believes that the possibility that such circumstances will arise is remote. paid Ordinary Shares loan capital fully to is Funding and Liquidity In addition to its imposition of capital adequacy requirements, APRA exercises liquidity control by requiring the banks it regulates to hold prime assets (cash, balances with the Reserve Bank or Commonwealth and semi government securities) equivalent to not less than 3% of a bank’s total liabilities (other than capital). As discussed in Note 37, this ratio is called the Prime Assets Requirement. APRA also requires banks to hold an adequate level of suitable assets to meet day to day fluctuations in liquidity. At 30 June 1999 the Bank held domestically $1,722 million in cash and short term liquid assets, on a Group basis, up 16% on the comparable figure at 30 June 1998. Approximately 44% of this holding ($752 million) comprised notes, coins and cash at bankers. In addition, trading securities with a market value of $3,219 million were held domestically, up 46% on the comparable figure at 30 June 1998. Of these trading securities $650 million comprised Commonwealth and Australian State government publicly issued securities with the largest component 27.6% being bills of exchange. As at 30 June 1999, investment securities with a book value of $3,147 million (market value $3,141 million) were also the held domestically, virtually unchanged on comparable figure at 30 June 1998. Approximately 84% by book and by market value of the holdings of those investment securities were Commonwealth public listed securities. Overseas holdings of cash and short term liquid assets totalled $92 million as at 30 June 1999, up $52 million on the comparable figure at 30 June 1998. As at 30 June 1999, trading securities with a market value of $1,489 million were held by the Bank, down 17% on the comparable figure as at 30 June 1998. As at 30 June 1999 investment securities with a book value of $4,040 million (market value $4,055 million) the Bank, up 9% and up 6% were held by respectively, on figures at 30 June 1998. comparable the in the Bank manages Because of the differences between its domestic its and offshore operations, liquidity the domestic and offshore markets separately. The Bank has followed a deliberate strategy of diversifying its sources of foreign currency funding into a range of markets in order to avoid over- reliance on any one market or maturity term. It has imposed internal prudential limits on the relative mix of its offshore sources of funds. from funding The Bank obtains a large proportion of its domestic retail deposits, primarily demand and short term deposits, which have a lower interest cost than wholesale funds. Over the past five years, the proportion of the Bank’s domestic funding that has come from retail sources has been over 70% and, as at 30 June 1999, the proportion was approximately 63%. The relative size of the Bank’s retail base has enabled it to source funds at a lower average rate of the other major Australian banks. However, some of this benefit is offset by the cost of the Bank’s retail network and the Bank’s large share (approximately 40%) of pensioner deeming accounts which, in the current interest rate environment are incurring an interest cost above normal retail deposit accounts. interest than the percentage of The Bank’s cost of funds for Financial Year 1999, calculated as interest expense to average interest bearing liabilities, was 4.1% on a Group basis compared with 4.6% for Financial Year 1998. In recent years, the Bank has experienced a movement of retail deposit balances reflecting into higher increased customer awareness of investment opportunities in an environment where the level of interest rates has remained lower and relatively more stable when compared with the interest rate cycle of 1980s and early 1990s. interest bearing accounts, for the domestic balance sheet The Bank obtains a growing proportion of its from funding wholesale sources – approximately 22%, excluding Bank Acceptances and Other Liabilities. The cost of funds raised in the wholesale markets is affected by independently assessed credit ratings. The removal progressive the Commonwealth’s guarantee has not had a material impact on the Bank’s overall cost of funds as the proportion of the Bank’s funding raised from the wholesale markets with the benefit of the guarantee is low. of 35 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES local currency. Local domicile of the borrower or guarantor of the ultimate risk. Outstandings include loans, acceptances and other monetary assets denominated in other than the currency counterparties’ activities with local residents by foreign branches and controlled entities of the Bank are excluded. The table excludes irrecoverable letters of credit, amounts of which are immaterial, and includes all local currency in outstandings with Australia. foreign subsidiaries located A T 3 0 J U N E 1999 1998 1997 ($ millions, except where indicated) Japan(1) Japan(1) - - - - - - 1,303 110 1,413 1.1% - 2,032 17 2,049 1.7% Financial Review Cross Border Outstandings by Industry Category The following table sets forth the aggregate cross border outstandings of the Group by industry category at 30 June 1997, 1998 and 1999. The table includes those outstandings due from countries where such outstandings individually exceed 1% of the Group’s total assets. At 30 June 1999 there are no countries where cross border outstandings, as defined below, exceed 1% of total assets. For the purposes of this presentation, cross border outstandings are based on the country of Country Government Banks and other financial institutions Other commercial and industrial Total outstandings for Japan as a percentage of total Bank assets (1) Australia has an extensive trading relationship with Japan. 36 Corporate Governance Board of Directors The Board of Directors assumes responsibility for corporate governance of the Bank. It oversees the business and affairs of the Bank, establishes the strategies and financial objectives to be implemented by management and monitors performance directly and through its committees. standards of The Board currently consists of ten Directors. Membership of the Board and its Committees is set out below: DIRECTOR BOARD MEMBERSHIP COMMITTEE MEMBERSHIP Nominations Remuneration Audit Risk Chairman Deputy Chairman Managing Director Chairman Member Member M A Besley, AO J T Ralph, AO D V Murray N R Adler, AO A C Booth R J Clairs, AO K E Cowley, AO J M Schubert F J Swan B K Ward Non executive Non executive Executive Non executive Non executive Non executive Non executive Non executive Non executive Non executive Chairman Member Member Member Chairman Member Member Member Member Chairman Member Member Details of experience, qualifications, special responsibilities and attendance at meetings of the Directors are set out in the Directors’ Report on pages 40 to 42. Mr Clairs was appointed as a non executive director on 1 March 1999. In accordance with the Bank’s Constitution and ASX Listing Rules, Mr Clairs will stand for election as a director at the Annual General Meeting to be held on 28 October 1999. Mr G H Slee, AM retired from the Board on 28 February 1999. • • The Constitution of the Bank specifies that: the managing director and any other executive directors shall not be eligible to stand for election as Chairman of the Bank; the number of directors shall be not less than 9 nor more than 13 (or such lower number as the Board may from time to time determine). The Board has determined that for the time being the number of directors shall be 10; and at each Annual General Meeting, one-third of directors (other than the managing director) shall retire from office and may stand for re-election. In February 1999, the Board adopted a policy that, with a phasing in provision dealing with existing directors, term of appointment of directors to the Board would normally be limited to twelve years. the maximum • The Nominations Committee of the Board critically reviews, at least annually, the corporate governance procedures of the composition and effectiveness of the Commonwealth Bank Board and the boards of the major wholly owned subsidiaries. The policy of the Board is that the Committee shall consist of a majority of non executive directors and that the Chairman of the Bank shall be Chairman of the Committee. the Bank and The Nominations Committee has developed a set of criteria for director appointments which have been adopted by the Board. The criteria set the objective of the Board as being as effective, and preferably more effective than the best boards in the comparable peer group. These criteria, which are reviewed annually, ensure that any new appointee is able to contribute to the ongoing effectiveness of the Board, has the ability to exercise sound business judgment, to think strategically and has demonstrated leadership experience, high levels of professional skill and appropriate personal qualities. by Candidates for appointment as directors are the Nominations Committee, considered recommended for decision by the Board and, if appointed, stand for election, in accordance with the Constitution, general meeting of shareholders. next the at Remuneration Arrangements The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined, is divided between the directors as they agree. The policy of the Board is that the aggregate amount should be set at a level which provides the Bank with the necessary degree of flexibility to enable it to attract and retain the services of directors of latest determination was at the Annual General Meeting held on 30 October 1997 when shareholders approved an aggregate remuneration of $1,000,000 per year. The Nominations Committee reviews the fees payable to non executive directors. Details of individual directors’ remuneration and the bands of remuneration are set out in Note 43. Directors’ fees do not incorporate a bonus element related to performance. the highest calibre. The The remuneration of Mr Murray (Managing Director) is fixed by the Board, pursuant to the Constitution, as part of the terms and conditions of his appointment. Those terms and conditions are subject to review, from time to time, by the Board. 37 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES • • the financial statements and their conformity with accounting standards, other mandatory reporting requirements and statutory requirements; and the quality of the accounting policies applied and any other significant judgements made. The Committee periodically meets separately with the Group Auditor and the external auditor in the absence of management. The Committee processes governing advisory work undertaken by the external auditor to ensure that the independence of the external auditor is not affected by conflicts. reviews the The scope of the audit is agreed between the Committee and the auditor. The external audit partner attends meetings of the Audit Committee by invitation and attends the Board meetings when the annual and half yearly accounts are signed. Risk Management The Risk Committee oversights credit, market and operational risks assumed by the Bank in the course of carrying on its business. risk/return expectations. The Committee considers the Group’s credit policies and ensures that management maintains a set of credit underwriting standards designed to the achieve portfolio outcomes consistent with Group’s the In addition, Committee reviews the Group’s credit portfolios and recommends provisioning for bad and doubtful debts. The Committee examines risk management policies and procedures for market, funding and liquidity risks incurred or likely to be incurred in the Group’s business. The Committee reviews progress in implementing management and identifying new areas of exposure relating to market, funding and liquidity risk. procedures The Committee ratifies the Group’s operational risk policies for approval by the Board and reviews and informs the Board of the measurement and management of operational risk. Operational risk is a basic line management responsibility within the Group consistent with the Committee. A range of insurance policies maintained by the Group mitigates some operational risks. the policies established by Independent Professional Advice The Bank has in place a procedure whereby, after appropriate consultation, directors are entitled to seek independent professional advice, at the expense of the Bank, to assist them to carry out their duties as directors. The policy of the Bank provides that any such advice is made available to all directors. Access to Information the The Board has an agreed policy on circumstances in which directors are entitled to obtain access to company documents and information. Corporate Governance There is in place a retirement scheme which provides for benefits to be paid to non executive directors after service of a qualifying period. The terms of this scheme, which were approved by shareholders at the 1997 Annual General Meeting, allow for a benefit on a pro rata basis to a maximum of four years’ total emoluments after twelve years’ service. The Board has established a Remuneration Committee to: • • • consider remuneration policy for the Bank’s senior executives and executives; consider senior executive appointments; and consider arrangements in the level or structure of remuneration and benefits for staff generally. The policy of the Board is that the Committee shall consist of a majority of non executive directors. The Committee has an established work plan which allows it to review all major human resource policies, strategies and outcomes. The Bank’s remuneration policy in respect of executives includes provisions that remuneration will be competitively set so that the Bank can seek to attract, motivate and retain high quality local and international executive staff and that remuneration will incorporate, to a significant degree, variable pay for performance elements. A full statement of the Bank’s remuneration policy for executives and details of the remuneration paid to six members of the senior executive team who were officers of the Bank at 30 June 1999 are set out in Note 44. Audit Arrangements Ernst & Young was appointed as the auditor of the Bank at the 1996 Annual General Meeting and continues to fulfil that office. is not Chairman of The Board’s Audit Committee consists entirely of non executive Directors and the Chairman of the Committee the Bank. This structure reflects the Board’s policy. The Managing Director attends Committee meetings by invitation. The Committee oversees the adequacy of the overall internal control internal audit functions within the Group and their relationship to external audit. functions and the current policies accounting ensure relevant In carrying out these functions, the Committee: reviews the financial statements and reports of the Group; to reviews compliance with laws, regulations and accounting standards; reviews, as necessary, the policy in relation to internal audit services within the Group and reviews internal audit plans for Group members; reviews reports from external auditors and the Group’s internal auditor; and conducts any investigations relating to financial matters, records, accounts and reports which it considers appropriate. The Committee regularly considers, the absence of management and the external auditor, the quality of the information received by the Committee and, financial statements, the discusses with management and the external auditor: in considering in • • • • • 38 Ethical Standards • • The Bank has adopted a Statement of Professional Practice which sets standards of behaviour required including: • to act properly and efficiently in pursuing the objectives of the Bank; to avoid situations which may give rise to a conflict of interests; to know and adhere to Employment Opportunity policy and programs; to maintain confidentiality in the affairs of the Bank and its customers; and to be absolutely honest activities. These standards are regularly communicated to staff. In addition, the Bank has established insider trading guidelines for staff to ensure that unpublished price sensitive information about the Bank or any other company is not used in an illegal manner. in all professional the Bank’s Equal • • The restrictions imposed by law on dealings by directors in the securities of the Bank have been supplemented by the Board of Directors adopting guidelines which further limit any such dealings by directors, their spouses, any dependent child, family company and family trust. The guidelines provide, that in addition to the requirement that directors not deal in the securities of the Bank or any related company when they have or may be perceived as having relevant unpublished price sensitive information, directors are only permitted to deal within certain periods. These periods include between 3 and 30 days after the announcement of half yearly and final results and from 3 days after release of the Annual Report until 30 days after the Annual General Meeting. Further, the guidelines require that directors not deal on the basis of considerations of a short term nature or to the extent of trading in those securities. Non executive directors are not entitled to participate in current employee share plans. In accordance with the Constitution and the Corporations Law, directors disclose to the Board any material contract in which they may have an interest. In compliance with Section 232A of the Corporations Law any director with a material personal interest in a matter being considered by the Board will not be present when the matter is being considered and will not vote on the matter. 39 Directors’ Report COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES The Directors of the Commonwealth Bank of Australia submit the their report, financial statements of the Commonwealth Bank of Australia (the Bank) and of the Group, being the Bank and the year ended 30 June 1999. its controlled entities, together with for The names of the Directors holding office during the financial year and until the date of this report are set out below together with details of Directors’ experience, qualifications, special responsibilities and organisations in which each of the Directors has declared an interest. M A (Tim) Besley, AO. Chairman Mr Besley has been Chairman and a member of the Board since 1988. He holds Bachelor degrees in Civil Engineering and Legal Studies and has forty six years’ experience in engineering, finance and public service. Mr Besley is Chairman of the Remuneration, Risk and Nominations Committees. Chairman: Leighton Holdings Limited. Director: O’Connell Street Associates Pty Ltd. Other Interests: Macquarie University (Chancellor), Australian Academy of Technological Sciences and Engineering (President), Australian National Gallery Foundation (Council of Governors), Legacy Torch Bearers Committee (Member), Salvation Army - NSW Advisory Board and Red Shield Appeal Committee (Member), Royal Botanic Gardens Sydney Foundation (Trustee), Sir Ian McLennan Achievement for Industry Award (Trustee), and World Vision of Australia Board of Reference (Member). Mr Besley is a resident of New South Wales. Age 72. John T Ralph, AO. Deputy Chairman Mr Ralph has been a member of the Board since 1985 and is Chairman of the Audit Committee and member of the Nominations Committee. He is a Fellow of the Australian Society of Certified Practicing forty seven years’ Accountants and has over experience in the mining and finance industries. Chairman: Foster’s Brewing Group Limited and Pacific Dunlop Limited. Deputy Chairman: Telstra Corporation Limited. Director: Pioneer Limited. Other Interests: Melbourne University Business School (Board of Management), The Queen’s Trust for Young Australians (National Chairman), Australian (Chairman), Australian Foundation Institute of Company Directors (Fellow), and Advisory Council of The Global Foundation (Member). Mr Ralph is a resident of Victoria. Age 66. International Limited and BHP for Science David V Murray, Managing Director Mr Murray has been a member of the Board and Managing Director since June 1992. He holds a Bachelor of Business and Master of Business Administration and has thirty three years’ experience in banking. Mr Murray the Remuneration, Risk and Nominations Committees. is a member of 40 Life Services Commonwealth Investment Limited, Chairman: Commonwealth Limited, Commonwealth Insurance Limited, Commonwealth Custodial Services Limited and Commonwealth Funds Management Limited. Director: International Monetary Conference. Other Interests: Asian Bankers’ Association (Member), Australian Bankers’ Association (Member), Asian Pacific Bankers’ Club (Member), Australian Coalition of Service Industries (Member), Australian Institute of Banking and Finance (President), Business Council of Australia (Member), World Economic Forum (Member), St Mary’s Cathedral Appeals Committee (Chairman), Macquarie University Graduate School of Management (Advisory Board), General Motors Australian Advisory Council (Member), APEC Business Advisory Council (Member) and Financial Sector Advisory Council (Member). Mr Murray is a resident of New South Wales. Age 50. Limited N R (Ross) Adler, AO Mr Adler has been a member of the Board since 1990 and is a member of the Remuneration Committee. He holds a Bachelor of Commerce and a Master of Business Administration. Mr Adler is currently Managing Director of Santos Limited. He has experience in various commercial enterprises, more recently in the oil and gas industry. Director: QCT Resources Limited Group Companies, Santos (Group) Companies, Telstra Corporation Limited, Australian Institute of Petroleum Limited, Shelrey Pty Ltd, South Blackwater Coal Limited and Tereny Investments Pty Ltd. Interests: Art Gallery of South Australia Other (Chairman), National Institute of Labour Studies, Flinders University of South Australia (Governor), University of Adelaide (Council Member), Business Council of Australia (Member), Corporations and Securities Panel (Member) and Australian Institute of Company Directors (Member). Mr Adler is a resident of South Australia. Age 54. Anna C Booth Ms Booth has been a member of the Board since 1990 and is a member of the Risk Committee. She holds a Bachelor of Economics (Hons) and has seventeen years’ experience in the trade union movement and most recently as General Manager Corporate Communications of the Sydney Harbour Casino. Director: Ausflag Limited. Other Interests: Tourism Council of Australia (National Councillor), Shopping Centres Council of Australia (Special Advisor), Breast Cancer Institute of Australia (Member), Sydney Research Organising Committee the Olympic Games Labour Management Studies (Member) (Fellow). Foundation of Macquarie University Ms Booth is a resident of New South Wales. Age 43. for Life Appeal and for in Reg J Clairs, AO Mr Clairs has been a member of the Board since 1 March 1999. He has thirty three years’ extensive experience retailing, branding and customer service. Mr Clairs is currently a board member of the Royal Children’s Hospital Foundation of Queensland, Chairman and a foundation member of the Prime Minister’s Supermarket to Asia Council. He is also Deputy Chairman of Woolstock Australia Limited and a director to the Boards of David Jones Ltd and Howard Smith Ltd. Mr Clairs is a resident of Queensland. Age 61. in the media is a member of Ken E Cowley, AO Mr Cowley has been a member of the Board since September 1997 and the Remuneration Committee. He has thirty three years’ industry, having been experience since 1976 and Director of News Limited that until July 1997, was Executive Chairman of company. Chairman: PMP Communications Limited, R M Williams Holdings Limited, Ansett New Zealand International Limited, Melbourne Limited, Ansett Storm Football Club Pty Ltd and Nardell Coal Corporation. Director: The News Corporation Limited, Independent Newspapers Limited, Ansett Australia Limited and Foxtel Management Pty Limited. Other Interests: Australian Stockman’s Hall of Fame & Outback Heritage Centre NSW (Chairman) and Royal Agricultural Society (Councillor). Mr Cowley is a resident of New South Wales. Age 64. John M Schubert Dr Schubert has been a member of the Board since 1991 and is a member of the Audit and Risk Committees. He holds a Bachelor Degree and PhD in Chemical Engineering and has experience in the petroleum, mining and building materials industries. Dr Schubert is currently Managing Director and Chief Executive Officer of Pioneer International Limited. Director: Australian Graduate School of Management Ltd. Other Interests: Academy of Technological Science (Fellow). Dr Schubert is a resident of New South Wales. Age 56. Graham H Slee, AM Mr Slee was a member of the Board from 1986 and a member of the Risk Committee until his retirement from the Board on 28 February 1999. He holds a Bachelor of Mechanical Engineering and has thirty seven years’ experience in engineering and manufacturing industries. Chairman: McNee Holdings Pty Limited and Sheet Metal Supplies Pty Ltd. Mr Slee is a resident of New South Wales. Age 62. is a member of Frank J Swan the Board Mr Swan has been a member of since July 1997 and the Risk Committee. He holds a Bachelor of Science degree and has twenty three years’ senior management experience in the food and beverage industries. Director: Foster’s Brewing Group Limited and National Foods Limited. Mr Swan is a resident of Victoria. Age 58. Barbara K Ward Ms Ward has been a member of the Board since 1994 and is a member of the Audit Committee. She holds a Bachelor of Economics and Master of Political Economy and has six years’ experience in policy development and public administration as a senior ministerial adviser and twelve years’ experience in the transport and aviation industries, most recently as Chief Executive of Ansett Worldwide Aviation Services. Since 1998, she has pursued a career as a company director. Chairman: HWW Limited. Director: Delta Electricity, Rail Services Australia, and Data Advantage Limited. Other Interests: Sydney Opera House Trust (Trustee) and Australia Day Council of New South Wales (Member). Ms Ward is a resident of New South Wales. Age 45. 41 Directors’ Report COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Directors’ Meetings The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Commonwealth Bank during the financial year were: DIRECTOR M A Besley J T Ralph D V Murray N R Adler A C Booth R J Clairs ## K E Cowley J M Schubert G H Slee # F J Swan B K Ward DIRECTORS’ MEETINGS No. of Meetings Held* No. of Meetings Attended 13 13 13 13 13 4 13 13 9 13 13 13 13 13 10 13 2 12 12 9 12 13 The number of meetings held during the time the Director held office during the year. Mr Slee retired 28 February 1999 * # ## Mr Clairs was appointed Director 1 March 1999 COMMITTEE MEETINGS Risk Committee Audit Committee Remuneration Committee No. of Meetings Held * No. of Meetings Attended No. of Meetings Held * No. of Meetings Attended No. of Meetings Held * No. of Meetings Attended M A Besley J T Ralph D V Murray N R Adler A C Booth ♦ K E Cowley (cid:1) J M Schubert (cid:2) G H Slee # F J Swan B K Ward 9 9 3 3 6 9 9 9 3 3 6 8 4 4 4 4 4 4 6 6 6 5 1 6 6 6 5 1 Nominations Committee No. of Meetings Held * No. of Meetings Attended M A Besley J T Ralph D V Murray 5 5 5 5 5 5 * # ♦ The number of meetings held during the time the Director was a member of the relevant committee. Mr Slee retired as Director 28 February 1999. Ms Booth moved from Remuneration Committee to Risk Committee on 1 March 1999. Mr Cowley was appointed to Remuneration Committee on 1 March 1999. Dr Schubert was appointed to Risk Committee on 1 March 1999. 42 (cid:1) (cid:2) Principal Activities The principal activities of the Commonwealth Bank Group during the financial year were: for marketing Banking & Financial Services Division – is responsible product development and brand management for the retail and small and medium business segments. The Division focuses on assessing customer needs and servicing those funds management and related products and services. insurance, services, banking, needs for Customer Service Division – provides quality sales and service to the Bank’s customers and is focused on managing the branch, agency networks and electronic delivery such as ATM, EFTPOS, telephone and direct/online services. Institutional Banking – provides corporate and general banking, financing (including international trade and project financing), merchant and investment banking and stockbroking. Institutional Banking maintains banking relationships with 1,000 of Australasia’s largest corporations, government bodies and other major institutions. Technology Operations and Property – facilitates the delivery of current and Information Technology and Telecommunication services for the Bank, provides a full service transaction processing function, and and back office/operation support manages the property investment and corporate real estate services of the Bank. future Financial and Risk Management – provides integrated financial, risk and capital management services to support the activities of the Bank. ASB Group Limited – 75% owned by the Commonwealth Bank, provides personal, business, corporate and rural banking and life insurance services in New Zealand. The only significant change in these activities was the acquisition within the ASB Group Limited in December 1998 of Sovereign Limited, a New Zealand life insurance company, for $205 million. There has been no other significant change in the nature of these activities during the year. Consolidated Profit Consolidated operating profit after tax and outside equity interests for the financial year ended 30 June 1999 was $1,422 million (1998: $1,090 million). There were no abnormal items for the year ended 30 June 1999. The 1998 result was affected by a number of abnormal items, including an abnormal expense for restructuring costs of $128 million after tax related to rationalisation of processing and administration functions, implementation of a new organisational structure and reconfiguration of delivery systems. Further with effect from 1 January 1998 the general provision for bad and doubtful debts is assessed using a statistical dynamic provisioning methodology. An abnormal expense for bad and doubtful debts of $370 million in 1998 in this regard was charged to profit and loss. Following this change in general provisioning methodology the general provision was income tax effected resulting in an abnormal tax credit of $337 million. The 1999 consolidated operating profit before abnormal tax was items and $2,160 million (1998: $1,912 million). The 1999 result represents a 13% increase over the prior year on a before abnormal items basis. The principal contributing factors to this increase were a growth in net interest income reflecting a 13% growth in lending assets together with growth in commissions, life insurance and funds management income and trading income. Dividends The Directors have declared a fully franked (at 36%) final dividend of 66 cents per share amounting to $605 million. The dividend will be payable on 30 September 1999. Dividends paid since the end of the previous financial year: • as provided for in last year’s report, a fully franked final dividend of 58 cents per share amounting to $535 million was paid on 30 September 1998. The payment comprised cash disbursements of $310 million with $225 million being reinvested by participants through the Dividend Reinvestment Plan; and in respect of the current year, a fully franked interim dividend of 49 cents per share amounting to $458 million was paid on 26 March 1999. The payment comprised cash disbursements of $258 million with $200 million being reinvested by participants through the Dividend Reinvestment Plan. • Review of Operations An analysis of operations for the financial year is set out in the Review of Operations on page 4. Changes in State of Affairs The Bank’s shareholders’ equity was reduced by the $650 million on 24 March 1999 pursuant buyback of 27.4 million shares. to There were no other significant changes in the state of affairs of the Group during the financial year. Events Subsequent to Balance Date Other than the acquisition of Credit Lyonnais Holding Australia Limited in July 1999, referred to in Note 1 to the Financial Report, the Directors are not aware of any other matter or circumstance that has occurred since the end of the financial year that has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Future Developments and Results Major developments which may affect the operations of the Group in subsequent financial years are referred to in the Review of Operations on page 4. In the opinion of the Directors, disclosure of any further information on likely developments in operations would be unreasonably prejudicial to the interests of the Group. 43 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES the Court grants relief to the person under the Corporations Law, provided that the director, officer or employee has obtained the company’s prior written approval (which shall not be unreasonably withheld) to incur the costs and expenses in relation to the proceedings’. The Corporations Law (Section 241) prohibits a company from indemnifying directors, secretaries and executive officers against a liability: • except for liability to another person (other than the company or a related body corporate) unless the liability arises out of conduct involving a lack of good faith; and except for a liability for costs and expenses incurred in defending proceedings in which the person is successful. indemnity An for employees, who are not directors, secretaries or executive officers, is not expressly restricted in any way by the Corporations Law. • The Directors, as named on pages 40 to 41 of this report, and the Secretaries of the Commonwealth Bank, being J D Hatton (Secretary) and K G Bourke (Assistant Company Secretary) are indemnified under Article 19 as are all the executive officers and employees of the Commonwealth Bank. Deeds of Indemnity have been executed by Commonwealth Bank in terms of Article 19 above in favour of each director. Directors’ and Officers’ Insurance the The Commonwealth Bank has, during financial year, paid an insurance premium in respect of an insurance policy for the benefit of those named the directors, secretaries, executive above and officers and employees of any related bodies corporate as defined in the insurance policy. The insurance grants indemnity against liabilities permitted to be indemnified by the company under Section 241A(1) of the Corporations Law. In accordance with commercial practice, the insurance policy prohibits disclosure of the terms of the policy including the nature of the liability insured against and the amount of the premium. Directors’ and other Officers’ Emoluments Details of the Bank’s remuneration policy in respect of the Directors and executives is set out under the ‘Corporate Governance’ section of this report. ‘Remuneration Arrangements’ within Details on emoluments paid to each director are detailed in Note 43 of the Financial Report. Details on emoluments paid to the executive director and the other five most highest paid executive officers of the Bank and the Group are disclosed in Note 44 of the Financial Report. Directors’ Report Environmental Regulation The Bank and its controlled entities are not subject to any particular or significant environmental regulation under a law of the Commonwealth or of a State or Territory. Directors’ Shareholdings Particulars of shares in the Commonwealth Bank or in a related body corporate are set out in a separate section at the end of the Financial Report titled to be regarded as contained in this report. Information’ which ‘Shareholding is Options An Executive Option Plan was approved by shareholders at the Annual General Meeting on 8 October 1996. On 30 September 1998, the Bank granted options over 3,275,000 unissued ordinary shares to 32 executives under the Executive Option Plan. On 31 May 1999, 26,000 shares were allotted consequent to an exercise of options granted under the Plan. Full details of the Plan are disclosed in Note 28 to the Financial Statements. The names of persons who currently hold options in the Plan are entered in the register of options kept by the Bank pursuant to Section 216C of the Corporations Law. The register may be inspected free of charge. For details of the options granted to a director, refer to the separate section at the end of the Financial Report Information’ which is to be regarded as contained in this report. ‘Shareholding titled Directors’ Interests in Contracts A number of Directors have given written notices, stating that they hold office in specified companies and accordingly are to be regarded as having an in any contract or proposed contract that may be made between the Bank and any of those companies. interest Directors’ and Officers’ Indemnity Article 19 of the Commonwealth Bank’s Constitution provides: ‘To the extent permitted by law, the company indemnifies every director, officer and employee of the company against any liability incurred by that person (a) in his or her capacity as a director, officer or employee of the company and (b) to a person other than the company or a related body corporate of the company. The company indemnifies every director, officer and employee of the company against any liability for costs and expenses incurred by the person in his or her capacity as a director, officer or employee of the company (a) in defending any proceedings, whether civil or criminal, in which judgment is given in favour of the person or in which the person is acquitted or (b) in connection with an application, in relation to such proceedings, in which 44 Incorporation of Additional Material This report incorporates the Review of Operations, Corporate Governance and Shareholding Information sections of this Annual Report. Roundings The amounts contained in this report and the financial statements have been rounded to the nearest million dollars unless otherwise stated, under the option available to the Company under ASIC Class Order 98/100. Signed in accordance with a resolution of the Directors. M A Besley AO Chairman 11 August 1999 D V Murray Managing Director 45 Selected Financial Data for Five Years COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 1999 $M 1998 $M 1997 $M 1996 $M 1995 $M 3,527 1,997 5,524 247 3,117 2,160 - 714 - 1,446 24 1,422 1,143 104 68 1,315 122 56 1,493 (47) (24) 1,422 - 1,422 3,397 1,833 5,230 233 3,085 1,912 (570) 641 (409) 1,110 20 1,090 1,096 98 (30) 1,164 87 66 1,317 (46) (20) 1,251 (161) 1,090 3,392 1,489 4,881 98 2,967 1,816 (200) 588 (72) 1,100 22 1,078 1,028 85 21 1,134 75 62 1,271 (43) (22) 1,206 (128) 1,078 3,397 1,355 4,752 113 2,863 1,776 - 635 - 1,141 22 1,119 984 71 20 1,075 59 48 1,182 (41) (22) 1,119 - 1,119 3,164 1,340 4,504 182 2,799 1,523 - 493 28 1,002 19 983 907 63 (2) 968 49 52 1,069 (39) (19) 1,011 (28) 983 101,837 138,096 93,428 131,134 6,735 6,471 99,556 114,271 103,130 89,816 130,544 83,886 123,655 6,712 6,358 94,431 102,165 91,650 81,632 120,103 77,880 113,079 6,846 6,450 86,468 96,163 85,296 70,042 109,285 71,381 101,918 7,190 6,793 77,246 84,770 74,879 62,707 102,774 67,824 96,079 6,568 6,087 70,383 78,461 69,300 115,510 13,046 9,540 138,096 110,120 10,846 9,578 130,544 101,202 9,994 8,907 120,103 92,456 7,903 8,926 109,285 86,191 6,986 9,597 102,774 Profit and Loss Net interest income Other operating income Total operating income Charge for bad and doubtful debts Total operating expenses (including goodwill) Operating profit before abnormal items and income tax expense Abnormal items Income tax expense (credit) Operating profit before abnormal items Abnormal items Operating profit after income tax Outside equity interests Operating profit after income tax attributable to shareholders Contributions to profit Banking Australia New Zealand (ASB Bank) Other countries Life insurance and funds management Finance Profit on operations Goodwill amortisation Outside equity interests Operating profit after income tax before abnormal items Abnormal expense (after income tax) Operating profit after income tax and abnormal items Balance sheet Loans, advances and other receivables Total assets Deposits and other public borrowings Total liabilities Shareholders’ equity Net tangible assets Risk weighted assets Average interest earning assets Average interest bearing liabilities Assets (on balance sheet) Australia New Zealand Other Total Assets 46 Shareholder Summary Dividends per share (cents) - fully franked Dividends provided for, reserved or paid ($million) Dividend cover (times) Earnings per share (cents) before abnormal items after abnormal items Dividend payout ratio (%) (1) before abnormal items after abnormal items Net tangible assets per share ($) Weighted average number of shares (basic) Number of shareholders Share prices for the year ($) Trading high Trading low End (closing price) Performance Ratios (%) Return on average shareholders’ equity (2) before abnormal items after abnormal items Return on average total assets (2) before abnormal items after abnormal items Capital adequacy - Tier 1 Capital adequacy - Tier 2 Deductions Capital adequacy - Total Net interest margin Other Information (numbers) Full time staff Part time staff Full time staff equivalent Branches/service centres (Australia) Agencies (Australia) ATMs EFTPOS terminals Productivity Total Operating Income per full time (equivalent) employee ($) Staff Expense/Total Operating Income (%) Total Operating Expenses (3) /Total Operating Income (%) (1) (2) Dividends per share divided by earnings per share. Calculations based on operating profit after tax and average outside equity shareholders’ equity/average total assets. interests applied to 1999 1998 1997 1996 1995 115 1,063 1.3 104 955 1.1 102 941 1.1 90 832 1.3 82 772 1.3 153.4 153.4 134.5 117.2 131.2 117.2 115.2 115.2 109.2 106.2 75.0 75.0 6.82 927m 75.1 77.2 6.28 924m 404,728 419,926 426,229 275,204 274,247 78.1 78.1 6.68 969m 77.7 87.0 6.74 917m 77.3 88.7 6.70 930m 28.76 18.00 24.05 19.66 13.70 18.84 16.00 9.93 16.00 12.05 9.20 10.46 9.58 7.05 9.33 20.54 20.54 18.48 16.10 18.16 16.39 16.27 16.27 16.13 15.69 1.06 1.06 7.05 3.12 (0.79) 9.38 3.09 1.01 0.87 8.07 2.82 (0.40) 10.49 3.33 1.05 0.94 8.64 2.82 (0.57) 10.89 3.53 1.06 1.06 10.05 2.97 (0.31) 12.71 4.01 1.04 1.01 10.25 1.30 (0.40) 11.15 4.03 26,394 6,655 28,964 1,162 3,934 2,602 90,152 28,034 6,968 30,743 1,218 4,015 2,501 83,038 30,566 7,364 33,543 1,334 4,205 2,301 63,370 31,455 7,964 34,518 1,390 4,214 2,113 43,703 31,333 7,602 34,383 1,474 4,282 1,643 20,250 190,720 170,120 145,515 137,667 130,995 33.8 61.3 33.3 59.4 29.0 55.6 31.0 58.1 34.0 59.9 (3) Total Operating Expenses excluding goodwill amortisation. 