Commonwealth Bank of Australia
Annual Report 2001

Plain-text annual report

Commonwealth Bank of Australia ACN 123 123 124 Annual Report 2001 Table of Contents COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Results Overview.............................................................................................................................................................................4 Group Performance Summary ........................................................................................................................................................6 Strategy............................................................................................................................................................................................9 Outlook Statement...........................................................................................................................................................................9 Main Financial Indicators...............................................................................................................................................................10 Banking Performance Summary ...................................................................................................................................................13 Banking – Business Analysis ........................................................................................................................................................15 Banking Analysis of Performance Net Interest Income..............................................................................................................................................................18 Group Interest Margins and Spreads ..................................................................................................................................19 Other Banking Operating Income ........................................................................................................................................20 Charge for Bad and Doubtful Debts ....................................................................................................................................21 Provisions for Impairment ....................................................................................................................................................21 Funds Management - Business Analysis .....................................................................................................................................22 Life Insurance - Business Analysis ...............................................................................................................................................25 Summary of Life Insurance and Funds Management Valuations................................................................................................27 Group Operating Expenses...........................................................................................................................................................28 Other Group Items .........................................................................................................................................................................29 Integrated Risk Management Risk Management ................................................................................................................................................................31 Credit Risk ............................................................................................................................................................................31 Market Risk...........................................................................................................................................................................31 Operational Risk...................................................................................................................................................................32 Insurance Risk......................................................................................................................................................................33 Derivatives............................................................................................................................................................................33 Business Continuity Management.......................................................................................................................................33 Government Guarantee.................................................................................................................................................................33 Credit Rating ..................................................................................................................................................................................33 Capital Adequacy...........................................................................................................................................................................34 Description of Business Environment ...........................................................................................................................................35 Corporate Governance..................................................................................................................................................................38 Directors’ Report............................................................................................................................................................................41 Five Year Financial Summary .......................................................................................................................................................47 Financial Statements Statements of Financial Performance .................................................................................................................................50 Statements of Financial Position .........................................................................................................................................51 Statements of Changes in Shareholders’ Equity ................................................................................................................52 Statements of Cash Flows ...................................................................................................................................................53 Notes to the Financial Statements ......................................................................................................................................54 Directors’ Declaration ..................................................................................................................................................................151 Independent Audit Report ...........................................................................................................................................................152 Shareholding Information ............................................................................................................................................................153 2 Introduction The Management Discussion and Analysis of the Group’s results for the year ended 30 June 2001 that follows compares the current year income and expenses to proforma 30 June 2000 information. The proforma data combines Colonial normalised results with Commonwealth actual results. It is considered that analysis on this basis is more meaningful. The statutory financial statements, that follow the Management Discussion and Analysis (on pages 4 to 30), are all actual results for the Commonwealth Bank Group for each of the years presented. 3 Results Overview (Except where otherwise stated, all figures relate to the year ended 30 June 2001 and comparatives for the profit and loss are to the proforma combination of the Commonwealth Bank Group and Colonial Limited for the year ended 30 June 2000.) For the year ended 30 June 2001, the Commonwealth Bank Group recorded a net operating profit after income tax of $2,398 million. The net operating profit (‘cash basis’) for the year ended 30 June 2001 after tax, and before goodwill amortisation and appraisal value uplift is $2,262 million. This is an increase of $194 million or 9% over the year ended 30 June 2000. A fully franked dividend of 75 cents per ordinary share will be paid on 8 October 2001 to owners of ordinary shares at the close of business on 27 August 2001. On a cash basis, the dividend payout ratio for the year is 75.5% down from 85.3% for the prior year. The prior year ratio was inflated by the dividend payment to Colonial shareholders with only 17 days of Colonial contribution included in the Group result. The Group result comprised: Segment profit after tax - Banking - Funds Management - Life Insurance Net operating profit after tax and before goodwill amortisation and appraisal value uplift Banking $M 1,793 149 320 up 12% up 34% down 12% 2,262 up 9% The contribution to profit after tax from the Group’s banking businesses increased to $1,793 million, 12% over the prior year, reflecting: (cid:1) Net interest income growth of $318 million or 8%, which was achieved through an 8% growth in average interest earning assets compared with the prior year and a stable net interest margin of 2.78%. Other banking income growth of $203 million or 9%, notwithstanding a reduction in lending fees as a result of discounted and nil home loan establishment fee offers. Tax benefits totalling $84 million with $30 million relating to the effect of the reduction in the corporate tax rate on current year income tax and deferred increased recoupment of prior year, unrecognised tax losses of $54 million. tax balances, and the (cid:1) (cid:1) Funds Management The contribution to profit after tax from the Group’s funds management businesses increased to $149 million, 34% over the prior year. Funds under management (FUM) (excluding life insurance FUM) have grown by 18% to $77 billion, contributing to a 29% increase in funds management income, partly offset by increased volume related expenses such as sales and processing costs. The funds management business also manages internal funds of $24 billion on behalf of the life insurance businesses of the Group. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Life Insurance The contribution from life insurance to profit after tax was down $43 million to $320 million, 12% less than the prior year. This result reflects lower investment earnings on shareholders funds which have reduced the after tax profit from life insurance by $17 million, together with the effect of poor persistency and claims experience in Asia and New Zealand. Group Expenses Operating expenses across the Group increased 7% or $348 million to $5,170 million. The increase includes the effect of GST of $111 million and expenses from acquired and developing businesses of $90 million. The merger of the Colonial and Commonwealth Group businesses realised approximately $120 million of expense savings in the current year. Excluding these items, expenses increased by 5.5%, reflecting a 4% wage increase as a result of a domestic enterprise bargaining related arrangement and expenses international business. increased sales volume the domestic and in both Bad debt expense increased by $75 million to $385 million due to the stage of the credit cycle. Provision coverage ratios have remained strong. Income Tax Income tax expense has reduced by $190 million to $993 million, 16% less than the prior year. Of this reduction, $93 million relates to tax on behalf of life insurance policyholders. The balance of $97 million primarily results from the 2 percentage points reduction in the corporate tax rate to 34% and utilisation of previously unrecognised tax losses. The components of the segment results are detailed below: Banking(1) Total operating income Net interest income Other operating income Operating expenses Bad debt charge Income tax expense Operating profit after tax Net interest margin Lending assets (net of securitisation) (2) Average interest earning assets Funds Management Operating income (3) Operating expenses Income tax expense Operating profit after tax Funds under management (4) - Retail - Wholesale - Life insurance Life Insurance Operating margin - Australia and New Zealand - Asia Investment earnings on assets in excess of policyholder liabilities Operating profit after tax Life insurance assets $M 6,855 4,474 2,381 3,958 385 705 1,793 2.78% $B 150 161 $M 739 496 94 149 $B 101 34 43 24 $M 213 (21) 126 320 $B 39 up 8% up 8% up 9% up 9% up 24% down 6% up 12% down 1 basis point up 3% up 8% up 29% up 21% up 81% up 34% up 15% up 38% up 6% up 7% down 4% down $17m down 12% down 12% up 18% 4 Results Overview Appraisal Value Uplift(5) For the year ended 30 June 2001, appraisal values of the life insurance and funds management businesses increased by $1,267 million. Of the increase, $423 million comprised net profit of the businesses, $806 million represented the appraisal value uplift and the balance of $38 million represented the net capital movements. The appraisal value uplift comprises two elements. Firstly, $332 million arising from realised Colonial integration synergy benefits relating to the life