47 Financial Statements COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Statements of Profit and Loss ...............................................................................................................................49 Balance Sheets .......................................................................................................................................................50 Consolidated Statements of Changes in Shareholders’ Equity .........................................................................51 Statements of Cash Flows .....................................................................................................................................52 Notes to and Forming Part of the Accounts.........................................................................................................53 1 Summary of Significant Accounting Policies......................................................................................................53 2 Operating Profit .................................................................................................................................................61 3 Average Balance Sheet and Related Interest....................................................................................................63 4 Abnormal Items .................................................................................................................................................66 5 Income Tax Expense .........................................................................................................................................67 6 Dividends, Provided For, Reserved or Paid.......................................................................................................68 7 Earnings Per Share ...........................................................................................................................................68 8 Cash and Liquid Assets .....................................................................................................................................69 9 Receivables from Other Financial Institutions ...................................................................................................69 10 Trading Securities .............................................................................................................................................69 11 Investment Securities .......................................................................................................................................70 12 Loans, Advances and Other Receivables..........................................................................................................73 13 Provisions for Impairment ..................................................................................................................................75 14 Credit Risk Concentrations ................................................................................................................................80 15 Asset Quality .....................................................................................................................................................87 16 Deposits with Regulatory Authorities .................................................................................................................93 17 Shares in and Loans to Controlled Entities........................................................................................................93 18 Property, Plant and Equipment..........................................................................................................................93 19 Goodwill.............................................................................................................................................................94 20 Other Assets......................................................................................................................................................94 21 Deposits and Other Public Borrowings ..............................................................................................................94 22 Payables to Other Financial Institutions.............................................................................................................95 Income Tax Liability...........................................................................................................................................95 23 24 Other Provisions ................................................................................................................................................95 25 Debt Issues........................................................................................................................................................96 26 Bills Payable and Other Liabilities .....................................................................................................................98 27 Loan Capital ......................................................................................................................................................99 28 Share Capital...................................................................................................................................................100 29 Outside Equity Interests...................................................................................................................................102 30 Capital Adequacy ............................................................................................................................................103 31 Maturity Analysis of Monetary Assets and Liabilities .......................................................................................105 32 Financial Reporting by Segments....................................................................................................................107 33 Remuneration of Auditors ................................................................................................................................110 34 Commitments for Capital Expenditure Not Provided for in the Accounts .........................................................110 35 Lease Commitments - Property, Plant and Equipment....................................................................................110 36 Contingent Liabilities........................................................................................................................................111 37 Market Risk......................................................................................................................................................113 38 Superannuation Commitments ........................................................................................................................126 39 Controlled Entities ...........................................................................................................................................127 40 Investments in Associated Entities ..................................................................................................................129 41 Standby Arrangements and Unused Credit Facilities ......................................................................................129 42 Related Party Disclosures ...............................................................................................................................130 43 Remuneration of Directors...............................................................................................................................132 44 Remuneration of Executives............................................................................................................................133 45 Statements of Cash Flows...............................................................................................................................136 46 Disclosures about Fair Value of Financial Instruments ....................................................................................137 47 Differences between Australian and United States Accounting Principles.......................................................140 Directors’ Declaration ..........................................................................................................................................151 Independent Audit Report....................................................................................................................................152 Shareholder Information ......................................................................................................................................153 48 Statements of Profit & Loss For the year ended 30 June 1999 Interest income Interest expense Net interest income Other operating income Total operating income Charge for bad and doubtful debts Total operating income after charge for bad and doubtful debts Total operating expenses Operating profit before goodwill amortisation, abnormal items and income tax Goodwill amortisation Operating profit before abnormal items and income tax Abnormal expense Operating profit before income tax Income tax expense (credit) Operating profit Abnormal items Income tax expense Operating profit after income tax Outside equity interests in operating profit after income tax Operating profit after income tax attributable to members of the Bank Retained profits at the beginning of the financial year Adjustment on adoption of ISC Life Insurance Rules Buyback Transfers from reserves Total available for appropriation Transfers to reserves Dividends (fully franked) Transfer to dividend reinvestment plan reserve Provided for payment in cash or paid Dividends provided for, reserved or paid Retained profits at the end of the financial year Earnings per share based on operating profit after income tax attributable to members of the Bank: Dividends provided for, reserved or paid per share attributable to members of the Bank: 1999 $M 7,745 4,218 3,527 1,997 5,524 247 5,277 3,070 2,207 47 2,160 - 2,160 714 - 714 1,446 24 1,422 755 - (404) 1,087 2,860 99 316 747 1,063 1,698 G R O U P 1997 $M 7,989 4,597 3,392 1,489 4,881 98 4,783 2,924 1,859 43 1,816 200 1,616 588 (72) 516 1,100 22 1,078 794 (11) - 74 1,935 86 419 522 941 908 1998 $M 7,605 4,208 3,397 1,833 5,230 233 4,997 3,039 1,958 46 1,912 570 1,342 641 (409) 232 1,110 20 1,090 908 - (384) 170 1,784 74 403 552 955 755 1999 $M 6,352 3,451 2,901 2,161 5,062 78 4,984 2,755 2,229 39 2,190 - 2,190 645 - 645 1,545 - 1,545 216 - (404) 1,001 2,358 - 316 747 1,063 1,295 B A N K 1998 $M 6,012 3,227 2,785 1,639 4,424 224 4,200 2,611 1,589 39 1,550 570 980 506 (409) 97 883 - 883 472 - (384) 200 1,171 - 403 552 955 216 Cents per share 153.4 117.2 117.2 115.0 104.0 102.0 Note 2 2 2 2 2 2,13 2 2 2 4 5 4 5 39 1(oo) 6 7 6 The Notes to and forming part of the accounts are an integral part of these accounts. 49 Balance Sheets As at 30 June 1999 Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Shares in and loans to controlled entities Property, plant and equipment Investment in associates Goodwill Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Due to controlled entities Provision for dividend Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Net Assets Shareholders’ Equity Share Capital Reserves Retained profits Shareholders’ equity attributable to members of the Bank Outside equity interests in controlled entities Total Shareholders’ Equity COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES G R O U P 1998 $M 1999 $M 1999 $M B A N K 1998 $M Note 8 9 10 11 12 16 17 18 40 19 20 21 22 6 23 24 25 26 27 28 29 1,814 1,206 4,708 7,187 101,837 9,672 953 - 1,001 281 491 8,946 138,096 1,526 3,448 4,009 6,858 89,816 9,727 832 - 1,662 276 531 11,859 130,544 93,428 3,249 9,672 - 472 1,410 805 10,763 8,507 128,306 2,828 131,134 83,886 3,397 9,727 - 321 1,099 875 10,608 10,746 120,659 2,996 123,655 1,746 1,182 3,251 6,708 82,952 9,672 952 7,108 796 292 451 7,952 123,062 80,940 2,886 9,672 4,276 472 897 742 6,340 7,525 113,750 2,828 116,578 1,393 3,205 2,698 5,949 72,949 9,737 828 5,583 1,438 278 490 11,402 115,950 72,944 3,008 9,737 359 321 642 830 9,239 10,234 107,314 2,996 110,310 6,962 6,889 6,484 5,640 3,526 1,511 1,698 6,735 227 6,962 1,845 4,112 755 6,712 3,526 1,663 1,295 6,484 177 - 6,484 6,889 1,845 3,579 216 5,640 - 5,640 The Notes to and forming part of the accounts are an integral part of these accounts. 50 Consolidated Statements of Changes in Shareholders’ Equity As at 30 June 1999 Issued and paid up capital Opening balance Transfer from share premium reserve Buyback Dividend reinvestment plan Employee share ownership schemes Issue costs Closing balance Retained profits Opening balance Adjustments to opening balance Buyback Transfers from reserves Operating profit attributable to members of Bank Total available for appropriation Transfers to reserves Interim dividend - cash component only Interim dividend - appropriated to dividend reinvestment plan reserve Provision for final dividend - cash component only Final dividend - appropriated to dividend reinvestment plan reserve Closing balance Reserves General Reserve Opening balance Appropriation from profits Transfer to retained profits Closing balance Capital Reserve Opening balance Transfers from reserves Closing balance Asset Revaluation Reserve Revaluation of investments Transfers to capital reserve Closing balance Share Premium Reserve Opening balance Buyback Premium from share issues Employee share acquisition plan issue Buyback costs and other adjustments Transfer to capital reserve Transfer to issued capital Closing balance Dividend Reinvestment Plan Reserve Opening balance Conversion to share capital Appropriation from profits Closing balance Foreign Currency Translation Reserve Opening balance Currency translation adjustments Transfer to retained profits Closing balance Note 28 1(oo) G R O U P 1999 $M 1998 $M 1997 $M 1999 $M 1,845 1,499 (246) 426 5 (3) 3,526 755 - (404) 1,087 1,422 2,860 99 275 183 472 133 1,698 1,860 - (76) 57 4 - 1,845 908 - (384) 170 1,090 1,784 74 231 189 321 214 755 1,981 - (200) 74 5 - 1,860 794 (11) - 74 1,078 1,935 86 231 180 291 239 908 1,845 1,499 (246) 426 5 (3) 3,526 216 - (404) 1,001 1,545 2,358 - 275 183 472 133 1,295 B A N K 1998 $M 1,860 - (76) 57 4 - 1,845 472 - (384) 200 883 1,171 - 231 189 321 214 216 2,069 99 (1,088) 1,080 2,195 74 (200) 2,069 2,182 86 (73) 2,195 1,572 - (1,002) 570 1,772 - (200) 1,572 289 - 289 - - - 1,499 - - - - - (1,499) - 214 (397) 316 133 41 (33) 1 9 288 1 289 - - - 1,300 (191) 396 (3) (2) (1) - 1,499 239 (428) 403 214 56 (45) 30 41 289 (1) 288 - - - 1,754 (801) 357 (5) (5) - - 1,300 162 (342) 419 239 28 28 - 56 277 665 942 665 (665) - 1,499 - - - - - (1,499) - 214 (397) 316 133 17 - 1 18 277 - 277 - - - 1,298 (191) 396 (3) - (1) - 1,499 239 (428) 403 214 - 17 - 17 Total Reserves Shareholders’ equity attributable to members of the Bank 1,511 6,735 4,112 6,712 4,078 6,846 1,663 6,484 3,579 5,640 The Notes to and forming part of the accounts are an integral part of these accounts. 51 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Statements of Cash Flows For the year ended 30 June 1999 Cash Flow From Operating Activities Interest received Dividends received Interest paid Other operating income received Staff expenses paid Occupancy and equipment expenses paid Information technology services expenses paid Other expenses paid Income taxes paid Tax losses purchased from controlled entities Net decrease (increase) in trading securities Net Cash provided by Operating Activities Cash Flows from Investing Activities Payments for acquisition of entities Net movement in investment securities: Purchases Proceeds from sale Proceeds at or close to maturity Lodgment of deposits with regulatory authorities Net increase in loans, advances and other receivables Net amounts paid to controlled entities Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Net decrease (increase) in receivables due from other financial institutions not at call Net decrease (increase) in securities purchased under agreements to resell Net decrease (increase) in other assets Net Cash used in Investing Activities Cash Flows from Financing Activities Buyback of shares Proceeds from issue of shares Net increase in deposits and other borrowings Proceeds from long term debt issues Repayment of long term debt issues Net increase (decrease) in short term debt issues Dividends paid Payments from provisions Net increase (decrease) in payables due to other financial institutions not at call Net increase (decrease) in securities sold under agreements to repurchase Proceeds from (repayment of) loan capital Other Net Cash provided by Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at beginning of year Cash and Cash Equivalents at end of year 1999 $M 1998 $M 7,796 6 (4,071) 1,972 (1,510) (313) (481) (452) (363) 7,557 18 (4,065) 1,152 (1,705) (289) (503) (416) (216) - - (646) 887 (408) 2,176 G R O U P 1997 $M 8,054 18 (4,342) 1,273 (1,614) (310) (251) (364) (629) - 556 2,391 1999 $M 6,343 584 (3,219) 1,652 (1,353) (279) (456) (358) (292) (40) (209) 2,373 B A N K 1998 $M 6,084 106 (3,187) 769 (1,467) (246) (476) (313) (134) (28) (591) 517 (196) - (66) (196) - (13,337) 146 11,993 (121) (11,819) (8,505) 1,787 8,681 (35) (9,882) - - 196 (78) 809 652 (81) 229 (8,887) 1,172 7,013 (86) (11,353) - 307 (180) 750 (13,129) 147 12,305 (124) (10,380) 2,191 640 (55) 229 (7,981) 1,666 8,364 (42) (8,190) (184) 167 (51) 809 (465) 347 641 (465) 347 (423) (13,422) 1,175 (5,505) (432) (11,121) (694) (9,531) 1,118 (3,977) (650) 6 9,476 131 (118) 386 (571) (138) (477) (651) 5 6,683 1,355 (1,230) (970) (502) (10) (869) (1,001) 12 6,892 1,414 (299) 1,905 (452) (59) 325 (650) 6 9,367 131 (118) (2,762) (568) (110) (477) (651) 3 5,177 1,290 (1,175) (1,005) (502) (11) (869) (43) (52) (783) (43) (52) (317) - (496) 3,263 (1,355) 3,318 1,963 1,041 8,726 (2,520) 1,963 (557) - (207) 7,747 (983) 4,301 3,318 (317) 437 4,896 (2,262) 1,975 (287) - (185) 2,020 (1,440) 3,415 1,975 Details of Reconciliation of Cash and Reconciliation of Operating Profit After Income Tax to Net Cash Provided by Operating Activities are provided in Note 45. The Notes to and forming part of the accounts are an integral part of these accounts. It should be noted that the Bank does not use this accounting Statement of Cash Flows in the internal management of its liquidity positions. 52 Notes to and forming part of the accounts NOTE 1 Summary of Significant Accounting Policies (a) Bases of accounting In this Financial Report Commonwealth Bank of Australia is referred to as the ‘Bank’ or ‘Company’, and the ‘Group’ or the ‘Consolidated Entity’ consists of the Bank and its controlled entities. The Financial Report is a general purpose financial report which complies with the requirements of the Banking Act, Corporations Law, applicable Accounting Standards and other mandatory reporting requirements so far as the requirements are considered appropriate to a banking corporation. The accounting policies applied are consistent with those of the previous year, except for the capitalisation of computer software costs, refer (u) Other Assets below. Further, in accordance with revised International Accounting Standard IAS1, Presentation of Financial Statements, certain income and expense items have been presented on a net basis. The principal items involved are the netting of card issuer reimbursement costs against merchant service fees. There is no effect on profit and loss. of assets the relevant cash flows have not been discounted to their present value unless otherwise stated. (c) Consolidation The consolidated financial statements include the financial statements of the Bank and all entities where there is a determined capacity to control as defined in AASB 1024: Consolidated Accounts. All balances and transactions between Group entities have been eliminated on consolidation. (d) Investments in associated companies Associated companies are defined as those entities over which the Group has significant influence but there is no capacity to control. Details of material associated companies are shown in Note 40. Investments in associates are carried at cost plus the Group’s share of post acquisition profit or loss. The Group’s share of profit or loss of associates is included in the Profit and Loss Statement. The Financial Report also includes disclosures required by the United States Securities and Exchange Commission (SEC) in respect of foreign registrants. The Statements of Cash Flows has been prepared International Accounting Standard IAS7, Cash Flow Statements. in accordance with the The preparation of the Financial Report in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates although it is not anticipated that such differences would be material. Unless otherwise indicated, all amounts are shown in $ million and are expressed in Australian currency. (b) Historical cost The financial statements of the Bank and the consolidated financial statements have been prepared in accordance with the historical cost convention and, except where reflect current indicated, do not valuations of non monetary assets. Domestic bills discounted which are included in loans, advances and other receivables and held by the Company and securities and derivatives held for trading purposes have been marked to market. The carrying amounts of all non current assets are reviewed to determine whether they are in excess of their recoverable amount at balance date. If the carrying amount of a non current asset exceeds the recoverable amount, the asset is written down to the lower amount. In assessing recoverable amounts for particular classes (e) Foreign currency translations All foreign currency monetary assets and liabilities are revalued at rates of exchange prevailing at balance date. Foreign currency forward, futures, swaps and option positions are valued at the appropriate market rates applying at balance date. Unrealised gains and losses arising from these revaluations and gains and losses arising from foreign exchange dealings are included in profit and loss. The foreign currency assets and liabilities of overseas branches and overseas controlled entities are converted to Australian currency at 30 June 1999 in accordance with the current rate method. Profit and loss items for overseas branches and overseas controlled entities are converted to Australian dollars progressively throughout the year at the exchange rate current at the last calendar day of each month. shareholders’ Translation differences arising from conversion of opening balances of funds of overseas controlled entities at year end exchange rates are excluded from profit and loss and reflected in a Foreign Currency Translation Reserve. The Bank maintains a substantially matched position in assets and liabilities in foreign currencies and the level of net foreign currency exposure does not have a material effect on its financial condition. (f) Roundings The amounts contained in this report and the the financial statements have been rounded nearest million dollars unless otherwise stated, under the option available to the Company under ASIC Class Order 98/100. to 53 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 1 Summary of Significant Accounting Policies continued diminution in the value of investment securities are recognised in profit and loss and the recorded values of those securities adjusted accordingly. Investment securities are recorded on a trade date basis. The relationship between book and net fair values of investment securities is shown in Note 11. (l) Repurchase agreements Securities sold under agreements to repurchase are retained within the investment or trading portfolios and accounted for accordingly. Liability accounts are used to record the obligation to repurchase and are disclosed as deposits and other public borrowings. Securities held under reverse repurchase agreements are recorded as liquid assets. In the average balance sheet and profit and loss, repurchase agreements and their related interest expense were previously netted against investment and trading securities. Repurchase agreements and related interest expense have been reclassified within other demand deposits. Comparative figures have been adjusted. (m) Loans, advances and other receivables the term loans, leasing, bill Loans, advances and other receivables include overdrafts, home, credit card and other personal lending, financing, redeemable preference shares and leverage leases. They are carried at recoverable amount represented by the gross value of the outstanding balance adjusted for provisions for bad and doubtful debts, interest reserved and unearned tax remissions on leverage leases. Interest and yield related fees are reflected in profit and loss when earned. Yield related fees received in advance are deferred, included as part of the carrying value of the loan and amortised to profit and loss as ‘Interest Income’ over the term of the loan. Note 1(n) provides additional information with respect to leasing and leveraged leasing. Non Accrual Facilities Non accrual facilities (primarily loans) are placed on a cash basis for recognition of income. Upon classification as non accrual, all interest charged in the current financial period is reversed from profit and loss and reserved if it has not been received in cash. If necessary, a specific provision for impairment is recognised so that the carrying amount of the facility does not exceed the expected future cash flows. In subsequent periods, interest in arrears/due on non accrual facilities is taken to profit and loss when a cash payment is received/realised and the amount is not designated as a principal payment. Non accrual facilities are restored to an accrual basis when all principal and interest payments are current and full collection is probable. (g) Financial instruments The Group is a full service financial institution which offers an extensive range of on balance sheet and off balance sheet financial instruments. For each class of financial instrument listed below, except for restructured in Note 1(m), financial instruments are transacted on a commercial basis yield/cost with terms and conditions having due regard to the nature of the transaction and the risks involved. to derive an referred to facilities interest (h) Cash and liquid assets Cash and liquid assets branches, cash at bankers and money at short call. includes cash at They are brought to account at the face value or the gross value of the outstanding balance where appropriate. Interest is taken to profit and loss when earned. due from other financial (i) Receivables institutions Receivables financial from other institutions includes loans, nostro balances and settlement account balances due from other banks. They are brought the outstanding balance. Interest is taken to profit and loss when earned. the gross value of to account at (j) Trading securities Trading securities are short and long term public, bank, other debt securities and equities which are acquired and held for trading purposes. They are brought to account at net fair value based on quoted market prices, broker or dealer price quotations. Realised gains and losses on disposal and unrealised fair value adjustments are reflected in ‘Other Income’ within profit and loss. Interest on trading securities is reported in net interest earnings. Trading securities are recorded on a trade date basis. (k) Investment securities Investment securities are securities purchased with the intent of being held to maturity. Investment securities are short and long term public, bank and other securities and include bonds, bills of exchange, commercial paper, certificates of deposit and equities. These securities are recorded at cost or amortised cost. Premiums and discounts are amortised through profit and loss each year from the their date of purchase so that securities attain redemption values by maturity date. is reflected in profit and loss when earned. Dividends on equities are brought to account in profit and loss on declaration date. Any profits or losses arising from disposal prior to maturity are taken to profit and loss in the period in which they are realised. The cost of securities sold is calculated on a specific identification to permanent basis. Unrealised Interest related losses 54 NOTE 1 Summary of Significant Accounting Policies continued Restructured Facilities When facilities (primarily loans) have the original contractual terms modified, the accounts become classified as restructured. Such accounts will have interest accrued to profit as long as the facility is performing on the modified basis in accordance with the is not maintained, or collection of interest and/or principal is no longer probable, the account will be returned to the non accrual classification. Facilities are generally kept as non accrual until they are returned to performing basis. If performance restructured terms. Assets Acquired through Securities Enforcement (AATSE) Assets acquired in satisfaction of facilities in default (primarily loans) are recorded at net market value at the date of acquisition. Any difference between the carrying amount of the facility and the net market value of the assets acquired is represented as a specific provision for diminution of value or written off. AATSE are further classified as Other Real Estate Owned (OREO) or Other Assets Acquired through Security Enforcement (OAATSE). Such assets are classified in the appropriate asset classifications in the balance sheet. Bad Debts Bad debts are written off in the period in which they are recognised. Bad debts previously specifically provided for are written off against the related specific provisions, while bad debts not provided for are written off the general provision. Any subsequent cash recovery is credited to the general provision. through (n) Leasing and leveraged leasing Finance leases are accounted for using the finance method and are included in loans, advances and other receivables. Income, determined on an actuarial basis, is taken to account over the term of the lease in relation to the outstanding investment balance. The finance method also applies to leveraged leases but with income being brought to account at the rate which yields a constant rate of return on the outstanding investment balance over the life of the transaction so as to reflect the underlying assets, liabilities, revenue and expenses that flow from the the arrangements. Where a change occurs estimated lease cash flows or available tax benefits at any stage during the term of the lease, the total lease profit is recalculated for the entire lease term and apportioned over the remaining lease term. in In accordance with amendments to AASB 1008: Leases, all new leveraged leases with a lease term beginning from 1 July 1999 will be accounted for as finance to account progressively over the lease term. income brought leases with Leveraged lease receivables are recorded under loans, advances and other receivables at amounts which reflect the equity participation in the lease. The debt provider in the transaction has no recourse other the than equipment under lease. the unremitted rentals and lease to Operating lease rental revenue and expense is recognised in the profit and loss in equal periodic amounts over the effective lease term. (o) Provisions for impairment Provisions for credit losses are maintained at an amount adequate to cover anticipated credit related losses. Credit losses arise primarily from loans but also from other credit instruments such as bank acceptances, financial instruments and investments and assets acquired through security enforcement. contingent liabilities, Specific provisions are established where full recovery of principal is considered doubtful. Specific provisions are made against individual facilities in the credit risk rated managed segment where exposure aggregates to $250,000 or more, and a loss of $10,000 or more is expected. A specific provision is also established against each statistically managed portfolio in the statistically managed segment to cover facilities which are not well secured and past due 180 days or more, against the credit risk rated managed segment for exposures aggregating to less than $250,000 and 90 days past due or more, and against emerging credit risks identified in specific segments in the credit risk rated managed portfolio. These provisions are to historical ratios of write offs to balances in default. funded primarily by reference General provisions for bad and doubtful debts are maintained to cover non identified probable losses and latent risks inherent in the overall portfolio of transactions. The advances and other credit to the regard provisions are determined having general risk profile of the credit portfolio, historical loss experience, economic conditions and a range of other criteria. The amounts required to bring the provisions for impairment to their assessed levels are taken to profit and loss. The balance of provisions for impairment and movements therein are set out in Note 13. All facilities subject to a specific provision are classified as non accrual and interest is only taken to profit when received in cash. Abnormal Item – General Provision Charge for Bad and Doubtful Debts (1998) This takes to estimate the methodology used into account historical With effect from 1 January 1998 the Group refined the provisions for impairment by adopting a statistically based technique referred to as Dynamic Provisioning. loss experience and current economic factors to assess the balance required in the general provision to cover expected losses in the credit portfolio. Initial adoption of this technique resulted in an abnormal expense for bad and doubtful debts of $370 million in respect of the general provision which was charged to profit and loss in the year ended 30 June 1998. Subsequent requirements for specific provisions are funded via the general provision. Accordingly, it is appropriate to tax effect the general provisioning refer Note 1(y). Refer also Notes 4 and 13. 55 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 1 Summary of Significant Accounting Policies continued The useful lives of major depreciable assets are as follows: Buildings Shell Integral plant and equipment - carpets - all other (air conditioning, lifts) Non integral plant and equipment - fixtures and fittings Leasehold improvements Maximum 30 years 10 years 20 years 10 years Lesser of unexpired lease term or lives as above Equipment - Security surveillance systems - Furniture - Office machinery - EFTPOS machines 10 years 8 years 5 years 3 years The Bank has outsourced the majority of its information processing and does not own any material amounts of computer or communications equipment. Abnormal Item - Information Technology Equipment Values (1997) technology processing, In anticipation of a restructuring of the Bank’s information including investment in an information technology business, the carrying value of the Bank’s computer and communications equipment as at 30 June 1997 was reduced. This reduction was undertaken having regard to the sale of equipment to a global technology company. As a result, an abnormal expense of $200 million ($128 million after tax) was charged to profit and loss in the year ended 30 June 1997. Also refer Note 4. (t) Goodwill Goodwill, representing the excess of purchase consideration plus incidental expenses over the fair value of the identifiable net assets at the time of acquisition of an entity, is capitalised and brought to account in the balance sheet. The goodwill so determined is amortised on a straight line basis over the period of expected benefit but not exceeding 20 years. Purchased goodwill arising from the merger with the State Bank of Victoria in 1991 is being amortised over 20 years, and goodwill on acquisition of Commonwealth Funds Management in December 1996, Micropay in 1995 and Leaseway in April 1997 is being amortised over 10, 7 and 5 years respectively. The periods of goodwill amortisation are subject to review annually by the Directors. (p) Bank acceptances of customers The exposure arising from the acceptance of bills of exchange that are sold into the market is brought to account as a liability. An asset of equal value is raised to reflect the offsetting claim against the drawer of the bill. Bank acceptances generate fee income which is taken to profit and loss when earned. In several countries (q) Deposits with regulatory authorities in which the Group operates, the law requires that the Group lodge regulatory deposits with the local central bank at a rate of interest below that generally prevailing in that market. The amount of the deposit and the interest rate receivable are calculated in accordance with the requirements of the local central bank. Interest is taken to profit and loss when earned. (r) Shares in and loans to controlled entities These investments are recorded at the lower of cost or recoverable amount. (s) Property, plant and equipment than (other holdings At year end, independent market valuations, reflecting current use, were obtained for all individual property leasehold improvements). Directors adopt a valuation at or below the independent valuation. Adjustments arising from revaluation are reflected in Asset Revaluation Reserve, except to the extent the adjustment reverses a revaluation previously recognised in profit and loss. For the current year the revaluation had no effect on the level of the reserve. Depreciation on owned buildings is based on the assessed useful life of each building. The book value of buildings demolished as part of the redevelopment of a site is written off in the financial year in which the buildings are demolished. Leasehold improvements are capitalised and depreciated over the unexpired term of the current lease. Equipment is shown at cost less depreciation calculated principally on a category basis at rates applicable to each category’s useful life. Depreciation is calculated using the straight line method. It is treated as an operating expense and charged to profit and loss. The amounts charged for the year are shown in Note 2. Profit or loss on sale of property is treated as operating income or expense. Realised amounts in Asset Revaluation Reserve are transferred to Capital Reserve. 56 NOTE 1 Summary of Significant Accounting Policies continued (u) Other assets Other assets includes all other financial assets and includes interest, fees, market revaluation of income trading derivatives and other unrealised receivable and securities sold not delivered. These assets are recorded at the cash value to be realised when settled. Capitalisation of Computer Software Costs In accordance with the American Institute of Certified Public Accountants Statement of Position 98- 1 ‘Accounting for the Costs of Computer Software Developed or Obtained for Internal Use’, the Group has capitalised $22 million of costs to developing or acquiring computer software for internal use as from 1 July 1998. The amortisation period for software will be 2½ years except for certain longer term projects. Software maintenance costs and Year 2000 project costs will continue to be expensed as incurred. related (v) Deposits and other public borrowings Deposits and other public borrowings includes term deposits, savings certificates of deposits, deposits, cheque and other demand deposits, debentures and other funds raised publicly by borrowing corporations. They are brought to account at the gross value of the outstanding balance. Interest is taken to profit and loss when incurred. (w) Payables due to other financial institutions financial Payables due institutions to other includes deposits, vostro balances and settlement to other banks. They are account balances due brought the the gross value of to account at outstanding balance. Interest is taken to profit and loss when incurred. (x) Provision for dividend The provision for dividend the maximum expected cash component of the declared final dividend. The remaining portion of the dividend is appropriated the Dividend Reinvestment Plan Reserve. represents to (y) tax effect of Income taxes The Group has adopted the liability method of tax effect accounting. The timing differences which arise from items being brought to account in different periods for income tax and accounting purposes is disclosed as a future income tax benefit or a provision for deferred income tax. Amounts are offset where the tax payable and realisable benefit are expected to occur in the same financial period. The future income tax benefit relating to tax losses and timing differences is not carried forward as an asset unless the benefit is virtually certain of being realised. (Note 20). Abnormal Credit – Tax Effecting General Provision for Bad and Doubtful Debts (1998) The general provision for bad and doubtful debts was tax effected as at 1 January 1998. This reflects the adoption of a balance sheet risk based dynamic provisioning methodology which the recognition requirement that utilisation of the provision be assured beyond reasonable doubt. satisfies An abnormal credit tax expense of $337 million was booked to profit and loss in the year ended 30 June 1998. Refer also Note 4. to (z) Provisions for employee entitlements The provision for long service leave is subject to actuarial review and is maintained at a level that accords with actuarial advice. The provision for annual leave represents the liability as at balance date. Actual in the year are included outstanding payments made during Salaries and Wages. The provision for other employee entitlements represents liabilities for staff housing loan benefits and a subsidy to a registered health fund with respect to retired employees and current employees. The level of these provisions has been determined in accordance with the requirements of AASB 1028, Accounting for Employee Entitlements. (aa) Provision for restructuring for The provision technology restructuring transition costs covers information to EDS (Australia) and other outsourcing arrangements, further rationalisation of processing and administration functions, implementation of the new organisational structure and reconfiguration of delivery systems. Each of these programmes has associated costs, principally in the areas of redundancy and property. Abnormal Item – Restructuring Costs (1998) An abnormal expense for restructuring costs of $200 million ($128 million after tax) was charged to profit and loss in the year ended 30 June 1998. Refer also Notes 4, 24 and 47(d). (bb) Provision for self insurance Actuarial reviews are carried out at regular intervals with provisioning effected in accordance with actuarial advice. The provision for self insurance covers certain non lending losses and non transferred insurance risks. (cc) Debt issues Debt issues are short and long term debt issues of the Group including commercial paper, notes, term loans and medium term notes which are recorded at cost or amortised cost. Premiums, discounts and associated issue expenses are amortised through profit and loss each year from the date of issue so that securities attain redemption values by maturity date. their Interest is reflected in profit and loss as incurred. Any profits or losses arising from redemption prior to maturity are taken to profit and loss in the period in which they are realised. Further details of the Group’s debt issues are shown in Note 25. 