insurance and funds management businesses which have been offset directly against goodwill; and secondly, $474 million of operating appraisal value uplift reflected in profit. Goodwill Amortisation The goodwill amortisation charged in determining the result for the year was $338 million. Key Performance Measures Return on equity (before abnormals) Return on equity (cash basis) Earnings per share (cents) (before abnormals)(6) Earnings per share (cents) (cash basis)(6) Total assets held and funds under management(6) 13.50% Refer Note (7) 12.83% up 0.37 percentage points 190 up 5 cents 179 down 2 cents $307bn up 8.4% As expected, the purchase of Colonial has resulted in a dilution of EPS (cash basis) during the first year. With the major integration milestones now achieved future results will benefit as the cost and revenue synergies are realised. Integration of Colonial the Significant progress has been made on integration of the Colonial businesses into the Group. Based on the work completed to date, cost and revenue synergies are expected to exceed the business case estimate of $380 million. The current forecast of the annualised synergies that will be realised when the integration is completed (by 30 June 2003) is of the order of $450 million. Additional costs associated with the integration work were identified during the year resulting in a $145 million increase in the provision for integration costs (before tax), bringing total once off integration costs to $545 million (Refer page 29 for detail). The major milestone achieved during the year was the integration of Colonial State Bank, which involved combining the distribution networks and the conversion of the Colonial equivalent systems Commonwealth Bank product systems. product to A new network staffing structure was introduced in October 2000, integrating the most effective sales and service elements of Commonwealth Bank and Colonial into a single, streamlined and customer focussed delivery system. Along with this new structure, 367 Colonial the branches were amalgamated or absorbed Commonwealth Bank branch network and two new call centres were established. into (1) (2) (3) (4) (5) (6) (7) Includes General Insurance. Net of loans securitised of $6,773 million ($3,006 million at 30 June 2000). Includes internal income. Includes internal and external FUM. AASB 1038 requires that all investments owned by a life company be recorded at market value. The ‘appraisal value uplift’ is the periodic movement in the Balance Sheet asset ‘excess of market value over net assets’. Comparison with actual 30 June 2000. Proforma results have only been prepared on a cash basis. 5 Group Performance Summary COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Full Year Ended Proforma Group 30/06/00(4) $M 30/06/01 $M Comparison 30/06/01 Actual vs 30/06/00 Proforma % 30/06/00 $M Profit and Loss - Summary Operating profit after tax (’cash basis (1) ’) Operating profit after tax and abnormal items 2,262 2,068 2,398 Refer note (5) Income Interest income Interest expense Net interest income Other banking operating income Total banking income Life insurance income (6) Funds management income Total Income Expenses Operating expenses - existing operations - business acquisitions and GST, net of synergies (2) Total operating expenses Charge for bad and doubtful debts Total Expenses Operating profit before goodwill amortisation, appraisal value uplift, abnormal items and income tax Income tax expense (6) Operating profit after income tax Outside equity interests (3) Operating profit after income tax and before goodwill amortisation, appraisal value uplift and abnormal items Abnormal items Income tax credit on abnormal items Appraisal value uplift Goodwill amortisation Operating profit after income tax attributable to shareholders of the Bank Contributions to profit (after tax) Banking Life insurance Funds management Profit after tax from operations (’cash basis (1) ’) Goodwill amortisation Appraisal value uplift Operating profit after income tax and before abnormal items Abnormal items after tax Operating profit after income tax 11,900 7,426 4,474 2,381 6,855 1,268 701 8,824 5,089 81 5,170 385 5,555 3,269 993 2,276 (14) 10,402 6,246 4,156 2,178 6,334 1,557 541 8,432 4,822 - 4,822 310 5,132 3,300 1,183 2,117 (49) 2,262 2,068 - Refer note (5) " - " 474 " (338) 2,398 " 1,594 1,793 363 320 111 149 2,262 2,068 (338) Refer note (5) " " " " 474 2,398 - 2,398 9 14 19 8 9 8 (19) 30 5 6 - 7 24 8 (1) (16) 8 (71) 9 12 (12) 34 9 1,678 2,700 8,842 5,123 3,719 1,951 5,670 326 143 6,139 3,407 - 3,407 196 3,603 2,536 820 1,716 (38) 1,678 967 20 92 (57) 2,700 1,513 129 36 1,678 (57) 92 1,713 987 2,700 (1) (2) (3) (4) (5) (6) ‘Cash basis’ for the purpose of this performance summary is defined as net profit after tax and before abnormal items, goodwill amortisation and life insurance and funds management appraisal value uplift. Business acquisitions include costs associated with acquisitions in the prior year including State Street Master custody operations, Trust Bank and the development of European Banking which increased expenses by $90 million, and net GST of $111 million. Offset against this figure are the Colonial integration expense synergies achieved to date of $120 million. Primarily includes 25% outside equity interest in the ASB Group. In August 2000 the Group purchased this 25% interest. Proforma Group represents the combined results of Commonwealth Bank and Colonial for the year ended 30 June 2000. The Colonial results have been adjusted for abnormal items and other items not considered part of the ongoing operations. Proforma results have only been prepared on a ‘cash basis’. Included within life insurance income is $94 million of tax relating to policyholder income (30 June 2000: $187 million). This item is also included in the income tax line in the above profit and loss. The net impact on the net profit after tax is therefore nil. 6 Group Performance Summary As at Balance Sheet - Summary Total Assets Total Liabilities Shareholders’ Equity Assets held and Funds under management On Balance Sheet Banking assets Life insurance funds under management Other life insurance and funds management assets Off Balance Sheet Funds under management (1) Banking Assets Life insurance and funds management assets External funds under management Shareholder Summary Dividends per share (cents) - fully franked Dividends provided for, reserved or paid ($million) Dividend cover (times - before abnormals) Dividend cover (times - cash) Earnings per share (cents) (2) (basic & fully diluted) before abnormal items after abnormal items cash basis (4) Dividend payout ratio (%) (3) before abnormal items after abnormal items cash basis (4) Net tangible assets per share ($) Weighted average number of shares (basic) Shares at end of period Number of shareholders Share prices for the period ($) Trading high Trading low End (closing price) 30/06/01 $M 230,411 210,563 19,848 191,333 24,527 14,551 230,411 76,954 307,365 191,333 39,078 76,954 307,365 30/06/00 $M 218,259 199,824 18,435 185,108 22,916 10,235 218,259 65,266 283,525 185,108 33,151 65,266 283,525 Comparison 30/06/01 vs 30/06/00 % 6 5 8 3 7 42 6 18 8 3 18 18 8 Full Year Ended 30/06/01 30/06/00 30/06/01 vs 30/06/00 % 5 20 17 (7) 136 1,720 1.4 1.3 190 190 179 71.2 71.2 75.5 10.19 1,260m 1,244m 709,647 34.15 26.18 34.15 130 1,431 1.2 1.4 185 291 181 83.5 53.0 85.3 9.18 927m 1,260m 788,791 27.95 22.54 27.69 (1) (2) (3) (4) funds management balances exclude $9.5 billion In accordance with ASSIRT reporting requirements the (2000: $8 billion) in funds under overlay management by Tactical Global Management. Calculated in accordance with AASB 1027: Earnings per Share. Dividends paid divided by earnings. The comparative ratios have been amended to the same basis as the current year. Previously this ratio was calculated as Dividend per share divided by Earnings per share. Excludes dividends on preference shares of $9 million. ‘Cash basis’ for the purpose of this performance summary is defined as net profit after tax and before abnormal items, before goodwill amortisation and life insurance and funds management appraisal value uplift. The 30 June 2000 dividend payout ratio was inflated by the payment of the final dividend to Colonial shareholders, but the Colonial Group only contributed 17 days profit to the 30 June 2000 result. 7 Group Performance Summary Performance Ratios (%) Return on average shareholders’ equity (1) before abnormal items after abnormal items cash basis Return on average total assets (2) before abnormal items after abnormal items cash basis Capital adequacy - Tier 1 Capital adequacy - Tier 2 Deductions Capital adequacy - Total Productivity Cost to total average assets ratio (3) Cost to assets held and funds under management (3) Staff expense/Total operating income (4) Total operating income per FTE (5) Cost to income ratios (%) Banking Funds management Life insurance Other Information (numbers) Full time staff Part time staff Full time staff equivalent COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Full Year Ended Proforma Group(6) 30/06/00 % Refer note (7) Refer note (7) 12.46 Refer note (7) Refer note (7) 1.03 7.49 4.75 (2.49) 9.75 30/06/01 % 13.50 13.50 12.83 1.07 1.07 1.01 6.51 4.18 (1.53) 9.16 30/06/00 % 22.06 34.78 21.61 1.08 1.70 1.06 7.49 4.75 (2.49) 9.75 2.30 1.75 26.75 $252,400 2.40 1.83 n/a $227,088 2.15 1.85 27.77 $211,842 57.70 67.10 59.50 31,976 7,161 34,960 57.40 71.60 52.10 34,154 7,383 37,131 55.80 67.30 46.00 34,154 7,383 37,131 (1) (2) (3) (4) (5) (6) (7) Ratio based on operating profit after tax and outside equity interest applied to average shareholders equity, excluding outside equity interests. Based on operating profit after tax and outside equity interest. Averages are based on beginning and end of year balances. 30 June 2000 includes Colonial assets weighted for the 17 days from 13 June 2000 to 30 June 2000. 30 June 2000 includes Colonial assets weighted for the 17 days from 13 June 2000 to 30 June 2000. The effect of lower investment earnings and MOS profits in the current year increased this ratio over the prior year. 30 June 2000 includes Colonial FTE staff numbers weighted for the 17 days from 13 June 2000 to 30 June 2000. Proforma Group represents the combined results of Commonwealth Bank and Colonial for the year ended 30 June 2000. Proforma results have only been prepared on a cash basis. 8 Strategy and Outlook Overview of Group Outlook Statement Commonwealth Bank of Australia provides a wide range of banking, financial and related services primarily in Australia and New Zealand. These services include personal, business and corporate banking, life insurance and funds management. On 13 June 2000 the Group acquired 100% of Colonial Limited (Colonial) a life insurance, banking and funds management group. Colonial had operations in Australia, New Zealand, the United Kingdom and throughout Asia and the Pacific. The Commonwealth Bank of Australia became the successor in law to the State Bank of New South Wales (known as Colonial State Bank) and to all the assets and liabilities of State Bank of New South Wales effective on 4 June 2001 pursuant to legislation. Strategic Initiatives The demand for banking and financial services is the is also being driven by three major forces: (cid:1) The convergence of technology and information, with the Internet a significant influence. The need to provide relevant long term savings and investment products for an ageing population. The need to satisfy the day to day individual requirements of personal and business customers. Changing customer needs is heightening (cid:1) (cid:1) demand encouraging demands for more regulation. information and advice, but for A more challenging, uncertain environment, continuing pressure on margins and a weaker domestic currency, each pose significant challenges. Within this globalising yet more customer focused environment, the Group’s major assets are its domestic scale and management capabilities, a pre-eminent brand and a strong, diversified business mix. Consistent with this context, the Group’s vision is to be recognised as having the best brands in helping customers manage and build wealth. A set of business goals underpins the achievement of the Group’s vision. Each operating division in turn has a series of strategies that are consistent with, and directed at the collective achievement of those business goals, which are to: (cid:1) Provide customised service to grow revenue per customer. Develop best team. Develop offshore opportunities. Achieve global best-practice costs. The strategic emphasis is on wealth management services that are aligned to customers’ needs, and the use of improve both service and productivity. technology (cid:1) (cid:1) (cid:1) to Recovery in the major global economies continues to be uncertain putting at risk the sustainability of current growth rates in Australia, even with a historically low exchange rate. Interest rates are expected to remain low, around the levels of the past six months. Equities markets will continue to reflect uncertainty about the global economy and corporate earnings. Credit quality in the business sector is expected to continue to weaken reflecting the normal lag from an economic slow-down. However, low interest rates should moderate the severity of the credit cycle. Uncertainty in the equities markets may affect investment returns in the insurance businesses and dampen revenue on investment management activities; however, continued strong growth of retail funds should be achieved in the light of the current momentum in the business and Government policy on superannuation. Lending volumes are expected to continue at recently achieved growth rates, supported by low interest rates and reasonable demand for credit. However, bank margins are expected to continue to decline reflecting the competitive environment witnessed over recent years. With the successful completion of the critical phases of the Colonial integration, the Bank is positioned to achieve the benefits of integration synergies. The Bank also expects that its strategic investments, including the Colonial merger, will improve its competitive position by enhancing customer service, revenue and efficiency. Directors expect that the Group will continue to maintain a high ratio of dividends to cash earnings relative to peer financial institutions. 9 Main Financial Indicators Graphs presented in this section include half yearly comparisons with prior years on a proforma basis where this information displays a more relevant trend. Net Operating Profit (Cash basis) (cid:1) The Group recorded a net operating profit before goodwill amortisation and appraisal value uplift for the year of $2,262 million. This result represents a 9% increase over last year. The result for the six months to 30 June 2001 of $1,153 million represents an increase of 11% over the prior comparative period. Operating Income (cid:1) for interest the year was income of $4,474 represents an Total operating income $8,824 million, an increase of 5% over last year. Net increase of 8% over last year. Other banking operating income of $2,381 million, represents an increase of 9% over last year. External funds management income of $701 million (before $38 million of internal income) represents an increase of 30% over last year. Life insurance income of $1,268 million represents a decline of 19% over last year. Cost Ratios (cid:1) The Banking cost income ratio has declined from 59% for the half year ended June 2000 to 58% for the current half year. The funds management cost income ratio has declined from 70% in the half year ended June 2000 to 68% for the current half year. The increase in the ratio over the past six months reflects one off costs incurred in aligning Stewart Ivory with the Colonial business in the United Kingdom. The life insurance cost income ratio has increased from 53% for the half year ended June 2000 to 60% for the current half year due to lower investment earnings and poor persistency and claims experience in Asia and New Zealand. (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 1,200 1,000 800 600 400 200 0 1,033 1,035 1,109 1,153 Proforma Dec 99 Proforma Jun 00 Dec-00 Jun-01 s n o i l l i M $ 70% 59% 53% 66% 60% 58% 68% 60% 58% 73% 56% 52% 75% 70% 65% 60% 55% 50% 45% 40% Proform a Dec 99 Proform a Jun 00 D ec-00 Jun-01 Banking Life Insurance Funds Managem ent 10 Main Financial Indicators Lending Assets Growth Lending assets spot balances (net of securitisation) have increased by $5 billion or 3% over the prior financial year. The majority of this growth has been achieved in housing during the six months ending June 2001, and reflects improved market conditions and the effect of Group strategic initiatives. Funds Under Management (cid:1) (cid:1) Total funds under management (FUM) at 30 June 2001 were $101 billion, a 15% increase for the year. Total FUM consists of $77 billion in external FUM and $24 billion in FUM managed on behalf of the life insurance business (Refer table on page 23). Retail FUM (including international funds) have increased by $10 billion or 42% for the year. (cid:1) Wholesale FUM (including international funds) have increased by $2 billion or 6% over the year. The Group’s $74 billion of assets. custody business administers (cid:1) Note: (1) (2) (3) Internal Managed Life FUM relates to the funds managed for the Life Insurance businesses of the Group. Total FUM as reported by ASSIRT is re``presented by Retail, Wholesale and Internal FUM, excluding $3 billion of international funds. The Wholesale balance of FUM has been adjusted due to the change in ASSIRT policy of reporting the Tactical Global Management fund under overlay management on a cash basis from March 2001, as opposed to reporting the total market exposure. the wholesale balance has been As a result reduced by $9.5 billion (2000: $8 billion). 11 Main Financial Indicators Shareholder Returns Earnings Per Share Earnings per share is up 3 cents in the half year ended June 2001 compared with the first half. This reflects the progressive realisation of synergies from the Colonial integration. Return on Equity (cid:1) Return on Equity (before abnormals) for the half year ended June 2001 has increased by 1.52 percentage points over the half year ended December 2000 from 12.74% to 14.26%. The annual return on equity before abnormals was 13.50%. Return on Equity (cash basis) for the half year ended 30 June 2001 has increased by 0.64 percentage points over the half year ended 31 December 2000 from 12.46% to 13.10%. The annual return on equity (cash basis) was 12.83%. (cid:1) COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 100 23.07% 22.58% 21.19% 20.78% EPS c 75 50 25 0 12.74% 12.46% 14.26% 13.10% 90 91 88 91 Dec-99 Jun-00 Dec-00 Jun-01 25% 20% 15% 10% 5% 0% ROE Earning per share - cash basis ROE - cash basis ROE - before abnormals Share Price Performance Total Shareholder Return (TSR) is calculated using movements in the share price assuming all dividends are reinvested. The five year return to 30 June 2001 is 34.2%. % 50 40 30 20 10 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Total Shareholder Return (TSR) for 5 years (%) Average TSR (ANZ, NAB, Westpac) 12 Banking Performance Summary The contribution from the Group’s banking business has increased 12% over the prior year to $1,793 million, with net interest earnings increasing by 8% to $4,474 million and other banking income increasing by 9% to $2,381 million. Average interest earning assets have increased by 8% over the prior year to $161 billion. Underlying profit, before tax and bad debts has increased by 7% over the prior year to $2,897 million. Full Year Ended Proforma Group(3) 30/06/00 $M 30/06/01 $M Comparison 30/06/01 vs 30/06/00 Proforma % Actual 30/06/00 $M Operating Profit after Tax from operations (1) 1,793 1,594 1,513 Lending Assets (2) Average interest earning assets (6) Average interest bearing liabilities Risk weighted assets Net impaired assets Performance Ratios (%) Net interest margin General provision/Risk weighted assets Total provisions/Gross Impaired assets (net of interest reserved) Non-interest income/Total operating income Cost to average assets ratio Cost to income ratio (4) Other Information (numbers) Branches/service centres (Australia) (8) Agencies (Australia) (7) ATMs (9) EFTPOS terminals EzyBanking sites Banking Margin(5) The ratio of total banking income to average total banking assets (including securitisation) has declined at an increasing rate from 4.36% at 30 June 1996 to 3.58% for the year ended 30 June 2001. This reflects how net interest margins have decreased over this period, but have only been partly offset by increases in other sources of banking income, leading to the lower net cost of banking to customers. this, Despite tax has continued to grow, reflecting strong asset growth, new service lines and cost efficiencies. the Group’s profit after 12 3 8 7 8 (27) (5) 41 1 - 1 149,776 160,607 145,978 138,383 415 145,159 149,106 135,801 128,484 572 145,159 129,163 117,075 128,484 572 2.78 1.01 251.6 34.7 2.1 57.7 2.79 1.06 178.3 34.4 2.1 57.4 2.88 1.06 178.3 34.2 2.0 55.8 1,066 3,928 3,910 122,074 659 1,441 4,020 4,141 116,064 603 1,441 4,020 4,141 116,064 603 4.36% 4.09% 4.02% 3.94% 3.76% 3.58% 6% 5% 4% 3% 2% 1% 0% Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 (1) (2) (3) (4) (5) (6) (7) (8) (9) Represents operating profit after tax and outside equity interest and before goodwill amortisation and abnormal items. The 30 June 2000 result includes $6 million of Colonial profit for the period 13 June 2000 to 30 June 2000. Lending Assets represents loans, advances and receivables and bank acceptances excluding provisions for bad and doubtful debts and securitised balances. Securitised balances are not included in lending assets and amounted to $6.8 billion as at 30 June 2001 compared to $3.0 billion as at 30 June 2000. Proforma Group represents the combined balances of the Commonwealth Bank and Colonial State Bank for the year ended 30 June 2000. The factors affecting the Group and banking cost to income ratio are discussed on page 28. Banking Margin represents total Banking income divided by total average Banking assets. Interest earning assets increased significantly in the latter half of the June 2000 year. This increase did not have a large impact on average assets for the prior year but resulted in a much higher average interest earning asset balance for the current year. Includes Australia Post and private agencies. Comparatives have been restated for a definitional change where Colonial single point operators have been reclassified to branches. Includes third party ATMs. 13 Banking Performance Summary COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Major Balance Sheet Items As at Loans, advances and other receivables (1) Gross Housing Securitisation Housing (net of securitisation) Personal Business Corporate Bank acceptances Total lending assets Trading securities Corporate Deposits and other public borrowings Personal Business Corporate Debt issues Corporate 30/06/01 $M 30/06/00(3) $M Comparison 30/06/01 vs 30/06/00 % 80,284 (6,773) 73,511 7,768 32,224 24,198 12,075 149,776 73,744 (3,006) 70,738 8,533 32,437 22,343 11,108 145,159 6,909 7,347 58,620 16,351 42,384 117,355 56,337 14,056 42,201 112,594 24,484 25,275 9 large 4 (9) (1) 8 9 3 (6) 4 16 0 4 (3) Detailed analysis of the above is provided in Banking - Business Analysis. (1) Loan balances are before provisions for impairment. Operating Profit Summary Interest income Interest expense Net interest income Other operating income Total operating income Operating expenses Underlying profit Charge for bad and doubtful debts Operating profit before abnormal items, goodwill amortisation and income tax Income tax expense Outside equity interests Operating profit after income tax, before abnormal items and goodwill amortisation Full Year Ended Proforma Group(2) 30/06/00 $M 10,402 6,246 4,156 2,178 6,334 3,633 2,701 310 2,391 748 49 1,594 30/06/01 $M 11,900 7,426 4,474 2,381 6,855 3,958 2,897 385 2,512 705 14 1,793 Comparison 30/06/01 vs 30/06/00 Proforma % Actual 30/06/00 $M 8,842 5,123 3,719 1,951 5,670 3,164 2,506 196 2,310 759 38 1,513 14 19 8 9 8 9 7 24 5 (6) (71) 12 Detailed analysis of the components of Banking Operating Profit is provided in Banking Analysis of Performance. (2) (3) Proforma Group represents the combined balances of the banking operations of Commonwealth Bank and Colonial for the year ended 30 June 2000. Prior year figures have been adjusted to align with categories as at 30 June 2001 following the amalgamation of Colonial operations and product systems. 14 Deposit Products As at 30 June 2001, the Group’s retail deposit base in Australia stood at approximately $58.6 billion, a 4% increase from June 2000. The Group is the largest acceptor of retail deposits in Australia with a market share of 24.0% at June 2001 compared with 25.3% at June 2000 (Source: APRA All banks). However, there was a planned reduction due to the non-renewal of some high cost Colonial certificates of deposit with consequent benefits to interest margins. Share Trading Commonwealth Securities maintained its position as the leading broker in Australia in terms of the number of transactions. The total number of clients increased over the year from 537,000 to 652,000 at 30 June 2001. Over 80% of CommSec trades are now conducted online with the balance by telephone. Service and efficiency has been improved through the launch of initiatives such as Voice Broker, a speech recognition system and enhanced Straight Through Processing across all channels. Business Products Business Lending At 30 June 2001, total Business Lending (excluding to $32.2 billion, bank acceptances) amounted representing a marginal decline during the year. Corporate Products Lending balances Corporate to $24.2 billion at 30 June 2001, representing an increase of 8% or $2 billion during the year. Corporate Deposits have risen slightly at 30 June 2001 to $42.4 billion (including certificates of deposit). amounted The Group’s Institutional Banking Division services the Group’s corporate clients with turnover of more than $40 million per annum, Government entities and other major financial institutions. The products offered include financial markets, securities corporate underwriting, trading and distribution, equities, payments and transaction services, investment management and custody. Many of these products are offered globally to match the international operations of the Group’s clients. Highlights during the year included the following: finance, Financial Markets There was a strong growth in the contribution of Financial Markets with Trading income up 30% due to increased volume of client transactions and underlying