57 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 1 Summary of Significant Accounting Policies continued (dd) Bills payable and other liabilities Bills payable and other liabilities includes all other financial liabilities and includes interest, fees, market revaluation of trading derivatives and other unrealised securities expenses purchased not delivered. payable and These liabilities are recorded at the cash value to be realised when settled. (ee) Loan capital Loan capital is debt issued by the Group with terms and conditions, such as being undated or subordinated, which qualify the debt issue for inclusion as capital under APRA. Loan capital debt issues are recorded at cost or amortised cost. Premiums, discounts and associated issue expenses are amortised through profit and loss each year from the date of issue so that securities attain their is redemption values by maturity date. reflected in profit and loss as incurred. Any profits or losses arising from redemption prior to maturity are taken to profit and loss in the period in which they are realised. Interest Further details of the Group’s loan capital debt issues are shown in Note 27. (ff) Shareholders’ equity Ordinary share capital is the amount of paid up capital from the issue of ordinary shares. General reserve is derived from revenue profits and is available for dividend except for undistributable profits in respect of Commonwealth Life Limited of $231 million (1998: $219 million , 1997: $168 million). Capital reserve is derived from capital profits and is available for dividend. plan Dividend for distribution It was not available Share premium reserve was derived from the premium over par value received from the issue of to shares. shareholders in the form of a cash dividend. Following changes to the Corporations Law on 1 July 1998, shares have no par value and the related Share Premium Reserve becomes part of share capital. reserve reinvestment is appropriated from revenue profits. The amount of the reserve represents the estimate of the minimum expected amount that will be reinvested in the Bank’s dividend reinvestment plan. The allotment of shares under the plan is subsequently applied against the reserve. This accounting the probability that a fairly stable proportion of the Bank’s final dividend will be reinvested in equity via the dividend reinvestment plan. This internal accounting methodology for the dividend reinvestment plan was introduced with the appropriation of the 1995 profit for the final dividend. treatment reflects Further details of share capital, outside equity interests and reserves are shown in Notes 28, 29 and in Consolidated Shareholders’ Equity. Statements Changes of (gg) Derivative financial instruments The Group enters into a significant volume of derivative financial instruments which include foreign 58 exchange contracts, forward rate agreements, futures, options and interest rate, currency, equity and credit swaps. Derivative financial instruments are used as part of the Group’s trading activities and to hedge certain assets and liabilities. Derivative financial instruments held or issued for trading purposes financial Traded derivative instruments are recorded at net fair value based on quoted market prices, broker or dealer price quotations. A positive revaluation amount of a contract is reported as an asset and a negative revaluation amount of a contract as a liability. Changes in net fair value are reflected in profit and loss immediately they occur. Derivative financial instruments held or issued for purposes other than trading The principal objective in holding or issuing derivative financial instruments for purposes other than trading is to manage balance sheet interest rate, exchange rate and credit risk associated with certain assets and investment liabilities such as loans, securities, deposits and debt issues. To be effective as hedges, the derivatives are identified and allocated against the underlying hedged item or class of items and generally modify the interest rate, exchange rate or credit characteristics of the hedged asset or liability. Such derivative financial instruments are purchased with the intent of being held to maturity. Derivatives that are designated and effective as hedges are accounted for on the same basis as the instruments they are hedging. Swaps Interest rate swap receipts and payments are accrued to profit and loss as interest of the hedged item or class of items being hedged over the term for which the swap is effective as a hedge of that designated item. Premiums or discounts to market interest rates which are received or made in advance are deferred and amortised to profit and loss over the term for which the swap is effective as a hedge of the underlying hedged item or class of items. Similarly with cross currency swaps, interest rate receipts and payments are brought to account on the same basis outlined in the previous paragraph. In addition, the initial principal flows are reported net and revalued to market at the current market exchange rate. Revaluation gains and losses are taken to profit and loss against revaluation losses and gains of the underlying hedged item or class of items. Credit default swaps are utilised to manage credit risk in the asset portfolio. Premiums are accrued to profit and loss as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. Any principal cash flow on default is brought to account on the same basis as the designated item being hedged. Credit default swaps held at balance date are immaterial. NOTE 1 Summary of Significant Accounting Policies continued the capital Equity swaps are utilised to manage the risk asso7ciated with both in equities and the related yield. These swaps enable the income stream to be reflected in profit and loss when earned. Any capital gain or loss at maturity of the swap is brought to account on the same basis as the underlying equity being hedged. investment Forward rate agreements and futures Realised gains and losses on forward rate agreements and futures contracts are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flow is amortised to profit and loss as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. Options Where options are utilised in the management of balance sheet risk, premiums on options and any realised gains and losses on exercise are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flows are amortised to profit and loss as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. Early termination Where a derivative instrument hedge is terminated prior to its ‘maturity date’, realised gains and losses are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flows are amortised to profit and loss as interest of the hedged item or class of items being hedged over the period for which the the hedge would have been effective. Where underlying hedged item or class of items being hedged ceases to exist, the derivative instrument hedge is terminated and realised and unamortised gains or losses taken to profit and loss. Further information on derivative financial instruments is shown in Note 37. (hh) Commitments to extend credit, letters of credit, guarantees, warranties and indemnities issued These financial instruments generally relate to credit risk and attract fees in line with market prices for similar arrangements. They are not sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and reflects the probability of default. They are recorded as contingent liabilities at their face value. Further information is shown in Note 36. (ii) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The principal sources of revenue are interest income and fees and commissions. Interest income Interest income is reflected in profit and loss when earned on an accrual basis. Further information is included in Notes 1(k) Investment securities, 1(m) Loans, advances and other receivables and 1(n) Leasing and leveraged leasing. costs Fee income Lending fees Material non refundable front end loan fees that are yield related and do not represent cost recovery, are taken to profit and loss over the period of the loan. lending incurred Associated transactions are deferred and netted against yield related loan fees. Where non refundable front end loan fees are received that represent cost recovery or charges for services not directly related to the yield on a loan, they are taken to income in the period in which they are received. Where fees are received on an ongoing basis and represent the recoupment of the costs of maintaining and administering existing loans, these fees are taken to income on an accrual basis. these in Commission and other fees When commission charges and fees relate to specific transactions or events, they are recognised as income in the period in which they are received. for services However, when provided over a period, they are taken to income on an accrual basis. they are charged Other income Trading income is brought to account when earned based on changes in net fair value of financial instruments and recorded from trade date. Further information is included in Notes 1(e) Foreign currency transactions, 1(j) Trading securities and 1(gg) Derivative insurance business income recognition is explained in Note 1(jj) below. instruments. Life financial (jj) Life insurance business The Group conducts life insurance business through Commonwealth Life Limited (CLL) which is subject to the provisions of the Life Insurance Act 1995. The shareholders’ interest in CLL, consisting of the shareholders’ fund and the shareholders’ interest in the statutory funds, is included in the financial statements of the Group and has been subject to the stated principles of consolidation. The shareholders’ interest in the statutory funds is carried at cost. Policyholders’ interest in the statutory funds is not included in the consolidated financial statements as the Group does not have control of such funds as defined by AASB 1024: Consolidated Accounts. The profits from the statutory funds are brought to account in the profit and loss of the Group. The profits have been determined according to the ‘Margin on Services’ methodology for valuation of policy liabilities under Actuarial Standard AS 1.01 issued by the Life Insurance Actuarial Standards Board. These profits are then transferred to general reserves as they are not fully available for distribution until all requirements of the Life Insurance Act are met. 59 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 1 Summary of Significant Accounting Policies continued The superannuation contributions expense principally represents the annual funding, determined after having regard to actuarial advice, to provide for future obligations of defined benefit plans. Contributions to all superannuation plans are made in accordance with the rules of the plans. (mm)Comparative figures Where necessary, comparative figures have in to conform with changes been adjusted presentation in these financial statements. (nn) Definitions ‘Overseas’ represents amounts booked branches and controlled entities outside Australia. in ‘Borrowing Corporation’ as defined by Section 9 is CBFC Limited and the Corporations Law of controlled entities. ‘Net Fair Value’ represents the fair or market value adjusted for transaction costs. ‘Abnormal items’ are items of revenue or expense included in operating profit after income tax and considered abnormal by reason of size and effect on operating profit after income tax for the financial year. (oo) Adjustments to retained earnings Commonwealth Life Limited adopted the new Insurance and Superannuation Commission Rules for financial reporting for the year ended 30 June 1997. This resulted in an $11 million debit adjustment to retained earnings in accordance with ASC Class Order No. 97/171 dated 17 February 1997. (pp) Events Subsequent to Balance Date In July 1999 the Bank acquired Credit Lyonnais Holding Australia Limited (CLHAL) which was the holding company for the Australian operations of total assets of Credit Lyonnais. CLHAL has $1.5 billion. The company was acquired on an adjusted net assets basis. A new related accounting standard AASB 1038: Life Insurance Business will become operative for the Bank as from 1 July 1999. The standard will require all life insurance assets and liabilities to be carried at market value and the first time consolidation of approximately $10 billion of assets and liabilities in statutory funds. to Commonwealth As part of an internal Group restructuring the Bank has sold its investment in Commonwealth Life Limited Insurance Holdings Limited, a life insurance wholly owned entity as at 30 June 1999. The sale price was at market value based on independent advice. The capital gain on sale eliminates on consolidation at 30 June 1999. Under the new life insurance accounting standard this investment in Commonwealth Life Limited will be carried at market value in the future. This will result in an increase in the Group’s retained earnings of $432 million as from 1 July 1999. (kk) Fiduciary activities The Bank and designated controlled entities act as Trustee and/or Manager and/or Custodian for a and number Investment Funds, Trusts and Approved Deposit Funds. Further details are shown in Note 36. of Wholesale, Superannuation The assets and liabilities of these Trusts and Funds are not included in the consolidated financial statements as the Bank does not have direct or indirect control of the Trusts and Funds as defined by AASB 1024. Commissions and fees earned in respect of the activities are included in the profit and loss of the Group and the designated controlled entity. (ll) Superannuation plans The Group sponsors a range of superannuation plans for its employees. The assets and liabilities of these plans are not included in the consolidated financial statements. 60 NOTE 2 Operating Profit Operating profit before income tax has been determined as follows: Interest Income Loans Other financial institutions Cash and liquid assets Trading securities Investment securities Dividends on redeemable preference shares Controlled entities Statutory deposits Other Total Interest Income Interest Expense Deposits Other financial institutions Short term debt issues Long term debt issues Controlled entities Loan capital Other Total Interest Expense Net Interest Income Other Operating Income Lending fees Commission and other fees Trading income Foreign exchange earnings Trading securities Other financial instruments (incl derivatives) Dividends - controlled entities - other Net gain (loss) on investment securities Net profit on sale of property, plant and equipment Life insurance and funds management General insurance premium income Less general insurance claims paid Other Total Other Operating Income Total Operating Income Charge for Bad and Doubtful Debts (Note 13) General provisions Specific provisions Total Charge for Bad and Doubtful Debts 1999 $M 1998 $M G R O U P 1997 $M 6,806 165 58 246 425 42 - - 3 7,745 3,353 207 393 106 - 155 4 4,218 3,527 6,588 241 88 213 409 59 - - 7 7,605 3,343 218 293 183 - 166 5 4,208 3,397 6,794 286 141 108 591 47 - 11 11 7,989 3,660 226 291 234 - 170 16 4,597 3,392 1999 $M 5,456 153 53 173 365 (36) 186 - 2 6,352 2,651 182 305 93 62 155 3 3,451 2,901 474 807 472 678 439 541 444 672 155 66 52 - 6 79 24 254 94 (63) 49 1,997 5,524 161 35 47 - 18 101 34 205 79 (46) 49 1,833 5,230 70 57 47 - 18 4 44 197 64 (44) 52 1,489 4,881 137 68 52 463 6 84 23 - - - 212 2,161 5,062 B A N K 1998 $M 5,126 226 88 110 344 (34) 150 - 2 6,012 2,464 192 226 163 11 167 4 3,227 2,785 438 571 147 35 47 156 18 119 31 - - - 77 1,639 4,424 247 - 247 165 68 233 36 62 98 78 - 78 164 60 224 61 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 2 Operating Profit continued Staff Expenses Salaries and wages Superannuation contributions Provision for long service leave Provision for annual leave Provisions for other employee entitlements Payroll tax Fringe benefits tax Other staff expenses Total Staff Expenses Occupancy and Equipment Expenses Operating lease rentals Depreciation Buildings Leasehold improvements Equipment Repairs and maintenance Other Total Occupancy and Equipment Expenses Information Technology Services Projects and development Data processing Desktop Communications Total Information Technology Services Other Expenses Postage Stationery Fees and commissions Other Total Other Expenses Total Operating Expenses Amortisation of Goodwill Operating Profit before Abnormal Items 1999 $M 1998 $M 1,406 1 42 2 (2) 77 34 44 1,604 1,412 1 32 (7) - 83 42 59 1,622 158 51 26 68 64 88 455 145 141 90 129 505 76 69 112 249 506 3,070 47 2,160 141 62 22 103 69 76 473 164 102 89 121 476 75 53 116 224 468 3,039 46 1,912 G R O U P 1997 $M 1,386 2 46 11 (3) 86 70 65 1,663 133 61 16 160 104 73 547 152 ) ) ) - - 103 255 72 57 92 238 459 2,924 43 1,816 1999 $M 1,265 - 41 1 (2) 74 34 32 1,445 152 47 24 47 51 72 393 137 131 89 122 479 70 57 100 211 438 2,755 39 2,190 B A N K 1998 $M 1,223 (7) 30 (3) - 76 39 34 1,392 126 58 20 80 55 61 400 180 69 87 113 449 67 43 94 166 370 2,611 39 1,550 The Bank outsourced most of its information technology functions to EDS (Australia) in October 1997. This has changed the mix of operating expenses and has required a change in categorisation of expenses to more appropriately reflect expenditure into the future. Line by line comparison with prior periods is less meaningful in some instances. Revenue from Operating Activities Interest income Fee and commissions Trading income Life insurance and funds management Dividends Proceeds from sale of property, plant and equipment Proceeds from sale of investment securities Other income 7,745 1,281 273 254 6 652 146 80 10,437 7,605 1,150 243 205 18 196 1,787 82 11,286 7,989 980 174 197 18 307 1,172 72 10,909 6,352 1,116 257 - 469 640 147 212 9,193 6,012 1,009 229 - 174 167 1,666 77 9,334 There were no sources of revenue from non operating activities. 62 NOTE 3 Average Balance Sheet and Related Interest The table lists the major categories of interest earning assets and interest bearing liabilities of the Group together with the respective interest earned or paid and the average interest rates for each of 1997, 1998 and 1999. Averages used are predominantly daily averages. The overseas component comprises the Bank and overseas overseas branches of domiciled controlled entities. Overseas intergroup borrowings have been adjusted into the interest spread and margin calculations to more appropriately reflect the overseas cost of funds. Non accrual loans are included in Interest Earning Assets under loans, advances and other receivables. 1999 1998 1997 Average Interest Average Average Interest Average Average Interest Average Rate Balance $M % Rate Balance $M Rate Balance $M $M $M $M % % Average Assets and Interest Income Interest Earning Assets Cash and liquid assets Australia Overseas Receivables due from other financial institutions Australia Overseas Deposits with regulatory authorities Australia Overseas Trading securities Australia Overseas Investment securities Australia Overseas Loans, advances and other receivables Australia Overseas Other interest earning assets Intragroup loans Australia Average interest earning assets and interest income including intragroup Intragroup eliminations Total average interest earning assets and interest income Non Interest Earning Assets Bank acceptances Australia Overseas Property, plant and equipment Australia Overseas Other assets Australia Overseas Provisions for impairment Australia Overseas Total average non interest earning assets Total Average Assets Percentage of total average assets applicable to overseas operations 1,468 119 1,481 1,522 892 2 2,720 1,700 3,052 4,659 58 - 79 86 - - 149 97 171 254 4.0 - 1,942 156 86 2 4.4 1.3 2,188 68 138 3 5.3 5.7 1,882 1,977 106 135 5.6 6.8 2,361 2,747 135 151 - - 5.5 5.7 5.6 5.5 809 - 1,297 1,709 2,987 3,662 - - 83 130 183 226 - - 6.4 7.6 6.1 6.2 7.5 9.2 n/a 756 - 1,511 357 5,083 4,068 11 - 96 12 303 288 67,292 9,732 - 5,959 882 11 6.3 4.4 5.7 5.5 1.5 - 6.4 3.4 6.0 7.1 8.9 9.1 n/a 83,350 13,306 - 5,899 949 3 7.1 73,797 7.1 11,947 - n/a 5,542 1,105 7 414 23 5.6 713 43 6.0 739 46 6.2 114,685 (414) 7,768 (23) 6.8 102,878 (713) 5.6 7,648 (43) 7.4 6.0 96,902 (739) 8,035 (46) 8.3 6.2 114,271 7,745 6.8 102,165 7,605 7.4 96,163 7,989 8.3 9,971 32 1,240 211 9,739 2,085 (1,210) (158) 21,910 136,181 17.2% 9,660 34 1,625 209 8,883 2,015 (950) (86) 21,390 123,555 17.5% 9,825 55 2,188 235 5,646 1,267 (938) (83) 18,195 114,358 16.1% 63 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 3 Average Balance Sheet and Related Interest continued 1999 1998 Average Interest Average Average Interest Average Average Interest Average Rate Balance % $M Rate Balance $M Rate Balance $M 1997 $M $M $M % % Average Liabilities and Interest Expense Interest Bearing Liabilities and Loan Capital Time Deposits Australia Overseas Savings Deposits Australia Overseas Other demand deposits Australia Overseas Payables due to other financial institutions Australia Overseas Short term borrowings Australia Overseas Long term borrowings Australia Overseas Loan capital Australia Other interest bearing liabilities Intragroup borrowings Overseas Average interest bearing liabilities and loan capital and interest expense including intragroup Intragroup eliminations Total average interest bearing liabilities and loan capital and interest expense Non Interest Bearing Liabilities Deposits not bearing interest Australia Overseas Liability on acceptances Australia Overseas Other liabilities Australia Overseas Total average non interest bearing liabilities Total average liabilities and loan capital Shareholders’ equity Total average liabilities, loan capital and shareholders’ equity Percentage of total average liabilities applicable to overseas operations 64 31,119 9,201 1,597 591 24,378 2,120 17,247 1,682 643 3,367 6,005 2,130 1,684 808 2,746 - 418 81 626 40 35 172 319 74 76 30 155 4 26,055 8,300 1,464 718 5.1 6.4 1.7 3.8 3.6 2.4 5.4 5.1 5.3 3.5 4.5 3.7 22,970 1,680 15,865 1,375 481 3,175 3,640 1,656 2,631 874 5.6 n/a 2,891 57 403 104 630 24 17 201 220 73 133 50 166 5 5.6 8.7 1.8 6.2 4.0 1.7 3.5 6.3 6.0 4.4 5.1 5.7 5.7 8.8 26,600 6,487 1,768 529 21,106 1,696 13,344 1,321 221 3,463 3,445 1,354 2,524 968 2,752 15 538 103 696 26 7 219 215 76 191 43 170 16 6.6 8.2 2.5 6.1 5.2 2.0 3.2 6.3 6.2 5.6 7.6 4.4 6.2 n/a 414 23 5.6 713 43 6.0 739 46 6.2 103,544 (414) 4,241 (23) 4.1 5.6 92,363 (713) 4,251 (43) 4.6 6.0 86,035 (739) 4,643 (46) 103,130 4,218 4.1 91,650 4,208 4.6 85,296 4,597 5.4 6.2 5.4 3,952 76 9,971 32 9,632 2,383 26,046 129,176 7,005 136,181 16.9% 3,738 58 9,660 34 9,377 1,990 24,857 116,507 7,048 123,555 16.5% 3,566 53 9,825 55 7,504 1,438 22,441 107,737 6,621 114,358 15.6% NOTE 3 Average Balance Sheet and Related Interest continued Changes in Net Interest Income: Volume and Rate Analysis Interest Earning Assets Cash and liquid assets Australia Overseas Receivables due from other financial institutions Australia Overseas Deposits with regulatory authorities Australia Overseas Trading securities Australia Overseas Investment securities Australia Overseas Loans, advances and other receivables Australia Overseas Other interest earning assets Intragroup loans Australia Change in interest income including intragroup Intragroup eliminations Change in interest income Interest Bearing Liabilities and Loan Capital Time deposits Australia Overseas Saving deposits Australia Overseas Other demand deposits Australia Overseas Payables due to other financial institutions Australia Overseas Short term borrowings Australia Overseas Long term borrowings Australia Overseas Loan capital Australia Other interest bearing liabilities Intragroup borrowings Overseas Change in interest expense including intragroup Intragroup eliminations Change in interest expense Change in net interest income Year ended 30 June 1999 versus 1998 Rate $M Volume $M Total $M Year ended 30 June 1998 versus 1997 Rate $M Volume $M Total $M (20) - (22) (28) - - 85 (1) 4 58 697 111 - (17) 839 17 861 272 68 24 22 53 6 7 11 134 19 (45) (3) (8) - (17) 486 17 498 363 (8) (2) (5) (21) - - (19) (32) (16) (30) (340) (267) (4) (3) (719) 3 (721) (139) (195) (9) (45) (57) 10 11 (40) (35) (18) (12) (17) (3) (1) (3) (496) 3 (488) (233) (28) (2) (27) (49) - - 66 (33) (12) 28 357 (156) (4) (20) 120 20 140 133 (127) 15 (23) (4) 16 18 (29) 99 1 (57) (20) (11) (1) (20) (10) 20 10 130 (13) 3 (27) (47) - - (14) 74 (127) (27) 532 203 - (2) 470 2 473 (33) 152 40 (1) 116 1 9 (18) 12 15 7 (5) 8 - (2) 316 2 317 156 (39) (4) (2) 31 (11) - 1 44 7 (35) (949) 20 (4) (1) (857) 1 (857) (271) 37 (175) 2 (182) (3) 1 - (7) (18) (65) 12 (12) (11) (1) (708) 1 (706) (151) (52) (1) (29) (16) (11) - (13) 118 (120) (62) (417) 223 (4) (3) (387) 3 (384) (304) 189 (135) 1 (66) (2) 10 (18) 5 (3) (58) 7 (4) (11) (3) (392) 3 (389) 5 65 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 3 Average Balance Sheet and Related Interest continued Changes in Net Interest Income: Volume and Rate Analysis The preceding table allocates changes in net interest income between changes in volume and changes in rate over the previous year. Volume variances have been calculated by multiplying the average of both years’ average interest rates, on average interest earning assets and average interest bearing liabilities, by the movement in average asset and liability balances. Rate variances have been calculated by multiplying the average of the average asset and liability balances by the change in average interest rates. The volume and rate variances for both total interest earning assets and liabilities have been calculated separately (rather than being the sum of the individual categories). Net interest income Average interest earnings assets Interest Margins and Spreads 1999 $M 1998 $M G R O U P 1997 $M 3,527 114,271 3,397 102,165 3,392 96,163 Interest spread represents the difference between the average interest rate earned and the average interest rate paid on funds. Interest margin represents net interest income as a percentage of average interest earning assets. The calculations for Australia and Overseas include intragroup cross border loans/borrowings and associated interest. % % % Australia Interest spread adjusted for interest forgone on non accrual and restructured loans Interest forgone on non accrual and restructured loans Interest Spread Benefit of net free liabilities, provisions and equity Australia Interest Margin Overseas Interest spread adjusted for interest forgone on non accrual and restructured loans Interest forgone on non accrual and restructured loans Interest spread Benefit of net free liabilities, provisions and equity Overseas Interest Margin Group Interest spread adjusted for interest forgone on non accrual and restructured loans Interest forgone on non accrual and restructured loans Interest spread Benefit of net free liabilities, provisions and equity Group Interest Margin 3.00 (0.02) 2.98 0.39 3.37 1.45 (0.06) 1.39 0.38 1.77 2.71 (0.02) 2.69 0.40 3.09 3.22 (0.04) 3.18 0.43 3.61 1.44 (0.04) 1.40 0.57 1.97 2.89 (0.04) 2.85 0.48 3.33 NOTE 4 Abnormal Items Abnormal expense item: Restructuring costs (Note 1(aa)) General provision charge for bad and doubtful debts (Note 1(o)) Write down of computer equipment (Note 1(s)) Total Abnormal Items Before Tax Abnormal tax expense (credit) items: Restructuring costs (Note 1(aa)) Tax effecting general provision (Note 1(y)) Write down of computer equipment (Note 1(s)) Total abnormal income tax expense (credit) Total Abnormal Items After Tax G R O U P 1999 $M 1998 $M 1997 $M 1999 $M - - - - - - - - - 200 370 - 570 (72) (337) - (409) 161 - - 200 200 - - (72) (72) 128 - - - - - - - - - 3.30 (0.07) 3.23 0.64 3.87 1.41 (0.02) 1.39 0.36 1.75 2.98 (0.06) 2.92 0.61 3.53 B A N K 1998 $M 200 370 - 570 (72) (337) - (409) 161 66 NOTE 5 Income Tax Expense Income tax expense shown in the financial statements differs from the prima facie tax charge calculated at current taxation rates on operating profit. Operating profit before abnormal items and income tax Prima facie income tax at 36% Add (or deduct) permanent differences expressed on a tax effect basis: Current Period Increase in general provisions for bad and doubtful debts Specific provisions for offshore bad and doubtful debts not tax effected Non deductible depreciation on buildings Taxation rebates (net of accruals) Non assessable income - life insurance surplus Non deductible goodwill amortisation Employee share acquisition plan Other Prior Periods Other Income tax attributable to operating profit Abnormal income tax expense (credit) (Note 4) Income tax expense Income tax expense comprises: Current taxation provision Deferred income (benefit)/tax provision Future income tax benefit Notional tax expense - leveraged leases Other Total Income Tax Expense The components of income tax expense consist of the following: Current Australia Overseas Deferred Australia Overseas The significant temporary differences are as follows: Deferred income tax assets arising from: Provisions not tax deductible until expense incurred Other Future income tax benefits (Note 20) Deferred income tax liabilities arising from: Leveraged leasing Lease financing Accelerated tax depreciation Other Total deferred income tax liabilities (Note 23) Future income tax benefits attributable to tax losses carried forward as an asset Future income tax benefits not taken to account Valuation allowance Opening balance Prior year adjustments Benefits now taken to account Benefits not recognised Closing balance (Note 20) G R O U P 1999 $M 1998 $M 1997 $M 1999 $M 2,160 777 1,912 688 1,816 654 2,190 789 B A N K 1998 $M 1,550 558 - 1 7 (27) (36) 17 - (19) (57) (6) 714 - 714 744 (24) (34) 8 20 714 710 34 744 (46) 16 (30) 255 78 333 461 209 41 222 933 9 35 9 (33) (27) 16 (10) (13) (14) (33) 641 (409) 232 245 128 (158) 16 1 232 194 51 245 (13) - (13) 272 53 325 437 185 47 214 883 28 - 9 (35) (27) 15 (10) (23) (43) (23) 588 (72) 516 375 97 22 22 - 516 326 49 375 141 - 141 82 85 167 439 175 74 67 755 - - 7 (170) - 14 - 5 (144) - 645 - 645 640 (25) 13 8 9 645 640 - 640 5 - 5 216 46 262 198 56 40 173 467 9 28 8 (44) - 14 (10) (25) (20) (32) 506 (409) 97 189 43 (146) 9 2 97 189 - 189 (92) - (92) 261 32 293 191 36 47 162 436 - - - - - 132 (12) (10) 36 146 96 6 (4) 34 132 83 7 (2) 8 96 121 (12) (5) 36 140 96 6 (4) 23 121 67 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 6 Dividends Provided For, Reserved or Paid Interim dividend (fully franked) of 49 cents per share (1998: 46 cents, 1997: 45 cents) Provision for interim dividend - cash component only Declared final dividend (fully franked) of 66 cents per share (1998: 58 cents, 1997: 57 cents) Provision for final dividend - cash component only Dividends provided for payments in cash or paid Appropriations to Dividend Reinvestment Plan Reserve Interim dividend Final dividend Dividends appropriated to Dividend Reinvestment Plan Reserve Total Dividends Provided for, Reserved or Paid Dividend Franking Account The amount of franking credits available for subsequent financial years stands at $96 million. This figure represents the extent to which future dividends could be fully franked at 36%, and is franking account at based on for 30 June 1999, which has been adjusted franking credits that will arise from the payment of the Bank’s G R O U P 1999 $M 1998 $M 1997 $M 1999 $M B A N K 1998 $M 275 231 231 275 231 472 747 183 133 316 1,063 321 552 189 214 403 955 291 522 180 239 419 941 472 747 183 133 316 1,063 321 552 189 214 403 955 income tax payable on profits of the financial year ended 30 June 1999, franking debits that will arise from the payment of dividends proposed as at 30 June 1999 and franking credits that the Bank may be prevented from distributing in subsequent financial periods. NOTE 7 Earnings Per Share Earnings Per Ordinary Share (basic and fully diluted) Reconciliation of earnings used in the calculation of earnings per share Operating profit after income tax Less: Outside equity interests Earnings used in calculation of earnings per share Weighted average number of ordinary shares used in the calculation of earnings per share 1999 c 153.4 $M 1,446 (24) 1,422 1998 c 117.2 $M 1,110 (20) 1,090 G R O U P 1997 c 117.2 $M 1,100 (22) 1,078 Number of Shares M M M 927 930 917 68 NOTE 8 Cash and Liquid Assets Australia Notes, coins and cash at bankers Money at short call Securities purchased under agreements to resell Bills receivable and remittances in transit Total Australia Overseas Notes, coins and cash at bankers Money at short call Bills receivable and remittances in transit Total Overseas Total Cash and Liquid Assets G R O U P 1998 $M 1999 $M 1999 $M B A N K 1998 $M 752 39 793 138 1,722 31 58 3 92 1,814 921 96 328 141 1,486 30 10 - 40 1,526 757 - 793 138 1,688 909 - 328 140 1,377 - 58 - 58 1,746 - 16 - 16 1,393 NOTE 9 Receivables from Other Financial Institutions Australia Overseas Total Receivables from Other Financial Institutions 621 585 1,206 2,382 1,066 3,448 627 555 1,182 2,371 834 3,205 NOTE 10 Trading Securities Australia Listed: Australian Public Securities Commonwealth and States Local and semi government Unlisted: Commercial paper Certificates of deposit Bills of exchange Medium term notes Other securities Total Australia Overseas Listed: Government securities Eurobonds Bills of exchange Other securities Unlisted: Government securities Commercial paper Other securities Total Overseas Total Trading Securities 603 47 176 642 890 693 168 3,219 - 212 814 32 22 340 69 1,489 4,708 237 282 336 146 656 263 290 2,210 413 306 514 73 4 402 87 1,799 4,009 317 47 176 642 890 693 168 2,933 - 212 - 32 - 6 68 318 3,251 237 281 336 146 656 263 290 2,209 59 306 - 73 - 1 50 489 2,698 69 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 1999 $M 1998 $M G R O U P 1997 $M 1999 $M B A N K 1998 $M 2,635 1,960 - - 578 282 3,769 2,611 1,914 20 - - 527 278 564 - - - - 17 - - - 141 455 3,151 160 70 3,147 8 - - 17 - - 34 - - 5 - - 141 13 2,595 160 9 3,058 115 301 4,833 234 5 - 583 484 179 5 547 539 447 323 5 234 5 923 - 583 367 484 687 179 5 547 539 447 1 25 - - - - 648 227 1 25 38 333 1 - 435 - - 647 1,228 227 317 29 27 182 228 527 542 3,354 3,650 5,949 6,708 64 78 29 - 351 796 4,400 9,233 182 879 3,707 6,858 1,228 317 27 228 933 4,040 7,187 NOTE 11 Investment Securities Australia Listed: Australian Public Securities Commonwealth and States Treasury notes Other securities and equity investments Unlisted: Australian Public Securities Commonwealth and States Treasury notes Bills of exchange Certificates of deposit Medium term notes Other securities and equity investments Total Australia Overseas Listed: Government securities Treasury notes Certificates of deposit Eurobonds Other securities Unlisted: Government securities Treasury notes Bills of exchange Certificates of deposit Eurobonds Medium term notes Commercial paper Other securities and equity investments Total Overseas Total Investment Securities 70 NOTE 11 Investment Securities continued Market Value Australia Australian Public Securities Commonwealth and States Treasury notes Bills of exchange Certificates of deposit Medium term notes Other securities and equity investment Total Australia Overseas Government securities Treasury notes Bills of exchange Certificates of deposit Eurobonds Medium term notes Other securities and equity investments Total Overseas Total Investment Securities Net Unrealised Surplus/(Deficit) Gross Unrealised Gains and Losses of Group G R O U P M A R K E T V A L U E A T 3 0 J U N E 1999 $M 1998 $M 1997 $M 2,637 - - - 171 333 3,141 1,994 - 17 - 159 1,092 3,262 3,907 37 34 5 128 944 5,055 243 5 - 1,236 924 20 1,627 4,055 7,196 9 231 5 - 1,201 811 25 1,544 3,817 7,079 221 376 339 436 990 464 - 1,902 4,507 9,562 329 A T 3 0 J U N E 1 9 9 9 A T 3 0 J U N E 1 9 9 8 Amortised Cost $M Gross Unrealised Losses Gains $M $M Fair Amortised Cost $M Value $M Gross Unrealised Losses Gains $M $M Fair Value $M Australia Australian Public Securities Commonwealth and States Bills of exchange Medium term notes Other securities and equity investments Total Australia Overseas Government securities Treasury notes Certificates of deposit Eurobonds Medium term notes Other securities and equity investments Total Overseas Total Investment Securities 2,635 - 160 352 3,147 235 5 1,228 900 27 1,645 4,040 7,187 13 - 11 - 24 10 - 46 46 - - 102 126 11 - - 19 30 2 - 38 22 7 18 87 117 2,637 - 171 333 3,141 243 5 1,236 924 20 1,627 4,055 7,196 1,960 17 141 1,033 3,151 204 5 1,195 766 29 1,508 3,707 6,858 34 - 18 59 111 30 - 7 53 - 83 173 284 - - - - - 3 - 1 8 4 47 63 63 1,994 17 159 1,092 3,262 231 5 1,201 811 25 1,544 3,817 7,079 71 Notes to and forming part of the accounts NOTE 11 Investment Securities continued Investment securities are carried at cost or amortised cost and are purchased with the intent of being held to maturity. The investment portfolio is managed in the context of the full balance sheet of the Bank. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES these contracts Equity derivatives are in place to hedge equity market risk. There are $19 million of net deferred gains on (1998: $50 million net deferred losses) which offset the above unrealised losses and these are disclosed within Note 37. At the end of the financial year $71 million of net deferred losses the amortised cost value. (1998: $80 million) are included in Maturity Distribution and Average Yield The table analyses the maturities and weighted average yields of the Group’s holdings of investment securities. 1 to 12 months % $M 1 to 5 years % $M 5 to 10 years % $M 10 years or more % $M Total $M M A T U R I T Y P E R I O D A T 3 0 J U N E 1 9 9 9 Australia Australian Public Securities Commonwealth and States Medium term notes Other securities, commercial paper and equity investments Total Australia Overseas Government securities Treasury notes Certificates of Deposit Eurobonds Medium term notes Other securities, commercial paper and equity investments Total Overseas Total Investment Securities Maturities at Fair Value 552 - 90 642 1 5 1,228 145 - 274 1,653 2,295 2,299 6.51 - 5.09 5.72 1.20 5.21 8.78 - 5.23 1,661 102 258 2,021 163 - - 222 27 624 1,036 3,057 3,033 5.19 8.33 3.62 2.32 - - 6.69 5.19 7.45 422 58 4 484 71 - - 533 - 697 1,301 1,785 1,814 6.14 9.80 6.52 5.62 - - 5.75 - 2.97 - - - - - - - - - 50 50 50 50 - - - - - - - - 5.53 2,635 160 352 3,147 235 5 1,228 900 27 1,645 4,040 7,187 7,196 Proceeds at or close to maturity of investment securities were $12,431 million (1998: $8,681 million, 1997: $7,013 million). Proceeds from sale of investment securities were $146 million (1998: $1,787 million, 1997: $1,172 million). Realised capital gains were $85 million and realised capital losses were $6 million (1998: realised capital gains $65 million, 1997: realised capital gains $12 million and realised capital losses $8 million). 72 NOTE 12 Loans, Advances and Other Receivables Australia Overdrafts Housing loans Credit card outstandings Lease financing Bills discounted Term loans Redeemable preference share financing Equity participation in leveraged leases Other lending Total Australia Overseas Overdrafts Housing loans Credit card outstandings Lease financing Bills discounted Term loans Redeemable preference share financing Other lending Total Overseas Gross Loans, Advances and Other Receivables Less - Provisions for impairment (Note 13) General provision Specific provision against loans and advances Unearned income Term loans Lease financing Leveraged leases Interest reserved Unearned tax remissions on leveraged leases Net Loans, Advances and Other Receivables Lease receivables, net of unearned income (included above) Current Non current G R O U P 1998 $M 1999 $M 1999 $M B A N K 1998 $M 3,821 45,495 2,510 3,966 1,650 29,607 682 1,737 1,607 91,075 2,841 41,137 2,218 3,594 916 25,676 740 1,615 1,290 80,027 3,821 45,495 2,510 1,207 1,654 25,535 89 774 1,052 82,137 2,876 41,137 2,217 1,123 917 22,173 125 769 738 72,075 6,273 519 - - 760 125 85 7,151 134 - - 162 60 - - 166 4 2 2 2,131 2,260 5,250 - 369 - - - - - - 2,389 74,464 12,548 92,575 2,218 84,355 4 5,189 13,491 104,566 (1,081) (275) (1,076) (279) (932) (209) (995) (232) (437) (489) (243) (68) (136) (2,729) 101,837 (425) - - (130) (142) (473) (42) (38) (295) (93) (62) (102) (23) (20) (109) (1,515) (1,403) (2,759) 72,949 82,952 89,816 1,250 2,393 3,643 932 2,249 3,181 348 717 1,065 281 712 993 73 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 12 Loans, Advances and Other Receivables continued Maturity Distribution of Loans The following table sets forth the maturity distribution of the Group’s loans, advances and other receivables (excluding bank acceptances) at 30 June 1999. M A T U R I T Y P E R I O D A T 3 0 J U N E 1 9 9 9 G R O U P Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Overseas Gross Loans, Advances and Other Receivables Interest Rate Sensitivity of Lending Variable Interest Rates Australia Overseas Total Fixed Interest Rates Australia Overseas Total Gross Loans, Advances and Other Receivables Maturing One Year or Less $M Maturing Between One & Five Years $M 272 1,464 1,588 3,018 942 3,307 1,144 10,428 22,163 84 205 456 794 315 47 18 1,506 3,425 25,588 12,021 2,510 14,531 10,141 916 11,057 25,588 844 2,046 1,524 7,832 939 7,531 905 8,423 30,044 40 628 525 2,605 112 88 52 719 4,769 34,813 11,825 2,928 14,753 18,218 1,842 20,060 34,813 Maturing After Five Years $M 611 693 936 23,475 224 8,912 1,051 2,966 38,868 33 - 526 4,014 - 142 121 461 5,297 44,165 20,065 889 20,954 18,804 4,407 23,211 44,165 Total $M 1,727 4,203 4,048 34,325 2,105 19,750 3,100 21,817 91,075 157 833 1,507 7,413 427 277 191 2,686 13,491 104,566 43,911 6,327 50,238 47,163 7,165 54,328 104,566 (1) Principally owner occupied housing. While most of these loans would have a contractual term of 20 years or more, the actual average term of the portfolio is less than 5 years. (2) Financing real estate and land development projects. 74 NOTE 13 Provisions For Impairment Provisions for Impairment General Provisions Opening balance Abnormal charge Charge against profit and loss Transfer to specific provisions Bad debts recovered Adjustments for exchange rate fluctuations Bad debts written off Closing balance Specific Provisions Opening balance Charge against profit and loss New and increased provisions Writeback of provisions no longer required Transfer from general provision for New and increased provisioning Less writeback of provisions no longer required Net transfer Adjustments for exchange rate fluctuations and other items Bad debts written off Closing balance Total Provisions for Impairment Specific provisions for impairment comprise the following segments: Provisions against loans and advances Provisions for diminution Total Provision Ratios (1) Specific provisions for impairment as % of gross impaired assets net of interest reserved Total provisions for impairment as % of gross impaired assets net of interest reserved General provisions as % of risk weighted assets Charge to profit and loss for bad and doubtful debts comprises: General provisions Specific provisions Total Charge for Bad and Doubtful Debts Ratio of net charge offs during the period to Average gross loans, advances and other receivables outstanding during the period 1999 $M 1998 $M 1997 $M 1996 $M 1995 $M 1999 $M G R O U P B A N K 1998 $M 1,076 - 247 (239) 51 (7) 690 370 165 (155) 48 - 1,128 1,118 (42) 1,081 1,076 (47) 613 - 36 - 80 2 731 (41) 690 476 - 99 - 74 (3) 646 (33) 613 396 - 15 - 105 1 517 (41) 476 995 - 78 (159) 43 - 604 370 164 (152) 38 2 957 1,026 (31) 995 (25) 932 279 241 318 511 713 262 211 152 (90) 155 (141) 333 (166) - - - - 284 (45) 239 105 (37) 175 (20) 155 (8) 510 (235) 275 (6) 458 (179) 279 1,356 1,355 - - - 6 386 (145) 241 931 - - - (4) 521 (203) 318 931 94 (34) 169 (17) 152 - - - 198 (39) 159 (7) (29) 17 416 392 897 (154) (183) (386) 511 262 209 987 1,141 1,257 275 - 275 279 - 279 241 - 241 310 8 318 498 13 511 209 - 209 232 30 262 % % % % % % % 46.69 37.60 30.24 29.94 32.28 42.65 37.11 230.22 182.61 116.81 87.66 62.35 232.86 201.44 1.14 0.79 0.68 0.79 1.09 1.14 1.09 $M $M $M $M $M $M $M 247 - 247 165 68 233 36 62 98 99 14 113 15 167 182 78 - 78 164 60 224 0.3% 0.3% 0.1% 0.2% 0.3% 0.1% 0.3% (1) Ratios have been restated for 1998 based on the amended definition of non accruals introduced with effect from 31 December 1998. 