market volatility. Financial Markets continues to offer a wide range of innovative risk management solutions to clients. New developments this year included various energy risk management transactions for clients using swaps and options, the development of products related to the environment the creation of a consumer the Australian oriented Greenhouse Office, and the continual development of financial risk management products including Best of Two Asset Options, Margin Locks, Floating Rate Par Forwards and Average Strike Options. labelling programme with including Banking - Business Analysis (All figures relate to the year ended 30 June 2001. All comparisons are to 30 June 2000 unless otherwise stated. Market share statistics exclude ASB Bank.) As shown in the Banking Performance Summary, total lending assets have grown by $4.6 billion to $149.8 billion during the year to 30 June 2001. As at 30 June 2001, securitised home loan balances amounted to $6.8 billion, an increase of $3.8 billion over the year. Allowing for this, gross lending assets have increased by $8.4 billion or 6% since 30 June 2000. Despite this growth, the market has remained very competitive and the Group has experienced a small decline in market share in the major product groups over the year. During the early part of the year, while the Group focussed on the more complex planning stages of integration, some business momentum was lost. Over the second half of the year the Group regained part of this. An analysis of the areas of growth is detailed below. Personal Products Housing Loans The Group’s home loan outstandings, including securitisation, totalled $80.3 billion at 30 June 2001, a 9% increase over the year. Securitised balances were $6.8 billion as at 30 June 2001 compared to $3.0 billion as at 30 June 2000. Growth in home loans was affected in the first half by the impact of the GST, the Sydney Olympics and significant growth in non-traditional mortgage origination such as mortgage broker channels. However, campaigns undertaken to drive balance sheet growth resulted in stronger sales in the second half, limiting the decline in the Group’s total market share of home loans, which was 20.3% at June 2001 (source: APRA 06/01). Personal Lending Personal Lending balances at 30 June 2001 amounted to $7.8 billion, a reduction of $0.8 billion compared with the balance at 30 June 2000. The principal balances included within Personal Lending are credit card outstandings and personal loans. These are discussed below. Credit Cards Credit card outstandings for the Group totalled just over $3.8 billion at 30 June 2001, a 9% increase from the balance of $3.5 billion at 30 June 2000. The Group has maintained strong new cardholder the number of the year with account growth for cardholder accounts to 2.8 million. The increasing number of merchants increased to over 146,000 from last year with growth encouraged through expanded Internet services to merchants. The Group’s market share of Credit Cards has declined marginally to 26.3% as at May 2001 from 27.8% last year (Source: ABA). Personal Loans Personal loan outstandings for the Group totalled $3.5 billion at 30 June 2001 compared with $4.2 billion as at 30 June 2000. During the half year to 31 December the reduction was due partly to $0.5 billion of loans to individuals for infrastructure borrowings which matured. The Group continues to hold the largest share of the personal loan market with 21.9% as at June 2001 compared to 23.9% last year (Source: APRA 06/01). 15 Banking – Business Analysis (cid:1) innovative non-recourse project Corporate Finance Corporate Finance undertook a number of substantial transactions in the twelve months to 30 June 2001 including: (cid:1) financing An transaction in Victoria for Pulse Energy to fund the acquisition of retail gas and electricity customers in Victoria. Joint lead underwriter and arranger of financing for the Worsley Alumina Billiton’s acquisition of Refinery. Joint lead arranger for a syndicated facility for an acquisition by CSL Limited. A cross border leasing transaction in the United Kingdom on behalf of the Royal Mail. Co-arranger of a debt package to support an acquisition by Amatek Holdings. Over $17 billion of capital was raised for clients in the year to 30 June 2001 which represents a 49% growth on that raised in the previous financial year. Of this amount 39% was by originations, 36% financing by direct lending and the balance by syndicated loans and equity. (cid:1) (cid:1) (cid:1) Equity Capital Markets The Group established a position in the equity capital markets during the year and participated in a number of raisings including managing the Initial Public Offering of shares by Pan Pharmaceuticals and underwriting and distributing the Resettable Preference Share Issue for Australand Holdings. Transaction Services Transaction Services, which provides cash through corporate for clients management solutions accounts, services, and payments experienced strong growth over the financial year. The payments business is now positioned as a leader in high volume payment processing and the Group is the largest clearer in the domestic market. information Commonwealth Custodial Services Commonwealth Custodial has consolidated its position in the market with $74 billion of assets under administration at 30 June 2001. Services Customer Service The Group operates the largest financial services distribution network in the country, with sales and service provided through a wide range of direct customer contact, self-service and third party channels. The integration of the Colonial banking operations over 2000/01 has further expanded the range of delivery options available to our customers. Strategic emphasis is on generating customer service, value and efficiency across the distribution network, with a number of transformational changes to management structures and systems over 2000/01 providing a strong platform for future growth. Direct contact service channels The combined branch network of Commonwealth and Colonial was reduced by 375 over 2000/01, from 1,441 as at June 2000 (1,074 Commonwealth, 367 Colonial) to 1,066 as at June 2001. Included in this reduction were 290 integration-related amalgamations. In addition, 536 branches were refurbished during the year. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES In integrating Colonial operations, a key priority was to ensure that the particular skills and competencies of both organisations were effectively leveraged going forward. A number of former Colonial franchisees have been retained in key network roles, including 15 in Regional and Rural locations. Through integration, a wider range of branch types is now available to customers, with further reconfiguration of the network planned to better meet the needs of locations and customer segments. A new specific network structure introduced in October 2000 draws on the best elements of both organisations to improve alignment and customer focus in key markets. Together with the implementation of a new sales and service system promoting greater ownership, leadership accountability and these changes are translating into a more client focussed, efficient, effective and committed delivery network. for performance, reward In addition to branches, there were important developments in a number of other direct customer the year. A comprehensive contact channels over transformation was of management structures and systems across the Group’s Business Banking arm thereby allowing the number of Business Banking Centres to be reduced from 97 to 83. undertaken The Group’s mobile banker sales force continues to play an important role in the home loan market, meeting customer demand for greater convenience and accessibility. In support of the Group’s strategy to be positioned to meet the full financial needs of customers, insurance managers have been appointed, trained and accredited to meet the insurance risk needs of the Commercial Business, Middle Market and Personal Segments. As a result of the Colonial integration, the combined Financial Advisor network of Financial Planners and Investment Consultants has expanded to 670. This network is fully accredited to sell a suite of internal and external products. The Group’s direct customer contact network continues to be augmented by the alliance with Australia Post. Personal Banking services are available at 3,738 Australia Post agencies across the country, and following a successful trial, transactional banking services for business clients has expanded to 112 Australia Post locations. Electronic and Direct Banking Customer usage of direct and self-service banking continues to gain pace. The total number of transactions performed in direct/electronic channels increased by 22% over the year while teller transactions continued to decline. As a result, the proportion of total transactions carried out in-branch was further reduced, from 18.8% to 15.6% registrations surpassed 1.0 million, up from 320,000 last year. Over the year, NetBank processed some 152 million transactions, up from 49 million in the previous year. The Group’s total online customers numbered over 1.5 million (including Commonwealth Securities Ltd customers) at 30 June 2001. this year. NetBank customer Telephone banking password customers now exceed 5 million (up 33%). During the year, in excess of 110 million calls were received on the 132221 customer service line (up 11%), peaking at 2.5 million calls per week. Two new call centres were established over the to both meet public assurance year, designed commitments arising from integration and to cater for our expanding requirements going forward. 16 Banking - Business Analysis ATM and EFTPOS usage continue to grow strongly, with total transactions up 6% and 40% respectively over 2000/01. The group retains the largest proprietary ATM and EFTPOS terminal networks in the country (2,910 and 122,074 the transactions of a further 1,000 third party ATMs. respectively) plus acquired terminals Woolworths EzyBanking Woolworths EzyBanking is available through 659 Woolworths stores nationally. Sales of transaction accounts (Ezy Action) and credit cards (Ezy Mastercard) during the year have been above expectations with more than 425,000 account holders signed up as at 30 June 2001. Approximately 35% of these customers are new to the Commonwealth Bank Group. Third Party Through the acquisition of Colonial Limited, the Group has increased the range of distribution networks previously used to include: (cid:1) (cid:1) Multi-agents and life brokers. Authorised financial planners through wholly owned businesses. Independent financial planners. Insurance franchisers. Mortgage brokers. Distributors in these new channels number over 5,000. (cid:1) (cid:1) (cid:1) United Kingdom Given the high level of competition, opportunities are being explored to leverage the Group’s presence in the UK flowing from the Colonial acquisition. This will involve merging the Newworld UK business with the existing UK Wealth Management Business. New Zealand Banking Operations Growth in ASB’s banking operations was particularly strong in relation to personal, business and rural lending. This contributed to a total annual lending growth for total loans of 10%, compared to the market annual growth rate of 3.7% (Source: PSCR – Reserve Bank of New Zealand). Customer retention and customer acquisition were important drivers of volume growth, with the customer base increasing by 2.3% in the past year to reach over 880,000 customers. At 30 June 2001, ASB Bank had total assets of NZ$20.1 billion (2000: $17.3 billion), including total advances of NZ$16.2 billion (2000 $14.4 billion). 17 Banking Analysis of Performance Net Interest Income Interest Income Loans Other financial institutions Liquid assets Trading securities Investment securities Dividends on redeemable preference shares Other Total Interest Income Interest Expense Deposits Other financial institutions Short term debt issues Long term debt issues Loan capital Other Total Interest Expense Net Interest Income Net Interest Income 30/06/01 – Proforma 30/06/00 (up 8%) Net interest income for the year increased by 8% or $318 million from $4,156 million to $4,474 million. The increase in net interest income was the result of the growth in net interest earning assets. As shown on page 13, average interest earning assets grew by $12 billion or 8% from $149 billion at 30 June 2000 to $161 billion at 30 June 2001. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Full Year Ended Proforma Group(1) 30/06/00 $M 30/06/01 $M Comparison 30/06/01 vs 30/06/00 Proforma % Actual 30/06/00 $M 10,246 280 110 548 655 54 7 11,900 5,042 328 902 759 374 21 7,426 4,474 9,031 198 82 465 598 24 4 10,402 4,386 300 762 560 237 1 6,246 4,156 7,663 191 78 295 586 24 5 8,842 3,773 297 671 171 210 1 5,123 3,719 13 41 34 18 10 large 75 14 15 9 18 36 58 large 19 8 This generated additional net interest income of $334 million, offset by a small decline in the net interest margin from 2.79% to 2.78% resulting in a reduction in net interest income of $5 million, and a one day variance in the accounting periods reducing net interest income by $11 million. The table below highlights the effect of movements in net interest earning assets and interest margin on net interest income. Financial Year 2001 vs Proforma Financial Year 2000 $M Financial Year 2000 vs Financial Year 1999 $M Full Year INCREASE/DECREASE Due to changes in average volume of interest earning assets and interest bearing liabilities Due to changes in interest margin Due to days variance in periods Change in net interest income The growth in average interest earning assets reflects: A strong growth in home loans in the latter half of the year ended June 2000 as the market anticipated increased prices following the introduction of the GST. The current financial year had a slow first quarter in home lending, where the introduction of the GST and post Olympic factors contributed to softer market conditions. This was compounded by unexpected growth in the volume of originations through mortgage brokers. Home loan volumes picked up strongly over the rest of the year as a result of an extensive advertising campaign supported by nil establishment fee offers, and an improvement in market conditions. 