75 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 13 Provisions For Impairment continued Total charge for bad and doubtful debts The charge is required for Specific Provisioning New and increased provisioning Less provisions no longer required Net specific provisioning Provided from general provision Charge to profit and loss General Provisioning Direct write offs Recoveries of amounts previously written off Movement in general provision Funding of specific provisions Charge to profit and loss Total Charge for Bad and Doubtful Debts 1999 $M 247 G R O U P 1998 $M 233 1999 $M 78 B A N K 1998 $M 224 284 (45) 239 (239) - 44 (51) 15 239 247 247 280 (57) 223 (155) 68 42 (48) 16 155 165 233 198 (39) 159 (159) - 25 (43) (63) 159 78 78 263 (51) 212 (152) 60 31 (38) 19 152 164 224 76 NOTE 13 Provisions For Impairment continued Specific Provisions for Impairment by Industry Category The following table sets forth the Group’s specific provisions for impairment by industry category as at 30 June 1995, 1996, 1997, 1998 and 1999. 1999 % 1998 1997 ($ millions, except where indicated) % % 1996 % A T 3 0 J U N E 1995 % - - - - - - - - - - 15 23 4 35 15 4 82 178 5.4 8.4 1.5 12.7 5.4 1.5 29.8 64.7 20 16 3 8 14 - 113 174 7.1 5.7 1.1 2.9 5.0 - 40.5 62.3 21 22 4 11 12 - 152 222 8.7 9.1 1.7 4.6 5.0 - 34 50 3 16 17 1 10.7 15.7 0.9 5.0 5.3 0.3 86 77 2 53 26 8 63.0 92.1 185 306 58.3 96.2 227 479 16.8 15.0 0.4 10.4 5.1 1.6 44.4 93.7 - - - - - - - - - - Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Overseas Total Specific Provisions - - 1 0.4 - - - - 3 1.1 - - 0.7 - - 2 92 97 275 33.5 35.3 100.0 5 10 - - 89 105 279 1.8 3.6 - - 31.9 37.7 100.0 (1) (2) Principally owner occupied housing. Financing real estate and land development projects. 1 2 - - - - 16 19 241 0.4 0.8 - - - - 6.7 7.9 100.0 1 2 - 1 - - 8 12 318 0.3 0.6 - 0.3 - - 2.6 3.8 100.0 1 3 - 3 - - 25 32 511 0.2 0.6 - 0.6 - - 4.9 6.3 100.0 77 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 13 Provisions For Impairment continued Bad Debts Written Off by Industry Category The following table sets forth the Group’s bad debts written off and bad debts recovered for Financial Years 1995, 1996, 1997, 1998 and 1999. Y E A R E N D E D 3 0 J U N E Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Overseas 1999 % - 2.5 1.4 3.2 2.5 33.3 3.9 25.2 72.0 - - - 0.4 5.0 - 1.0 21.6 28.0 1998 1997 ($ millions, except where indicated) % - 4.1 1.8 5.0 2.7 38.9 2.7 35.7 90.9 - - 1.4 0.5 - 2.7 - 4.5 9.1 - 15 4 9 14 58 5 69 174 - - - 1 2 3 - 6 12 % - 8.1 2.2 4.8 7.5 31.2 2.7 37.1 93.6 - - - 0.5 1.1 1.6 - 3.2 6.4 - 20 25 5 17 52 4 93 216 - - 1 - - 3 - 16 20 - 9 4 11 6 86 6 79 201 - - 3 1 - 6 - 10 20 1996 % - 8.5 10.6 2.1 7.2 22.0 1.7 39.4 91.5 - - 0.4 - - 1.3 - 6.8 8.5 - 28 67 7 43 79 5 159 388 - - 7 - 11 2 - 19 39 1995 % - 6.6 15.7 1.6 10.1 18.5 1.2 37.2 90.9 - - 1.6 - 2.6 0.5 - 4.4 9.1 - 7 4 9 7 94 11 71 203 - - - 1 14 - 3 61 79 Gross Bad Debts Written Off 282 100.0 221 100.0 186 100.0 236 100.0 427 100.0 Bad Debts Recovered Australia Overseas Bad Debts Recovered Net Bad Debts Written Off 48 3 51 231 46 2 48 173 63 17 80 106 65 9 74 162 84 21 105 322 (1) (2) Principally owner occupied housing. Financing real estate and land development projects. 78 NOTE 13 Provisions For Impairment continued Bad Debts Recovered by Industry Category The following table sets forth the Group’s bad debts recovered by industry category for Financial Years 1995, 1996, 1997, 1998 and 1999. 1999 % - 3.9 3.9 - 2.0 52.9 3.9 27.5 94.1 - - - - - 5.9 - - 5.9 - 2 2 - 1 27 2 14 48 - - - - - 3 - - 3 1998 1997 ($ millions, except where indicated) % % 1996 % 1995 % Y E A R E N D E D 3 0 J U N E - - - - - - - - 4 6 - 1 21 2 12 46 8.3 12.5 - 2.1 43.7 4.2 25.0 95.8 5 8 - 1 16 2 31 63 6.3 10.0 - 1.2 20.0 2.5 38.8 78.8 5 7 - 1 16 2 34 65 6.8 9.5 - 1.3 21.6 2.7 45.9 87.8 5 8 - 4 8 5 54 84 4.8 7.6 - 3.8 7.6 4.8 51.4 80.0 - - - - - - - - - - - - - - - - - - - - 2 - - 2 - - 4.2 - - 4.2 2 - 2 1 - 12 17 2.5 - 2.5 1.2 - 15.0 21.2 3 - 2 1 - 3 9 4.1 17 16.2 - 2.7 1.3 - 4.1 12.2 - 1 1 - 2 21 - 1.0 1.0 - 1.8 20.0 Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Overseas Bad Debts Recovered 51 100.0 48 100.0 80 100.0 74 100.0 105 100.0 (1) (2) Principally owner occupied housing. Financing real estate and land development projects. 79 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 14 Credit Risk Concentrations in Facilities the credit risk rated managed segment become classified for remedial management by centralised units based on assessment in the risk rating system, which for each exposure makes an assessment of the risk of default, and then the risk of loss if default should occur. Impaired assets in this segment are those ‘classified’ facilities where either a specific provision for impairment has been raised, the facility is maintained on a cash basis, a loss of principal or interest is anticipated, facilities have been restructured or other assets have been accepted in satisfaction of an outstanding debt. Loans are generally classified as non accrual when receivership, insolvency or bankruptcy occurs. Provisions for impairment are raised for an amount equal to the difference between the exposure and the estimated the security net of realisable market value of estimated realisation costs. Most loans that are rated as impaired are managed by centralised and specialised units. troublesome or A centralised exposure management system records all significant credit risks borne by the Group. This system is used to monitor concentrations by client, other geography concentrations where increased risk is apparent. industry, and any Aggregated credit limits apply for debtors or counterparties (refer ‘Large Exposures’). The Risk Committee of the Board operates under a charter of the Board in terms of which the Committee oversees the Bank’s credit management policies and practices. The Committee usually meets on a monthly basis and more often if required. to control limits and The Group uses a portfolio approach to the management of its credit risk. A key element is a well diversified portfolio. The Group has a system of industry industry targets concentration. The Group has a large credit exposure policy for commercial and industrial credit risk, tiered by credit risk rating and loan duration. The Bank has a system of country limits in place to control geographic concentration of credit risk. These policies are to ensure diversification of the credit portfolio. The Group is using various portfolio management tools to diversify the credit portfolio. The Bank is involved in credit derivative transactions, has purchased various assets in the market, has carried out various asset securitisations and has recently concluded a Collateralised Loan Obligation issue. • Management of the Credit Business Credit risk is the potential for loss arising from: • failure of a debtor or counterparty to meet their contractual obligations; and failure to recover the recorded value of equity investments arising from individual transactions. The Group has clearly defined credit policies for the approval and management of credit risk. Credit incorporate underwriting income/repayment capacity, acceptable terms and security and loan documentation tests exist for all products. standards, which to meet its contracted integrity and ability of The Group relies, in the first instance, on the the debtor or assessed counterparty financial obligations for repayment. Collateral security, in the form of real property or a floating charge is generally for major taken government, bank and corporate counterparties of strong financial standing. Longer term consumer finance is generally secured against real estate while short term revolving consumer credit is generally unsecured. for business credit except The credit risk portfolio is divided into two segments, statistically managed and credit risk rate managed. Statistically managed exposures are generally not individually reviewed unless arrears occur. Statistically managed portfolios are reviewed by business unit Credit Support and Monitoring units with an overview by the Risk Asset Review unit. Credit risk rated managed exposures are required to be reviewed at least annually. The risk rated segment is subject to inspection by the Risk Asset Review unit, which is independent of the business units and which reports quarterly on its findings to the Board Risk Committee. Most risk rated portfolios are reviewed on a random basis, usually within a period of twenty four months, by the Risk Asset Review unit. High risk portfolios are frequently. Credit processes, including compliance with policy and underwriting standards, and application of risk ratings, are examined and reported on where cases of non compliance are observed. reviewed more Facilities in the statistically managed segment become classified for remedial management by centralised units based on arrears status. Impaired assets in this segment are those ‘classified’ facilities which are not well secured and past due 180 days or more. 80 NOTE 14 Credit Risk Concentrations continued Total Gross Credit Risk by Industry The following table sets out the Group’s Total Gross Credit Risk by industry as at 30 June 1996, 1997, 1998 and 1999. Comparative figures are not available for Financial Year 1995. The industry profile of the loans, advances and other receivables content for the five financial years to 30 June 1999 is shown on page 86. Industry Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Overseas Total Gross Credit Risk Less unearned income Total Credit Risk 1999 $M 1998 $M A T 3 0 J U N E 1997 $M 1996 $M 6,162 5,303 15,430 37,980 3,830 20,294 3,100 36,519 128,618 493 833 5,631 7,414 579 280 191 7,945 23,366 151,984 (1,169) 150,815 5,200 4,791 17,654 34,599 2,790 14,362 1,940 35,074 116,410 819 640 7,012 6,686 3,743 14,878 32,990 2,705 11,060 4,277 29,747 106,086 1,048 595 7,147 6,247 6,306 166 505 259 148 173 - 6,759 22,110 128,196 (1,019) 127,177 8,091 23,805 140,215 (1,193) 139,022 6,080 3,741 13,642 30,556 2,635 9,869 4,245 24,821 95,589 806 376 7,005 4,545 233 256 1 5,143 18,365 113,954 (963) 112,991 81 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 14 Credit Risk Concentrations continued The following tables set out the credit risk concentrations of the Group. R I S K C O N C E N T R A T I O N O F T H E G R O U P B Y A S S E T C L A S S 3 0 J U N E 1 9 9 9 Industry Trading Investment Loans Advances and Other Acceptances Contingent Bank Securities $M Securities Receivables of Customers $M $M $M Liabilities Derivatives $M $M Total $M Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Overseas Gross Balances Other Risk Concentrations Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 650 - 2,635 - 1,532 - - - - - 1,037 3,219 - - - - 512 3,147 22 - 814 240 - 1,228 - - - - 653 1,489 4,708 - - - - 2,572 4,040 7,187 1,727 4,203 4,048 34,325 2,105 19,750 3,100 21,817 91,075 157 833 1,507 7,413 427 277 191 2,686 13,491 104,566 387 859 2,594 126 743 208 - 4,717 9,634 625 220 1,176 138 21 4,507 3,529 - 969 13 336 - - 957 5,636 - 7,479 14,334 - - - 69 - 276 5 - 1,220 - - - - 38 38 9,672 1 - 152 - 3 - - - 1,912 84 1,309 2,413 6,945 16,747 6,162 5,303 13,857 37,980 3,830 20,294 3,100 36,519 127,045 493 833 5,045 7,414 579 280 191 7,945 22,780 149,825 1,206 953 151,984 Risk concentrations for contingent liabilities and derivatives are based on the credit equivalent balance in Note 36, Contingent Liabilities and Note 37, Market Risk respectively. 82 NOTE 14 Credit Risk Concentrations continued R I S K C O N C E N T R A T I O N O F T H E G R O U P B Y A S S E T C L A S S 3 0 J U N E 1 9 9 8 Industry Trading Investment Loans Advances and Other Acceptances Contingent Bank Securities Securities Receivables of Customers $M $M $M $M Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Overseas Gross Balances Other Risk Concentrations Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 544 - 484 1,698 - 17 - - - - - - - - 1,436 3,151 1,182 2,210 74 208 - - 1,195 916 - - - - - - - - 2,304 3,707 6,858 809 1,799 4,009 1,216 4,128 2,490 34,505 1,197 14,063 1,940 20,488 80,027 105 640 1,449 6,304 318 217 173 3,342 12,548 92,575 Liabilities Derivatives $M $M Total $M 1,034 82 2,358 343 58 6,543 5,200 4,791 14,441 - 34,599 - 2,790 708 - 14,362 57 - 1,940 - 1,303 35,074 8,247 113,197 - 5,623 9,862 365 523 2,549 94 885 242 - 5,042 9,700 - - - 312 - 451 120 - 1,934 819 640 5,945 - - - - 27 27 9,727 2 - 187 - 38 - 29 2,121 6,306 505 259 173 8,091 22,738 10,368 135,935 4 - 1,580 2,536 12,398 3,448 832 140,215 83 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 14 Credit Risk Concentrations continued R I S K C O N C E N T R A T I O N O F T H E G R O U P ’ S I M P A I R E D A S S E T S 3 0 J U N E 1 9 9 9 Industry Total Risk $M Impaired Assets $M Provisions for Impairment Write offs $M $M Recoveries $M Net Write offs $M 6,162 - 55 5,303 47 13,857 - 15 23 - 7 4 37,980 - 101 10 5 278 496 3,830 20,294 3,100 36,519 127,045 4 35 15 4 82 178 9 7 94 11 71 203 493 - 833 5,045 - - 1 - - 7,414 - 579 - 280 - 191 - 160 161 657 7,945 22,780 149,825 3 - 2 - 92 97 275 1,206 953 151,984 - - - 1 14 - 3 61 79 282 - (2) (2) - (1) (27) (2) (14) (48) - 5 2 9 6 67 9 57 155 - - - - - - - - (3) - - (3) (51) 1 14 (3) 3 61 76 231 Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Overseas Gross Balances Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 84 NOTE 14 Credit Risk Concentrations continued R I S K C O N C E N T R A T I O N O F T H E G R O U P ’ S I M P A I R E D A S S E T S 3 0 J U N E 1 9 9 8 Industry Total Risk $M Impaired Provisions for Assets $M Impairment Write offs $M $M Recoveries $M Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage Construction Personal Lease Financing Other Commercial and Industrial Total Overseas Gross Balances Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk Large Exposures 5,200 4,791 14,441 - 66 65 34,599 2,790 14,362 1,940 35,074 113,197 - 102 9 2 372 616 - 20 16 - 9 4 3 8 14 - 113 174 11 6 86 6 79 201 819 640 5,945 - 3 2 - - 1 - 3 - - 3 2 - 300 310 926 6,306 505 259 173 8,091 22,738 135,935 3,448 832 140,215 5 1 10 - 6 - 10 20 221 - - 89 105 279 - (4) (6) - (1) (21) (2) (12) (46) - - - - - (2) - - (2) (48) Net Write offs $M - 5 (2) 11 5 65 4 67 155 - - 3 1 - 4 - 10 18 173 Concentration of exposure to any debtor or counterparty, other than to governments and banks, is controlled by the Large Credit Exposure Policy. All exposures outside the policy are approved by the Board Risk Committee. The following table shows the aggregate number of the Group’s corporate exposures (including direct and contingent exposure) which individually were greater than 5% of the Group’s capital resources (Tier 1 and Tier 2 capital): 10% to less than 15% of Group’s capital resources 5% to less than 10% of Group’s capital resources 1 7 1 7 1 4 1 4 2 6 1999 1998 1997 1996 1995 Number Number Number Number Number 85 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 14 Credit Risk Concentrations continued Credit Portfolio Industry Profile The following table sets forth the distribution of the Group’s loans, advances and other receivables (excluding bank acceptances) classified by industry category at 30 June 1995, 1996, 1997, 1998 and 1999. 1999 % 1.6 4.0 3.9 32.8 2.0 18.9 3.0 20.9 87.1 0.1 0.8 1.4 7.1 0.4 0.3 0.2 1,216 4,128 2,490 34,505 1,197 14,063 1,940 20,488 80,027 105 640 1,449 6,304 318 217 173 1,727 4,203 4,048 34,325 2,105 19,750 3,100 21,817 91,075 157 833 1,507 7,413 427 277 191 1998 1997 ($ millions, except where indicated) % % 1996 % A T 3 0 J U N E 1995 % 1.3 4.4 2.7 37.3 1.3 15.2 2.1 22.1 86.4 0.1 0.7 1.6 6.8 0.3 0.2 0.2 1,955 3,185 1,859 32,892 1,138 10,740 4,277 16,675 72,721 28 547 1,494 6,247 151 133 - 2.3 3.8 2.2 39.3 1.4 12.8 5.1 19.9 86.8 - 0.7 1.8 7.4 0.2 0.2 - 1,477 2,896 2,211 28,963 1,065 9,456 4,245 13,024 63,337 310 376 1,134 4,545 205 240 1 2,000 8,811 2.0 4.0 3.1 40.1 1.5 13.1 5.9 18.1 87.8 0.4 0.5 1.6 6.3 0.3 0.3 - 2.8 12.2 874 2,538 1,641 26,808 1,084 8,669 3,749 11,262 56,625 274 224 956 3,701 359 168 2 2,474 8,158 1.3 3.9 2.5 41.4 1.7 13.4 5.8 17.4 87.4 0.4 0.3 1.5 5.7 0.6 0.3 - 3.8 12.6 2,686 13,491 2.6 12.9 3,342 12,548 3.7 13.6 2,469 11,069 2.9 13.2 104,566 100.0 92,575 100.0 83,790 100.0 72,148 100.0 64,783 100.0 (2,729) 101,837 (2,759) 89,816 (2,158) 81,632 (2,106) 70,042 (2,076) 62,707 Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate Mortgage (1) Construction (2) Personal Lease Financing Other Commercial and Industrial Total Overseas Gross Loans, Advances and Other Receivables Provisions for bad And doubtful debts, Unearned income, interest reserved and unearned tax remissions on leverage leases Net Loans, Advances and Other Receivables (1) Principally owner occupied housing. (2) Financing real estate and land development projects. 86 NOTE 15 Asset Quality Credit Portfolio The Group manages its credit portfolio in two segments: Statistically Managed Segment This segment comprises selected products where than $250,000. This segment is dominated by the housing portfolio. Credit facilities are approved using credit scoring and check sheet techniques. the exposures are generally less Risk Rated Managed Segment This segment comprises all credit exposures not statistically managed. Management of this segment is based on the credit risk rating system, which for each exposure makes an assessment of the risk of default, and then the risk of loss if default should occur. The Group’s credit risk portfolio is as follows: 1997 $M 1999 $M 1998 $M Total gross credit risk (Note 14) Less unearned income (Note 12) Credit Risk Credit Segments Statistically managed Risk rated managed Credit Risk 151,984 (1,169) 150,815 54,556 96,259 150,815 140,215 (1,193) 139,022 50,264 88,758 139,022 128,196 (1,019) 127,177 46,795 80,382 127,177 Charge for bad and doubtful debts for each segment was: Credit Segments Charge 1999 $M Loss Rate 1999 %pa Charge 1998 $M Loss Rate 1998 %pa Charge 1997 $M Loss Rate 1997 %pa Statistically managed Risk rated managed Sub total Funding to general provisions Total charge for bad and doubtful debts 81 151 232 15 247 0.15 0.16 0.15 0.01 0.16 80 137 217 16 233 0.16 0.15 0.16 0.01 0.17 61 (38) 23 75 98 0.13 (0.05) 0.02 0.06 0.08 The loss rate is the charge as a percentage of the credit segments. Impaired Assets for Impaired Assets contained The Group adopted the Australian disclosure in requirements ‘Specific Disclosures by Financial AASB1032 Institutions’ with effect from Financial Year 1997. The Group’s policies incorporate the Reserve Bank of Australia guidelines issued in December 1993, which meet the requirements of AASB1032. There are three classifications of Impaired Assets: (a) Non accruals, comprising: • • • any credit risk facility against which a specific provision for impairment has been raised; any credit risk facility maintained on a cash basis because of significant deterioration in the financial position of the borrower; and any credit risk facility where principal or interest is anticipated. loss of At 31 December 1998 the definition of non accruals was amended to align more closely with APRA (formerly RBA) guidelines and industry practice. When a client is experiencing difficulties the account is classified as a non accrual only where a loss is expected, taking into account the level of security held. To provide comparable provisioning and asset quality ratios at 30 June 1998 and 30 June 1999, impaired assets at 30 June 1998 have also been disclosed under the amended definition. All interest charged in the current financial period that has not been received in cash is reversed from profit and loss when facilities become classified as non accrual. Interest on these facilities is only taken to profit if received in cash. (b) Restructured Facilities Credit risk facilities on which the original contractual terms have been modified due to financial difficulties of the borrower. Interest on these facilities is taken to profit and loss. Failure to comply fully with immediate the modified reclassification to non accruals. terms will result in 87 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 15 Asset Quality continued Impaired Assets continued (c) Assets Acquired Through Security Enforcement (AATSE), includes: • • Other Real Estate Owned (OREO), comprising real estate where the Bank has assumed ownership or foreclosed in settlement of a debt; and Other Assets Acquired Through Security Enforcement (OAATSE), comprising assets other than real estate where the Bank has assumed ownership or foreclosed in settlement of a debt. Impaired Asset Ratios (1) Gross impaired assets net of interest reserved as % of credit risk net of interest reserved Net impaired assets as % of: Risk weighted assets Total shareholders’ equity 1999 % 1998 % G R O U P 1997 % 0.39 0.32 4.52 0.53 0.49 6.76 0.63 0.64 7.92 (1) Ratios have been restated from 1998 based on amended definition of non accruals introduced with effect from 31 December 1998. US GAAP SFAS 114 and 118 - Accounting by Creditors for Impairment of Loans Impaired Loans - including non accruals Impaired Loans with allowance for credit losses - allowance for credit losses Impaired Loans with no allowance for credit loss Average investment in Impaired Loans Income recognised on Impaired Loans Y E A R E N D E D 3 0 J U N E 1998 $M 920 920 726 259 194 908 34 1997 $M 896 896 670 226 226 1,008 50 1999 $M 636 636 505 255 131 778 33 88 NOTE 15 Asset Quality continued Impaired Assets The following table sets forth the Group’s impaired assets as at 30 June 1995, 1996, 1997, 1998 and 1999. Australia Non accrual loans: Gross balances Less interest reserved Gross balance (net of interest reserved) Less provisions for impairment Net non accrual loans Restructured loans: Gross balances Less interest reserved Gross balance (net of interest reserved) Less specific provisions Net restructured loans Other Assets Acquired Through Security Enforcement (OAATSE): Gross balances Less provisions for impairment Net OAATSE Net Australian impaired assets Overseas Non accrual loans: Gross balances Less interest reserved Gross balance (net of interest reserved) Less provisions for impairment Net non accrual loans Restructured loans: Gross balances Less interest reserved Gross balance (net of interest reserved) Less specific provisions Net restructured loans Other Real Estate Owned (OREO) Gross balances Less provisions for impairment Net OREO Net Overseas impaired assets Total net impaired assets 1999 $M 495 (66) 429 (178) 251 1 - 1 - 1 - - - 252 147 (2) 145 (97) 48 - - - - - 14 - 14 62 314 1998 (1) $M 616 (85) 531 (174) 357 - - - - - - - - 357 310 (17) 293 (105) 188 - - - - - - - - 188 545 1997 $M 831 (100) 731 (222) 509 - - - - - - - - 509 75 (9) 66 (19) 47 - - - - - - - - 47 556 A T 3 0 J U N E 1996 $M 1995 $M 1,060 (108) 952 (300) 652 1,500 (129) 1,371 (473) 898 29 (9) 20 - 20 37 (11) 26 - 26 6 (6) - 672 6 (6) - 924 51 (6) 45 (10) 35 142 (9) 133 (26) 107 - - - - - - - - - - 39 (2) 37 72 744 47 (5) 42 149 1,073 (1) Under revised definition of non accrual assets introduced 31 December 1998 net impaired assets at 30 June 1998 would have been $466 million. 89 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 15 Asset Quality continued Movement in Impaired Asset Balances The following table provides an analysis of the movement in the gross impaired asset balances for Financial Years 1995, 1996, 1997, 1998 and 1999. Gross impaired assets at period beginning New and increased Balances written off Returned to performing or repaid Gross impaired assets at period end 1999 $M 926 415 (280) (404) (1) 657 1998 $M 906 689 (216) (453) 926 Y E A R E N D E D 3 0 J U N E 1996 $M 1,732 390 (269) (668) 1,185 1995 $M 2,555 773 (541) (1,055) 1,732 1997 $M 1,185 487 (190) (576) 906 (1) Includes $99 million reduction due to revised definition of non accruals introduced 31 December 1998. Loans Accruing But Past Due 90 Days or More Accruing loans past due 90 days or more Housing loans Other loans Total Interest Income Forgone on Impaired Assets Interest income forgone Australia Non Accrual Facilities Overseas Non Accrual Facilities Total Interest Taken to Profit and Loss on Impaired Assets Australia Non Accrual Facilities Restructured Facilities Overseas Non Accrual Facilities OREO Total Interest to Profit and Loss 1999 $M 182 23 205 1999 $M 17 10 27 1999 $M 33 - - - 33 1998 $M 249 41 290 1998 $M 34 7 41 1998 $M 34 - - - 34 A T 3 0 J U N E 1996 $M 336 29 365 1995 $M 257 44 301 Y E A R E N D E D 3 0 J U N E 1996 $M 75 5 80 1995 $M 112 11 123 Y E A R E N D E D 3 0 J U N E 1996 $M 1995 $M 70 5 - 6 81 62 - 1 - 63 1997 $M 267 37 304 1997 $M 52 3 55 1997 $M 50 - - 5 55 90 NOTE 15 Asset Quality continued Impaired Assets Non Accrual Loans With provisions Without provisions Gross Balances Less interest reserved Net Balances Less provisions for impairment Net Non Accrual Loans Restructured Loans Gross Balances Less interest reserved Net Balances Less provisions for impairment Net Restructured Loans Other Real Estate Owned (OREO) Gross Balances Less provisions for impairment Net OREO Other Assets Acquired Through Security Enforcement (OAATSE) Gross Balances Less provisions for impairment Net OAATSE Total Impaired Assets Gross Balances Less interest reserved Net Balances Less provisions for impairment Net Impaired Assets Non Accrual Loans by Size of Loan Less than $1 million $1 million to $10 million Greater than $10 million Total G R O U P G R O U P Australia Overseas 1999 $M 1999 $M Total 1999 $M Australia Overseas 1998 $M 1998 $M 366 129 495 (66) 429 (178) 251 145 2 147 (2) 145 (97) 48 511 131 642 (68) 574 (275) 299 439 177 616 (85) 531 (174) 357 293 17 310 (17) 293 (105) 188 Total 1998 $M 732 194 926 (102) 824 (279) 545 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 616 (85) 531 (174) 357 274 183 159 616 310 (17) 293 (105) 188 5 43 262 310 926 (102) 824 (1) (279) 545 (1) 279 226 421 926 1 - 1 - 1 - - - - - - 496 (66) 430 (178) 252 173 142 180 495 - - - - - 1 - 1 - 1 14 - 14 14 - 14 - - - - - - 161 (2) 159 (97) 62 5 27 115 147 657 (68) 589 (275) 314 178 169 295 642 (1) Under the revised definition of non accrual assets introduced at 31 December 1998, Net Balances would be $742 million, and Net Impaired Assets $466 million. Accruing Loans 90 days past due or more These are loans which are well secured and not classified as impaired assets but which are in arrears 90 days or more. Interest on these loans continues to be taken to profit. 182 23 205 265 25 290 91 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 15 Asset Quality continued Asian and Other Regional Exposures Approximately 65% of the Bank’s Asian exposures relate to counterparties rated investment grade equivalent or better. Almost 47% of total exposures relate to financial institutions. Exposures to Indonesia, Thailand and Korea have reduced by 24% in the Financial Year 1999 and represent approximately 23% of the Bank’s Asian credit risk. The Group’s credit risk exposure to Asian countries as at 30 June 1999 is set out below. Country Finance Corporate/ Government Customer Type China Hong Kong Japan Malaysia Singapore Taiwan Other Indonesia South Korea Thailand Total Country China Hong Kong Japan Malaysia Singapore Taiwan Other Indonesia South Korea Thailand Total $M 21 205 226 968 7 361 5 5 1,346 61 264 24 349 1,921 Multinational $M 85 554 639 291 60 103 16 4 474 162 92 128 382 1,495 $M - 45 45 223 - 1 - - 224 50 - 17 67 336 Product Category Trade Finance $M Lending Bkd Other Comm Lending outside Asia $M $M 13 1 14 - - - 4 1 5 - 110 1 111 130 41 277 318 287 1 21 - - 309 5 - - 5 632 51 371 422 220 7 404 16 8 655 358 73 143 574 1,651 Total Exposure - The maximum of the limit or balance utilised for committed facilities, whichever is highest, and the balance utilised for uncommitted facilities. For derivative for 30 June 1998 were reported based on the RBA ‘original exposure’ method, from 1 July 1998 balances are reported on a ‘mark to market plus potential exposure’ basis. facilities, balances Project Finance - Long term lending for large scale projects (such as mining, infrastructure) where repayment is primarily reliant on the cash flow from the project for repayment. Trade Finance - Trade related documentary letters of credit and other trade products. 92 Project Finance $M - - - - - - - - - 94 - - 94 94 APL/NZPL $M 1 164 165 - 4 38 - - 42 50 - - 50 257 APL/NZPL $M 1 164 165 - 4 38 - - 42 50 - - 50 257 Treasury/ Securities $M 1 155 156 975 59 40 1 - 1,075 4 173 25 202 1,433 1999 Total Exposure $M 1998 Total Exposure $M 107 968 1,075 1,482 71 503 21 9 2,086 417 356 169 942 4,103 225 979 1,204 2,574 78 749 45 13 3,459 618 370 254 1,242 5,905 1999 Total Exposure $M 1998 Total Exposure $M 107 968 1,075 1,482 71 503 21 9 2,086 417 356 169 942 4,103 225 979 1,204 2,574 78 749 45 13 3,459 618 370 254 1,242 5,905 APL/NZPL - These are facilities to persons supported primarily by residential property in Australia and New Zealand. Lending Bkd outside Asia - Lending Booked outside Asia are indirect exposures booked outside Asia where there is a relationship with the parent of through entity awareness/letter of comfort. guarantee letter or a Other - Countries with total exposure of less than $10 million. The Group had total exposures at 30 June 1999 of $163 million to Eastern Europe, Latin America and the Middle East. NOTE 16 Deposits with Regulatory Authorities Reserve Bank of Australia Central Banks Overseas Total Deposits with Regulatory Authorities 1999 $M 952 1 953 G R O U P 1998 $M 831 1 832 1999 $M 951 1 952 B A N K 1998 $M 827 1 828 Deposits with the RBA are non callable deposits which are required to be maintained at a level equivalent to 1% of the liabilities of the Bank in Australia. NOTE 17 Shares in and Loans to Controlled Entities Shares in controlled entities Loans to controlled entities Total Shares in and Loans to Controlled Entities - - - - - - 3,065 4,043 7,108 3,052 2,531 5,583 NOTE 18 Property, Plant and Equipment (a) Land and Buildings Land At 30 June 1999 valuation At 30 June 1998 valuation Closing balance Buildings At 30 June 1999 valuation At 30 June 1998 valuation Closing balance Total Land and Buildings 239 - 239 470 - 470 709 - 373 373 - 964 964 1,337 216 - 216 358 - 358 574 - 347 347 - 856 856 1,203 These valuations were established by the Directors and are lower than valuations prepared by independent valuers. No adjustments have been taken to asset revaluation reserve in 1999 or 1998. (b) Leasehold Improvements At cost Provision for depreciation Closing balance (c) Equipment At cost Provision for depreciation Closing balance Total Property, Plant and Equipment 344 (191) 153 254 (129) 125 505 (366) 139 1,001 539 (339) 200 1,662 311 (176) 135 339 (252) 87 796 242 (126) 116 335 (216) 119 1,438 93 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 19 Goodwill Purchased goodwill Accumulated amortisation Total Goodwill NOTE 20 Other Assets Accrued interest receivable Shares in other companies Accrued fees/reimbursements receivable Securities sold not delivered Future income tax benefits Unrealised gains on trading derivatives (Note 37) Other Total Other Assets 1999 $M 841 (350) 491 G R O U P 1998 $M 835 (304) 531 1999 $M 784 (333) 451 B A N K 1998 $M 784 (294) 490 795 123 233 350 333 4,978 2,134 8,946 794 103 114 1,076 325 8,297 1,150 11,859 791 23 198 290 262 4,978 1,410 7,952 868 8 32 1,033 293 8,297 871 11,402 Potential future income tax benefits of the Company arising from tax losses in offshore centres and timing differences have not been recognised as assets because recovery is not virtually certain. These benefits, which could amount to $146 million (1998: $132 million) will only be obtained if: • The Company derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the losses to be realised; The Company continues to comply with the conditions for deductibility imposed by tax legislation; and No changes in tax legislation adversely affect the Company in realising the benefit from the deductions for the losses. • • NOTE 21 Deposits and Other Public Borrowings Australia Certificates of deposit Term deposits On demand and short term deposits Deposits not bearing interest Securities sold under agreements to repurchase Other Total Australia Overseas Certificates of deposit Term deposits On demand and short term deposits Deposits not bearing interest Total Overseas Total Deposits and Other Public Borrowings 11,000 23,871 41,454 4,555 619 7 81,506 2,295 5,692 3,878 57 11,922 93,428 2,156 24,522 40,337 3,936 662 7 71,620 2,938 6,201 3,057 70 12,266 83,886 11,000 21,188 41,305 4,555 619 - 78,667 534 1,723 10 6 2,273 80,940 2,156 21,679 40,229 4,962 662 - 69,688 975 2,230 39 12 3,256 72,944 Term deposit balances include $2,683 million (1998: $2,852 million) of borrowings secured by charges over the assets of CBFC Limited Group, a controlled entity of the Bank. 94 NOTE 21 Deposits and Other Public Borrowings continued Maturity Distribution of Certificates of Deposit and Time Deposits The following table sets forth the maturity distribution of the Group’s certificates of deposits and time deposits as at 30 June 1999. A T 3 0 J U N E 1 9 9 9 Maturing Three Months or Less $M Maturing Between Three & Six Months $M Maturing Between Six & Twelve Months $M Maturing After Twelve Months $M Australia Certificates of deposit (1) Time deposits Total Australia Overseas Certificates of deposit (1) Time deposits Total Overseas Total Certificates of Deposit and Time Deposits 4,030 10,799 14,829 1,405 4,321 5,726 20,555 1,541 5,296 6,837 583 643 1,226 8,063 - 4,374 4,374 248 571 819 5,193 (1) All certificates of deposit issued by the Bank are for amounts greater than $100,000. NOTE 22 Payables to Other Financial Institutions Australia Overseas Total Payables to Other Financial Institutions 1999 $M 879 2,370 3,249 G R O U P 1998 $M 1,281 2,116 3,397 5,429 3,402 8,831 59 157 216 9,047 1999 $M 799 2,087 2,886 NOTE 23 Income Tax Liability Australia Provision for income tax Provision for deferred income tax Total Australia Overseas Provision for income tax Provision for deferred income tax Total Overseas Total Income Tax Liability NOTE 24 Other Provisions Provision for: Long service leave Annual leave Other employee entitlements Restructuring costs General insurance claims Self insurance/non lending losses Other Total Other Provisions 472 933 1,405 215 883 1,098 428 467 895 5 - 5 1,410 1 - 1 1,099 2 - 2 897 286 129 200 57 57 35 41 805 289 129 218 122 285 124 200 57 35 - 35 30 41 52 742 875 Total $M 11,000 23,871 34,871 2,295 5,692 7,987 42,858 B A N K 1998 $M 1,252 1,756 3,008 205 436 641 1 - 1 642 288 123 218 122 - 30 49 830 95 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 25 Debt Issues Short term debt issues Long term debt issues Total Debt Issues Short Term Debt Issues AUD Promissory Notes NZD Promissory Notes US Commercial Paper Euro Commercial Paper and Certificates of Deposit Long Term Debt Issues with less than One Year to Maturity Total Short Term Debt Issues Long Term Debt Issues USD Medium Term Notes AUD Medium Term Notes JPY Medium Term Notes Other Currencies Medium Term Notes Offshore Loans (all JPY) Eurobonds (all AUD) Develop Australia Bonds (all AUD) Total Long Term Debt Issues Maturity Distribution of Debt Issues Less than 3 months 3 months to 12 months Between 1 and 5 years Greater than 5 years Total Debt Issues 1999 $M 8,009 2,754 10,763 G R O U P 1998 $M 6,758 3,850 10,608 576 119 4,491 1,582 1,241 8,009 124 525 665 399 313 200 528 2,754 319 - 4,219 1,365 855 6,758 460 681 813 509 558 301 528 3,850 6,179 1,830 1,588 1,166 10,763 4,653 2,105 2,376 1,474 10,608 1999 $M 4,118 2,222 6,340 - - 1,557 1,320 1,241 4,118 124 525 665 395 313 200 - 2,222 3,215 903 1,519 703 6,340 B A N K 1998 $M 6,190 3,049 9,239 - - 4,219 1,245 726 6,190 460 624 813 293 558 301 - 3,049 4,085 2,105 2,160 889 9,239 it may The Bank has a Euro Medium Term Note programme under which issue notes (EuroMTNs) up to an aggregate amount of is USD5 billion. At 30 June 1999, USD3.0 billion outstanding under this programme. Notes issued under the programme are both fixed and variable rate. Interest rate risk associated with the notes is incorporated within the Bank’s interest rate risk framework. Where any debt is booked in an offshore branch or subsidiary, the amounts have first been converted into the base currency of the branch at a branch defined exchange rate, before being converted into the AUD equivalent. in When proceeds have been employed currencies other than that of the ultimate repayment liability, swap or other hedge arrangements have been entered into. 96 NOTE 25 Debt Issues continued Short Term Borrowings The following table analyses the Group’s short term borrowings for the Financial Years ended 30 June 1997, 1998 and 1999. US Commercial Paper Outstanding at period end (1) Maximum amount outstanding at any month end (2) Approximate average amount outstanding (2) Approximate weighted average rate on: Average amount outstanding Outstanding at period end Euro Commercial Paper Outstanding at period end (1) Maximum amount outstanding at any month end (2) Approximate average amount outstanding (2) Approximate weighted average rate on: Average amount outstanding Outstanding at period end Other Commercial Paper Outstanding at period end (1) Maximum amount outstanding at any month end (2) Approximate average amount outstanding (2) Approximate weighted average rate on: Average amount outstanding Outstanding at period end Y E A R E N D E D 3 0 J U N E 1999 1998 1997 ($ millions, except where indicated) 4,491 5,408 4,419 5.2% 5.0% 1,582 2,267 1,714 4.5% 4.4% 695 781 324 4.6% 4.9% 4,219 4,256 2,501 5.7% 5.6% 1,365 2,813 1,544 5.7% 5.3% 319 604 466 5.2% 5.1% 3,074 3,553 2,519 5.5% 5.7% 1,922 2,089 1,484 5.6% 5.7% 827 867 776 6.3% 5.7% (1) (2) The amount outstanding at period end is reported on a book value basis. The maximum and average amounts over the period are reported on a face value basis because the book values of these amounts are not available. Exchange Rates Utilised AUD 1.00 = USD GBP JPY NZD HKD DEM CHF IDR 30 June 1999 .6599 .4190 79.7934 1.2478 5.1197 1.2487 1.0228 4432 30 June 1998 .6128 .3675 86.3201 1.1930 4.7486 1.1091 .9337 8000 97 Notes to and forming part of the accounts NOTE 25 Debt Issues continued Guarantee Arrangements Commonwealth Bank of Australia The due payment of all monies payable by the Bank was guaranteed by the Commonwealth of Australia under Section 117 of the Commonwealth Bank’s Act 1959 (as amended) at 30 June 1996. This guarantee has been progressively phased out following the Commonwealth’s of sale shareholding in the Bank on 19 July 1996. the The transitional arrangements for phasing out the Commonwealth’s guarantee are contained in the Commonwealth Bank Sale Act 1995. In relation to the Commonwealth’s guarantee of transitional arrangements liabilities, the Bank’s provided that: • • the end of all demand deposits and term deposits would be guaranteed until the day on 19 July 1999, with term deposits outstanding at the end of the day on 19 July 1999 being guaranteed until maturity; and all other amounts payable under a contract that was entered instrument executed, issued, endorsed or accepted by the Bank before 19 July 1996 are guaranteed until their maturity. Under the terms of an agreement reached between the Commonwealth and the Bank, the Bank will report to the Commonwealth annually on the level into, or under an COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES and maturity profile of outstanding liabilities which are subject to the Commonwealth’s guarantee. Commonwealth Development Bank On 24 July 1996, the Commonwealth of Australia sold the Commonwealth Development Bank Limited (CDBL) to the Bank for $12.5 million. its 8.1% shareholding in • • remain liabilities continue in CDBL, consistent with Under the arrangements relating to the purchase by the Bank of the Commonwealth’s shareholding in the CDBL: • all lending assets as at 30 June 1996 have been quarantined the Charter terms on which they were written; the CDBL’s to guaranteed by the Commonwealth; and CDBL ceased to write new business or incur additional liabilities from 1 July 1996. From that date, new business that would have previously been written by CDBL is being written by the rural arm of the Bank. The due payment of all monies payable by the Commonwealth of CDBL Australia under Section 117 of the Commonwealth Bank’s Act 1959 (as amended). This guarantee will continue to be provided by the Commonwealth whilst quarantined assets are held. The value of the the guarantee will diminish as liabilities under quarantined assets reach maturity and are repaid. is guaranteed by NOTE 26 Bills Payable and Other Liabilities Bills payable Accrued interest payable Accrued fees and other items payable Securities purchased not delivered Unrealised losses on trading derivatives (Note 37) Other liabilities Total Bills Payable and Other Liabilities 1999 $M 1,226 782 615 296 4,687 901 8,507 G R O U P 1998 $M 547 817 500 650 7,790 442 10,746 1999 $M 575 639 601 239 4,687 784 7,525 B A N K 1998 $M 531 592 458 609 7,790 254 10,234 98 NOTE 27 Loan Capital 1999 $M 1998 $M G R O U P 1997 $M 1999 $M 1998 $M B A N K 1997 $M Tier 1 Capital Exchangeable Exchangeable Undated Tier 2 Capital Extendible Extendible Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Total Loan Capital Currency Amount (M) USD300 USD400 USD100 FRNs FRNs FRNs USD125 AUD300 AUD185 AUD115 AUD25 FRNs FRNs MTNs FRNs FRNs Euro MTNs JPY20,000 Euro MTNs USD400 Euro MTNs GBP200 Euro MTNs JPY30,000 (1) (2) (3) (4) (5) (5) (6) (7) (8) (9) (10) 113 330 152 595 - 300 185 115 25 251 501 408 448 2,233 2,828 422 563 163 1,148 156 300 - - - - 501 408 483 1,848 2,996 388 517 134 1,039 156 300 - - - - 501 408 397 1,762 2,801 113 330 152 595 - 300 185 115 25 251 501 408 448 2,233 2,828 422 563 163 1,148 156 300 - - - - 501 408 483 1,848 2,996 388 517 134 1,039 156 300 - - - - 501 408 397 1,762 2,801 (1) (2) USD 300 million Undated Floating Rate Notes (FRNs) issued 11 July 1988 exchangeable into Dated FRNs. Outstanding notes at 30 June 1999 were: USD19 million : Due July 1999 USD48.25 million : Due July 2000 USD1.5 million : Due July 2003 Undated USD5.5 million : USD 400 million Undated FRNs issued 22 February 1989 exchangeable into Dated FRNs. Outstanding notes at 30 June 1999 were: : USD176 million Due February 2000 Undated : USD71 million USD 100 million Undated Capital Notes issued on 15 October 1986. The Bank has entered into separate agreements with the Commonwealth of Australia relating to each of the above issues (the ‘Agreements’) which qualify the issues as Tier 1 capital. (3) The Agreements provide that, upon the occurrence of certain events listed below, the Bank may issue either fully paid ordinary shares to the Commonwealth or (with the consent of the Commonwealth) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the relevant note issue or issues plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price of such shares will be determined by reference to the prevailing market price for the Bank’s shares. Any one or more of the following events may trigger the issue of shares to the Commonwealth or a rights issue: • • • • a relevant event of default (discussed below) occurs in respect of a note issue and the Trustee of the relevant notes gives notice to the Bank that the notes are immediately due and payable; the most recent audited annual financial statements of the Group show a loss (as defined in the Agreements); the Bank does not declare a dividend in respect of its ordinary shares; the Bank, if required by the Commonwealth and subject to the agreement of the APRA, exercises its option to redeem a note issue; or in respect of Undated FRNs which have been exchanged to Dated FRNs, the Dated FRNs mature. Any payment made by the Commonwealth pursuant to its guarantee in respect of the relevant notes will trigger the issue of shares to the Commonwealth to the value of such payment. • The relevant events of default differ depending on the relevant Agreement. In summary, they cover events such as failure of the Bank to meet its monetary obligation in respect of the relevant notes; the insolvency of the Bank; any law being passed to dissolve the Bank or the Bank ceasing to carry on general banking business in Australia; and the Commonwealth ceasing to guarantee the relevant notes. In relation to Dated FRN’s which have matured to date, the Bank and the Commonwealth agreed to amend the relevant Agreement to reflect that the Commonwealth was not called upon to subscribe for fully paid ordinary shares up to an amount equal to the principal value of the maturing FRNs. 99 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 27 Loan Capital continued (4) to the above AUD 300 million Extendible Floating Rate Stock issued December 1989; due December 2004. The Bank has entered into a separate agreement with the Commonwealth relating issue (the ‘Agreement’) which qualifies the issue as Tier 2 capital. For capital adequacy purposes Tier 2 debt based capital is reduced each year by 20% of the original amount during the last 5 years to maturity. The Agreement provides for the Bank to issue either fully paid ordinary shares to the Commonwealth or (with the consent of the Commonwealth) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the note issue plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price will be determined by reference to the prevailing market price for the Bank’s shares. Any one or more of the following events will trigger the issue of shares to the Commonwealth or a rights issue: • a relevant event of default occurs in respect of the note issue and, where applicable, the Trustee of the notes gives notice of such to the Bank; or NOTE 28 Share Capital Issued and Paid Up Capital Opening balance Transfer from share premium reserve Buyback Dividend reinvestment plan Employee Share Acquisition Plan Employee Share Subscription Plan Issue costs Closing balance Shares on Issue As at 30 June 1998 Buyback Dividend reinvestment plan issues: 1998 final dividend fully paid ordinary shares at $18.79 1999 interim dividend fully paid ordinary shares at $24.50 Exercise under Executive Option Plan Employee Share Subscription Plan issues Total shares on issue at 30 June 1999 • the Bank, if required by the Commonwealth and subject to the agreement of the APRA, exercises its option to redeem such issue. Any payment made by the Commonwealth pursuant to its guarantee in respect of the issue will trigger the issue of shares to the Commonwealth to the value of such payment. (5) AUD300 million Subordinated Notes, issued February 1999; due February 2009, split into $185 million fixed rate notes and $115 million floating rate notes. AUD25 million Subordinated FRN, issued April 1999, due April 2029. JPY20 billion Perpetual Subordinated Euro MTN, issued February 1999. USD400 million issued June 1996; due July 2006. GBP200 million Subordinated Euro MTN issued March 1996; due December 2006. JPY30 billion Subordinated Euro MTN issued October 1995; due October 2015. Subordinated Euro MTN (6) (7) (8) (9) (10) 1999 $M B A N K 1998 $M 1,845 1,499 (246) 426 - 5 (3) 3,526 1,860 - (76) 57 4 - - 1,845 Number 922,658,274 (27,366,447) 12,114,896 8,260,352 26,000 275,550 915,968,625 Options to purchase securities from registrant or subsidiaries • • • The Bank has in place the following employee share plans: Employee Share Acquisition Plan; Employee Share Subscription Plan; and Executive Option Plan, each of which was approved for a 3 year period by shareholders at the Annual General Meeting on 8 October 1996. Continuation of each of the plans for another 3 years was approved by shareholders at the Annual General Meeting on 29 October 1998. 100 NOTE 28 Share Capital continued Employee Share Acquisition Plan The Employee Share Acquisition Plan provides employees of the Bank with up to $1,000 worth of free shares per annum subject to a performance target being met. The performance target is growth in annual profit of the greater of 5% or consumer price index plus 2%. Details of issues under this plan are: Issue Date 1996 Offer 2 January 1997 18 March 1997 1997 Offer 11 December 1997 3 February 1998 Total Ordinary Shares Issued(1) Total Bonus Ordinary Shares Issued(2) No. of Eligible Employees Participating Shares Issued to each Participant 27,755 13 3,025 2,275,910 1,066 1,637,273 232 27,755 13 28,281 4 83 83 58 58 Issue Price(3) $12.04 $12.04 $17.16 $17.16 (1) (2) (3) New employee shareholders are granted one ordinary share with the remainder of shares issued as Bonus Ordinary Shares. The bonus shares were fully paid up as issued shares utilising the Share Premium Reserve. The Issue Price x Shares issued to each Participant effectively represents $1,000 of free shares. Under the Plan a further grant of up to $1,000 was possible during the year if the Bank had achieved the year ended the performance 30 June 1998. As the target was not achieved, no allotments occurred under this Plan during the year. target for Employee Share Subscription Plan The Employee Share Subscription Plan provides employees of the Bank with the opportunity to purchase ordinary shares at a 5% discount to the market price of the shares at the time of purchase, subject to a one year restriction on the disposal of the shares. At the Board’s discretion up to 300 shares per annum can be acquired by employees who have had at least one year’s service, excluding casual and overseas resident employees. The opportunity to acquire the shares is available twice a year within a period commencing two days and expiring thirty days after the Bank’s half yearly and annual results are announced. Details of allotments to date under this plan are: Issue Date 27 March 1997 25 September 1997 27 March 1998 30 September 1998 26 March 1999 No. of Ordinary Shares Issued No. of Eligible Employees Participating Purchase Price(1) Offer Date Market Value at Issue Date 209,400 171,000 158,600 81,450 194,100 1,149 971 815 511 1,027 $12.74 $14.84 $16.80 $18.60 $23.36 25 February 1997 26 August 1997 24 February 1998 25 August 1998 23 February 1999 $12.75 $17.22 $18.07 $19.97 $26.25 (1) The Purchase Price was 95% of the weighted average market price of Commonwealth Bank shares on the ASX during the five trading days immediately before the Offer Date. 101 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 28 Share Capital continued Executive Option Plan Under the Executive Option Plan, the Bank will grant options to purchase ordinary shares to those key executives who, are able, by virtue of their responsibility, experience and skill, to influence the generation of shareholder wealth, are declared by the Board of Directors to be eligible to participate in the Plan. Non executive directors are not eligible to participate in the Executive Option Plan. Eligible executives must hold a minimum number of shares as determined by the Board before they are permitted to take up any options. The minimum holding must be maintained during the five year life of the options. The options cannot be exercised before each respective exercise period other than at Board discretion in terms of Plan rules, and exercise is conditional on the Bank achieving a reach prescribed performance hurdle. To the performance hurdle, the Bank’s Total Shareholder Return (broadly, growth in share price plus dividends reinvested) over a minimum three year period, must equal or exceed the index of Total Shareholder Return achieved by companies represented in the ASX’s ‘Bank’s and Finance Accumulation Index’, excluding the Bank. If the performance hurdle is not reached within that three years, the options may nevertheless be exercisable only where the hurdle is subsequently reached within the remaining life of the options. The Plan is limited to no more than 50 executives. The options do not grant rights to the option holders to participate in a share issue of any other body corporate. Details of issues under this Plan are: Issue Date 16/12/96 11/12/97 30/09/98 Total Options Issued Eligible Executives Participating 2,100,000 2,875,000 3,275,000 25 27 32 Exercise Price(1) $11.85 $15.53(2) $19.58(2) Expiry Date Grant Date Market Price at Issue Date 12/11/01 03/11/02 25/08/03 12/11/96 03/11/97 25/08/98 $11.93 $16.85 $19.97 Share Buyback to The Bank’s shareholders’ equity was reduced by $650 million on 24 March 1999 pursuant the buyback of 27.4 million shares. The price per share paid by the Bank for the buyback shares was $23.78 calculated in accordance with the buyback offer. In accordance with an agreement reached with the Australian Taxation Office $9 per share of the consideration for each share bought back has been charged to paid up capital ($246 million). The balance of $14.78 per share is deemed to be a fully franked dividend profits ($404 million). retained charged and to 1999 $M 1998 $M G R O U P 1997 $M 203 118 130 - - - 48 178 24 227 59 177 (1) Market Value at the Grant Date. Market Value is defined as the weighted average of the prices at which the Bank’s ordinary shares were traded on the ASX during the one week period before the Grant Date. (2) Will be adjusted by the premium formula (based on the actual differences between the dividend and bond yields at the date of the vesting of the right to exercise the options). 682,500 options, from all grants to date, have been forfeited as at the date of this report. 26,000 options from the 1996 grant, have been exercised as at the date of this report. There are 7,541,500 options outstanding at the date of this report. NOTE 29 Outside Equity Interests Share Capital Reserves Retained profits Total Outside Equity Interests 102 NOTE 30 Capital Adequacy In August 1988 the Reserve Bank of Australia (RBA) established guidelines for the capital adequacy of Australian banks, to strengthen their soundness and stability. These guidelines have been adopted by APRA, and they are generally consistent with those proposed by the Basle Committee on Banking Supervision. They require Australian banks to have a ratio of capital (comprising ‘Tier 1’ and ‘Tier 2’ capital) to risk adjusted assets and off balance sheet exposures, determined on a risk weighted basis, of at least 8 per cent, of which at least half must be Tier 1 capital. Tier 1, or core, capital includes paid up ordinary shares, retained earnings, reserves, other approved capital resources and minority interest in subsidiaries, less goodwill. Tier 2, or supplementary, capital includes general provisions for bad and doubtful debts and dated bond and note issues. For capital adequacy purposes Tier 2 debt based capital is reduced each year by 20% of the original amount during the last five years to maturity. Risk weighted assets compiled for credit risk purposes are calculated by applying one of four approved categories of risk weight (0, 20, 50 or 100 Risk Weighted Capital Ratios Tier one Tier two Less deductions Total Tier One Capital Total Shareholders’ Equity Eligible Loan Capital Total Shareholders’ Equity and Loan Capital Less Goodwill Less Preference Shares Total Tier One Capital Tier Two Capital General provisions for bad and doubtful debts FITB related to general provision Dated note and bond issues (eligible loan capital) Preference shares Total Tier Two Capital Tier One and Tier Two Capital Less deductions Total Tier One and Tier Two Capital per cent) to the assets of the Group, based primarily on the calibre of the counterparty. Off balance sheet exposures are firstly converted to on balance sheet credit equivalents using credit conversion factors relating to the nature of the exposure, then weighted the same manner as balance sheet assets. in The only exception for derivatives where a maximum weighting of 50% applies. is In addition to the capital requirements for credit risk purposes, effective from 1 January 1998, Australian banks are also required to hold sufficient levels of capital to cover market risk of their trading books. Market risk is defined as the risk of losses in on and off balance sheet positions arising from movements in market price. APRA require the measure of market risk to be multiplied by 12.5 (ie the reciprocal of the minimum capital ratio of 8 per cent) to determine a notional Risk Weighted Asset figure. The capital adequacy ratio is calculated by taking the total risk weighted assets (credit risk assets plus notional market risk assets) as the denominator and the Group’s capital base as the numerator. 1999 Actual % 7.05 3.12 (0.79) 9.38 1999 $M 6,962 638 7,600 (491) (88) 7,021 1,081 (347) 2,335 40 3,109 10,130 (788) 9,342 1998 Actual % 8.07 2.82 (0.40) 10.49 G R O U P 1998 $M 6,889 1,306 8,195 (531) (47) 7,617 1,076 (337) 1,885 42 2,666 10,283 (381) 9,902 103 Notes to and forming part of the accounts NOTE 30 Capital Adequacy continued Risk weighted assets On balance sheet assets Cash, claims on Reserve Bank, short term claims on Australian Commonwealth and State Government and Territories, and other zero weighted assets (1) Longer term claims on Australian Commonwealth, State and Territory Governments Claims on OECD banks and local governments Advances secured by residential property (2) All other assets (3) (4) Total on balance sheet assets - credit risk (2) (1998: (1) Other zero weighted assets include gross unrealised gains on trading derivative financial instruments of $8,297 million). APRA $4,978 million announced on 28 August 1998 that claims on Australian Commonwealth, State and Territory Governments are risk weighted at zero per cent irrespective of terms. For loans secured by residential mortgages approved after 5 September 1994, a risk weight of 100 per cent applied where the loan to valuation ratio is in excess of 80 per cent. Effective from 28 August 1998, a risk weight of 50 per cent applies to these loans if they are totally insured by an acceptable lender’s mortgage insurer. Loans that are risk weighted at 100 per cent are reported under ‘All Other Assets’. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Face Value 1999 $M 1998 $M Risk Weights % Risk Weighted Balance 1998 $M 1999 $M 14,533 10,732 0% - - - 6,697 57,478 55,481 134,189 4,954 7,566 46,158 57,004 126,414 10% - 20% 1,339 50% 28,739 100% 55,481 85,559 495 1,513 23,079 57,004 82,091 (3) (4) The difference between total on balance sheet assets and the Group’s balance sheet reflects the alternative treatment of some assets and provisions as prescribed in APRA’s capital adequacy guidelines, principally goodwill and general provisions for bad and doubtful debts. Total on balance sheet assets exclude debt and equity securities in the trading book and all on balance sheet positions in commodities as they are included in the calculation of notional market risk weighted assets. F a c e V a l u e 1999 $M 1998 $M C r e d i t E q u i v a l e n t 1998 $M 1999 $M R i s k W e i g h t e d B a l a n c e 1998 $M 1999 $M Off balance sheet exposures Direct credit substitutes Trade and performance related items Commitments Foreign exchange, interest rate and other market related transactions Total off balance sheet exposures - credit risk Total risk weighted assets - credit risk Risk weighted assets - market risk Total risk weighted assets 3,027 1,704 32,970 2,729 1,593 23,669 3,027 779 12,941 2,729 655 9,014 283,646 321,347 276,051 304,042 6,598 23,345 9,813 22,211 2,424 770 8,366 1,852 13,412 98,971 585 99,556 2,188 608 6,010 2,921 11,727 93,818 613 94,431 104 NOTE 31 Maturity Analysis of Monetary Assets and Liabilities The maturity distribution of monetary assets and liabilities is based on contractual terms. The majority of the longer term monetary assets are variable rate products. Therefore this information is not relied on by the Bank in the management of its interest rate risk. M a t u r i t y P e r i o d A t 3 0 J u n e 1 9 9 9 G R O U P Assets Cash and liquid assets Receivables due from other financial institutions Trading securities (1) Investment securities Loans, advances and other receivables (2) Bank acceptances of customers Other monetary assets Total monetary assets Liabilities Deposits and other public borrowings (3) Payables due to other financial institutions Bank acceptances Debt issues and loan capital Other monetary liabilities Total monetary liabilities 3 to 12 At Call Overdrafts months months $M 0 to 3 $M $M $M 1 to 5 years $M Over Not 5 years specified $M $M Total $M 864 - 950 - - - - 1,814 88 - - 1,498 - 173 2,623 49,947 657 - - 235 50,839 - - - 2,900 - - 2,900 - - - - - - 1,026 4,708 1,802 7,982 8,804 6,404 31,676 21,178 2,270 8,804 6,040 7,613 45,905 92 - 493 11,624 868 2 13,079 13,256 320 868 2,222 9 16,675 - - 3,057 35,496 - 12 38,565 8,890 2 - 2,127 237 11,256 - - - - 1,835 - 1,206 4,708 7,187 (943) 101,837 - 9,672 8,238 665 (278) 134,662 43,280 - 982 46,097 93,428 157 - 3,249 - 9,672 - 13,591 517 295 8,769 812 128,709 - - 2,685 380 3,222 (1) (2) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months. $36 billion of this figure represents principally owner occupied housing loans. While most of these loans would have a contractual term of 20 years or more, and are analysed accordingly, the actual average term of the portfolio is less than 5 years. (3) Includes substantial ‘core’ deposits which are contractually at call customer savings and cheque accounts. History demonstrates such accounts provide a stable source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table in Note 37. 105 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 31 Maturity Analysis of Monetary Assets and Liabilities continued G R O U P M a t u r i t y P e r i o d A t 3 0 J u n e 1 9 9 8 0 to 3 At Call Overdrafts months $M $M $M 3 to 12 months $M 1 to 5 years $M Over Not 5 years specified $M $M Total $M Assets Cash and liquid assets Receivables due from other financial institutions Trading securities (1) Investment securities Loans, advances and other receivables (2) Bank acceptances of customers Other monetary assets Total monetary assets 1,041 115 - - 485 - 110 1,751 Liabilities Deposits and other public borrowings (3) Payables due to other financial institutions Bank acceptances Debt issues and loan capital Other monetary liabilities Total monetary liabilities 47,373 431 - - 174 47,978 - 485 - - - - 1,526 - - - 2,841 - - 3,280 4,009 1,383 5,070 8,849 10,444 2,841 33,520 895 11,940 51 - - - 2,626 - - 1,934 33,052 37,266 - 856 35,757 40,056 878 - 79 2 13,766 2 - 20 (838) - 497 (319) 3,448 4,009 6,858 89,816 9,727 11,988 127,372 - - - - - - 19,788 2,648 8,849 1,783 10,837 43,905 6,094 9,260 312 6 878 - 2,544 130 8,774 5,891 34 16,375 1,371 - - 3,203 - 4,574 - - - 183 139 322 83,886 3,397 9,727 13,604 11,314 121,928 (1) (2) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months. $35 billion of this figure represents principally owner occupied housing loans. While most of these loans would have a contractual term of 20 years or more, and are analysed accordingly, the actual average term of the portfolio is less than 5 years. (3) ‘core’ deposits which are Includes substantial contractually at call customer savings and cheque accounts. History demonstrates such accounts provide a stable source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table in Note 37. 106 NOTE 32 Financial Reporting by Segments 1999 % $M 1998 % $M G R O U P 1997 % $M (a) Geographical segments Revenue Australia New Zealand Other Countries (1) Operating profit before tax Australia New Zealand Other Countries (1) Operating profit after tax and outside equity interests Australia New Zealand Other Countries (1) Assets Australia New Zealand Other Countries (1) (b) Industry segments Revenue Banking Life Insurance and Funds Management Finance Operating profit before tax Banking Life Insurance and Funds Management Finance Operating profit after tax and outside equity interests Banking Life Insurance and Funds Management Finance Assets Banking Life Insurance and Funds Management Finance 8,801 976 660 84.3 9.4 6.3 10,437 100.0 9,514 1,115 657 84.3 9.9 5.8 11,286 100.0 9,484 977 448 86.9 9.0 4.1 10,909 100.0 1,933 151 76 89.5 7.0 3.5 2,160 100.0 1,221 148 (27) 91.0 11.0 (2.0) 1,342 100.0 1,454 128 34 90.0 7.9 2.1 1,616 100.0 1,270 80 72 89.3 5.6 5.1 1,422 100.0 1,044 73 (27) 95.8 6.7 (2.5) 1,090 100.0 990 63 25 91.9 5.8 2.3 1,078 100.0 115,510 13,046 9,540 84.3 8.3 7.4 138,096 100.0 130,544 100.0 120,103 100.0 83.6 110,120 10,846 9,578 84.4 101,202 9,994 8,907 9.5 6.9 8.3 7.3 9,576 360 501 91.8 3.4 4.8 10,437 100.0 10,563 214 509 93.6 1.9 4.5 11,286 100.0 10,293 202 414 94.3 1.9 3.8 10,909 100.0 1,944 127 89 90.0 5.9 4.1 2,160 100.0 1,158 81 103 86.3 6.0 7.7 1,342 100.0 1,443 74 99 89.3 4.6 6.1 1,616 100.0 1,252 117 53 88.1 8.2 3.7 1,422 100.0 940 84 66 86.2 7.7 6.1 1,090 100.0 941 75 62 87.2 7.0 5.8 1,078 100.0 131,043 1,309 5,744 96.1 0.3 3.6 138,096 100.0 130,544 100.0 120,103 100.0 94.9 124,765 427 5,352 95.6 115,368 359 4,376 0.3 4.1 0.9 4.2 (1) Other Countries are: United Kingdom, United States of America, Japan, Singapore, Hong Kong, Grand Cayman, Netherlands Antilles and Papua New Guinea. These operations have a greater proportion of wholesale business with a funding base from predominantly wholesale markets where margins are very fine. The overseas balance sheet also supports trading activities. The geographical segments represent the location in which the transaction was booked. 107 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 32 Financial Reporting by Segments continued Detailed below is Segment Information required in accordance with US SFAS 131 Disclosure about Segments of an Enterprise and Related Information. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker or decision making group, In accordance with the new standard, results have been presented based on segments as reviewed by the the Managing chief operating decision maker, in assessing performance. Director, as well as other members of senior management. The Bank segments are: Retail Financial Services, Institutional Banking, ASB Bank Limited (ASB) and Corporate. Retail Financial Services comprises the Bank’s Customer Service Division and Banking and Financial Services. Institutional Banking comprises debt funding, corporate finance, financial market activities and the securities business. ASB is a stand alone bank in New Zealand. Corporate comprises head office and service functions. Profit and Loss Net interest income Fees and commissions Trading income Life insurance and funds management Other income Internal charges (1) Total operating income Provisions for impairment Staff expenses Provisions (non cash) Other Total Staff expenses Occupancy and equipment expenses Depreciation Other Total Occupancy and equipment expenses Information technology services Other expenses Internal charges (1) Total operating expenses Amortisation of goodwill Abnormal items Profit before tax Income tax expense Outside equity interest Profit after tax Balance Sheet Total Assets Total Liabilities Performance Ratios (%) Retail Financial Services $M 2,769 939 - 223 59 159 4,149 172 33 1,021 1,054 109 228 337 366 280 678 2,715 7 - 1,255 416 - 839 Institutional Banking $M 273 240 253 16 75 167 1,024 62 4 212 216 8 42 50 104 48 171 589 - - 373 68 - 305 G R O U P Y E A R E N D E D 3 0 J U N E 1 9 9 9 ASB Corporate Total $M 279 94 18 7 9 - 407 11 1 124 125 25 27 52 21 47 - 245 - - 151 47 24 80 $M 206 8 2 8 46 520 790 2 4 205 209 3 13 16 14 131 (2) 368 40 - 380 183 - 197 $M 3,527 1,281 273 254 189 - 5,524 247 42 1,562 1,604 145 310 455 505 506 - 3,070 47 - 2,160 714 24 1,422 81,583 57,390 40,697 34,251 12,855 11,992 2,961 27,501 138,096 131,134 Total operating expenses/Total operating income Asset growth 65.44% 8.30% 57.52% (2.22%) 60.20% 19.10% 46.58% 5.75% 55.58% 5.78% (1) Internal charges are eliminated on consolidation. 108 NOTE 32 Financial Reporting by Segments continued Profit and Loss Net interest income Fees and commissions Trading income Life insurance and funds management Other income Internal charges (1) Total operating income Provisions for impairment Staff expenses Provisions (non cash) Other Total Staff expenses Occupancy and equipment expenses Depreciation Other Total Occupancy and equipment expenses Information technology services Other expenses Internal charges (1) Total operating expenses Amortisation of goodwill Abnormal items Profit before tax Income tax expense Outside equity interest Profit after tax Balance Sheet Total Assets Total Liabilities Performance Ratios (%) G R O U P Y E A R E N D E D 3 0 J U N E 1 9 9 8 ASB Corporate Total Institutional Banking $M $M 242 223 229 17 99 140 950 132 4 191 195 5 48 53 101 30 168 547 - - 271 78 - 193 282 90 14 1 4 - 391 9 1 111 112 22 30 52 21 48 - 233 - - 149 50 25 74 $M 143 3 - (1) 64 556 765 (45) (4) 248 244 (23) 29 6 32 95 (3) 374 45 570 (179) (270) (5) 96 $M 3,397 1,150 243 205 235 - 5,230 233 25 1,597 1,622 132 341 473 476 468 - 3,039 46 570 1,342 232 20 1,090 Retail Financial Services $M 2,730 834 - 188 68 141 3,961 137 24 1,047 1,071 128 234 362 322 295 672 2,722 1 - 1,101 374 - 727 75,329 56,894 41,622 35,928 10,793 10,147 2,800 20,686 130,544 123,655 Total operating expenses/Total operating income Asset growth 68.72% N/A 57.58% N/A 59.59% N/A 48.89% N/A 58.11% N/A (1) Internal charges are eliminated on consolidation. for the Segment information financial year ending 30 June 1997 is not available in the above classifications. The Group undertook a major restructuring program during the financial year ended 30 June 1998. As part of the restructuring program, the previous business units of Personal Banking, Business Banking and Commonwealth Financial Services were reorganised into two new divisions: the specialist areas of marketing, customer segmentation and product development became the Banking and Financial Services Division, while the various distribution arms were brought together to form the Customer Services Division. The Institutional Banking Division remained largely unchanged. Retail Financial Services is comprised of two divisions, Customer Services Division and Banking and Financial Services Division. Corporate comprises the various head office functions as well as Technology, Operations and Property. 109 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 33 Remuneration of Auditors Amounts paid or due and payable for audit services to: Auditors of the Bank Other auditors Amounts paid or due and payable for other services to: Auditors of the Bank G R O U P 1998 $’000 1999 $’000 1999 $’000 B A N K 1998 $’000 2,593 300 2,893 2,540 250 2,790 1,753 - 1,753 1,671 - 1,671 5,011 5,040 4,905 5,004 Total Remuneration of Auditors 7,904 7,830 6,658 6,675 NOTE 34 Commitments for Capital Expenditure Not Provided for in the Accounts $M $M $M $M Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Total Commitments for Capital Expenditure Not Provided for in the Accounts NOTE 35 Lease Commitments - Property, Plant and Equipment Commitments in respect of non cancellable operating lease agreements due - Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Total Lease Commitments - Property, Plant and Equipment Group’s share of lease commitments of associated entities - Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Total Lease Commitments - Property, Plant and Equipment 7 - - - 7 25 - - - 25 172 143 347 303 965 147 116 254 234 751 9 - - - 9 197 164 394 363 1,118 8 6 16 14 44 25 - - - 25 171 136 304 302 913 9 5 9 11 34 110 NOTE 36 Contingent Liabilities The Group is involved in a range of transactions that give rise to contingent and/or future liabilities. These transactions meet the financing requirements of customers and include endorsed bills of exchange, letters of credit, guarantees and commitments to provide credit. These transactions combine varying levels of credit, interest rate, foreign exchange and liquidity risk. In accordance with Bank policy, exposure to any of these transactions is not carried at a level which would have a material effect on the financial condition of the Bank and its controlled entities. Details of contingent liabilities and off balance sheet business (excluding Derivatives – Note 37) are: Credit risk related instruments Guarantees Standby letters of credit Bill endorsements Documentary letters of credit Performance related contingents Commitments to provide credit Other commitments Total credit risk related instruments Face Value 1998 $M 1999 $M G R O U P Credit Equivalent 1998 1999 $M $M 2,030 487 510 244 1,460 32,151 819 37,701 1,878 396 455 474 1,120 22,693 975 27,991 2,030 487 510 49 730 12,155 786 16,747 1,878 396 455 95 560 8,069 945 12,398 Contingent increased by liabilities have $9.7 billion primarily due to the APRA requirement to include the value of any redraw facilities for owner occupied and in commitments to provide credit. investment housing loans Guarantees represent conditional undertakings by the Group to support the financial obligations of its customers to third parties. Standby letters of credit are undertakings by the Group to repay a loan obligation in the event of a default by a customer. Bill endorsements relate to bills of exchange which have been confirmed by the Group and represent liabilities in the event of default by the acceptor and the drawer of the bill. Documentary letters of credit represent an undertaking to pay an overseas supplier of goods in the event of payment default by a customer who is importing the goods. related Performance involve undertakings by the Group to pay third parties if a customer fails to fulfil a contractual non monetary obligation. contingents Commitments include all obligations on the part of the Group to provide funding facilities. to provide credit Other commitments the Group’s obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities. include The transactions are categorised and credit equivalents calculated under APRA guidelines for the risk based measurement of capital adequacy. The credit equivalent amounts are a measure of the potential loss to the Group in the event of possible non performance by a counterparty. The potential loss (exposure) from direct credit substitutes (guarantees, standby letters of credit and bill endorsements) is the face value of the transaction, where as the exposure to documentary letters of credit and performance related contingents is 20% and 50% respectively of the face value. The exposure to commitments to provide credit is calculated by applying given credit conversion factors to the face value to reflect the duration, the nature and the certainty of the contractual undertaking to provide the facility. Where the potential loss depends on the performance of a counterparty, the Group utilises the same credit policies and assessment criteria for off balance sheet business as it does for on balance sheet business and if it is deemed necessary, collateral is obtained based on management’s credit evaluation of the counterparty. If a probable loss is identified, suitable provisions are generated. Litigation Neither the Commonwealth Bank nor any of its controlled entities is engaged in any litigation or claim which is likely to have a materially adverse effect on the business, financial condition or operating results of the Commonwealth Bank or any of its controlled entities. Where some loss is probable an appropriate provision has been made. 111 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES controlled trusts. CFM has incurred liabilities in its capacity as Trustee, however it has a right of indemnity against the assets of the respective trusts and as at 30 June 1999 the assets of the trusts exceeds those liabilities incurred. Commonwealth Managed Investments Limited (CMIL) is a company established to act as the Responsible Entity of the Bank’s managed investment schemes. CMIL as Trustee of the Commonwealth Property Office Fund has incurred liabilities in its capacity as Trustee. However, it has a right of indemnity against the Trust and at 30 June 1999 the assets of the Trust exceeded those liabilities. EDSA Contract In 1997, the Bank entered into a ten year contract with an associated entity, EDSA, relating to the provision of information technology services. The exact amount of the contract is unable to be reliably determined as it is dependent upon business volumes over the period of the contract. Liquidity support clearing governing In accordance with the Regulations and Procedures arrangements contained within the Australian Paper Clearing Stream (Clearing Stream 1) and the Bulk Electronic Clearing the Australian Stream Payments Clearing Association Limited, the Bank is subject to a commitment to provide liquidity support to these clearing streams in the event of a failure to settle by a member institution. (Clearing Stream 2) of Year 2000 systems compliance The Bank has previously estimated total rectification costs issues at $115 million. The Bank expects to complete the this estimate. overall programme Expenditure to the end of June 1999 was $87 million. for Year 2000 line with in The Bank reported to the Australian Stock Exchange in March 1999, that depositors’ funds will not be at risk from Year 2000 issues. Service agreements The maximum contingent liability for termination benefits in respect of service agreements with the the Managing Director and other executives of Company and its controlled entities at 30 June 1999 was $10 million (1998: $10 million). NOTE 36 Contingent Liabilities continued Fiduciary activities The Group conducts investment management and other fiduciary activities as responsible entity, for numerous trustee, custodian or manager investment funds and trusts, including superannuation and approved deposit funds, wholesale and retail unit trusts. The amounts of funds concerned, which are not included in the Group’s balance sheet, are as follows: Funds under trusteeship Funds under management Funds under custody 1999 $M 10,740 27,189 23,965 1998 $M 10,385 21,983 22,300 As an obligation arises under each type of duty the amount of funds has been included where that duty arises. This may lead to the same funds being shown more than once where either Commonwealth Investment Services Limited, Commonwealth Funds Management Limited or Commonwealth Custodial Services Limited acts in more than one capacity in relation to those funds, eg manager and trustee. Commonwealth Custodial Services Limited, acts as Trustee of the Commonwealth Bank Approved Deposit Fund and of State Bank Supersafe Approved Deposit Fund. In terms of the relevant Trust Deeds of those Funds, the Trustee has an obligation to repay deposits in the Funds. It is not envisaged that any material irrecoverable liabilities will result from these obligations. Commonwealth Custodial Services Limited also acts as Trustee for various controlled superannuation funds and wholesale unit trusts. The Commonwealth Bank of Australia does not guarantee the performance or obligations of its subsidiaries including the Trustee of these funds and unit trusts. Commonwealth Investment Services Limited (CISL) and Commonwealth Funds Management Limited (CFM), as Managers of the various controlled investment funds and retail and wholesale unit trusts have an obligation under the Trust Deeds of those funds, upon request of a unitholder, to repurchase units of those funds or to arrange for the relevant Trustee to redeem units from the assets of the trusts. It is considered unlikely that CISL or CFM would need to repurchase units from their own funds. Commonwealth Funds Management Limited (CFM) acts as trustee and manager of various 112 NOTE 37 Market Risk The Group in its daily operations is exposed to a number of market risks. A market risk is the risk of an adverse event in the financial markets that may result in a loss of earnings to the Bank, eg an adverse interest rate movement. Within the Group, market risk exists in its balance sheet structure and in financial markets trading. Market risk in the balance sheet Market risk in the balance sheet includes liquidity risk, funding risk, interest rate risk and foreign exchange rate risk. Liquidity risk Balance sheet liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Group manages liquidity risk separately for its domestic AUD obligations and for its foreign currency obligations. In both domestic and foreign currency operations, liquidity policies are in place to manage liquidity both in a day to day sense, and also under crisis assumptions. Domestically, each bank in Australia must maintain at all times a minimum proportion of its balance sheet in specified highly liquifiable assets as an emergency source of liquidity. This ratio, referred to as (‘PAR’), the Prime Assets Requirement currently requires the banks to hold prime assets equivalent to not less than 3% of total liabilities (other than capital) that are invested in Australian dollar assets within Australia. Eligible PAR assets comprise the Reserve Bank, cash, and securities Commonwealth Government Australian dollar denominated securities issued by the central borrowing authorities of State and Territory governments. In addition to observing PAR, banks are expected to hold a stock of high quality liquid assets sufficient to meet day to day liquidity needs and protect against an unexpected outflow of funds. balances with In April 1998, the RBA announced that the PAR ratio requirement will be abolished once liquidity for a non PAR management policies (suitable environment) are agreed with individual banks. APRA is currently in the midst of discussions with the banks and it is expected new liquidity arrangements will be in place by end 1999. Foreign currency liquidity risk is managed by ensuring that a positive cumulative cash flow always exists for the next 7 days’ operations. This means that should a crisis situation arise, the Bank would not need to access new funding from wholesale markets for at least one week. There is also a cap on the maximum level of cumulative negative cash flows at day 28. A stock of liquid assets is included in this protective measure. Funding risk Funding risk is the risk of over reliance on a funding source to the extent that change in that funding source would increase funding cost or cause difficulty in raising funds. The Group has a policy of funding diversification to ensure that over reliance is not placed on any one market sector. Domestically, the Bank continues to obtain the majority of its AUD funding from its stable retail deposit base, primarily demand and short term deposits, which have a lower interest cost than wholesale funds. The retail funding percentage has fallen over recent years from 69% in June 1998 to 63% in June 1999 (monthly averages). The relative size of the Bank’s retail base has enabled it to source funds at a lower average rate of interest than the other major Australian banks. However, some of this benefit is offset by the cost of the Bank’s retail network and the Bank’s large share (approximately 40%) of pensioner deeming accounts which, in the current interest rate environment are incurring an interest cost above normal retail deposit accounts. In recent years, the Bank has experienced a into higher movement of retail deposit balances interest bearing accounts, increased reflecting customer awareness of investment opportunities in an environment where the level of interest rates has remained lower and relatively more stable when compared with the interest rate cycles of the 1980s and early 1990s. The Bank’s cost of funds for Financial Year 1999, calculated as the percentage of interest expense to average interest bearing liabilities, was 4.1% on a Group basis compared with 4.6% on a Group basis for Financial Year 1998. The Bank obtains a growing proportion of its funding for the domestic balance sheet from wholesale sources – approximately 22%, excluding Bank Acceptances. The cost of the wholesale markets independently assessed credit ratings. Previously, the Bank has benefited the Commonwealth of Australia’s guarantee of its liabilities in terms of both credit ratings and the resultant cost of wholesale funds. is affected by raised funds from in the date on which Under the Commonwealth Bank Sale Act 1995, this guarantee is being phased out, over a three year the period commencing on Commonwealth’s shareholding in the Bank fell below 50% (ie 19 July 1996). All liabilities incurred prior to that time continue to be guaranteed until maturity and, for a period of three years from that time, all deposits made in that period continue to be guaranteed. Time deposits outstanding at the end of the transition period are guaranteed until maturity. 113 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES any ‘natural’ offshore funding base means the Bank is principally reliant on money market and capital market sources for funding. The Bank has imposed internal prudential limits on the relative mix of offshore sources of funds. The following table outlines the range of financial instruments used by the Group to raise deposits and borrowings both within Australia and overseas. Funds are raised from well diversified sources and there are no material concentrations in these categories. 