334 (5) (11) 318 424 (232) - 192 While market share declined across a number of products, growth in balances over the final months reflected a strong level of home loan approvals. Commercial lending had a slow first half, however during the second half volumes improved providing clear indications that the extensive rebuilding programme undertaken across the network during 2000/01 is driving improved results. The acquisition of Trust Bank during the prior financial year contributed to the current year growth in average interest earning assets. (1) Proforma Group represents the combined results of Commonwealth Bank and Colonial for the year ended 30 June 2000. 18 Banking Analysis of Performance Group Interest Margins and Spreads The following table shows both actual and proforma margins and spreads for the Group for the June 2000 and June 2001 financial years. 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. Australia Interest spread (1) Benefit of interest free liabilities, provisions and equity (2) Net interest margin (3) Overseas Interest spread (1) Benefit of interest free liabilities, provisions and equity (2) Net interest margin (3) Group Interest spread (1) Benefit of interest free liabilities, provisions and equity (2) Net interest margin (3) for The calculations of margins and spreads Australia and Overseas include an allowance for transfer of offshore funding used to finance onshore lending. The lower overseas margins and spreads reflect the effect of the wholesale funding nature of that business. Full Year Ended Proforma Group 30/06/00 % 30/06/01 % Actual 30/06/00 % 2.56 0.43 2.99 1.06 0.55 1.61 2.32 0.46 2.78 2.58 0.40 2.98 1.10 0.42 1.52 2.38 0.41 2.79 2.71 0.42 3.13 1.22 0.30 1.52 2.47 0.41 2.88 (1) (2) (3) Difference between the average interest rate earned and the average interest rate paid on funds. A portion of the Group’s interest earning assets is funded by 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 interest income divided by average interest earning assets for the period. Group Interest Margin 30/06/01 – Proforma 30/06/00 (down 1 basis point) 30/06/01 – Actual 30/06/00 (down 10 basis points) The Group net interest margin for the year to 30 June 2001 decreased slightly by 1 basis point from the prior year to 2.78%. There was a number of factors which impacted the average rate. In addition to three cash rate increases in the latter part of the June 2000 financial year there was also one cash rate increase and three reductions in the year to June 2001. The net effect of the product repricing following these changes was to put pressure on the net interest margin. Partly offsetting this was the benefit to net interest margins from the difference of market driven short term wholesale rates being below official cash rates during the year due to an expectation by the market that official rates would fall. However, the market has started to anticipate the end of the easing cycle in official rates with the next move more likely to be an increase. Average deposit balances on low interest paying accounts were higher over the year than the prior year, mainly as a result of businesses accumulating their GST instalments. This benefited the net interest margin by increasing the amount of interest free liabilities. 19 Banking Analysis of Performance COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Other Banking Operating Income The following table sets forth the Group’s other banking operating income for the year ended 30 June 2001 together with comparatives. Lending fees Commission and other fees Trading income Dividends Net gain on investment securities Net profit on sale of property, plant and equipment General insurance premium income Less general insurance claims Other Total Other Banking Operating Income Full Year Ended Proforma Group 30/06/00 $M Actual 30/06/00 $M 30/06/01 vs 30/06/00 Proforma % 623 1,066 327 20 12 14 104 (55) 67 2,178 554 946 311 20 12 14 104 (55) 45 1,951 (3) 10 30 (30) large 79 3 4 (48) 9 30/06/01 $M 602 1,173 426 14 56 25 107 (57) 35 2,381 Other Banking Operating Income Trading Income 30/06/01 – Proforma 30/06/00 (up 9%) 30/06/01 – Proforma 30/06/00 (up 30%) Other Operating increased by 9% or Income $203 million from $2,178 million to $2,381 million during the current year. The principal reasons for the overall increase are set out below. Lending Fees 30/06/01 – Proforma 30/06/00 (down 3%) Lending fees have dropped by 3% or $21 million to $602 million over the prior year mainly due to a number of nil entry and discounted home loan establishment fee offers during the current year. This was part of the Group’s strategy to build lending balances to improve future earnings potential. The lower establishment fees were partly offset by increases in other lending fees based on higher volumes. Commission and Other Fees 30/06/01 – Proforma 30/06/00 (up 10%) Growth in commission and other fees has been driven by Credit Cards with increased sales activity from both merchants and cardholders, although growth has slowed since last year. There has been a 27% increase in the value of merchants sales and 20% increase in the value of credit cardholders sales. Retail transaction fees for the year to 30 June 2001 represent 12% of Other Banking Operating income (4% of total Banking Operating income) which is consistent with last year. The Group’s Financial Markets operations contributed $426 million of trading income, representing growth of 30% or $99 million on the previous year. Trading Income improved due to market volatility in the interest rate and foreign exchange markets. Volumes of client transactions grew significantly as a result of this higher level of underlying volatility. This growth in trading income did not result in significant additional risk exposure. Dividends 30/06/01 – Proforma 30/06/00 (down 30%) Dividend income represents dividends earned on the Group’s strategic investments. Net Gain on Investment Securities 30/06/01 – Proforma 30/06/00 (up $44 million) Gains during the current year included the sale of the Brisbane Airport investment and the sale of the Group’s interest in IPAC Securities. Net Profit on Sale of Property Plant and Equipment 30/06/01 – Proforma 30/06/00 (up 79%) The Group continued leaseback strategy during the current year, with the sale of several major properties within the Sydney CBD. its sale and General Insurance Income (net of claims) 30/06/01 – Proforma 30/06/00 (up 3%) General Insurance premium income less claims has remained stable at $50 million during the current financial year. 20 Banking Analysis of Performance Charge for Bad and Doubtful Debts The following table sets out the charge for bad and doubtful debts for the year ending 30 June 2001 together with comparatives. 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 Full Year Ended 30/06/01 $M Proforma Group 30/06/00 $M Actual 30/06/00 $M 495 (84) 411 (411) - 35 (88) 27 411 385 385 n/a n/a 246 (246) - 34 (54) 84 246 310 310 236 (96) 140 (140) - 34 (54) 76 140 196 196 Total charge for bad and doubtful debts increased by 24% to $385 million during the year to 30 June 2001, primarily relating to a small number of large corporate and commercial lending exposures that became impaired during the year and were provisioned for potential loss. Provisions for Impairment As at General Provisions Specific Provisions Total Provisions Total provisions for impairment as a % of gross impaired assets net of interest reserved Specific Provisions for impairment as a % of gross impaired assets net of interest reserved General provisions as a % of risk weighted assets Total Provisions for Impairment for the Group at 30 June 2001 were $1,633 million, down 8.8% from 30 June 2000. This level of provisioning is considered adequate to cover any bad debt write offs from the current lending portfolio having regard to the current outlook. Specific provisions for impairment have decreased 46% from $432 million to $234 million from 30 June 2000 to 30 June 2001, primarily as a result of increased write offs of the impaired asset portfolio including the effect of applying the Commonwealth policy to Colonial portfolios. 21 30/06/01 $M 1,399 234 1,633 30/06/00 $M 1,358 432 1,790 251.6 178.3 36.06 1.01 43.03 1.06 for The general provisions impairment have increased to $1,399 million at 30 June 2001 from $1,358 million at 30 June 2000, an increase of 3%. The general provision as a percentage of Risk Weighted Assets is at 1.01%, down from 1.06% at 30 June 2000. This level is consistent with that of other major Australian banks. Gross impaired assets less interest reserved have decreased 35% from $1,004 million to $649 million over the year. This has been primarily due to additions to gross impaired assets (including interest reserved) for the year of $707 million which have been more than offset by write offs and realisations totalling $1,125 million. This has resulted in a decrease in the coverage ratio of specific provisions to 36.06% from 43.03%, reflecting the positive management of impaired assets, which were generally well provisioned, and have now been written off. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Funds Management – Business Analysis The funds management businesses have contributed $149 million to the Group’s result for the year. This represents an increase of $38 million or 34% over the prior year. The growth in operating profit reflects strong growth in external funds under management which have increased by $11.7 billion to $77 billion. Funds management income has increased by 29% partly offset by an increase in variable sales and processing expenses. The following tables set forth the Group’s Funds Management result for the year ending 30 June 2001 together with comparatives. Funds Management Operating income - external Operating income - internal (1) Total operating income Operating expenses Operating profit before tax Income tax expense Operating profit after tax Full Year Ended Proforma Group 30/06/00 $M 30/06/01 $M Comparison 30/06/01 vs 30/06/00 Proforma % Actual 30/06/00 $M 701 38 739 496 243 94 149 541 32 573 410 163 52 111 143 10 153 103 50 14 36 30 19 29 21 49 81 34 The Funds Management business manages both internal funds (Life Insurance statutory fund assets) and external funds (wholesale and retail). The tables below show the split of each type of funds managed. As at Assets held and funds under management (FUM) (2) Funds management (4) (5) Internal life insurance funds Total FUM Other life and funds management assets (3) Total Australia United Kingdom New Zealand Asia Total Total expenses to funds under management (6) Total funds management expense to Income (7) 30/06/01 $M 30/06/00 $M 30/06/01 vs 30/06/00 % 76,954 24,527 101,481 14,551 116,032 91,810 14,953 4,650 4,619 116,032 0.5% 67.1% 65,266 22,916 88,182 10,235 98,417 72,456 19,202 3,270 3,489 98,417 0.5% 71.6% 18 7 15 42 18 27 (22) 42 32 18 n/a n/a (1) (2) (3) (4) (5) (6) (7) Income received from the life insurance business to manage statutory funds. Excludes non-Group funds under trusteeship, custody and administration. Includes life investment assets managed by parties other than the Group funds management businesses, and other non-investment life assets (including excess of market value over net assets of life insurance subsidiaries). Funds under management exclude funds under tactical overlay management. In accordance with revised ASSIRT reporting requirements 30 June 2000 comparatives have been restated to exclude $8 billion in funds under tactical overlay management at 30 June 2000 and $9.5 billion from 30 June 2001. Represents total external funds under management of the Group. ASSIRT reporting includes external funds under management, and funds managed on behalf of the life insurance companies in the Group which are included within life insurance assets. ASB Group funds under management are not included in the ASSIRT reporting. The 30 June 2000 ratio is calculated on a proforma basis. Total funds management expense to income ratio is calculated on a gross of commission basis due to the differing cost structures of the funds management businesses across the Group. The 30 June 2000 ratio is calculated on a proforma basis. 