1999 $M 12,104 24,961 23,871 8,789 5,980 9,634 11,000 2,828 619 1,041 100,827 14,292 3,758 1,025 38 19,113 119,940 11,194 131,134 G R O U P 1998 $M 11,824 23,471 24,531 8,651 8,078 9,700 2,156 2,996 662 1,606 93,675 14,382 1,270 1,260 27 16,939 110,614 13,041 123,655 Notes to and forming part of the accounts NOTE 37 Market Risk continued of The removal progressive the Commonwealth’s guarantee has not had a material impact on the Bank’s overall cost of funds as the proportion of the Bank’s funding raised from the wholesale markets with the benefit of the guarantee the following is Commonwealth’s on guarantee 19 July 1999, negligible change has occurred in retail deposit funding costs. the removal of deposits low. Similarly, on A funding diversification policy is particularly important in offshore markets where the absence of Australia Cheque Accounts Savings Accounts Term Deposits Cash Management Accounts Debt Issues Bank Acceptances Certificates of Deposit Loan Capital Securities Sold Under Agreements to Repurchase Other Total Australia Overseas Deposits and Interbank Commercial Paper Other Debt Issues Bank Acceptances and Other Total Overseas Total Funding Sources Provisions and Other Liabilities Total Liabilities 114 NOTE 37 Market Risk continued Interest rate risk Interest rate risk in the balance sheet arises from the potential for a change in interest rates to have an adverse effect on the net interest earnings of the Bank in the current reporting period, and in future years. Interest rate risk arises from the structure and characteristics of the Group’s assets, liabilities and equity, and in the mismatch in repricing dates of its assets and liabilities. The objective is to manage the interest rate risk to secure stable and sustainable net interest earnings in the long term. The Group measures and manages balance sheet interest rate risk from two perspectives: (a) Next 12 months’ earnings least a monthly basis. Risk The risk to the net interest earnings over the next 12 months from a change in interest rates is measured on at is immediate 1% parallel measured assuming an movement in interest rates across the full yield curve as well as other interest rate scenarios with variations in the size and timing of interest rate movements. Potential variations interest earnings are to net measured using a simulation model which takes into account the projected change in balance sheet level and mix. Assets and liabilities with pricing directly based on market rates are repriced based on the full extent of the rate shock that is applied. Risk on other assets and liabilities (those priced at the discretion of the Group) is measured by taking into account both the manner in which the products have repriced in the past as well as the expected change in price based on the current competitive market environment. The figures in the table represent the potential change to net interest earnings (expressed as a percentage of expected net interest earnings in the next 12 months) based on a 1% parallel rate shock and the expected change in price of assets and liabilities held for purposes other than trading. (expressed as a % of expected next 12 months’ earnings) Average monthly exposure High month exposure Low month exposure 1999 % 2.1 2.9 1.5 1998 % 2.8 3.4 2.3 (b) Economic value Some of the Group’s assets and liabilities have interest rate risk that is not captured within the measure of risk to next 12 month’s earnings, as the risk is beyond the next 12 months. To measure this longer term sensitivity, the Group utilises an economic value at risk analysis. This analysis measures the potential change in the net present value of cashflows of assets and liabilities. Cashflows for fixed rate products are included on a contractual basis, after adjustment activity. Cashflows for products repriced at the discretion of the Group are based on the expected repricing characteristics of the products. prepayment forecast for The total cashflows are revalued under a range of possible interest rate scenarios using a Value at Risk (VaR) methodology. The interest rate scenarios are based on actual interest rate movements that have occurred over 1 year and 5 year historical observation periods. The measured VaR exposure is an estimate to a 97.5% confidence level (one tail) of the potential loss that could occur if the balance sheet positions were to be held unchanged for a one month holding period. For example, value at risk exposure of $1 million means that in 97.5 cases out of 100, the expected net present value will not decrease by more than $1 million given the historical movement in interest rates. The figures in the following table represent the net present value of the expected change in future earnings in all future periods for the remaining term of these existing assets and liabilities held for purposes other than trading. Exposure as at 30 June Average monthly exposure High month exposure Low month exposure 1999 $M 54 48 65 31 1998 $M 78 25 78 7 at as and The 30 June 1999 table following represents the Group’s contractual interest rate risk sensitivity from repricing mismatches the corresponding weighted average effective interest rates. The net mismatch represents the net value of assets, liabilities and off balance sheet instruments which may be repriced in the time periods shown. The Bank does not use repricing information to manage its interest rate risk; the risk is managed using the ‘Next 12 months’ earnings’ and ‘Economic Value’ perspectives outlined above. All assets and to contractual repricing dates. Options are shown in the mismatch report using delta equivalents of the option face values. liabilities are shown according this contractual 115 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 37 Market Risk continued Interest Rate Risk Sensitivity R E P R I C I N G P E R I O D A T 3 0 J U N E 1 9 9 9 Balance 6 to 12 1 to 3 Sheet Total month months months months $M $M 3 to 6 0 to 1 $M $M $M 1 to 5 years $M over 5 Interest years Bearing $M $M Not Weighted Average Rate % Australia Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Property, plant and equipment Goodwill Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Provision for dividend Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Shareholders’ Equity Outside equity interests in controlled entities Total Shareholders’ Equity Off Balance Sheet Items Swaps FRAs Futures Net Mismatch Cumulative Mismatch # * no rate applicable no balance sheet amount applicable 1,722 859 - - - - - 863 621 3,219 3,147 215 3,219 1,414 88,500 44,457 - 952 - - - 117,071 51,116 9,634 952 806 491 7,979 206 - 20 4,869 - - - - - 5,095 159 - - - - - - 332 931 5,830 10,403 22,291 - - - - - 5,989 10,735 23,222 - - - - - - - - - - - - 450 1,634 - - - - - 41 - - (984) 9,634 - 806 491 7,979 2,084 18,830 81,506 48,174 7,714 7,916 5,244 5,169 2,734 4,555 879 9,634 472 1,405 804 5,980 7,443 645 - - - - 1,075 - 17 - - 1 - 1,880 - 2,828 789 110,951 50,237 10,401 343 6,735 - 6,735 - - - - - - 61 - - - - 440 - 152 8,569 - - - 153 - - - - 1,061 - - 6,458 - - - 2 - - - - 1,319 - 185 6,675 - - - - - - - - 205 - 1 9,634 472 1,404 804 - 7,443 1,359 - 4,298 24,313 - - - 6,735 - 6,735 * * * * * (4,537) (181) - 2,917 (6,076) 269 (271) (2,000) 2,000 (3,839) (13,653) 2,606 (3,839) (17,492) (14,886) 2,006 183 - 2,651 - - 6,466 19,198 (8,420) 10,778 11,603 - - - 825 (12,218) (615) 3,039 - - 1.42 8.08 3.99 6.64 6.92 - - - - - 5.58 3.28 4.55 - - - - 5.03 - 5.59 2.86 # # # # # As noted above the cumulative mismatch reflects contractual repricing periods. The balance sheet is managed based on assessments of expected pricing behaviour having regard to historical trends and competitive positioning. 116 NOTE 37 Market Risk continued R E P R I C I N G P E R I O D A T 3 0 J U N E 1 9 9 9 Balance Sheet 1 to 3 Total month months months months $M $M Not Weighted 3 to 6 6 to 12 1 to 5 over 5 Interest Average Rate % years Bearing $M years $M 0 to 1 $M $M $M $M Overseas Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Property, plant and equipment Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Shareholders’ Equity Outside equity interests in controlled entities Total Shareholders’ Equity Off Balance Sheet Items Swaps Options FRAs Futures Net Mismatch Cumulative Mismatch # * no rate applicable no balance sheet amount applicable 92 34 58 - - - - - 585 1,489 4,040 13,337 38 1 195 1,248 21,025 289 474 656 5,407 38 - - - 6,898 233 452 982 1,014 - - - - 2,739 39 262 55 1,415 - - - - 1,771 - 90 124 - - 184 27 978 1,245 213 - - - - 1,479 5,291 1,485 1,265 4,129 - - - - - - - - 11,922 7,043 2,591 1,195 837 216 - 2,370 38 5 1 4,783 1,064 1,717 38 - - 1,356 376 - - 20,183 10,530 - 227 227 - - - 358 - - - 1,861 212 - 5,022 - - - 145 - - - 706 - 3 - - - 239 - - 2,046 - 1,079 - - - - - - - - - - 292 24 - 532 - - - - - - - 329 19 - 348 - - - * * * * * * 1,159 - (339) - (2,812) (2,812) 2,150 - 138 275 280 (2,532) (8) - 56 (515) (742) (3,274) 96 (3,059) - - - 145 217 11 858 1,711 (705) (2,416) (338) - - 12 811 106 24 - - (106) - 1 195 1,248 1,362 40 147 - 5 1 - 433 - 626 - 227 227 - - - - 509 615 2.08 5.07 4.90 5.29 7.15 - - - - 6.05 4.16 4.99 - - - 4.79 1.84 - 4.28 # # # # # # 117 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 37 Market Risk continued R E P R I C I N G P E R I O D A T 3 0 J U N E 1 9 9 8 Balance Sheet 6 to 12 1 to 3 Total month months months months $M $M 0 to 1 3 to 6 $M $M $M 1 to 5 years $M Not Weighted over 5 Interest Average Rate years Bearing % $M $M Australia Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Property, plant and equipment Goodwill Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Provision for dividend Income tax liability Other provisions Debt issues Bills payable and other liabilities 1,486 642 - - - - - 844 1.28 2,382 1,676 2,210 2,210 3,151 1,095 77,443 38,845 - 831 - - 87 110,120 45,386 9,700 831 1,448 531 10,938 680 - 53 4,974 - - - - - 5,707 24 - 322 5,858 - - - - - 6,204 - - 332 - - 660 7,500 18,578 - - - - - 7,832 19,238 - - - - - 7.67 4.73 5.58 7.49 - 2 - - 161 528 (1,258) 2,946 9,700 - - - - 1,448 - - - 531 - 6 10,845 - - 3,482 22,271 5.71 71,620 45,934 6,542 6,250 2,417 4,787 735 4,955 3.43 1,281 9,700 321 1,098 869 945 - - - - 8,078 1,777 90 10,120 165 - - - - 1,594 - - - - 4 - 1,474 - 165 - - - - 6 - - - - 486 2,152 - - - 4.17 9,700 - 321 - 1,094 - 869 - - - - - - 595 - 23 10,007 - 5.22 Loan Capital Total Liabilities 2,996 480 106,083 49,226 953 9,254 367 8,095 - - 3,068 6,945 1,196 - 2,549 26,946 7.30 2.97 Shareholders’ Equity Outside equity interests in controlled entities Total Shareholders’ Equity Off Balance Sheet Items Swaps FRAs Futures Net Mismatch Cumulative Mismatch 6,712 5 6,717 - - - - - - - - - - - - - - - - - - 6,712 5 6,717 * * * * * 441 (1,330) - (4,729) (4,729) (3,811) 595 - 598 735 (650) (641) - 650 2,042 - - 1,371 - - - - - (6,763) (11,492) (1,208) (12,700) 4,773 14,335 (7,927) 6,408 2,304 (11,392) (2,680) 8,712 # # # # # # * no rate applicable no balance sheet amount applicable 118 NOTE 37 Market Risk continued R E P R I C I N G P E R I O D A T 3 0 J U N E 1 9 9 8 Balance Sheet 6 to 12 Total month months months months $M $M 0 to 1 1 to 3 3 to 6 $M $M $M 1 to 5 years $M Not Weighted over 5 Interest Average Rate years Bearing % $M $M Total Assets 20,424 5,540 4,657 Overseas Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Property, plant and equipment Other assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Shareholders’ Equity Outside equity interests in controlled entities Total Shareholders’ Equity Off Balance Sheet Items Swaps Options FRAs Futures Net Mismatch Cumulative Mismatch # * no rate applicable no balance sheet amount applicable 40 24 - - - - - 16 - 1,066 1,799 3,707 12,373 27 1 214 1,197 496 367 1,200 3,136 27 - 197 93 471 680 653 2,853 397 272 1,292 41 132 1,132 302 700 3,997 51 - - - 48 12 - 750 - (93) 5.92 7.23 8.62 8.37 - - - - - - - 1 - - - - - - 17 - - - - - - 1,104 - - - - - - 818 1,093 4,999 2,012 1,305 7.58 56 12,266 6,067 3,735 1,501 609 265 26 63 6.22 2,116 27 1 6 2,530 626 1,657 27 (1) 5 894 209 - 17,572 - 8,858 310 353 1 105 6.28 43 - - - - - - - - - 2 - - - - - - 1 - - - - - - 4.76 417 - - - - - - 428 - 479 311 65 - - - - - - - 5.78 1,917 484 717 454 744 4,398 - 172 172 * * * * * * - - - - - - - - - - - - - - - - - - - 172 172 989 - (507) (2) 1,687 - (78) (695) 266 270 590 680 (2,285) (299) (358) - (270) - - - (13) - - 7 - 11 8 (1) (2,838) (2,838) 1,173 (1,665) 1,901 236 26 262 1,968 2,230 13 2,243 437 2,680 # # # # # # 119 Notes to and forming part of the accounts NOTE 37 Market Risk continued Foreign exchange risk Foreign exchange risk is the risk to earnings caused by a change in foreign exchange rates. The Group hedges all balance sheet foreign exchange risk except for long term investments in offshore subsidiaries. An adverse movement of 10% in foreign exchange rates would cause the Group’s capital adequacy ratio to deteriorate by less than 0.3% (1998: less than 0.3%). COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Net deferred gains and losses Net deferred realised and unrealised gains and losses arising from derivative hedging contracts entered into in order to manage the risk arising from assets, liabilities, commitments or anticipated future transactions, together with the expected term of deferral are shown below. A s a t 3 0 J u n e Within 6 months Within 6 months - 1 year Within 1-2 years Within 2-5 years After 5 years Net deferred gain (loss) E x c h a n g e R a t e R e l a t e d C o n t r a c t s 1998 $M 1999 $M I n t e r e s t R a t e R e l a t e d C o n t r a c t s 1998 $M 1999 $M 86 68 (71) 22 233 338 67 39 181 (20) 348 615 80 6 (64) (134) (172) (284) 63 (6) 12 (63) (14) (8) 1999 $M 166 74 (135) (112) 61 54 T o t a l 1998 $M 130 33 193 (83) 334 607 Net deferred gains and losses are only in respect of derivatives and must be considered in the context of the total interest rate and foreign exchange risk of the balance sheet. The deferred gains and losses on both derivatives and on balance sheet assets and liabilities are included in the economic value at risk measure outlined above. Additionally, there are $19 million of net deferred gains on derivatives (1998: $50 million net deferred losses) used to hedge equity risk on investments disclosed within Note 11. Market risk in financial markets trading Traded market risk is the risk of loss from adverse movements in the level or volatility of market prices in interest rate, foreign exchange, equity and commodity markets. Nature of trading activities The Group’s policy is that exposure to market risk from trading activities is managed in the Financial Markets area of Institutional Banking. The Group trades and distributes financial markets products and provides risk management services to clients on a global basis. The objectives of the Group’s financial markets activities are to: • • • Provide risk management products and services to customers; Manage the Group’s own market risks; and Conduct controlled trading in pursuit of profit, leveraging off the Bank’s market presence and expertise. The Group maintains access to markets by quoting bid and offer prices with other market makers instruments, and carries an inventory of treasury and capital market including a broad range of securities and derivatives. In foreign exchange, the Group is a participant in all major currencies and is a major participant in the Australian dollar market, providing services for central banks, institutional, corporate and retail customers. Positions are also taken in the interest rate, debt, equity and commodity markets based on views of future market movements. in Trading securities are further detailed Note 10. Derivatives Derivative instruments are contracts whose value is derived from one or more underlying financial the contract. indices defined instruments or Derivatives entered into for trading purposes include swaps, forward rate agreements, futures, options and combinations of these instruments. in The sale of derivatives to customers as risk management products and their use for trading purposes is integral to the Group’s financial markets activities. Derivatives are also used to manage the Group’s own exposure to fluctuations in interest and exchange rates. The Group participates in both exchange traded and OTC derivatives markets. Exchange traded derivatives: The Group buys and sells exchange traded financial instruments, primarily financial futures and options on financial futures. have standardised terms and require lodgment of initial and variation margins in cash or other collateral at the exchange, which guarantees ultimate settlement. derivatives Exchange traded 120 NOTE 37 Market Risk continued Derivatives continued these OTC traded derivatives: The Group buys and sells financial instruments that are traded ‘over the counter’, rather than on recognised exchanges. The terms and conditions of transactions are negotiated between the parties, although the majority conform to accepted market conventions. Industry standard documentation is used, most commonly in form of a master agreement supported by the individual The documentation protects the Group’s interests should the counterparty default, and provides the ability to net outstanding balances in jurisdictions where the relevant law allows. confirmations. transaction Profit contribution Income is earned from spreads achieved through market making and from changes in market value caused by movements in interest and exchange rates, equity prices and other market prices. All trading positions are valued and taken to profit and loss on a mark to market basis. Trading profits also take account of interest, dividends and funding costs relating to trading activities. Note 2 details Financial Markets Trading Income contribution of $273 million (1998: $243 million) to the income of the Bank. The contribution is significant and provides important diversification benefits within the Group’s overall earnings. The risk/reward balance is highlighted by comparing the income contribution of $273 million to the ‘value at risk’ (VaR) measure, explained following, which has averaged approximately $2.36 million for the year ended 30 June 1999. The VaR measure highlights that trading activity is undertaken within a tightly controlled environment where exposure to revenue loss from market price movements is restricted to tolerable levels based on statistical experience. the section in The distribution of daily earnings for the year ended 30 June 1999 is set out in the following histogram: Distribution of Daily Financial Markets Income s y a D f o r e b m u N 50 45 40 35 30 25 20 15 10 5 - >-3.0 >-1.5 >-1.0 >-0.5 >0 >0.5 >1.0 $m >1.5 >2.0 >2.5 >3.0 >3.5 >4.0 >4.5 Risks and controls The broad categories of risks associated with financial market products are credit risk, liquidity risk, and market risk. These risks are independently monitored, controlled and mitigated by a system of limits, the use of various hedging strategies, credit liquidity control, daily management and a regime of accounting and systems controls. revaluations of positions, Credit risk occurs if a counterparty defaults in performance of its obligations. Credit risk related to financial market products is assessed on a total basis for each client as part of the Group’s overall credit require management process. The Group may lodgment of collateral for credit exposures arising from derivative products, although this is not a common practice. Liquidity risk arises from the possibility that market changes could prevent the Group readily obtaining prices to allow it to close out its position. This risk is controlled by concentrating trading activity in highly liquid markets and limiting the Bank’s volume of activity in less liquid markets. 121 Notes to and forming part of the accounts NOTE 37 Market Risk continued Risks and controls continued Market risk is the risk of loss arising due to adverse price movements in financial markets. The Group’s major market risks are interest rate risk and exchange rate risk. The Risk Committee of the Board recommends for Board approval the market risk management policies of the Group and overall market risk appetite. The Risk Committee allocates a total VaR limit and delegates the day to day control and monitoring of market risk to management who set limits for each trading portfolio. The approval of trading limits and the monitoring of compliance are the responsibility of a function within separate Risk Management Institutional Banking. Institutional Banking reports regularly on its trading activity to the Risk Committee. An independent Market Risk Policy Unit monitors the Group market risk profile and integrates policy on market related exposures across the Group. The effectiveness of controls is reviewed regularly by internal audit. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Value at risk (VaR) The Group uses a VaR measure as the primary mechanism for controlling market risk. VaR is an estimate to a 97.5% confidence level of the potential loss that could occur if the Group’s positions were to be held unchanged for one business day. The VaR measure takes into account correlation between risks, ie where an exposure in one portfolio may be offset in whole or in part by an exposure in another portfolio. Actual outcomes are independently monitored and daily backtesting performed to confirm the validity of the assumptions made in the calculation of VaR. In addition to the daily report of aggregate VaR, there are daily risk reports by: • • • Risk type, that is interest rate, exchange rate, equity, volatility; Product; and Business unit. The following table shows the VaR for each financial year ended the trading day during 30 June 1999. Daily Value-at-Risk 2 9-J ul-9 8 2 6- A u g-9 8 2 3- S e p-9 8 2 1- O ct-9 8 1 8- N o v-9 8 1 6- D e c-9 8 1 3-J a n-9 9 1 0- F e b-9 9 1 0- M ar-9 9 7- A pr-9 9 5- M a y-9 9 2-J u n-9 9 3 0-J u n-9 9 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 1-J ul-9 8 122 NOTE 37 Market Risk continued The Group trades in numerous products and markets. This provides significant diversification of risk. The following table provides a summary of VaR by product: Risk Type VaR During Half Year to 30 June 1999 VaR During Half Year to 31 Dec 1998 VaR During Half Year to 30 June 1998 High * $M Avg $M Low * $M High * $M Interest rate risk Foreign exchange risk Implied volatility risk Equities risk Commodities risk Diversification benefit Total 2.97 2.15 0.83 0.10 0.14 - 3.37 2.02 0.83 0.53 0.04 0.11 (1.33) 2.20 1.34 0.08 0.38 0.01 0.00 - 1.41 3.04 4.73 0.81 0.81 - - 5.18 Avg $M 1.97 1.35 0.58 0.14 - (1.51) 2.53 Low * $M High * $M 1.30 0.43 0.33 0.00 - - 1.65 4.55 2.08 0.89 0.37 - - 4.41 Avg $M 2.92 1.12 0.30 0.13 - (1.29) 3.18 Low * $M 1.94 0.47 0.16 0.00 - - 2.26 Actual** VaR as at 31 Dec 1997 $M 4.55 0.95 0.16 0.00 - (1.26) 4.40 * ** The high and low figures for each risk category may not occur on the same day. A diversification benefit therefore cannot be calculated. Comparative data is not available for the half year ended 31 December 1997 due to a material change in the basis of measurement from 2 January 1998. The ignored correlation previous VaR between risks. The actual VaR as at 31 December 1997 has been calculated and for comparative purposes. risk measure is supplied In managing the risk the Group aligns itself with industry experts. These industry experts ensure that the residual value of equipment is prudently estimated at the start of the lease and the Group realises the maximum value of the equipment at lease expiry. Derivative contracts following The the Group’s outstanding derivative contracts as at the end of the year. table details In addition to monitoring VaR at a 97.5% confidence level, monitoring is also performed daily at a 99% confidence level and for the worst case outcome over the two year historical period used for simulation. This additional monitoring provides a deeper understanding of the risk profile and provides a perspective on possible stress scenarios that may adversely impact the trading portfolio. that could potentially arise VaR provides a statistical estimate of the risk at the chosen confidence level, and not the size of losses in extreme conditions. Recognising this limitation of VaR, monthly stress tests covering a variety of scenarios are also performed to simulate the impact of extreme market movements on the trading portfolios. leases Residual Value Risk on Operating Leases The Group provides operating to customers on equipment such as motor vehicles, computers and industrial equipment. A residual value risk arises when equipment is not fully depreciated at lease expiry. Residual value risk is the risk that the amount recouped by selling the equipment at lease expiry will be less than the residual value on the lease. Each derivative type is split between those held for ‘Trading’ purposes and for ‘Other than Trading’ purposes. Derivatives classified, as than Trading’ are transactions entered into in order to manage the risks arising from non traded assets, liabilities and commitments in Australia and our offshore centres. ‘Other The ‘Face Value’ is the notional or contractual amount of is not the derivatives. This amount necessarily exchanged and predominantly acts as a reference value upon which interest payments and net settlements can be calculated and on which revaluation is based. The ‘Credit Equivalent’ is a number calculated using a standard Reserve Bank of Australia formula and is disclosed for each product class. This amount is a measure of the on balance sheet loan equivalent of the derivative contracts, which includes a specified percentage of the face value of each contract plus the market value of all contracts with an unrealised gain at balance date. The Credit Equivalent does not take into account any benefits of netting exposures to individual counterparties. The accounting policy for derivative financial instruments is set out in Note 1(gg). 123 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 1999 $M Face Value 1998 $M G R O U P Credit Equivalent 1998 $M 1999 $M 92,721 43 92,764 12,244 6,050 18,294 218 - 218 41,028 - 41,028 152,304 6,863 8,527 15,390 56,534 36,343 92,877 44,602 454 45,056 8,471 61 8,532 161,855 119,979 - 119,979 2,521 - 2,521 5,880 - 5,880 11,940 5,231 17,171 84 - 84 35,272 - 35,272 172,506 11,739 2,586 14,325 37,849 30,128 67,977 39,410 726 40,136 7,030 65 7,095 129,533 954 810 1,764 - - - 662 - 662 4,947 1 - 1 1,261 634 1,895 775 1,146 1,921 - - - 824 - 824 8,625 4 - 4 1,005 608 1,613 - - - - - - 41 61 102 1,998 51 65 116 1,733 278 278 314,437 449 449 302,488 - - 6,945 10 10 10,368 NOTE 37 Market Risk continued Derivatives Exchange rate related contracts Forwards Trading Other than trading Total Forwards Swaps Trading Other than trading Total Swaps Futures Trading Other than trading Total Futures Options purchased and sold Trading Other than trading Total options purchased and sold Total exchange rate related contracts Interest rate related contracts Forwards Trading Other than trading Total Forwards Swaps Trading Other than trading Total Swaps Futures Trading Other than trading Total Futures Options purchased and sold Trading Other than trading Total options purchased and sold Total interest rate related contracts Equity risk related contracts Options purchased and sold Other than trading Total equity risk related contracts Total derivatives exposures 124 NOTE 37 Market Risk continued The fair or market value of trading derivative contracts, disaggregated into gross unrealised gains and gross unrealised losses, are shown below. In line with the Group’s accounting policy, these unrealised gains and losses are recognised immediately in profit and loss, and together with net realised gains on Exchange rate related contracts Forward contracts Gross unrealised gains Gross unrealised losses Swaps Gross unrealised gains Gross unrealised losses Futures Gross unrealised gains Gross unrealised losses Options purchased and sold Gross unrealised gains Gross unrealised losses Net Unrealised Gains on Exchange Rate Related Contracts Interest rate related contracts Forward contracts Gross unrealised gains Gross unrealised losses Swaps Gross unrealised gains Gross unrealised losses Futures Gross unrealised gains Gross unrealised losses Options purchased and sold Gross unrealised gains Gross unrealised losses Net Unrealised Losses on Interest Rate Related Contracts Net Unrealised Gains (Losses) on Trading Derivative Contracts trading derivatives and realised and unrealised gains and losses on trading securities, are reported within trading income under foreign exchange earnings or 2). instruments other In aggregate, derivatives trading was profitable for the Group during the year. (refer Note financial G R O U P Fair Value 1998 $M 1999 $M Average Fair Value 1998 $M 1999 $M 1,804 (1,473) 331 1,181 (1,165) 16 14 (16) (2) 409 (293) 116 461 4,332 (3,697) 635 1,662 (1,925) (263) 5 (4) 1 602 (406) 196 569 2 (3) (1) 5 (7) (2) 2,490 (1,902) 588 1,656 (1,727) (71) 3,988 (3,687) 301 1,218 (1,326) (108) 12 (13) 2 (2) (1) - 536 (374) 162 678 3 (6) (3) 401 (297) 104 297 5 (9) (4) 1,530 (1,697) (167) 1,648 (1,725) (77) 1,806 (1,930) (124) 1,596 (1,681) (85) 16 (11) 5 22 (29) (7) (170) 291 7 (10) (3) 36 (16) 20 (62) 507 20 (11) 9 31 (20) 11 (107) 571 13 (14) (1) 41 (12) 30 (60) 237 In accordance with the accounting policy set out in Note 1(gg) the above trading derivative contract revaluations have been presented on a gross basis on the balance sheet. Unrealised gains on trading derivatives (Note 20) Unrealised losses on trading derivatives (Note 26) Net unrealised gains (losses) on trading derivatives 4,978 (4,687) 291 8,297 (7,790) 507 125 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 38 Superannuation Commitments The Group sponsors a range of superannuation plans for its employees worldwide. Details of major plans with assets in excess of $10 million are: Name of Plan Type Form of Benefit Officers’ Superannuation Fund (OSF) Commonwealth Bank of Australia (UK) Staff Benefits Scheme (CBA(UK)SBS) Defined Benefits and Accumulation Defined Benefits and Accumulation Indexed pensions and lump sums Indexed pensions and lump sums Financial Details of Defined Benefits Plans Net Market Value of Assets Present Value of Accrued Benefits Difference between Net Market Value of Assets and Present Value of Accrued Benefits Difference as a percentage of plan assets Value of Vested Benefits The above values have been extracted from financial statements and actuarial assessments of each plan, which have been prepared in accordance with relevant accounting and actuarial standards and practices. Contributions For the plans listed in the above table, entities of the Group contribute to the respective plans in accordance with the Trust Deeds following the receipt of actuarial advice. the contributions exception corresponding to salary sacrifice benefits, the Bank ceased contributions to the OSF from 8 July 1994. Further, the Bank ceased contributions to the OSF With of OSF 30 June 1997 $M CBA(UK)SBS 1 January 1997 $M 5,302 4,022 1,280 24% 4,022 75 47 28 37% 39 Total $M 5,377 4,069 1,308 24% 4,061 corresponding 1 July 1997. to salary sacrifice benefits from An actuarial assessment of the OSF, as at 30 June 1997 was completed during the year ended 30 June 1998. the actuarial advice contained in the assessment, the Bank does not intend to make contributions to the OSF until after consideration of the next actuarial assessment of the OSF as at 30 June 2000. line with In Management of OSF The Board of Directors of the Trustee of the OSF comprises an equal number of member and Bank representatives. 126 NOTE 39 Controlled Entities AUSTRALIA (a) Banking Commonwealth Bank of Australia (Australia only) Controlled Entities: Commonwealth Development Bank of Australia Limited CBA Investments Limited Antarctic Shipping Pty Ltd * Australian Bank Limited Balga Pty Limited * Binya Pty Limited * Brookhollow Ave Pty Limited * CBA Specialised Financing Limited Share Investments Pty Limited CBA EDSA IT Assets Partnership CBA Investments (No 2) Pty Ltd CBA Indemnity Co. Pty Limited * CBA International Finance Pty Limited Collateral Leasing Pty Limited Chullora Equity Investments (No.2) Pty Limited * Chullora Equity Investments (No.3) Pty Limited * Commonwealth Insurance Limited (1) Commonwealth Investments Pty Limited * Hazelwood Investment Company Pty Limited * Commonwealth Managed Property Limited Darontin Pty Limited * Infravest (No. 1) Limited Infravest (No. 2) Limited Micropay Pty Limited Perpetual Stock Pty Limited * Retail Investor Pty Limited Sparad (No. 16) Pty Limited * (5) Sparad (No. 20) Pty Limited * Sparad (No. 24) Pty Limited Sparad (No. 29) Pty Limited * Sparad (No. 30) Pty Limited * Sparad (No. 31) Pty Limited * (b) Finance CBFC Group CBFC Limited CBFC Leasing Pty Limited Commonwealth Securities Limited Group Commonwealth Securities Limited Share Direct Nominees Pty Limited * Comsec Nominees Pty Limited * Fleet Care Services Pty Limited * Leaseway Australia Pty Limited Incorporated in Extent of Beneficial Interest if not 100% Contribution to Consolidated Profit 1998 $M 1999 $M 1,104 897 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 49 62 127 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 39 Controlled Entities continued (c) Life Insurance and Funds Management Commonwealth Custodial Services Limited Commonwealth Insurance Holdings Limited Commonwealth Life Limited CLL Investments Limited CIF (Hazelwood) Pty Limited Commonwealth Investment Services Limited Group Commonwealth Investment Services Limited Commonwealth Managed Investments Limited CISL (Hazelwood) Pty Limited Commonwealth Funds Management Limited Group Commonwealth Funds Management Limited CFM (ADF) Limited CFML Nominees Pty Limited NEW ZEALAND (a) Banking # ASB Group Limited (2) ASB Bank Limited ASB Finance Limited ASB Management Services Limited ASB Properties Limited ASB Superannuation Nominees Limited CBA Funding (NZ) Limited (b) Life Insurance ASB Group Limited (2) # ASB Life Limited Sovereign Limited OTHER OVERSEAS (a) Banking Commonwealth Bank of Australia (Offshore Branches) CBA Asia Limited CBA (Europe) Finance Limited CBA (Delaware) Finance Incorporated Brigidina Investments Limited (3) (5) Senator House Investments (UK) Limited (4) Commonwealth Securities (Japan) Pty Limited (b) Finance Central Real Estate Holdings Group Central Real Estate Holdings Corporation Wilshire 10880 Corporation Wilshire 10960 Corporation CTB Australia Limited SBV Asia Limited Operating Profit After Tax and Outside Equity Interests Incorporated in Extent of Beneficial Interest if not 100% Contribution to Consolidated Profit 1998 $M 1999 $M 117 84 75% 75% 75% 75% 75% 75% 75% 75% 75% Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Singapore United Kingdom USA Jersey United Kingdom Japan USA USA USA Hong Kong Hong Kong 80 73 68 (30) 4 4 1,422 1,090 Non-operating controlled entities are excluded from the above list. (1) (2) During the year Commonwealth Connect Insurance Limited changed its name to Commonwealth Insurance Limited. ASB Group Limited is a 75% owned subsidiary of the Bank. ASB Group Limited owns 100% of ASB Bank Limited and ASB Life Limited. (3) Wholly owned subsidiary of Share Investments Pty Limited. (4) Wholly owned subsidiary of CBA International Finance Pty Limited. (5) # Disposed of during the 1999 Financial Year. Controlled entities not audited by Ernst & Young. Small proprietary companies not requiring audit. * 128 NOTE 40 Investments in Associated Entities Extent of Principal Activities Book Value Ownership Interest % $M Balance Date EDS (Australia) Pty Limited IPAC Securities Limited PT Bank BII Commonwealth Electronic Financial Technologies Pty Ltd Corporate Fleet Management 238 23 13 - 7 Information Technology Services 35 50 Funds Manager 50 Banking in Indonesia 50 50 Desktop IT Lease Management Financial Technology Development 31 December 30 June 31 December 30 June 30 June Share of associates’ profits (losses) after notional goodwill amortisation Operating profits before income tax Income tax expense Operating profits after income tax Carrying amount of investments in associated entities Opening balance New investments Share of associates’ profits (losses) Foreign exchange adjustment Dividends paid Closing Balance 1999 $M G R O U P 1998 $M (1) 1 - 276 6 - - (1) 281 2 (4) (2) 60 248 (2) (30) - 276 NOTE 41 Standby Arrangements and Unused Credit Facilities (of controlled entities that are borrowing corporations and entities subject to the Financial Corporations Act 1974) (a) Financing arrangements accessible Bank overdraft Bill facilities (b) Financing arrangements provided Wholesale finance Other facilities 1999 $M G R O U P 1998 $M Available Unused Available Unused 50 5 55 - - - - 1 1 - - - 17 5 22 - 1 1 1 - 1 - - - 129 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 42 Related Party Disclosures Australian banks, parent entities of Australian banks and controlled entities of Australian banks have been exempted, subject to certain conditions, under an ASIC Order No. 98/110 dated 10 July 1998, from making disclosures of any loan made, guaranteed or secured by a bank to related parties (other than directors) and financial instrument transactions (other than shares and share options) of a bank where a director of the relevant entity is not a party and where the loan or financial instrument transaction is lawfully made and occurs in the ordinary course of banking business and either on an arm’s length basis or with the approval of a general meeting of the relevant entity and its ultimate parent entity (if any). The exemption does not cover transactions which relate to the supply of goods and services to a bank, other than financial assets or services. The Class Order does not apply to a loan or financial instrument transaction which any director of the relevant entity should reasonably be aware that if not disclosed would have the potential to adversely affect the decisions made by users of the financial statements about the allocation of scarce resources. A condition of the Class Order is that the Bank must lodge a statutory declaration, signed by two directors, with the Australian Securities and Investments Commission accompanying the Annual Report. The declaration provides confirmation that the bank has systems of internal control and procedures to provide assurance that any financial instrument transactions of a bank which are not entered into on an arm’s length basis are drawn to the attention of the Directors so that they may be disclosed. Directors The name of each person holding the position of Director of the Commonwealth Bank during the financial year is: M A Besley, AO J T Ralph, AO D V Murray N R Adler, AO A C Booth R J Clairs, AO K E Cowley, AO J M Schubert G H Slee, AM F J Swan B K Ward (Chairman) (Deputy Chairman) (Managing Director) (Appointed 1 March 1999) (Retired 28 February 1999) Details of remuneration received or due and receivable by Directors are set out in Note 43. Loans to Directors Loans are made to Directors in the ordinary course of business of the Bank and on an arm’s length basis. Loans to Executive Directors have been made on normal commercial terms and conditions. Under the Australian Securities and Investments Commission Class Order referred to above, disclosure is the Bank to its Directors; banks which are controlled entities to their Directors; and non bank controlled entities to Directors (and their related parties) of those entities. limited to the aggregate amount of loans made, guaranteed or secured by: • • • The aggregate amount of such loans outstanding at 30 June 1999 was: $1,863,945 to Directors of the Bank (1998: $468,000); and • $1,084,533 to Directors of related entities (1998: $1,191,900). • The aggregate amount of such loans received and repayments made was: Directors of the CBA Normal terms and conditions (1) Directors of related entities Normal terms and conditions (2) (1) (2) Directors: A C Booth, K E Cowley and B K Ward Directors: G J Judd, R J Norris, G A Thorby and W W Moyes L O A N S R E C E I V E D R E P A Y M E N T S M A D E 1999 $ 1998 $ 1999 $ 1998 $ 1,600,000 - 204,055 111,000 123,886 186,663 231,252 154,522 130 NOTE 42 Related Party Disclosures continued Shares of Directors The aggregate number of shares acquired by, disposed of and held by Directors and their director related entities in the Commonwealth Bank during the financial year ended 30 June 1999, were: Director M A Besley J T Ralph D V Murray N R Adler A C Booth K E Cowley J M Schubert G H Slee (retired 28/02/99) F J Swan B K Ward Held 30 June 1998 Ordinary 10,602 10,942 47,530 9,946 1,021 8,000 5,261 2,538 1,908 1,660 All shares were acquired by Directors on normal terms and conditions or under the employee share scheme, as appropriate. Additionally D V Murray was granted 500,000 options during the year bringing his total holdings the Executive to 1,300,000 under Option Plan. Refer Note 28 for details. Other Transactions of Directors and Other Related Parties Financial Instrument Transactions Financial instrument transactions (other than loans and shares disclosed above) of Directors of the Bank and other banks which are controlled entities occur in the ordinary course of business of the banks on an arm’s length basis. Under the Australian Securities and Investments to above, Commission Class Order transactions disclosure of regularly made by a bank is limited to disclosure of such the entity concerned. transactions with a Director of referred instrument financial All such financial instrument transactions that have occurred between the banks and their Directors have been trivial or domestic and were in the nature of normal personal banking and deposit transactions. Transactions other than Financial Instrument Transactions of Banks All other transactions with Directors, director related entities and other related parties are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally involve the provision of financial and investment services by non bank controlled entities. All such transactions that have occurred with Directors, director related entities and other related Shares Acquired Shares Disposed Of Ordinary Ordinary 547 122 2,512 388 54 - 273 99 87 993 - 1,250 1,159 - - - 179 - Held 30 June 1999 Ordinary 10,156 11,064 48,792 9,175 1,075 8,000 5,534 1,828 1,747 parties have been trivial or domestic and were in the nature of lodgment of deposit monies. Controlled Entities Transactions with related parties in the Group are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally arise out of the provision of banking services, the acceptance of funds on deposit, the granting of loans and other associated financial activities. to Commonwealth As part of an internal Group restructuring, the Bank has sold its investment in Commonwealth Life Limited Insurance Holdings Limited, a life insurance wholly owned entity as at 30 June 1999. The sale price was at market value based on independent advice. The capital profit is reserve at included 30 June 1999. The capital reserve is eliminated on consolidation. Also refer Note 1(jj). the Bank’s capital in Support services are provided by the Bank such as provision of premises and/or equipment, availability of transfer payment and accounting facilities through data processing etc, and are transfer charged to the respective user entity at commercial rates. Refer to Note 39 for details of controlled entities. The Bank’s aggregate investment in and loans to controlled entities are disclosed in Note 17. Amounts due to controlled entities are disclosed in the balance sheet of the Bank. Details of amounts paid to or received from related parties, in the form of dividends or interest, are set out in Note 2. All transactions between Group entities are eliminated on consolidation. 131 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 42 Related Party Disclosures continued Commonwealth Guarantee of the Bank’s Liabilities The liabilities of the Bank and its controlled entity, Commonwealth Development Bank of Australia, as at 30 June 1996 were guaranteed by the Commonwealth under a statute of the Australian Parliament. NOTE 43 Remuneration of Directors Such guarantee is being progressively phased out sell-down on following full details of 19 July 1996. Refer Note 25 transitional measures. The removal of the guarantee has not materially affected either the borrowing costs or the borrowing capabilities of the Bank. the Government for Total amount received or due and receivable by non executive Directors of the Company for the year ended 30 June 1999 was: Non executive Directors Mr M A Besley, AO Mr J T Ralph, AO Mr N R Adler, AO Ms A C Booth Mr R J Clairs, AO(3) Mr K E Cowley, AO Dr J M Schubert Mr G H Slee, AM(2) Mr F J Swan Ms B K Ward Executive Director Mr D V Murray (refer Note 44) Base Fee/Pay $ Committee Fee $ Superannuation (1) $ Total Remuneration $ 200,000 90,000 60,000 60,000 20,054 60,000 60,000 46,589 60,000 60,000 - 15,000 10,000 15,014 - 3,342 23,356 10,000 25,000 15,000 - 7,350 4,900 5,250 1,404 4,435 5,835 3,961 5,950 5,250 200,000 112,350 74,900 80,264 21,458 67,777 89,191 60,550 90,950 80,250 (1) The Bank is currently not contributing to the Officers’ Superannuation Fund. A notional cost of superannuation has been determined on an individual basis for certain of the Directors. Other Directors have superannuation contributions made to other funds. (2) Mr Slee retired 28 February 1999. (3) Mr Clairs was appointed Director 1 March 1999. Retirement Benefit The aggregate amount of ‘prescribed benefits’ (as defined by Section 237 of the Corporations Law) given by the Bank during the year ended 30 June 1999 was $287,708 being a payment made to Mr G H Slee pursuant to the Directors’ Retirement Allowance Scheme approved by shareholders at the 1997 Annual General Meeting. 