22 Funds Management – Business Analysis The analysis of the movement of funds by product category is as follows: Year to Date June 2001 Opening Balance Inflows Outflows (9) Portfolio and Other Returns Closing Balance Funds Under Management $M (including Life Insurance) Retail Wholesale (8) Internal managed life Total FUM Other Life assets (3) Total 24,554 40,712 22,916 88,182 10,235 98,417 20,616 13,228 4,964 38,808 3,051 41,859 (12,337) (12,436) (5,045) (29,818) - (29,818) 1,115 1,502 1,692 4,309 1,265 5,574 33,948 43,006 24,527 101,481 14,551 116,032 (8) Wholesale opening balance has been reduced by $8 billion to exclude tactical overlay management (Refer Note 4). (9) Internal managed life outflows include the transfer of $2.5 billion of funds during the current financial year relating to assets acquired by Winterthur as part of the sale of Colonial UK Life. 23 Funds Management – Business Analysis COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Performance Analysis The result has been driven by a strong growth in income, which has increased by $166 million from $573 million in the financial year ended 30 June 2000 to $739 million in the current financial year. This growth in income is due to an increase of $13 billion or 15% in funds under management (FUM). for Expenses the business increased volumes; however, some one off expenses were incurred in integrating the Stewart Ivory acquisition into the First State business in the United Kingdom. reflect Tax expense has the non-recognition of tax benefits in relation to certain offshore tax losses. increased due to Funds Under Management Performance The combined Commonwealth and Colonial First State funds management business rank first in terms of both retail and wholesale FUM (Source: ASSIRT March 2001). Total external FUM have increased by $11.7 billion or 18% to $77 billion over the year to 30 June 2001. Internally managed increased by 7% or $1.6 billion over the year to 30 June 2001. The combined life insurance assets and funds under management totalled $116 billion at 30 June 2001 (Refer page 22). life FUM The growth in assets held and funds under management of $18 billion to $116 billion was achieved across retail ($9 billion), wholesale ($3 billion) and life insurance assets ($6 billion). Colonial First State Investments Colonial First State Investment’s (CFSI) FUM grew 23 % with strong growth recorded in both wholesale and retail funds. New business inflows remained strong during the year, particularly in Australia. The number of active accounts in Australia increased from 565,000 at 30 June 2000 to 793,000 at 30 June 2001, representing an increase of 40%. This enabled Colonial First State to improve its retail market share from 5.4% to 6.1% (Source: ASSIRT March 2001). Colonial First State continues to have a five star rating. During the year, the property asset management businesses of Commonwealth Property and Colonial First Sate were merged, giving the combined group approximately $12 billion in property assets under management. Commonwealth Funds Management Businesses Commonwealth Funds Management Businesses total FUM grew by 6 % over the year mainly due to strong retail funds growth which increased 78% over the year to $12 billion at 30 June 2001. This included the transfer in of $2.3 billion of funds from Colonial life which were previously managed by CFSI. Excluding this transfer the increase was 44% for the year. This growth reflected strong sales in retail unit trust (entry fee product) and retail cash management trusts. As at 30 June 2001 $9 billion was managed on behalf of a diverse range of wholesale and including semi-government entities, corporations, investment funds and superannuation funds. clients, state, local New Products and Initiatives The CFSI group continued to develop its international business in the United Kingdom and Asia, which trade under the name of First State Investments. In the UK, the integration of the Stewart Ivory business (acquired in March 2000) was completed giving the UK business a funds management and private client platform for growth. In Hong Kong, a number of new products were launched including the New China Fund, which invests in Chinese corporations through the Chinese and Hong Kong stock markets. A number of enhancements to CFSI’s online services were made during the year including extensions to FirstNet Adviser, an online service that allows advisors enquiry access to their clients’ investment details. CFSI investors can transact online, with functionality allowing additional investments to existing accounts, withdrawals to a nominated bank account and switching of investment monies between a range of Managed Investment Funds. In May 2001, CFSI launched the Diversified Private Equity Fund, a public offer fund that invests in a portfolio of quality unlisted companies. 24 Life Insurance – Business Analysis life The insurance operations contributed $320 million to the Group’s result for the year, which is a decrease of $43 million from $363 million for the year to 30 June 2000. The effect of the decline in world equity markets on investment earnings on life insurance funds, together with poor claims and persistency experience were the principal reasons for the reduction in the profit from life insurance operations. As at 30 June 2001, life insurance assets totalled $39 billion, an increase of $6 billion or 18% over the year. The results from the Group’s life insurance operations are detailed on the following pages. During the early part of the year while the Group focussed on the more complex planning stages of integration, some business momentum was lost. The Group is now starting to regain part of this. The following table sets forth the Group’s Life Insurance Income result for the year ending 30 June 2001 together with comparatives. Summary Profit and Loss (excluding abnormal income and appraisal value uplift) 30/06/01 $M Life Insurance Margin on Services operating income - external Operating expenses - external Operating expenses - internal (1) Total expenses Operating profit before tax Income tax expense Operating profit after tax (1) Management charge paid to Funds Management. The table above details the operating income, operating expenses and tax expense from the Group’s life insurance businesses, based on the disclosure required by Accounting Standard AASB 1038. It should be noted that income, operating expenses and tax expense included in the table above includes both policyholders’ and shareholders’ components. Full Year Ended Proforma Group 30/06/00 $M 1,557 (779) (32) (811) 746 383 363 1,268 (716) (38) (754) 514 194 320 Comparison 30/06/01 vs 30/06/00 Proforma % Actual 30/06/00 $M 326 (140) (10) (150) 176 47 129 (19) (8) 19 (7) (31) (49) (12) tax expense Included within is $94 million relating to policyholder earnings, compared with $187 million last year. The reduction is mainly attributable to reduced investment earnings on behalf of policyholders. the year for The operating profit after relates to informative shareholders. understanding of the shareholder profit after tax, the sources of profit are analysed in the table below. In order to gain a more tax The table below details the sources of after tax profit from the Group’s life insurance operations. Full Year Ended Proforma Group 30/06/00 $M 30/06/01 $M Comparison 30/06/01 vs 30/06/00 Proforma % Actual 30/06/00 $M Sources of life insurance operating profit (excluding abnormal income) The Margin on Services operating profit after income tax is represented by: Planned profit margins Experience variation New business losses / reversal of capitalised losses Operating margins Investment earnings on assets in excess of policyholder liabilities (2) Other Operating profit after tax 257 (63) (2) 192 126 2 320 225 (20) 13 218 143 2 363 121 (8) 1 114 13 2 129 14 large large (12) (12) - (12) (2) Includes a gain of $46 million in the current year resulting from the transfer of certain strategic investments to the life insurance business. 25 Life Insurance – Business Analysis Underlying results of life insurance businesses by geographical region. The table below details the underlying results of the Group’s life insurance businesses by geographical region. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Full Year Ended Operating Margins Investment earnings on assets in excess of policyholder liabilities Other Operating profit after tax Operating margins in Australia decreased to $190 million from $201 million in the prior year reflecting lower policyholder investment returns, and increased claims offset by growth in the investment-linked portfolio, particularly superannuation and allocated pension products. The disability trends experienced in the first half have been controlled through improvements in claims management and repricing which should protect margins on this line of business in the future. In addition experience variations in the prior year in Australia reflected some positive one off items and loss reversals that have not been repeated in the current year, and hence operating margins are lower in the current reporting period. Expense integration synergies achieved to date are reflected in the current year operating margins. The expense synergies reflect the benefits of the integration of the Colonial life companies which occurred in the first half of the June 2000 financial year and the benefits of the progressive the Colonial and Commonwealth life companies in the current reporting period. integration of The Australian life business has experienced sales pressure on its master fund business, although across the Group this was largely compensated by strong sales growth of complementary products by funds management businesses. While this did not materially the New Business – Life Insurance and Superannuation Master Fund/Trusts Risk Annuities, bonds and other statutory fund products Total Details of the Group’s new business mix for life insurance products is set out in the above table. On a pro-forma basis, sales of new business grew by 3% over the year. This reflects growth across all regions. The growth within Australia represents an increase in masterfund/trust products and risk business offset by a decline in Annuities and Bonds. The growth in masterfund/trust products has been in personal and corporate superannuation. Margins on these products remain strong, and while there is some pressure on third party originated business overall there has been no margin compression. Sales of life insurance bonds and traditional forms of life insurance investment business within Australia have fallen over the year. This is in line with expectations, as investors switch to masterfund/trust products. 26 Australia Proforma Group Asia Proforma Group 30/06/01 30/06/00 30/06/01 30/06/00 30/06/01 30/06/00 $M New Zealand Proforma Group $M $M $M $M $M 190 129 - 319 201 112 1 314 23 (5) 1 19 21 15 - 36 (21) 2 1 (18) (4) 16 1 13 impact the profit margin in the current year, it did impact the life business appraisal value (Refer Summary of Life Insurance and Funds Management Valuations – page 27). Margins on the Asian life insurance business have fallen by $17 million in the current year. The primary driver of this is persistency rates in Hong Kong. Although persistency rates are improving, the residual effect from large acquisitions of agents in 1998/99 and continued poaching of staff continues to depress margins. Investment returns on shareholders funds for the year ended 30 June 2001 (assets in excess of policyholder liabilities) were $126 million which was $17 million lower than in the prior year. Investment returns were lower in all regions due to the global downturn in equity markets and some investment write downs within the New Zealand portfolio. As part of a re-balancing of the Group’s exposure to equities, during the year certain strategic investments previously held by the Bank, which were held at cost, were transferred to the life insurance operations where assets are reported at market value. This resulted in a gain of $46 million after tax being reported within investment earnings on assets held in excess of policyholder liabilities. Life insurance assets in excess of liabilities amounted to approximately $2.6 billion as at 30 June 2001. The Group has maintained a balanced weighting between growth and fixed interest investments during the period. Full Year Ended Proforma Group 30/06/00 $M 4,333 253 1,153 5,739 30/06/01 $M 4,727 295 901 5,923 Comparison 30/06/01 vs 30/06/00 Proforma % 9 17 (22) 3 Actual 30/06/00 $M 2,646 46 348 3,040 Further growth in Australia is expected following the introduction of a more comprehensive life insurance risk product range to the branch network and the introduction of specialist risk writers for both personal and business lines. New member services are being developed to strengthen the Group’s offerings to this market. Asian new business sales are above the prior year. The largest areas of growth have been in Thailand following expansion of its agency force, and Hong Kong following the launch of the Mandatory Provident Fund (MPF). The launch of the MPF funds is a one off event and the impact that it had on the current year’s new business is not expected to be repeated in future years. New Zealand growth has primarily been within the risk products and the masterfund/trust product offerings. Summary of Life Insurance and Funds Management Valuations The following table sets out the components of the carrying values of the Group’s life insurance and funds management businesses. These are Directors’ valuations based on appraisal values determined by independent actuaries Trowbridge Consulting. The key actuarial assumptions that have been used by the independent