1999 $ B A N K 1998 $ Total amount received or due and receivable by executive and non executive Directors (includes accumulated benefits due to Directors who retired during the year) 3,156,330 3,477,583 The number of executive and non executive Directors whose remuneration fell within these bands was: Remuneration (Dollars) 30,000 20,001 - $ $ 40,001 - $ $ 50,000 60,001 - $ $ 70,000 70,001 - $ $ 80,000 80,001 - $ $ 90,000 $ 90,001 - $ 100,000 $ 110,001 - $ 120,000 $ 160,001 - $ 170,000 $ 190,001 - $ 200,000 $ 340,001 - $ 350,000 $1,060,001 - $1,070,000 $1,710,001 - $1,720,000 $1,990,001 - $2,000,000 Number 1 - 1 1 3 1 1 - 1 1 * - - 1 11 Number - 1 4 2 - 1 - 1 - - 1 # 1 - 11 * # Remuneration includes retirement payment to Mr G H Slee who retired on 28 February 1999. Remuneration includes retirement payment to Mr I K Payne who retired on 11 July 1997. 132 NOTE 43 Remuneration of Directors continued Total amount received or due and receivable by executive and non executive Directors of the Bank and controlled entities 1999 $ G R O U P 1998 $ 4,902,942 4,142,444 NOTE 44 Remuneration of Executives The following table shows remuneration for the executive director and five highest paid other members of the senior executive team who were officers of the Bank and the Group for the year ended 30 June 1999. Senior Executive Team Name & Position Year Base Pay(1) Bonus D V Murray Managing Director & CEO M J Ullmer Group General Manager Financial & Risk Management M A Katz Head of Institutional Banking A E Long Head of Customer Service Division J F Mulcahy Head of Banking & Financial Services R J Scrimshaw Head of Technology, Operations & Property 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 $ 1,000,000 1,000,000 $ 700,000 450,000 Super- annuation(2) $ 41,332 97,200 Other Compensation(3) $ 249,600 168,500 Total Remuneration $ 1,990,932 1,715,700 Option Grant(4) Number 500,000 500,000 700,000 (5)496,712 250,000 150,000 126,000 89,408 159,600 156,032 1,235,600 892,152 200,000 200,000 600,000 600,000 340,000 160,000 500,000 500,000 270,000 175,000 600,000 500,000 320,000 200,000 420,000 (6)163,288 230,000 130,000 45,000 45,000 20,178 42,120 45,000 37,500 25,200 12,247 129,600 88,500 210,441 181,453 9,600 88,500 9,600 3,470 1,114,600 893,500 250,000 250,000 1,000,619 898,573 175,000 150,000 974,600 826,000 250,000 250,000 684,800 309,005 125,000 n/a (1) Base Pay is calculated on a Total Cost basis and includes any FBT charges related to employee benefits including motor vehicles. (2) The Bank is currently not contributing to the Officers’ Superannuation Fund (OSF) – refer Note 38. For 1999, notional cost of superannuation has been determined on an individual basis for each executive. In 1998, a notional cost of superannuation spread across all members of the relevant Division of the OSF was used. (3) Other compensation includes, where applicable, housing (including FBT), car parking (including FBT) and other payments. (4) Option Grants are a right to buy ordinary shares at an exercise price which is the Market Value (as defined in the Plan Rules) at the date of commencement of the options, plus a premium representing the time value component of the value of options. The ability to exercise is conditional on the Bank achieving a prescribed performance hurdle. To reach the performance hurdle, the Bank’s Total Shareholder Return (broadly, growth in share price plus dividends reinvested) over a minimum three year period, must equal or exceed the index of Total Shareholder Return achieved by companies represented in the ASX’s ‘Bank’s and Finance Accumulation Index’, excluding the Bank. If the performance hurdle is not met, the options will have nil value. The options have a maximum term of five years and are exercisable after three years. Options issued during the year to executives under the Executive Option Plan have an exercise price equivalent to the Market Value of the Bank’s ordinary shares as at the Grant Date of the options. Market Value is defined as the weighted average of the prices at which shares were traded on the ASX during the one week period before the Grant Date. Additionally, options granted in 1997 and 1998 will be adjusted by a premium formula (based on the actual differences between the dividend and bond yields at the date of the vesting of the right to exercise the options). As the options are subject to a performance hurdle, the achievement of which is uncertain, the amount included as remuneration in the above table is nil. Under the Bank’s US GAAP disclosures, fair value of options for purposes of inclusion in the potential compensation expense has been determined using the Black-Scholes option pricing model, being $1.05 per option issued on 30 September 1998 and 89c per option issued on 11 December 1997. Refer Notes 28 and 47(c) for further details. (5) From commencement of employment in October 1997. (6) From commencement of employment in February 1998. 133 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 44 Remuneration of Executives continued The following table shows the number of executives whose remuneration fell within the stated bands: 1999 Number G R O U P 1998 Number 1999 Number B A N K 1998 Number Remuneration (Dollars) $ 120,000 $ 150,000 $ 200,000 $ 250,000 $ 260,000 $ 280,000 $ 290,000 $ 300,000 $ 320,000 $ 340,000 $ 350,000 $ 360,000 $ 370,000 $ 380,000 $ 390,000 $ 400,000 $ 410,000 $ 430,000 $ 440,000 $ 450,000 $ 460,000 $ 470,000 $ 480,000 $ 490,000 $ 500,000 $ 510,000 $ 550,000 $ 570,000 $ 600,000 $ 630,000 $ 650,000 $ 680,000 $ 710,000 $ 770,000 $ 820,000 $ 890,000 $ 930,000 $ 970,000 $ 1,000,000 $ 1,060,000 $ 1,070,000 $ 1,110,000 $ 1,230,000 $ 1,710,000 $ 1,990,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ 129,999 $ 159,999 $ 209,999 $ 259,999 $ 269,999 $ 289,999 $ 299,999 $ 309,999 $ 329,999 $ 349,999 $ 359,999 $ 369,999 $ 379,999 $ 389,999 $ 399,999 $ 409,999 $ 419,999 $ 439,999 $ 449,999 $ 459,999 $ 469,999 $ 479,999 $ 489,999 $ 499,999 $ 509,999 $ 519,999 $ 559,999 $ 579,999 $ 609,999 $ 639,999 $ 659,999 $ 689,999 $ 719,999 $ 779,999 $ 829,999 $ 899,999 $ 939,999 $ 979,999 $ 1,009,999 $ 1,069,999 $ 1,079,999 $ 1,119,999 $ 1,239,999 $ 1,719,999 $ 1,999,999 - 1 * - - 1 - 2 - 1 - - - - 1 2 1 1 1 - 1 1 1 2 2 1 1 1 - - 1 1 1 1 - - - 1 1 1 - - 1 1 - 1 1 - 1 2 - 1 - 2 1 # 1 1 3 # 3 1 - 4 1 1 3 - - - - - - 1 - 1 1 - - - - 1 1 3 - - - 1 # 1 # - - 1 - - 1 * - - 1 - 2 - 1 - - - - 1 2 1 1 1 - 1 1 1 2 2 1 1 1 - - 1 1 1 1 - - - 1 1 1 - - 1 1 - 1 1 - 1 2 - 1 - 2 1 # 1 1 3 # 3 1 - 4 1 1 3 - - - - - - 1 - 1 1 - - - - 1 1 3 - - - 1 # 1 # - - 1 - Total number of executives 31 37 31 37 134 NOTE 44 Remuneration of Executives continued Total amount received or due and receivable by executives (includes accumulated benefits due to executives who retired during the year). 1999 $M G R O U P 1998 $M 1999 $M B A N K 1998 $M 18,623,129 19,058,944 18,623,129 19,058,944 * Includes termination payment to 1 retired, resigned, or retrenched executive during the 1998/99 financial year. # Includes termination payments to 4 retired, resigned or retrenched executives during the 1997/98 financial year. An executive is a person who works in Australia and is either a participant in the Bank’s Executive Option Plan or is otherwise directly accountable and responsible to the Managing Director for strategic direction or operational management functions. Participation in the Executive Option Plan is limited to executives who, in the opinion of the Managing Director and the Board are able by virtue of their responsibility, experience and skill to influence the generation of shareholder wealth. Remuneration is based on amounts paid and accrued with respect to the financial year. 1998 comparatives have been restated where appropriate. The Group’s Policy in respect of executives is that: • • Remuneration will be competitively set so that the Group can seek to attract, motivate and retain high quality international executive staff; Remuneration will incorporate, to a significant degree, variable pay for performance elements, both short term and long term focused as appropriate, which will: local and • • • • individual performance reward executives for Group, business unit and against appropriate benchmarks/goals, align the interests of executives with those of shareholders, link executive reward with the strategic goals and performance of the Group, ensure total remuneration is competitive by market standards; • • • the market and Remuneration will be reviewed annually by the Remuneration Committee through a process that considers Group, business unit and individual performance, relevant comparative remuneration in internal and, where appropriate, external advice on policies and practices; Remuneration systems will complement and reinforce the Group’s leadership and succession planning systems; and terms and conditions of Remuneration and employment will be specified in an individual contract of employment and signed by the executive and the Bank. 135 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 45 Statements of Cash Flows Note (a) Reconciliation of Cash 1999 $M 1998 $M G R O U P 1997 $M 1999 $M B A N K 1998 $M For the purposes of the Statements of Cash Flows, cash includes cash at bankers, money at short call, at call deposits with other financial institutions and settlement account balances with other banks. Notes, coins and cash at bankers Other short term liquid assets Receivables due from other financial institutions - at call Payables due to other financial institutions - at call Cash and Cash Equivalents at end of year 784 238 912 (2,491) (557) 951 247 2,925 (2,160) 1,963 1,091 241 3,502 (1,516) 3,318 757 197 886 (2,127) (287) 909 157 2,681 (1,772) 1,975 Note (b) Cash Flows presented on a Net Basis Cash flows arising from the following activities are presented on a net basis in the Statement of Cash Flows: • customer deposits to and withdrawals from deposit accounts; • • • loans, borrowings and repayments on advances and other receivables; sales and purchases of trading securities; and proceeds from and repayment of short term debt issues. Note (c) Reconciliation of Operating Profit After Income Tax to Net Cash Provided by Operating Activities 1999 $M Operating profit after income tax (Increase) decrease in interest receivable Increase (decrease) in interest payable Net (increase) decrease in trading securities Net (gain) loss on sale of investment securities Charge for bad and doubtful debts Depreciation and amortisation Other provisions Increase (decrease) in income taxes payable Increase (decrease) in deferred income taxes payable (Increase) decrease in future income tax benefits Amortisation of discount on debt issues Amortisation of premium (discount) on investment securities Unrealised (gain) loss on revaluation of trading securities Abnormal item Other Net Cash provided by Operating Activities 1,446 (1) (35) (408) (79) 247 192 68 261 50 (8) 206 57 216 - (36) 2,176 1998 $M 1,110 (13) 75 (646) (101) 233 233 (74) 46 128 (158) 261 26 (484) 492 (241) 887 G R O U P 1997 $M 1999 $M 1,545 1,100 77 80 47 5 (209) 556 (84) (4) 78 98 157 280 19 36 224 (222) 31 97 31 22 206 256 53 (13) (147) 216 200 - (18) 2,373 47 2,391 B A N K 1998 $M 883 (33) (32) (591) (119) 224 197 (71) 45 43 (146) 260 29 (484) 492 (180) 517 Note (d) Non cash Financing and Investing Activities Shares issued under the Dividend Reinvestment Plan $426 million (1998: $452 million) and Employee Share Acquisition Plan - nil (1998: $28 million). 136 NOTE 45 Statements of Cash Flows continued Note (e) Acquisition of Controlled Entities In December 1998, the Group acquired 100% of life the Share Capital of Sovereign Limited, a insurance company. During 1997, the Group acquired 100% of the share capital of Commonwealth Funds Management 1999 $M 1998 $M G R O U P 1997 $M and Leaseway and the 8.1% minority interest in Commonwealth Development Bank. Details of controlled entities acquired during the financial year are as follows: Consideration Cash paid on acquisition Fair value of net tangible assets acquired Cash Investment securities Loans, advances and other receivables Property, plant and equipment Other assets Outside equity interest Borrowings Income tax liability Other provisions Bills payable and other liabilities Policy liabilities Excess market value over net assets of life insurance subsidiary Discount on acquisition Goodwill Outflow of cash on acquisition Cash payments Less cash and cash equivalents acquired Note (f) Financing Facilities 205 - 88 9 260 671 4 28 (28) (460) - (4) (72) (358) 50 155 - - 205 - - - - - - - - - - - - - - - - 22 2 15 4 6 28 - (3) (5) (6) - 63 - (16) 41 88 205 (9) 196 - - - 88 (22) 66 Standby funding lines with overseas banks as at 30 June 1999 amounted to AUD equivalent $24 million (1998: $21 million). NOTE 46 Disclosures about Fair Value of Financial Instruments These amounts represent estimates of net fair values at a point in time. Significant estimates regarding economic conditions, loss experience, risk characteristics associated with particular financial instruments and other factors were used for the purposes of this disclosure. These estimates are subjective in nature and involve matters of judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could have a material impact on the amounts estimated. While the estimated net fair value amounts are designed to represent estimates at which these in a current instruments transaction between willing parties, many of the be exchanged could Group’s financial instruments lack an available trading market as characterised by willing parties engaging in an exchange transaction. In addition, it is the Bank’s intent to hold most of its financial instruments to maturity and therefore it is not probable that the net fair values shown will be realised in a current transaction. The estimated net fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments. In addition, the value of long term relationships with depositors (core deposit intangibles) and other customers (credit card intangibles) are not reflected. The value of these items is significant. 137 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 46 Disclosures about Fair Value of Financial Instruments continued Because of range of valuation the wide techniques and the numerous estimates which must be made, it may be difficult to make reasonable comparisons of the Bank’s net fair value information with that of other financial institutions. It is important the many uncertainties discussed above be that considered when using the estimated net fair value disclosures and to realise that because of these uncertainties, the aggregate net fair value amount should in no way be construed as representative of the underlying value of the Commonwealth Bank of Australia. Carrying Value $M 1,814 1,206 4,708 7,187 101,837 9,672 953 9,046 1999 Net Fair Value $M 1,814 1,206 4,708 7,196 105,768 9,672 953 9,489 Carrying Value $M 1,526 3,448 4,009 6,858 89,816 9,727 832 12,054 93,428 3,249 9,672 10,763 8,451 2,828 - 93,737 3,249 9,672 10,791 8,558 2,862 73 83,886 3,397 9,727 10,608 10,616 2,996 - G R O U P 1998 Net Fair Value $M 1,526 3,448 4,009 7,079 92,646 9,727 832 12,518 84,305 3,397 9,727 10,828 10,856 3,170 557 models (ie the net present value of the portfolio future principal and interest cash flows), based on the maturity of the loans. The discount rates applied were based on the current benchmark rate offered for the average remaining term of the portfolio plus an add- on of the average credit margin of the existing portfolio, where appropriate. The net fair value of loans was calculated by discounting expected cash flows using a rate which includes a premium for the uncertainty of the flows. impaired For shares in companies, the estimated net fair values are based on quoted market prices. Statutory deposits with central banks In Australia, and several other countries in which the Group operates, the law requires that the Group lodge regulatory deposits with the local central bank at a rate of interest below that generally prevailing in that market. The net fair value is assumed to be equal to the carrying value as the Group is only able to continue as a going concern with the maintenance of these deposits. Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposit accounts with regulatory authorities Other assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Debt issues Bills payable and other liabilities Loan Capital Asset and liability hedges - unrealised gains/(losses) (Refer Note 37) The net fair value estimates were determined by the following methodologies and assumptions: Liquid assets and bank acceptances of customers The carrying values of cash and liquid assets, receivables due from other financial institutions and bank acceptances of customers approximate their net fair value as they are short term in nature or are receivable on demand. Securities Trading securities are carried at net market/net fair value and investment securities have their net fair value determined based on quoted market prices, broker or dealer price quotations. Loans, advances and other receivables The carrying value of loans, advances and other receivables is net of general and specific provisions for doubtful debts and interest/fees reserved. For variable rate loans, excluding impaired loans, the carrying amount is a reasonable estimate of net fair value. The net fair value for fixed rate loans was calculated by utilising discounted cash flow 138 NOTE 46 Disclosures about Fair Value of Financial Instruments continued All other financial assets Included in this category are fees receivable, unrealised income and investments in associates of $281 million (1998: $276 million), where the carrying amount is considered to be a reasonable estimate of net fair value. Other financial assets are net of goodwill, future income tax benefits and prepayments/unamortised payments, as these do not constitute a financial instrument. Deposits and other public borrowings The net fair value of non interest bearing, call and variable rate deposits, and fixed rate deposits repricing within six months, is the carrying value as at 30 June. Discounted cash flow models based upon deposit type and its related maturity were used to calculate the net fair value of other term deposits. Short term liabilities The carrying value of payables due to other financial acceptances and approximate their net fair value as they are short term in nature and reprice frequently. institutions bank Debt issues and loan capital The net fair values of debt issues and loan capital were calculated based on quoted market prices as at 30 June. For those debt issues where quoted market prices were not available, a discounted cash flow model using a yield curve appropriate to the remaining maturity of the instrument was used. All other financial liabilities This category includes interest payable and unrealised expenses payable for which the carrying amount is considered to be a reasonable estimate of net fair value. For liabilities which are long term, net fair values have been estimated using the rates currently offered for similar liabilities with remaining maturities. Other provisions including provision for dividend, income tax liability and unamortised receipts are not considered financial instruments. Asset and liability hedges Net fair value of asset and liability hedges is based on quoted market prices, broker or dealer price quotations. Commitments to extend credit, letters of credit, guarantees, warranties and indemnities issued The net fair value of these items was not calculated as estimated fair values are not readily ascertainable. These financial instruments generally relate to credit risk and attract fees in line with market for similar arrangements. They are not prices presently sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and reflects the probability of default. The net fair value may be represented by the present value of fees expected to be received, less associated costs. The overall level of fees involved is not material. Other off balance sheet financial instruments The net fair value of trading and investment derivative contracts (foreign exchange contracts, currency swaps, exchange rate futures, currency options, forward rate agreements, interest rate swaps, interest rate futures, interest rate options), were obtained from quoted market prices, discounted cash flow models or option pricing models as appropriate. The fair value of these instruments are disclosed in Note 37. 139 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to and forming part of the accounts NOTE 47 Differences between Australian and United States Accounting Principles The consolidated financial statements of the Group are prepared in accordance with Generally Accepted Accounting Principles in Australia (‘Australian GAAP’, refer Note 1) which differ in some respects from Generally Accepted Accounting Principles in the United States (‘US GAAP’). The following are significant adjustments between net profit, shareholders’ equity and consolidated in these financial statements and which would be reported in accordance with US GAAP. disclosed balance sheets Footnote 1999 $M 1998 $M 1997 $M 1,422 - (27) 65 38 (4) - 1,494 1,090 (248) (1) (65) 20 - - 796 1,078 28 (57) - 44 - (11) 1,082 (20) (10) 18 (206) (51) (257) (277) 1,217 161.2 229 10 239 229 1,025 85.6 18 (3) 15 33 1,115 118.0 6,735 (3) 6,712 (15) 6,846 (20) - 472 - 6 708 (255) (4) 7,659 - 321 (65) 263 648 (233) - 7,631 248 291 - 24 616 (222) - 7,783 138,096 130,544 120,103 - 10,241 9 708 248 7,249 37 616 149,054 139,460 128,253 - 7,959 309 648 Consolidated Statements of Profit and Loss Net profit reported under Australian GAAP Tax effect of increase in general provision for bad and doubtful debts Employee share compensation Unrealised net gain on available for sale securities Pension expense adjustment Goodwill amortisation Adjustment on adoption of new ISC Life Insurance Rules Net income according to US GAAP Other Comprehensive Income Foreign currency translation reserve Unrealised holding gains on available for sale securities Less reclassification adjustment for gains/losses included in net income Total other comprehensive income Total comprehensive income according to US GAAP Basic and diluted earnings per share on net income according to US GAAP (cents) Shareholders’ Equity Shareholders’ equity reported under Australian GAAP, excluding outside equity interests Tax effect of foreign currency translation reserve Reinstatement of the deferred tax asset relating to general provision for bad and doubtful debts Provision for final cash dividend Unrealised net gain on trading securities transferred to available for sale securities Unrealised net gain on other available for sale securities Prepaid pension cost Tax effect of prepaid pension cost Goodwill amortisation Shareholders’ equity according to US GAAP Consolidated Balance Sheets Total assets reported under Australian GAAP Reinstatement of the deferred tax asset relating to general provision for bad and doubtful debts at year end Assets relating to life insurance statutory funds Unrealised net gain(loss) on available for sale securities Prepaid pension cost Total assets according to US GAAP (a) (c) (f) (i) (k) (p) (a) (a) (d) (f) (f) (i) (i) (k) (a) (e) (f) (i) 140 NOTE 47 Differences between Australian and United States Accounting Principles continued Income Tax (a) Deferred Income Tax Assets and Liabilities tax-effect of Australian GAAP follows the liability method of timing tax-effect accounting. The differences which arise from items being brought to account in different periods for income tax and accounting purposes is disclosed as a future income tax benefit (FITB) or a provision for deferred income tax. Amounts are offset where the tax payable and the realisable benefit are expected to occur in the same period. Permanent differences are differences between taxable income and pre-tax accounting profit where the related income or expense items will never be included in either taxable income or pre-tax accounting profit. The Group has applied SFAS 109 ‘Accounting for Income Taxes’ in the preparation of its US GAAP information. • the criterion the change will occur The differences between the effect of applying the provisions of SFAS 109 and the accounting policy adopted in the Australian Financial Statements are as follows: • for Under Australian GAAP recognition of timing differences is assurance beyond any reasonable doubt and for tax losses ‘virtual certainty’. The recognition criterion under US GAAP is that the tax benefit is probable. Australian GAAP requires that an announcement of the Government’s intention to change the rate of company income tax in advance of periods in which is adequate evidence for the deferred tax balances to be restated. This treatment is not permitted under SFAS 109 ‘Accounting for Income Taxes’ which requires that the deferred tax liabilities and assets be adjusted in the financial year in which a change in the tax rate is enacted. The general provision for bad and doubtful debts has been tax effected as at 1 January 1998. This reflects the adoption of a balance sheet risk based dynamic provisioning methodology which satisfies the recognition requirement that utilisation of the provision be assured beyond reasonable doubt. Previously the related deferred tax asset associated with the Group’s general provision was not recognised. For US GAAP recognition purposes, the related deferred tax asset income is recognised. The 1998 US GAAP net adjustment of $248 million represents the cumulative deferred tax asset previously recognised as income for US GAAP. (Also refer Note 1(o)). Similarly for US GAAP purposes, the tax effect of the foreign currency translation reserve is booked as a deferred tax liability. Investment Securities Income from tax exempt securities does not exceed $500,000. Tax related securities sales 1997: $1.4 million). to gains/losses on investment is $28 million (1998: $3.7 million, (b) Pension Plans In accordance with Australian GAAP, contributions to company sponsored defined benefit pension plans are expensed as incurred. Other than by way of a note to the financial statements, any surplus or deficit is not reflected in the consolidated accounts. US GAAP pension expense, for defined benefit pension plans, is determined using defined methodology that is based on concepts of accrual accounting. This methodology, which requires several types of actuarial measurements, results in net amounts of expense and the related plan surplus or deficiency being recorded in the financial statements of the sponsor systematically over the working lives of the employees covered by the plan. As a result US GAAP reconciliation adjustments are required. The disclosure requirements of SFAS 87 ‘Employers Accounting for Pensions’ and SFAS 132 ‘Employers Disclosures about Pensions and Other Post Retirement Benefits’ have been included at footnote (i) within this note. The Group adopted SFAS 87 later than the effective date specified in the accounting standard. To introduce the information required under SFAS 87 as from the effective date was not feasible. Accordingly an allocation of the pension obligation/asset has been taken directly to equity based on the number of years elapsed between the effective date and the date of adoption by the Group. The adoption date for the purposes of the US GAAP reconciliation information is 1 July 1994 and the remaining amortisation period at the adoption date was ten years. (c) Employee Share Compensation issue is shown as a reduction In the Consolidated Statements of Changes in Shareholders’ Equity the Employee Share Acquisition Plan share to shareholder reserves. Under US GAAP, SFAS123 ‘Accounting for Stock Based Compensation’, this employee share scheme would be considered as part of employee compensation and charged to profit and loss. The grants of shares are in respect of the Group’s performance for the prior years. Further, under US GAAP, in accordance with the Employee Share Acquisition Plan an accrual for the probable grant of shares is required. For 1999 a US GAAP adjustment of $25 million has been included. 141 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 47 Differences between Australian and United States Accounting Principles continued (c) Employee Share Compensation continued Also under US GAAP, the fair value of the options issued under the Executive Option Plan is included as part of employee compensation and charged to profit and loss. For 1999 a US GAAP adjustment of $2 million has been included. fair The value of options (issued on 16 December 1996), being 45¢ per option, has been determined using the Black-Scholes option pricing model with the following assumptions at the date of issue: expected volatility of 17.5%, risk free interest rate of 6.94%, dividend rate of 8.18%, expected life of 39 months and a 50% probability for the performance hurdle. The (issued on 11 December 1997), being 89¢ per option, has been value of options fair determined using the Black-Scholes option pricing model with the following assumptions at the date of issue: expected volatility of 19.1%, risk free interest rate of 5.88%, dividend rate of 5.96%, expected life of 39 months and a 50% probability for the performance hurdle. fair The value of options (issued on 30 September 1998), being $1.05 per option, has also been determined using the Black-Scholes option pricing model with the following assumptions at the date of issue: expected volatility of 19.4%, risk free interest rate of 4.79%, dividend rate of 5.99%, expected life of 39 months and a 50% probability for the performance hurdle. Movement in Executive Options during the year 1999 Weighted Average Exercise Price* 1998 Weighted Average Exercise Price* Options Outstanding at the start of the year Options Granted during the year Options Forfeited during the year Options Exercised during the year Options Outstanding at the end of the year 4,675,000 3,275,000 382,500 26,000 7,541,500 $14.05 $19.58 $14.66 $11.85 $16.43 2,100,000 2,875,000 300,000 4,675,000 $11.85 $15.53 $12.77 $14.05 The exercise price for options granted in 1997 and 1998 will be adjusted by the premium formula (based on the actual * difference between the dividend and bond yields at the date of vesting). Outstanding Options at 30 June 1999 Number Exercise Price Expiry Date December 1996 Options December 1997 Options September 1998 Options 1,704,000 2,612,500 3,225,000 $11.85 $15.53 $19.58 12 Nov 2001 3 Nov 2002 25 Aug 2003 for The provision Under US GAAP, dividends are recorded as liabilities only if formally declared prior to balance date. This difference in treatment has been amended in the US GAAP reconciliation of shareholders’ equity. restructuring costs at 30 June 1999 of $57 million (refer Note 24) includes staff redundancy costs of $31 million with the balance relating principally to occupancy and equipment expenses. This represents the remaining portion of the $200 million abnormal restructuring charge booked during the year ended 30 June 1998. It is planned that this remaining provision be substantially utilised during the year ended 30 June 2000. The accounting policy adopted by the Group for restructuring provisions is detailed in Note 1(aa). The weighted average exercise price for options outstanding at 30 June 1999 is $16.43. The weighted average remaining contractual life of these options is 3 years and 4 months. The other disclosure requirements of SFAS 123 ‘Accounting in respect of the employee share plans are included in Note 28. for Stock-Based Compensation’ (d) Provisions The term ‘provisions’ is used in Australian GAAP to designate accrued expenses with no definitive payment date. Provisions, principally disclosed in Note 24 comply in all material respects with US GAAP with the exception of the provision for the final cash dividend (Note 6), which is not formally declared until the meeting of directors shortly after the balance date. 142 NOTE 47 Differences between Australian and United States Accounting Principles continued (e) Life Insurance Controlled Entity the For Australian GAAP the assets of the statutory funds and its liabilities of policyholders are excluded from the consolidated balance sheet (Note 1 (jj)). An adjustment has been made for this in relation to US GAAP. All related investments are brought to account at market values. funds the to Life Insurance Statutory Fund Assets The following fair value table of the investments of the life company shows the unrealised gains/losses by major category: Investments Government securities Australia Overseas Local and semi government securities Equity investments Promissory notes Certificates of deposit Bank accepted bills Other investments Cash Other assets At 30 June 1999 Fair Gross Unrealised Amortised Cost $M Losses $M Gains $M Value $M Fair Value $M At 30 June 1998 Gross Unrealised Amortised Cost Losses Gains $M $M $M 741 225 881 17 1 7 12 6 9 2,857 639 7 - 2 - - - 48 1,827 3,036 - 665 - 712 10,241 135 - 1 - 13 - - 176 736 230 883 2,353 7 3 - 1,792 3,036 665 9,705 791 177 729 2,026 - - 22 1,112 3,062 40 7,959 28 16 22 488 - - - 36 - - 590 - 1 - 134 - - - 1 - - 136 763 162 707 1,672 - - 22 1,077 3,062 40 7,505 Fair Value Maturity Distribution of Debt Securities The tables analyse the maturities on a fair value basis: At 30 June 1999 At 30 June 1998 Maturing Maturing Maturing Maturing 1 year Between Between After 10 or less Years 1 and 5 and 5 years 10 years $M $M Maturing Maturing Maturing Maturing 1 year Between Between After 10 Years or less 1 and 5 and 5 years 10 years $M $M Total $M $M $M Investments Government securities Australia Overseas Local and semi government Promissory notes Certificates of deposit Bank accepted bills Other investments Cash Other assets $M 43 6 205 7 2 - 526 3,036 665 4,490 432 210 530 - - - 751 - - 1,923 156 7 110 - - - 79 - - 352 110 2 36 - - - 471 - - 619 741 225 881 127 18 247 7 - 2 - 22 251 3,062 40 3,767 - 1,827 3,036 665 7,384 465 82 358 - - - 559 - - 1,464 113 46 106 - - - - - - 265 $M Total $M 86 31 18 - - - 302 - - 437 791 177 729 - - 22 1,112 3,062 40 5,933 143 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 47 Differences between Australian and United States Accounting Principles continued (f) Available For Sale Securities under US GAAP Under Australian GAAP, only two categories of securities prevail, namely Investment and Trading Securities. Investment securities are purchased by the Bank with the intent to ‘hold to maturity’. Trading securities are purchased and held for the short term, primarily with the intention of making profits from anticipated movements in market rates. Government securities, held in the investment securities portfolio, were sold during the 1998 financial year following the change in the Reserve Bank of Australia maximum holding for regulatory requirements. As a result, all Investment Securities have been reclassified as Available for Sale securities for the purposes of US GAAP disclosure. Any capital gain or loss realised on sale is taken to profit and loss at that time. The cost of available for sale securities sold is calculated on a specific identification basis. Under US GAAP, these securities are revalued to market and the difference between carrying value and market value is taken to shareholders’ equity. Trading securities under Australian GAAP include infrastructure equity securities on hand at to 30 June 1998. These securities are revalued market with the unrealised gain or loss at balance sheet date taken to profit and loss. Under US GAAP these securities are classified as ‘Available for Sale’ and the unrealised gain taken to shareholders’ equity loss. The disclosure rather requirements of SFAS 115 ‘Accounting for Certain Investments in Debt and Equity Securities’ in respect of Available for Sale securities have been included at footnote (m) within this note. than profit and (g) Net Profit Under US GAAP the concept of ‘operating profit’ is not recognised. Net profit under Australian GAAP is operating profit after tax including ‘abnormal items’ and after deducting outside equity interests. In performing the US GAAP profit reconciliation, the net profit reported using Australian GAAP is after deducting goodwill amortisation and abnormal items. 144 NOTE 47 Differences between Australian and United States Accounting Principles continued (h) Consolidated Balance Sheet The following reconciliations are of significant adjustments to Australian GAAP balance sheet categories disclosed in these accounts and which would be reported in accordance with US GAAP: Assets Available for sale securities under Australian GAAP Reclassification to Available for Sale securities Restatement of Available for Sale securities to fair value According to US GAAP Investment securities under Australian GAAP Reclassification to Available for Sale securities According to US GAAP Trading securities under Australian GAAP Reclassification to Available for Sale securities According to US GAAP Goodwill under Australia GAAP Reclassification from Other Assets Goodwill amortisation According to US GAAP Other assets under Australian GAAP Deferred tax assets on general provision for bad and doubtful debts Assets relating to life insurance statutory funds Prepaid pension cost Reclassification to Goodwill According to US GAAP Liabilities Income tax liability under Australian GAAP Tax effect of foreign currency translation reserve Deferred tax liability on unrealised gain on Available for Sale securities Deferred tax liability on pension income According to US GAAP Provision for dividend under Australian GAAP Reversal of provision for final cash dividend According to US GAAP Bills payable and other liabilities under Australian GAAP Liabilities relating to life insurance statutory funds According to US GAAP Footnote 1999 $M 1998 $M 1997 $M (f) (f) (f) (f) (k) (k) (a) (e) (i) (k) (a) (f) (i) (d) (e) - 7,187 9 7,196 7,187 (7,187) - 4,708 - 4,708 491 155 (4) 642 8,946 - 10,241 708 (155) 19,740 1,410 3 3 255 1,671 472 (472) - 8,507 10,241 18,748 - 6,999 309 7,308 6,858 (6,858) - 4,009 (141) 3,868 531 - - 531 11,859 - 7,959 648 - 20,466 1,099 15 111 233 1,458 321 (321) - 10,746 7,959 18,705 - 2,129 37 2,166 9,233 (2,129) 7,104 2,635 - 2,635 574 - - 574 7,502 248 7,249 616 - 15,615 925 20 13 222 1,180 291 (291) - 7,698 7,249 14,947 i) Details of Pension Expense and Reconciliation of Funded Status of Pension Plans The Bank and its controlled entities sponsor a its for The policy accounting range of superannuation (pension) plans employees worldwide. Group’s for superannuation expense, under Australian GAAP reporting, is set out in Note 1(ll) of the financial statements. The superannuation expense principally represents funding, determined after having regard to actuarial advice, to provide for future obligations of defined benefit plans. Other details of the Group’s major superannuation plans are set out in Note 38 of the financial statements. the annual For US GAAP purposes, the Group adopted the disclosure requirement of SFAS 87 ‘Employers’ Accounting for Pensions’ for the major defined benefit the Officers’ Superannuation Fund (OSF), fund, financial year commencing 1 July 1994. For ending 30 June 1999, its revised disclosures in accordance with SFAS 132 ‘Employers’ Disclosures about Pensions and Other Post Retirement Benefits’. the Group the Other defined benefit funds are immaterial for US GAAP reconciliation purposes. 145 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 47 Differences between Australian and United States Accounting Principles continued i) Details of Pension Expense and Reconciliation of Funded Status of Pension Plans continued The OSF does not hold any equity in the Bank’s paid capital. Amounts on deposit with the Bank at 30 June 1999 totalled $46 million (1998: $73 million and 1997: $145 million). Other investments with the Bank and/or controlled entities at 30 June 1999 were $27 million (1998: $40 million and 1997: $10 million). year as well as the funded status as at 31 March 1997, 31 March 1998 and 31 March 1999 for the OSF. The assumptions used in the calculations were a discount rate of 6.25% pa (1998: 6.50% pa, 1997: 8.00% pa), compensation increase rate of 4.25% pa (1998: 4.25% pa, 1997: 4.50% pa) and return on assets of 7.50% pa (1998: 7.50% pa, 1997: 8.25% pa). The table displays the elements of the net in benefit pension expense and obligations and fair value of assets for each financial the change Pension plan Service cost Interest cost Expected return on assets Amortisation of transitional obligation assets Recognised net loss Amortisation of prior service costs Employer financed benefits within Accumulation Division Net periodic pension (cost) income Expensed employer contribution Less tax effect Pension Expense Adjustment - see US GAAP Reconciliation Reconciliation Change in benefit obligation: Benefit obligation at beginning of year Service cost Member contributions Interest cost Acquisitions Benefit changes Actuarial gains Benefits and expenses paid Benefit obligation at end of year Change in fair value of assets Fair value of assets at beginning of year Actual return on assets Total contributions Benefits and expenses paid Employer financed benefits within Accumulation Division Fair value of assets at end of year Funded status at measurement date: Assets not recognised: Transitional obligation assets Unrecognised net loss Unrecognised prior service costs Employer contribution from measurement date to balance date Prepayment of pension costs (1) For the financial year ended 30 June 1996, the Group adopted 30 June as the measurement date for plan assets and obligations. Effective from the financial year ended 30 June 1997, the Group adopted 31 March as the measurement date for plan assets and obligations. Hence, the change in plan assets and obligations for 1996/1997 financial year is for the 9 months to 31 March 1997. 