actuaries are also summarised. As at 30 June 2001 Shareholders net tangible assets Value of inforce business Embedded Value Value of future new business Carrying Value 30 June 2000 Carrying Value Increase to 30 June 2000 Analysis of Movement since 30 June 2000 Profits (2) Opening Fair Value Adjustments Net Capital Movements (3) Transfers / Acquisitions of Business (4) Change in Shareholders NTA Synergies Credited to Goodwill (4) Transfers / Acquisitions of Business (5) Net Appraisal Value Uplift Increase to 30 June 2001 Life Insurance Australia New Zealand $M $M Funds Asia(1) Management $M $M 1,643 706 2,349 786 3,135 3,015 120 236 135 371 265 636 604 32 719 101 820 123 943 875 68 269 618 887 2,402 3,289 2,242 1,047 Life Insurance Australia New Zealand $M $M Funds Asia Management $M $M 273 - (269) - 4 332 (183) (33) 120 19 - 39 - 58 - - (26) 32 (18) (30) 179 - 131 - - (63) 68 149 - 77 34 260 - 191 596 1,047 Total $M 2,867 1,560 4,427 3,576 8,003 6,736 1,267 Total $M 423 (30) 26 34 453 332 8 474 1,267 (1) (2) (3) (4) (5) The Asian Life businesses are not held in the market value environment and are carried at net assets plus an excess representing the difference between appraisal value and net assets at the time of acquisition. This excess which effectively represents goodwill is being amortised on a straight line basis over 20 years. Excluding the gain of $46 million resulting from the transfer of certain strategic investments to the life insurance business. Includes dividends paid, capital injections and payments for investments in controlled entities. Represents the inclusion of net assets for funds management businesses not held in a market value environment. This item includes a transfer of business from the life insurance business to the funds management business ($183 million). Balance of $8 million represents goodwill on acquisition of State Street. Change in Life Insurance and Funds Management Valuations The valuations adopted above have resulted in a total valuation increase of $1,267 million since 30 June 2000. (cid:1) (cid:1) the Colonial The main components of the increase comprise: (cid:1) (cid:1) Total profits earned for the year of $423 million. Opening fair value adjustments to the Asian life operations totalling $30 million representing changed assumptions on tax and investment earnings in the opening valuation. revenue synergy Realisation of expense and benefits arising on integration of $332 million. These have been credited against goodwill. Net appraisal value uplift of $474 million for the year. The net appraisal value uplift of $474 million includes $596 million funds management businesses. This reflects strong growth in funds under management which have increased by 15% over the year to 30 June 2001 and lower expense levels arising from increased scale in the businesses. life insurance businesses appraisal values reduced by $122 million. This result reflects lower than expected growth in sales volumes in the Australian business and the impact of lower than expected investment returns during the year. Offsetting relating this, the the to A partial write off of the ‘excess’ in relation to the Asian life businesses and lower than expected business persistency experience in the New Zealand business also contributed to the reduced uplift. Further details on the movement in carrying value for the year are included in Note 34. Valuation Assumptions The key changes in assumptions used in the life (cid:1) (cid:1) (cid:1) in light of insurance appraisal valuations since 30 June 2000 are: (cid:1) Investment earnings rates, discount rates and new business growth rates have been reduced by 0.5% to reflect changes in long term interest rates. New business volumes for life insurance business in Australia have been slightly reduced reflecting lower than expected growth in sales during the year (Refer Life Insurance Business Analysis). A slight increase in disability claims in Australia and New Zealand. Business persistency in New Zealand has been reduced recent poor persistency experience. The key changes in assumptions used in the funds management appraisal valuations since 30 June 2000 are: (cid:1) Investment earnings rates, discount rates and new business growth rates have been reduced by 0.5% to reflect changes in long term interest rates. New business volumes for the funds management businesses have been increased based on improved (Refer Funds the experience during Management Business Analysis). Expense for businesses have decreased slightly increased scale in the businesses. Further details on actuarial assumptions can be funds management reflecting levels year the (cid:1) (cid:1) found in Note 34. 27 Group Operating Expenses The following table sets forth the Group’s operating expenses for year ended 30 June 2001 together with comparatives. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Expenses from - Existing operations Expenses from - Business acquisitions and GST (net of synergies) Total Operating Expenses Expenses by category as follows: Staff Occupancy and equipment Information technology services Other expenses Total Operating Expenses Banking Life Insurance Funds Management Total Operating Expenses Cost to average assets held and funds under management (1) Full Year Ended Proforma Group 30/06/00 $M 4,822 - 4,822 Actual 30/06/00 $M 3,407 - 3,407 30/06/01 $M 5,089 81 5,170 2,360 Refer note (2) " " " " 604 748 1,458 5,170 3,958 716 496 5,170 1.75 3,633 779 410 4,822 1.85 1,705 437 571 694 3,407 3,164 140 103 3,407 1.85 Comparison 30/06/01 vs 30/06/00 Proforma % 6 n/a 7 9 (8) 21 7 (5) (1) (2) The fall in cost to average assets held and funds under management reflects the strong growth in funds under management (up $13 billion or 15% on a proforma basis) and on balance sheet assets, including life insurance (up $4 billion or 42%) over the past 12 months. In contrast operating expenses have risen 7%. Proforma is not available as Colonial Group did not prepare expense breakdown on this basis. The Group’s operating expenses have increased $348 million or 7% from $4,822 million for the year ended 30 June 2000 to $5,170 million for the current year. The Group’s cost to income ratio reflects the different business mix, including policyholder items and investment returns on life insurance shareholder funds. (cid:1) related from $4,822 million Expenses from existing operations have increased by $267 million or 5.5% to $5,089 million in the current year. The increase in expenses primarily relates to: (cid:1) Volume increases of $122 million, predominantly relating to the Funds Management businesses and increased loyalty costs in the Cards business. The finalisation of an enterprise bargaining agreement with staff resulted in a 4% increase in salaries effective from 1 July 2000. This added $97 million to costs. Asian expenses incurred in developing the life insurance business. The introduction of the GST added $111 million to expenses while the costs of developing European banking, the full year effect of the acquisition in the first half of last year of Trust Bank of Tasmania and State Street Master Custody businesses has added a further $90 million. The above increases are partly offset by $120 million of Colonial integration savings made in the current year. (cid:1) (cid:1) Accordingly, it is more appropriate to look at the cost to income ratio by line of business. The increase in the Banking cost income ratio of 0.3% from 57.4% in the year ended 30 June 2000 to 57.7% in the current year is attributable to the following: (cid:1) The GST together with the impact of the 4% wage rise increased the cost income ratio by 1.8%. Expenditure in relation to the development of the European banking operations and the full year effect of new businesses has increased the cost to income ratio by 0.7%. Synergies achieved in relation to the Colonial integration have decreased the cost to income ratio by 1.6%. The cost to income benefit from improved volumes of 0.3%. The improvement in the funds management ratio of 4.5% from 71.6% in the prior year to 67.1% in the current year is due to scale economies from the growth in funds under management, partly offset by some one off expenses within Stewart Ivory during the second half of the financial year. (cid:1) (cid:1) Cost to Income Ratios Banking Funds Management Life Insurance Group 30/06/01 % 57.7 67.1 59.5 58.6 Proforma 30/06/00 % 57.4 71.6 52.1 57.2 The increase in the life insurance cost income ratio reflects the impact of lower investment earnings and policyholder tax (4.8% impact). The achievement of the integration of the Colonial business ahead of schedule represented a significant milestone for the Group. The current forecast of the annualised cost synergies that will be realised when the integration is completed (by 30 June 2003) is $355 million (out of the total synergies forecast of $450 million). 28 Other Group Items Staff Numbers The table below details the Group’s staff numbers as at 30 June 2001. Staff number reductions related to the Colonial integration were in excess of 2,700 with a net increase in other staff movements reflecting business growth. Staff Numbers as at Full time staff Part time staff Full time staff equivalent Australia New Zealand Other Overseas Income Tax Expense Banking Funds Management Life Total Income Tax Expense Effective tax rate Banking Funds Management Life Insurance (Policyholder and Corporate) 30/06/01 Number 30/06/00 Number 31,976 7,161 34,960 28,837 3,872 2,251 34,960 34,154 7,383 37,131 31,056 3,731 2,344 37,131 Full Year Ended Proforma Group 30/06/00 $M 30/06/01 $M Comparison 30/06/01 vs 30/06/00 Proforma % Actual 30/06/00 $M 705 94 194 993 28% 39% 38% 748 52 383 1,183 31% 32% 51% 759 14 47 820 33% 28% 27% (6) 81 (49) (16) Income tax expense has decreased 16% from $1,183 million for 30 June 2000 to $993 million for 30 June 2001. The tax expense consists of corporate tax of $899 million (year to 30 June 2000 $996 million) and policyholder tax of $94 million (year to 30 June 2000 $187 million). Corporate taxation has declined by $97 million, primarily reflecting the benefit from the drop in the corporate tax rate from 36% to 34% which reduced the prima facie income tax expense by $65 million, the utilisation of previously unrecognised overseas tax losses of $54 million, offset by a $20 million adjustment for the effect of lower tax rates on deferred tax balances when compared to the prior year. The reduction in policyholder tax expense of $93 million is as a result of lower tax paid due to weaker investment returns on behalf of policyholders. The funds management effective tax rate increased due to the non-recognition of overseas tax losses partly offset by the benefits from the change in tax rate. Restructuring Provisions and Fair Value Adjustments The following table highlights the restructuring provisions and fair value adjustments raised as part of the acquisition of Colonial Limited at 30 June 2000 and subsequent revisions at 30 June 2001. Restructuring Costs - Colonial - Commonwealth Bank Total restructuring costs (pre tax) Net of Tax Actual Balance 30/06/01 $M Expenditure Year Ended 30/06/01 $M 195 6 201 142 244 100 344 275 Fair Value Adjustments Net of Tax 29 Revised 30/06/01 $M 439 106 545 417 Actual Balance 30/6/01 $M 637 478 Increase $M 145 - 145 87 Revision $M 162 151 Reported 30/06/00 $M 294 106 400 330 Reported 30/6/00 $M 475 327 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Fair value adjustments of $475 million ($327 million net of tax) were raised at 30 June 2000. These fair value adjustments principally related to write offs of capitalised systems costs in accordance with Commonwealth Bank accounting policy and additional general provisioning for bad debts to bring Colonial onto a consistent provisioning methodology. Additional fair value adjustments of $151 million (net of tax) were taken during the year. These principally relate to asset and investment write downs, additional general provisioning as a result of aligning Colonial credit policies with the Commonwealth Group and tax adjustments. These revisions to the provision for restructuring and fair value adjustments result in an increase in goodwill on acquisition of $238 million. Dividends Dividends will continue to be based on Cash Earnings Per Share, having regard to the following: (cid:1) (cid:1) (cid:1) (cid:1) Rate of business growth; Capital adequacy; Investment requirements; The cyclical nature of life insurance investment returns; and A range of other factors. Subject to these factors, the group will continue to maintain a high payout ratio relative to its peers. The dividend payout ratio for the year was 75.5% on a cash basis. (cid:1) Other Group Items Provisions for restructuring costs of $400 million ($330 million after tax) were raised at 30 June 2000. These provisions covered the estimated costs, based on information then available, of integrating the Colonial operations (acquired 13 June 2000) into the Group, including and administrative functions. The principal costs associated with this programme are in the area of redundancy, property and systems. rationalisation processing the of An additional $145 million ($87 million after tax) was added to the provision during the year to cover the forecast additional costs of integration. The additional costs are primarily in the area of staff redundancies and information technology contract termination costs. Integration related synergies of $450 million are expected to be achieved by 2003, an increase of $70 million on those previously forecast. This comprises forecast cost synergies of $355 million revenue synergies of $70 million and funding synergies of $25 million. The increase is the result of a more detailed understanding of the business together with the accelerated timeframes over which the integration will be completed. During the current year, restructuring costs of $344 million were charged against the provision. These expenses included redundancy and other staff payments of $100 million, occupancy costs of $45 million, information technology costs of $95 million and other staff costs of $24 million. 