146 1999 $M (86) (284) 388 69 - - (27) 60 - 60 (22) 38 4,364 86 31 284 - - 78 (557) 4,286 (5,279) (476) (31) 557 26 (5,203) (917) 345 (136) - - (708) 1998 $M (80) (328) 395 69 - - (24) 32 - 32 (12) 20 4,112 80 36 328 - - 348 (540) 4,364 (4,896) (911) (36) 540 24 (5,279) (915) 414 (147) - - (648) 1997(1) $M (62) (344) 425 69 - - (21) 67 1 68 (24) 44 3,822 46 28 258 - - 242 (284) 4,112 (4,815) (353) (28) 284 16 (4,896) (784) 483 (315) - - (616) Additionally, a deferred tax liability has been taken up for US GAAP reconciliation purposes in respect of the above prepayment of pension costs. NOTE 47 Differences between Australian and United States Accounting Principles continued Employee Benefits – Post Retirement Benefits (j) Other than Pensions Health Care Subsidies The Group provides a benefit to employees including retirees who were members of the CBHS Friendly Society Limited (CBHS) as at 6 July 1995 and who met certain criteria. The benefit provided by the Group is in the form of financial assistance in respect of eligible employees and retirees with their private health insurance premium. All staff who joined the CBHS on or after 7 July 1995 are not eligible for the financial assistance benefits. An agreement between the Group and the Finance Sector Union provides that those members of the CBHS who were retired as at 30 June 1995 receive an ongoing fixed subsidy indexed to a maximum of the movements in the Consumer Price insurance Index whenever premiums in CBHS increase. Eligible members who retired on or between 1 July 1995 and 31 July 1996 are provided with a fixed ongoing premium subsidy in accordance with their benefit category. Other than the subsidised health insurance premium, which is fully provided for, the Group does not have a post retirement health care liability. the members’ health and senior executives) Concessional housing loans The Group provides housing loans at concessional interest rates to assist with private housing for staff who meet certain criteria. All staff who joined the Bank on or after 1 May 1997 are not eligible to a post retirement concessional interest rate housing loan. Except for certain staff (including whose executives remuneration package excludes a post retirement concessional interest rate loan, the Group provides post retirement interest concessions for retirees who joined the Bank prior to 1 May 1997 on the following basis. Staff with housing loans prior to 1 April 1997 and taken into retirement may be repaid over the remainder of loan. Borrowings on or after 1 April 1997 but before 1 April 2002 may be retained into retirement until 1 April 2007 at which time the concession will cease. Borrowings after 1 April 2002 may be retained into retirement for a period of five years at which time the concession will cease. the specified term of the No new or additional loans are offered at concessional interest rates after retirement. Australian GAAP Compliance Effective 1 July 1994 the Group adopted the Australian Accounting Standard AASB 1028: ‘Accounting for Employee Entitlements’ with respect to the liabilities arising from the post retirement benefits described above. AASB 1028: ‘Accounting for Employee Entitlements’ specifies that employee post retirement benefit liabilities are calculated as the present value of the estimated future cash flows due to the services of employees provided up to the reporting date. The adequacy of the full provision for employee post retirement benefits liabilities in the financial statements is determined in accordance with the requirements of AASB 1028 after considering that employee post retirement benefits carry limited risks and after obtaining actuarial advice. US GAAP Compliance Prior to the adoption of AASB 1028 the Group accounted for its obligation for employee entitlements substantially in accordance with SFAS 43 ‘Accounting the for Compensated Absences’. Other disclosures discussed above, there are no US GAAP adjustments or further disclosures under SFAS 106 ‘Employers’ Accounting for Post Retirements Other than Pensions’ and SFAS 132 ‘Employers’ Disclosures about Pensions and Other Post Retirement Benefits’. than (k) Goodwill Upon acquisition of Sovereign Limited in December 1998, (refer Note 45(e) for full details), an asset was brought to account being ‘excess market value over net assets of life insurance subsidiary’ of $155 million which under US GAAP would be accounted for as goodwill. For US GAAP this asset is being amortised over a 20 year period on a straight line basis. Property and Other Non Current Asset (l) Revaluations Each year a review of non current assets is performed to assess the recoverable amount of non current assets. The ‘recoverable amount test’ is in accordance with the Australian accounting standard which requires future cash flows associated with non current assets to be discounted at a rate which reflects the determination of the fair value of non current assets and the recognition of losses from impairments, the requirements under Australian accounting standards and the requirements of SFAS 121 ‘Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of’ are essentially the same. involved. With respect the risk to 147 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 47 Differences between Australian and United States Accounting Principles continued (l) Property and Other Non Current Asset Revaluations continued Australian GAAP allows non current assets including property, plant and equipment to be to an asset revaluation revalued upwards direct reserve. Assets with a carrying amount greater than their recoverable amount may be revalued to their recoverable amount. Impairments to asset values, where there is an amount in the revaluation reserve relating to the relevant asset class, are taken to reduce the revaluation reserve. Impairments to asset values otherwise must be recorded in the profit and loss. Any subsequent upward reversing revaluations to the same asset class are recorded as revenue in the profit and loss. With the exception of land, all revalued assets are depreciated over their assessed useful lives. as part of accounting for business combinations under the Purchase Method. US GAAP requires impairments of non current assets to be recorded in the profit and loss account. Once such impairments have been recorded, subsequent recoveries to the income statement are not allowed. A discounted cash flow methodology was used in arriving at the valuation at which the Group’s property is carried. No asset writedowns were necessary in 1999, 1998 or 1997. At 30 June 1999, 1998 and 1997 the asset revaluation reserve shows a nil balance. Any US GAAP adjustment of revalued assets to an historical cost basis would not be material in the income statement, shareholders’ equity or carrying value of the property assets. Upward revaluations of property, plant and equipment are not allowed under US GAAP, except (m) Available for Sale Securities A T 3 0 J U N E 1 9 9 9 A T 3 0 J U N E 1 9 9 8 Amortised Gross Unrealised Gains Losses $M Cost $M $M Fair Amortised Cost $M Value $M Gross Unrealised Losses Gains $M $M Fair Value $M Australia Australian Public Securities: Commonwealth and States Bills of exchange Medium Term Notes Other securities and equity investments Total Australia Overseas Government securities Treasury Notes Certificates of deposit Eurobonds Medium Term Notes Other securities and equity investments Total Overseas Total Available for Sale Securities 2,635 - 160 352 3,147 235 5 1,228 900 27 1,645 4,040 7,187 13 - 11 - 11 - 19 30 - 24 10 2 - - 38 22 7 18 87 117 46 46 - - 102 126 2,637 - 171 333 3,141 243 5 1,236 924 20 1,627 4,055 7,196 1,960 138 17 - 38 161 337 141 1,072 3,190 204 1,195 766 31 5 - 7 66 29 - 148 252 589 1,508 3,707 6,897 - - - 50 50 3 - 1 21 4 99 128 178 2,098 17 179 1,183 3,477 232 5 1,201 811 25 1,557 3,831 7,308 requirements. As a result, all Investment Securities have been reclassified as Available for Sale securities. The fair value of Available for Sale securities includes the fair value of derivative hedges. Realised capital gains were $85 million and realised capital losses were $6 million, (1998: realised losses realised capital capital gains $65 million, gains capital $80 million $12 million, realised capital losses $8 million). 1997: realised and Proceeds at or close to maturity of Available for Sale securities during 1999 were $12,431 million (1998: $8,681 million and 1997: $6,479 million). from sale of Available for Sale Proceeds securities during the year were $146 million (1998: $1,787 million and 1997: $1,172 million). investment Government securities, held the the 1998 securities portfolio, were sold during financial year following the change in the Reserve Bank of Australia maximum holding for regulatory in 148 NOTE 47 Differences between Australian and United States Accounting Principles continued (m) Available For Sale Securities continued Maturity Distribution and Average Yield The table analyses the maturities and weighted average yields of the book value of the Group’s holdings of Available for Sale securities: At 30 June 1999 Australia Australian Public Securities: Commonwealth and States Medium Term Notes Other securities, commercial paper and equity investments Total Australia Overseas Government securities Treasury Notes Certificates of Deposit Eurobonds Medium Term Notes Other securities, commercial paper and equity investments Total Overseas Total Available for Sale Securities Maturities at Fair Value 1 to 12 months % $M 1 to 5 years % $M 5 to 10 years % $M 10 years or more % $M Total $M 552 - 90 642 1 5 1,228 145 - 274 1,653 2,295 2,299 6.51 - 5.09 5.72 1.20 5.21 8.78 - 5.23 1,661 102 258 2,021 163 - - 222 27 624 1,036 3,057 3,033 5.19 8.33 3.62 2.32 - - 6.69 5.19 7.45 422 58 4 484 71 - - 533 - 697 1,301 1,785 1,814 6.14 9.80 6.52 5.62 - - 5.75 - 2.97 - - - - - - - - - 50 50 50 50 - - - - - - - - 5.53 2,635 160 352 3,147 235 5 1,228 900 27 1,645 4,040 7,187 7,196 (n) Impairment of Assets SFAS 114 ‘Accounting by Creditors for Impairment of a Loan’ as amended by SFAS 118 ‘Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures’, requires the value of an impaired loan to be measured as the present value of future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is required the US GAAP reconciliation as the estimated fair value of the impaired loans is not materially different from the carrying value as at 30 June 1999. is collateral dependent. No adjustment in (o) Comprehensive Income the financial SFAS 130: ‘Reporting Comprehensive Income’ year ending to is applicable 30 June 1999. the requires The Statement classification of items of other comprehensive income the display of other by retained from income separately comprehensive earnings and shareholders equity. All prior periods have been restated to conform to the provisions of this Statement. their nature and Accumulated Other Comprehensive Income Balances Foreign currency translation reserve Balance at beginning of financial year Foreign currency translation adjustment net of tax expense Balance at end of financial year Available for Sale securities Balance at beginning of financial year Change in fair value of Available for Sale securities Balance at end of financial year Total Other Comprehensive Income 1999 $M 26 (20) 6 263 (257) 6 12 1998 $M 36 (10) 26 24 239 263 289 1997 $M 18 18 36 9 15 24 60 149 Notes to and forming part of the accounts COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 47 Differences between Australian and United States Accounting Principles continued the financial year ending 30 June 1999. The Group does not believe these standards would materially impact the financial position and results of operations if they were applicable at 30 June 1999. 133 SFAS ‘Accounting for Derivative Instruments and Hedging Activities’ was issued in June 1998 and is applicable to the Group from 1 July 2000. This standard may have a material impact on financial position and results of operations if it were applicable at 30 June 1999. As of the date of this report the Group is assessing the impact of application of this standard, however as yet is unable to determine its effect. the (p) Life Insurance Under Australian GAAP, transitional adjustments on of and adoption financial Superannuation Commission Rules reporting were made directly to retained earnings at the beginning of the 1997 financial year. Under US GAAP such adjustments were included as part of the 1997 financial year profits. Insurance for new the (q) Newly Accounting Standards Board Issued Statements of the Financial The Financial Accounting Standards Board (FASB) of the United States of America has recently issued Statements of Financial Accounting Standards (SFAS) Nos. 134 and 135, which are not applicable to 150 Directors’ Declaration In accordance with a resolution of the directors of the Commonwealth Bank of Australia, we state that in the opinion of the Directors: (a) the financial statements and notes of the Bank and of the Group are in accordance with the Corporations Law, including: (i) giving a true and fair view of the Bank’s and the Group’s financial position as at 30 June 1999 and of their performance for the year ended on that date; and complying with Accounting Standards and Corporations Regulations; and (ii) there are reasonable grounds to believe that the Bank will be able to pay its debts when they become due and payable. (b) Signed in accordance with a resolution of the Directors. M A Besley AO Chairman 11 August 1999 D V Murray Managing Director 151 Independent Audit Report To the members of Commonwealth Bank of Australia Scope We have audited the Financial Report of Commonwealth Bank of Australia for the financial year ended 30 June 1999, as set out on pages 49 to 151, including the Directors’ Declaration. The Financial Report includes the financial statements of Commonwealth Bank of Australia and the consolidated financial statements of the Group comprising the Bank and the entities it controlled at year’s end or from time to time during the financial year. The Bank’s directors are responsible for the Financial Report. We have conducted an independent audit of the Financial Report in order to express an opinion on it to the members of the Bank. Our audit has been conducted in accordance with Australian and United States Auditing Standards to provide reasonable assurance whether the Financial Report is free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the Financial Report, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion as to whether, in all material respects, the Financial Report is presented fairly in accordance with Accounting Standards, other mandatory professional reporting requirements and statutory requirements, so as to present a view which is consistent with our understanding of the Bank’s and the Group’s financial position and performance as represented by the results of these operations and their cash flows. The audit opinion expressed in this report has been formed on the above basis. Audit Opinion In our opinion, the Financial Report of Commonwealth Bank of Australia is in accordance with: (a) the Corporations Law including: (i) giving a true and fair view of the Bank’s and the Group’s financial position as at 30 June 1999 and of their performance for the year ended on that date; and (b) (ii) complying with Accounting Standards and the Corporations Regulations; and other mandatory professional reporting requirements. Accounting principles generally accepted in Australia vary in certain respects from accounting principles generally accepted in the United States. The application of the United States principles would have affected the determination of consolidated net income for each of the years in the three year period ended 30 June 1999 and the determination of consolidated financial position as at 30 June 1999 and 1998 to the extent summarised in Note 47 to the Financial Report. ERNST & YOUNG Sydney Date: 11 August 1999 S C Van Gorp Partner 152 Shareholding Information Top 20 Holders of Fully Paid Ordinary Shares as at 5 August 1999 Rank Name of Holder 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Chase Manhattan Nominees Ltd Westpac Custodian Nominees National Nominees Limited ANZ Nominees Limited Permanent Trustee Australia Limited Queensland Investment Corporation Limited AMP Life Limited Citicorp Nominees Pty Ltd Perpetual Trustees Victoria Limited MLC Limited c/- Westpac Custodian Nominees National Mutual Trustees Ltd Mercantile Mutual Life Insurance Company Limited BT Custodial Services Pty Limited The National Mutual Life Association of Australasia Limited Perpetual Trustees Nominees Limited CSS & PSS Board c/- Chase Manhattan Nominees Limited BT Custodial Services Pty Ltd Australian Foundation Investment Company Limited AMP Nominees Pty Limited HKBA Nominees Ltd Number of Shares 50,381,450 39,854,067 30,885,440 18,814,636 15,456,208 15,161,443 13,459,003 11,581,634 10,828,657 6,751,515 6,182,714 5,792,278 5,313,625 5,073,601 4,669,921 4,645,939 4,578,168 4,032,538 3,374,644 3,348,590 % 5.52 4.37 3.38 2.06 1.69 1.66 1.47 1.27 1.19 0.74 0.68 0.63 0.58 0.56 0.51 0.51 0.50 0.44 0.37 0.37 The twenty largest shareholders hold 260,186,071 shares which is equal to 28.50% of the total shares on issue. Stock Exchange Listing The shares of the Commonwealth Bank of Australia are listed on the Australian Stock Exchange under the trade symbol CBA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers, generally under the abbreviation of CBA or C’wealth Bank. Directors Shareholdings as at 11 August 1999 Shares Options M A Besley, AO J T Ralph, AO D V Murray N R Adler, AO A C Booth K E Cowley, AO J M Schubert F J Swan B K Ward 1,300,000 10,156 11,064 48,792 9,175 1,075 8,000 5,534 1,828 1,747 Guidelines for Dealings by Directors in Shares The restrictions imposed by law on dealings by Directors in the securities of the Bank have been supplemented by the Board of Directors adopting guidelines which further limit any such dealings by Directors, their spouses, any dependent child, family company and family trust. The guidelines provide, that in addition to the requirement that Directors not deal in the securities of the Bank or any related company when they have or may be perceived as having relevant unpublished price sensitive information, Directors are only permitted to deal within certain periods. Further, the guidelines require that Directors not deal on the basis of considerations of a short term nature or to the extent of trading in those securities. 153 Shareholding Information Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 5 August 1999 Range Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001-Over Total Less than marketable parcel of $500 272,569 125,152 10,255 4,414 303 412,693 4,590 66.05 30.33 2.48 1.07 0.07 100.00 125,572,304 247,057,304 70,551,790 90,187,357 382,599,870 915,968,625 43,619 13.71 26.97 7.70 9.85 41.77 100.00 Voting Rights Under the Bank’s Constitution, each member present at a general meeting of the Bank in person or by proxy, attorney or official representative is entitled: • • on a show of hands – to one vote; and on a poll – to one vote for each share held or represented. enacted in December 1995. As part of the sale process, which was completed in July 1996, the non- Government shareholders agreed on 14 May 1996 to permit the Bank to purchase from the Commonwealth approximately $1 billion of its Ordinary Shares held by the Commonwealth. of of The sale remainder the the Commonwealth’s shareholding included the global offering of 399,103,979 of the Bank’s shares in the form of ‘Instalment Receipts’. The Instalment Receipts evidenced full beneficial ownership in an ordinary share in the Bank. The final price for the global offering was set by the Commonwealth at $10.45 per share which was payable in two instalments of $6.00 and $4.45 on 22 July 1996 and 14 November 1997, respectively. The Bank’s Ordinary Shares are listed on the Australian Stock Exchange. In addition, the Bank established in 1996 a Rule 144A American Depositary Receipt program (‘Restricted ADR Program’) in the to Ordinary Shares United States purchased in the Rule 144A Offering in the United States, conducted as part of the global offering of the Commonwealth’s remaining shareholding in 1996. American Depositary Shares (‘ADSs’) issued pursuant to the Restricted ADR Program each represent the right to receive three Ordinary Shares. relation in than one proxy, attorney or official If more representative is present for a member: • none of them is entitled to a vote on a show of hands; and the vote of each one on a poll is of no effect unless each represent a specified proportion of the member’s voting rights, not exceeding in aggregate 100%. is appointed to • Control Of Registrant The Bank is not directly or indirectly owned or controlled by another corporation or any foreign government. At 30 June 1999 there is no person who is known to the Bank to be the beneficial owner of more than 10% of the Bank’s Ordinary Shares. Until recently, under the Banking Act and the Bank’s Constitution, the Commonwealth has had a special relationship with the Bank and was required to hold a minimum of 50.1% of the total voting rights of Ordinary Shares in the Bank. In May 1995, the Commonwealth announced its intention to sell the Commonwealth’s remaining 50.4% shareholding, and necessary amendments to the Banking Act were 154 Nature Of Trading Market The Bank’s Ordinary Shares are listed on the ASX. Trading of the Ordinary Shares on the ASX commenced on 9 September 1991. The table below sets forth, for the calendar periods indicated, high and low closing prices and average daily trading volumes for the Ordinary Shares as reported by the ASX. H I G H L O W T R A D I N G V O L U M E P E R I O D C L O S I N G P R I C E C L O S I N G P R I C E ( N U M B E R O F $ $ S H A R E S ) Ordinary Shares 1997 First Quarter Second Quarter Third Quarter Fourth Quarter 1998 First Quarter Second Quarter Third Quarter Fourth Quarter 1999 First Quarter Second Quarter 13.93 16.00 17.28 17.69 18.52 19.49 20.55 23.16 26.65 28.69 11.98 12.39 14.70 14.90 17.49 17.40 18.66 18.50 22.15 23.95 2,134,888 1,662,578 1,747,491 1,761,689 1,671,196 1,724,830 1,952,258 1,513,759 1,714,077 1,727,382 On 30 June 1999, the last sale price of the Ordinary Shares as reported on the ASX was $24.05 per Share. The Bank’s total market capitalisation was $22,029 million. Stamp duty will arise on the sale or transfer of Ordinary Shares in Australia. Where the transaction is processed through the ASX by a broker, the rate generally will be 0.15% for the seller and 0.15% for the buyer. The rate generally will be 0.3% payable by the buyer for off market transfers. (Minimum amount payable is $20 for companies incorporated in the ACT.) At 1999 the Bank maintained a restricted Rule 144A American Depositary Receipt (‘ADR’) program in the United States, representing ordinary shares, for which The Bank of New York acted as depositary bank. The ratio of Ordinary Shares per American Depositary Share (‘ADS’) is 3:1. Because the ADSs are not publicly listed or traded it is not possible to provide accurate market price information with respect to the ADSs. On 30 June 1999, there were 246 shareholders with declared addresses in the United States holding 232,198 Ordinary Shares and 1 holder (a nominee company) of ADRs within the United States holding 595 ADRs representing ordinary shares. In addition, there are a number of United States shareholders who hold beneficial ownership in Ordinary Shares through nominee companies located outside the United States. 155 are eligible for re-election. The Board of Directors oversees the Bank’s operation both directly and through its committees. The members of the Board of Directors and executive and senior officers of the Group as at 30 June 1999 are as follows: Shareholding Information Directors and Officers Of Registrant The business of the Bank is managed by a Board of Directors presently consisting of ten Directors who, except for the Managing Director, are elected on a rotating basis. At each annual general meeting of the Bank’s shareholders, one-third of the Directors, excluding the Managing Director, retire and Board of Directors Name Age Position M A Besley, AO J T Ralph, AO D V Murray N R Adler, AO A C Booth R J Clairs, AO K E Cowley, AO J M Schubert F J Swan B K Ward Chairman 72 66 Deputy Chairman 50 Managing Director 54 43 61 64 56 58 45 Director Director Director Director Director Director Director Executive and Senior Officers Name Age Position 52 43 45 48 38 40 52 50 39 56 46 37 47 47 43 47 45 49 46 59 50 54 54 51 General Manager, Sales and Service Delivery Head of Asset Management Group Financial Controller Head of Equities General Manager, Personal Customers General Manager, eComm General Manager, Products General Manager, Group Human Resources Group Auditor General Manager, Banking Operations General Manager, Finance and Operations, Banking and Financial Services General Manager, Business Customers Company Secretary Head of Institutional Banking General Manager, Strategic Marketing General Manager, Sales and Service Victoria/Tasmania Head of Investment and Insurance Products Financial Controller, Institutional Banking Chief Credit Officer Head of Customer Service Division Head of Group Planning and Development General Manager, Lending Services General Manager, Commonwealth Property General Manager and Chief Information Officer, Group Technology Head of Banking and Financial Services 49 50 Managing Director, ASB Bank 55 41 50 59 48 52 General Manager, Sales and Service NSW/ACT Head of Financial Markets Head of Technology, Operations and Property Chief Solicitor and General Counsel Group General Manager, Financial and Risk Management Group Treasurer P M Andrews N G Basile J D Beecher J J Beggs A R Cosenza S B Coulter N J Cox L G Cupper D A Doyle R C Eddington J K Evans H D Harley J D Hatton M A Katz G P Kelly E J Kinsella A J Lally D J Lawler M A Leonard A E Long G L Mackrell A C McMorron G K McWilliam H M Morris J F Mulcahy R J Norris R A Perkins P G Riordan R J Scrimshaw L E Taylor M J Ullmer R G Wilkie 156 Director Since 1988 1985 1992 1990 1990 1999 1997 1991 1997 1994 Position held since Year Joined Group 1998 1999 1996 1997 1999 1999 1997 1996 1998 1991 1998 1998 1994 1993 1998 1998 1998 1998 1998 1997 1995 1998 1998 1997 1997 1991 1998 1994 1998 1989 1997 1990 1963 1999 1994 1997 1981 1998 1964 1996 1997 1958 1996 1987 1985 1993 1997 1970 1990 1993 1987 1956 1973 1989 1996 1997 1995 1989 1962 1994 1998 1955 1997 1961 Compensation Of Directors And Executive Officers The aggregate compensation paid by the Bank during Financial Year 1999 to all directors and executive officers as a group (43 persons) was $20.8 million. Australian executive officers are members of the Bank’s principal superannuation fund, the Officers’ Superannuation Fund (OSF). The OSF is a defined benefit fund. Executive officers who joined the Bank the on or after 1 July 1993 are members of accumulation division of the OSF. From 1 July 1996 the Bank introduced salary sacrifice superannuation benefits within the OSF for selected employees, including sacrifice superannuation benefits accrued during the 1999 Financial Year in respect of executive officers have been included in the above aggregate compensation. contributions exception corresponding to salary sacrifice benefits, the Bank ceased contributions to the OSF from 8 July 1994. Further, the Bank ceased contributions to the OSF corresponding to accruing salary sacrifice benefits from 1 July 1997. officers. Salary executive With the of legislation, Under Australian the Bank was required to provide minimum superannuation benefits for non executive directors under age 70 equal to 7% of their cash remuneration in the 1999 Financial Year. Benefits funded by the Bank during Financial Year 1999 to meet this requirement amounted to $44,355. The Bank also provides defined benefits to non executive directors in connection with their departure from office after three years of service in accordance with an arrangement approved by shareholders. The Bank’s executive officers, (including the Managing Director) may be eligible to participate in the Executive Option Plan ‘EOP’ and the Employee Share Subscription Plan ‘ESSP’. Executives who participate in the EOP are excluded from participating in the Employee Share Acquisition Plan ‘ESAP’. Refer Executive Option Plan - Note 28. that The Bank’s Constitution provide the directors who are not also executive officers shall be paid an ordinary remuneration which may not exceed the maximum amount fixed by the Bank in general meeting from time to time. At the annual general meeting of the Bank held in October 1997 the shareholders set a maximum amount of $1 million per the non executive to be divisible among year, directors as the directors may determine. Currency Of Presentation And Certain Definitions The Bank publishes its consolidated financial statements in Australian dollars. In this Annual Report, unless otherwise stated or the context otherwise requires, references to ‘US$’ or ‘US dollars’ are to United States dollars and references to ‘$’ or ‘A$’ are to Australian dollars. Merely for the convenience of the reader, this Annual Report contains translations of certain Australia dollar amounts into US dollars at specified rates. These translations should not be construed as representations that the Australian dollar amounts actually represent such US dollar amounts or have been or could be converted into US dollars at the rate indicated. Unless otherwise stated, the translations of Australian dollars into US dollars have been made at the rate of US$0.6611 = $1.00, the noon buying rate in New York City for cable transfers in Australian dollars as certified for customs purposes by the Federal Reserve Bank of New York on 30 June 1999. Exchange Rates For each of the Commonwealth Bank’s financial years, the high, low, average and year end Noon Buying Rates, see ‘Selected Financial and Operating Data’ on page 19. Fluctuations in the exchange rate between the Australian dollar and the US dollar may affect the Bank’s earnings, the book value of its assets and its shareholders’ equity as expressed in US dollars, and consequently may affect the market price for the Shares. In addition, fluctuations in the exchange rate between the Australian dollar and the US dollar will affect the US dollar equivalent of the Australian dollar price of the Bank’s Ordinary Shares on the ASX and, as a result, are likely to affect the market price of the Shares. Such fluctuations will also affect the conversion into US dollars of cash dividends, if any, paid in Australian dollars. Certain Definitions The Bank’s financial year ends on 30 June. As used throughout this Annual Report, the financial year ended 30 June 1999 is referred to as Financial Year 1999, and other financial years are referred to in a corresponding manner. ‘Financial Statements’ means the Group’s audited consolidated balance sheets as of 30 June 1998 and 1999 and consolidated statements of income, cash flows and changes in shareholders’ equity for each of the three years in the period ended 30 June 1999, together with accompanying notes, which are included elsewhere in this Annual Report. ‘ACCC’ means Australian Competition and Consumer Commission. ‘APRA’ means the Australian Prudential Regulation Authority. ‘ASB Bank’ means the ASB Bank Limited, incorporated in New Zealand. ‘ASX’ means the Australian Stock Exchange Limited. ‘Australian GAAP’ means Australian generally accepted accounting principles. ‘Bank’, ‘CBA’ or ‘Company’ means the Commonwealth Bank of Australia (A.C.N. 123 123 124), a banking corporation incorporated in Australia. ‘Banking Act’ means the Australian Banking Act 1959, as amended. ‘CDBL’ means the Commonwealth Development Bank of Australia Limited. ‘Commonwealth’ means Australia and its Territories. the Commonwealth of 157 Shareholding Information Certain Definitions continued ‘EFTPOS’ means Electronic Funds Transfer at Point of Sale. or ‘Consolidated Entity’ means the ‘Group’ Commonwealth Bank of Australia and its controlled entities. ‘Ordinary Shares’ or ‘Shares’ means the ordinary shares of the Bank. ‘Reserve Bank’ or ‘RBA’ means the Reserve Bank of Australia. ‘US GAAP’ means United States generally accepted accounting principles. Any discrepancies between totals and sums of components in tables contained herein are due to rounding. Exchange Controls Affecting Security Holders The Australian dollar is convertible into US dollars at freely floating rates and there are no restrictions on the flow of Australian currency between Australia and the United States. Under existing Australian legislation, the Reserve Bank does not inhibit the import and export of funds, and generally no governmental permission is required for the Bank to move funds in and out of Australia. The United States is not a declared tax haven. Accordingly, at the present time, remittances of any dividends, interest or other payment by the Bank to non resident holders of the Bank’s securities in the United States are not restricted by exchange controls. restrict Apart from withholding tax on dividends and interest paid to non residents, there are currently no Australian exchange controls which the payment of dividends, interest or other remittances to holders of securities issued by the Bank provided that such holders who are not residents of Australia are not connected with Iraq, Libya or the government of the Federal Republic of Yugoslavia (Serbia and Montenegro). The approval of the Reserve Bank is required for any payments to the Government of Iraq, its agencies or its nationals or to the Government or public authority of Libya; any commercial, industrial or public undertaking owned or controlled (whether directly or indirectly) by the Government or public authority of Libya or by an entity that is owned or controlled by the Government or public authority of Libya; or to any person acting for or on behalf of the Government and public authority of Libya or an entity as described previously. In addition, any transactions involving the authorities of the Federal Republic of Yugoslavia (Serbia and Montenegro) or their agencies will require the specific approval of the Reserve Bank. foreign monetary institutions are permitted to invest the official reserve in Australian domestic assets of securities, provided they agree to be stable holders of Australian dollar assets and to keep the Reserve Bank informed of their Australian dollar portfolios. Central banks and other their country 158 thereof, Section 16 of the Banking Act provides that in the event of the Bank becoming unable to meet its obligations or suspending payment the Bank’s assets in Australia shall be available to meet its deposit liabilities in Australia in priority to all of its other liabilities. Section 86 of the Australian Reserve Bank Act provides that in a winding up of the Bank, all debts due to the Reserve Bank shall, subject to Section 13A(3) of the Banking Act, have priority over all other debts of the Bank other than debts due to the Commonwealth. Taxation The following discussion is a summary of certain Australian tax consequences of the ownership of Ordinary Shares. For purposes of this discussion, a ‘US Holder’ is any beneficial owner who or that owns the Ordinary Shares as a capital asset and is (i) a citizen or resident of the United States, (ii) a domestic corporation, or (iii) an individual or entity otherwise subject to United States federal income taxation on a net income basis. Prospective investors are urged to consult their own tax advisors regarding the United States and Australian tax consequences of owning and disposing of Ordinary Shares. The forth below taxation discussion set is intended only as a descriptive summary and does not purport to be a complete technical analysis or listing of all potential Australian tax effects to US Holders. Except as otherwise noted, the statements of Australian tax laws set out below are based on the laws in force as at the date of this Annual Report, and are subject to any changes in Australian law, and in any double taxation convention between the United States and Australia occurring after that date. from shares Under Australian law non-residents may be subject to withholding tax in respect of dividends in Australian companies received depending upon the extent to which dividends are franked. Also, in limited circumstances (as discussed below) such non-resident shareholders may be subject to Australian income tax in respect of gains made on disposal of shares in Australian companies. In accordance with the Australia/United States double tax agreement, withholding tax on dividend income derived by a non- resident of Australia, who is a resident of the United States, is limited to 15% of the gross amount of the dividend. the provisions of double The Australia/United States tax agreement referred to in the preceding paragraph was entered into on 6 August 1982 and represents a convention between the Government of Australia and the Government of the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The agreement applies to residents of one or both of Australia and the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Taxation continued Under Australia’s dividend imputation system dividends are ‘franked’ dividends to the extent that they are paid out of income on which Australian income tax has been paid. Where an Australian resident individual shareholder receives a franked dividend, the shareholder receives a tax credit which can be offset against the Australian income tax payable by the shareholder. The amount of the credit is dependent upon the extent to which the dividend is franked. The extent to which a dividend is franked typically depends upon a company’s available franking credits at the time of payment of the dividend. Accordingly, a dividend paid to a shareholder may be wholly or partly franked or wholly unfranked. Dividends non-resident shareholders are exempt from dividend withholding tax to the extent the dividend is franked. The unfranked portion of the dividend is subject to 15% dividend withholding tax. paid to Subject two exceptions, a non-resident disposing of shares in Australian public companies to • will be free from tax in Australia. The exceptions are as follows: • Shares held as part of a trade or business conducted through a permanent establishment in Australia. In such a case any profit on disposal would be assessable to ordinary income tax. Losses would constitute allowable deductions. Shares held in public companies where such shares represent (or in the past five years have represented) a holding of 10% or more in the issued share capital of the company. In such a case capital gains tax would apply, but not otherwise. Capital gains tax in Australia is payable on real gains over the period in which the shares have been held, ie the difference between the disposal price and the original cost indexed for inflation over that period. Normal rates of income tax would apply to real gains so calculated. Capital losses are not subject to indexing; they are available as deductions, but only as an offset against other capital gains. 159 Signatures Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorised, in the City of Sydney, Commonwealth of Australia. COMMONWEALTH BANK OF AUSTRALIA (Registrant) By: Name: James David Beecher Title: Group Financial Controller Date: 11 August 1999 160 Domestic Representation The members of the Bank’s Executive Committee, listed below, are located at: Level 3 48 Martin Place Sydney NSW 1155 Telephone (02) 9378 2000 Postal Address: GPO Box 2719 Sydney NSW 1155 Group Human Resources General Manager Les Cupper Institutional Banking Head of Institutional Banking Michael Katz Customer Service Division Head of Customer Service Division Alf Long Banking and Financial Services Head of Banking and Financial Services John Mulcahy Head of Products Neville Cox Technology Operations and Property Head of Technology Operations and Property Russell Scrimshaw Financial and Risk Management Group General Manager Michael Ullmer 161 International Representation Europe United Kingdom Senator House 85 Queen Victoria Street London EC4V 4HA Telephone: (44 171) 710 3999 Telex: 883864 Swift: CTBA GB 2L Facsimile: (44 171) 710 3939 General Manager Europe S Biggs Australian Financial & Migrant Information Service Senator House 85 Queen Victoria Street London EC4V 4HA Telephone: (44 171) 710 3999 Telex: 883864 Swift: CTBA GB 2L Facsimile: (44 171) 710 3939 Senior Consultant J O’Brien Grand Cayman CBA Grand Cayman PO Box 501 British West Indies Americas United States of America 599 Lexington Avenue (Level 17) New York NY 10022 Telephone: (1 212) 848 9200 Telex: TRT 177666 Swift: CTBA US 33 Facsimile: (1 212) 336 7725 General Manager Americas I M Phillips Singapore 50 Raffles Place #22-04 Singapore Land Tower Singapore 048623 Telephone: (65) 326 3877 Telex: RS 20920 Swift: CTBA SG SG Facsimile: (65) 224 5812 General Manager P Beswick Vietnam Suite 202-203A Central Building 31 Hai Ba Trung Hanoi Vietnam Telephone: (84 4) 826 9899 Facsimile: (84 4) 824 3961 Chief Representative P R Milton Indonesia Plaza BII Tower 11 (5th Floor) JI M.H. Thamrin No 51 Kav 22 Jakarta 10350 Indonesia Telephone: (6221) 318 4394 Facsimile: (6221) 318 4391 Chief Representative P R Milton Japan 8th Floor Toranomon Waiko Building 5-12-1 Toranomon 5 chrome Minato-ku Tokyo 105-0001 Japan Telephone: (813) 5400 7280 Facsimile: (813) 5400 7288 Telex: J 28167 Combank Swift: CTBA JP JTS General Manager D A Hazelton Australia Head Office 48 Martin Place (Level 3) Sydney NSW 1155 Telephone: (612) 9378 2000 Telex: AA 120345 Swift: CTBAAU2S Facsimile: (02) 9378 3023 Head of Institutional Banking M A Katz New Zealand Head Office ASB Bank Ltd ASB Bank Centre (Level 5) Corner Albert & Wellesley Streets Auckland New Zealand Telephone: (64 9) 373 3427 Facsimile: (64 9) 373 3426 Chief Representative G Porter Asia/Pacific Beijing, China 2910 China World Towers Beijing China World Trade Centre 1 Jianguomenwai Avenue Beijing 100004 People’s Republic of China Telephone: (86 10) 6505 5350 Facsimile: (86 10) 6505 5354 Chief Representative Y T Au Shanghai, China 805 Union Building 100 Yan An Road (East) Shanghai 200002 People’s Republic of China Telephone: (86 21) 6355 3939 Facsimile: (86 21) 6373 5066 Chief Representative Y T Au Hong Kong 1405-1408 Two Exchange Square 8 Connaught Place Central Hong Kong Telephone: (852) 2844 7500 Telex: (852) 60466 CTB HX Swift: CTB HK HH BKG Facsimile: (852) 2845 9194 General Manager S R J Holden 162 Contact Us www.commbank.com.au Corporate Directory 13 2221 13 2224 13 15 19 For your everyday banking including paying bills using BPAY (insert Bpay logo) Our automated service is available from 7am to 11pm (Sydney time), 365 days a year. From overseas call +61 13 2221. For a password and demonstration of the automated service, call our telephone staff between 8am and 8pm, Monday to Friday. To apply for a home loan, investment home loan or open an account Available from 8am to 10pm, 365 days a year. Commonwealth Securities Limited Easy, low cost access to the stock market By phone or Internet at www.comsec.com.au 1800 240 889 Telephone Typewriter Service A special telephone banking service for our hearing and speech impaired customers. The service covers all the services available on 13 2221. Available from 8am to 8pm, Monday to Friday. 1800 011 217 To report a lost or stolen card after hours or at weekends. Business Line For a full range of business banking solutions. Available from 8am to 8pm, Monday to Friday. Commonwealth Insurance Ltd For all your home insurance needs or visit www.commbank.com.au/insurance 13 1998 13 2423 13 2420 13 2015 Registered Office Level 1, 48 Martin Place Sydney NSW 1155 Telephone: (02) 9378 2000 Facsimile: (02) 9378 3317 Company Secretary JD Hatton Shareholder Information www.commbank.com.au Share Registrar Perpetual Registrars Limited Locked Bag A14 SYDNEY SOUTH NSW 1232 Telephone Freecall 1800 022 440 or (02) 9285 7111 Facsimile (02) 9261 8489 Internet www.perpetual.com.au Commonwealth Insurance Ltd For home insurance claims assistance 24 hours a day, 365 days a year Email Registry_syd@perpetual.com.au For enquiries on retirement and superannuation products, life insurance or managed investments. Available from 8am to 8pm (Sydney time), Monday to Friday. Unit prices are available 24 hours a day, 365 days a year. Australian Stock Exchange Listing Fully paid Ordinary Shares: CBA Annual Report To request a copy of the Annual Report please call (02) 9378 3229 Internet Banking You can apply for a home loan or credit card on the internet by visiting our website at www.commbank.com.au available 24 hours a day, 365 days a year. Do your everyday banking on our internet banking service NetBank at www.commbank.com.au/netbank available 24 hours a day, 365 days a year. To apply for access to NetBank, call Freecall 1800 022 955 between 8am and 8pm (Sydney time), Monday to Friday. Financial Calendar 2000 Interim Profit result and dividend announced Ex-dividend date Record date Interim dividend paid Final profit result and final dividend announced Ex-dividend date Record date Final dividend paid Annual General Meeting, Melbourne 2000 9 February 2000 17 February 2000 23 February 2000 31 March 2000 9 August 2000 17 August 2000 23 August 2000 29 September 2000 26 October 2000 163 

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