30 Integrated Risk Management Risk Management The integrated framework identifies, assesses, manages and reports risks and risk adjusted returns on a consistent and reliable basis. risk management Independent review is carried out through the audit role. The Group’s risk profile is the difference between capital available to absorb loss and risk. The measure of risk is economic equity, which is defined as the potential risk of loss of one year’s earnings, measured at a standard consistent with an AA credit rating. Economic equity is derived to credit, market, operational and from underlying exposures life insurance risks in the banking, life insurance and funds management businesses of the Group. In the banking business, economic equity is a measure of the potential risk of loss of cash earnings, In the life insurance and funds management businesses, economic equity is a measure of the potential risk of loss of the fair value of the business. The composition of economic equity of the Group during the financial year ended 30 June 2001 was 49% credit risk, 20% market risk, 30% operational risk and 1% insurance risk. The component measures of economic equity for the banking, life insurance and funds management businesses were as follows: (cid:1) Banking; 68% credit risk, 7% market risk and 25% operational risk Life insurance; 54% market risk, 40% operational risk, 4% credit risk and 2% insurance risk. Funds Management; 51% market risk and 49% operational risk. The following sections describe the integrated risk (cid:1) (cid:1) management framework components. Credit Risk Credit risk is the potential for loss arising from their to meet failure of a debtor or counterparty contractual obligations. Credit risk arises in the banking business from lending activities, the provision of guarantees including letters of credit and commitments to lend, investment in bonds and notes and financial markets and other associated activities. In the life insurance business credit risk arises from investment in bonds and notes, loans and from reliance on reinsurance. The funds management business generally involves minimal credit risk from a shareholder perspective. The measurement of credit risk is based on an internal credit risk rating system, and utilises analytic tools to calculate expected and unexpected loss for the credit portfolio. (cid:1) The Group uses a diversified portfolio approach for the management of credit risk comprised of the following: a system of industry limits and targets for exposures by industry; (cid:1) (cid:1) (cid:1) large credit exposure policy a for aggregate exposures to individual commercial and industrial client groups tiered by credit risk rating and loan duration; and a system of country exposures. These policies assist in the diversification of the for geographic limits credit portfolio. (cid:1) (cid:1) The credit portfolio is managed in two segments: Statistically Managed Segment Comprises exposures that are generally less than $250,000 and is dominated by the housing loan portfolio. Credit facilities are approved using scoring and check sheet techniques. Risk Rated Managed Segment Comprises all other credit exposures. Management is based on the internal credit risk rating system, which makes an assessment of the potential for default for each exposure and the amount of loss if default should occur. Allowance for expected credit loss in the banking business commences when an exposure first arises. The expected loss is reassessed on a regular basis and provisioning adjusted accordingly. A centralised exposure management system records all significant credit exposures of the Group. Customers, industry, geographic and other significant groupings of exposure are monitored. Market Risk Market risk is the potential for change in the value of on and off balance sheet positions caused by a change in the value, volatility or relationship between market rates and prices. Market risk arises from the mismatch between assets and liabilities in both the banking and insurance businesses. The Group is exposed to diverse financial instruments including interest rates, foreign currencies, equities and commodities and transacts in both physical and derivative instruments. A discussion and analysis of the Group’s market risk is contained in Note 39 to the financial statements. Information on trading securities is further contained in Note 10 of the financial statements. Note 3 of the financial statements contains financial markets trading income contribution to the Group. In the trading book of the banking business, market risk is measured by a Value at Risk (VaR) model. This model uses the distribution of historical changes in market prices to assess the potential for future losses. The VaR model takes into account correlations between risks and the potential for movements in one portfolio to offset movements results are backtested to check the veracity of the VaR model. In addition, because the VaR model cannot predict all possible outcomes, tests covering a variety of stress scenarios are regularly performed to simulate the effect of extreme market conditions. in another. Actual 31 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Integrated Risk Management The following table provides a summary of VaR by product. This is one element of the total integrated risk model used by the Group. Refer Note 39 of the financial statements for further details. Trading Book Group (excluding ASB Bank) Interest rate risk Exchange risk Implied volatility risk Equities risk Commodities risk Prepayment risk ASB Bank Diversification benefit Total Average VaR During June 2001 Half $M Average VaR During December 2000 Half $M Average VaR During June 2000 Half $M Average VaR During December 1999 Half $M 2.21 1.03 0.39 0.42 0.34 0.44 0.17 (1.99) 3.00 2.30 0.64 0.32 0.42 0.33 0.38 0.21 (1.74) 2.86 2.52 0.73 0.25 0.32 0.29 0.28 0.26 (1.59) 3.06 2.35 0.67 0.32 0.13 0.47 0.00 0.00 (1.49) 2.45 Trading income for 30 June 2001 increased by 30% over 30 June 2000 without an increase in the VaR during the period. In the non-traded book of the banking business, a range of techniques is adopted to measure market risk. These include simulation of the effects of market price changes on assets and liabilities for business activities where there are no direct measures of the effects of market prices on those activities. Liquidity risk is the risk that assets cannot be liquidated in time to meet maturing obligations. Limits are set to ensure that holdings of liquid assets do not fall below prudent levels. The liquid assets held are assets that are available for repurchase by the Reserve Bank of Australia (over and above those required to meet the Real Time Gross Settlement obligations), certificates of deposits and bills of exchange accepted by other banks and overnight interbank loans. More detailed comments on the Group’s liquidity and funding risks are provided in Note 39. Market risk in the life insurance business arises from mismatches between assets and liabilities guaranteed returns offered on some classes of policy (which may not be capable of being hedged through matching assets), adverse movements in market prices affecting fee income on investment-linked policies and from the returns obtained from investing the shareholders capital held in each life company. possible, Wherever the Group segregates policyholder funds from shareholder funds and sets investment mandates that are appropriate for each. The investment mandates for assets in policyholder funds attempt to match asset characteristics with the nature of policy obligations but it is not always possible to obtain a perfect match between assets and liabilities. The ability to match asset characteristics with policy obligations may be constrained by promises made in policy and sales documents, by regulatory constraints and by the lack of suitable investments. A large proportion of the policyholder assets is held for investment linked policies where the policyholder takes the risk of falls in the market value of the assets. However, as the Group earns fees on investment linked policies that are based on the amount of assets invested, it will receive lower fees should markets fall. Asset allocation for investment linked policies is decided by the policyholder. A smaller proportion of policyholder assets is held to support policies where life companies have guaranteed either the principal invested or the investment 32 return (‘guaranteed policies’). Investment mandates for these classes of policies emphasise investment in lower volatility assets such as cash and fixed interest. The Group no longer sells guaranteed policies in Australia or New Zealand but they continue to be sold in Asia. The Australian and New Zealand books of in force business contain guaranteed policies sold in the past and on which it continues to collect premiums. income on Thus, it is likely to be several years before the Australian and New Zealand in force book of guaranteed policies will decline significantly as the policy payments on maturing policies continues to be offset by the premium the remaining policies. Some guaranteed policies were sold on the basis of profits being shared between policyholders and shareholders. Profits are allocated to policyholders by the declaration of ‘bonuses’. Bonuses may be declared annually (‘annual bonuses’) or upon maturity of the policy (‘terminal bonuses’). Once declared, annual bonuses form part of the guaranteed sum assured. Shareholders funds in the life insurance business are on average invested 50% in income assets (cash and fixed interest) and 50% in growth assets (shares and property), although the asset mix may vary from company to company. Policyholder funds are invested to meet policyholder reasonable expectations without putting the shareholder at undue risk. Market risk in the funds management business is the risk of an adverse movement in market prices which leads to a reduction in the amount of funds under management and a consequent reduction in fee income. Liquidity risk is not a significant issue in life insurance companies. The life insurance companies in the Group hold substantial investments in highly liquid assets such as listed shares, government bonds and to receive substantial bank deposits and continue for premium time claims and redemptions enables each company to forecast and manage its liquidity needs with a high degree of accuracy. income. Furthermore, processing Operational Risk Operational Risk is defined broadly as risks, other than those captured in credit, market and life insurance risk definitions, due to: (cid:1) (cid:1) (cid:1) business and strategic decisions; processes, people or systems; and external events. Integrated Risk Management Risks are identified, quantified and managed under the Group’s operational risk framework by business unit owners, with risk management being a key result area for Divisions. Each risk owner quantifies individual risks according to their probability of occurrence, and the economic loss given occurrence, including the impact on shareholder value. The mitigating effects of preventative controls, insurance are also assessed and quantified based on expert opinion, external events, risk incidents and indicators. Individual risks are aggregated into one of eleven operational risk categories. impact controls and The quantification and allocation of operational risk economic equity for the banking business is primarily based on the aggregation of these individual risks, taking into account any correlation of risks, through a Monte Carlo simulation. The resulting economic equity amount is also validated using top down aggregate measures. Operational risk economic equity life insurance and funds management businesses is based on worst case scenarios using volatility shocks for business risks and top down measures using internal and external loss data for event risks. the for Insurance Risk This is the risk that the incidence of mortality (death) and morbidity (illness and injury) claims is higher than assumed when pricing life insurance policies, or is greater than best estimate assumptions used to determine the fair value of the business. Insurance risk may arise through reassessment of the incidence of claims, the trend of future claims and the effect of unforeseen diseases or epidemics. In addition, in the case of morbidity, the time to recovery may be longer than assumed. Insurance risk is controlled by ensuring underwriting standards adequately identify potential risk, retaining the right to amend premiums on risk policies where appropriate and through the use of reinsurance. The experience of the Group’s life insurance business and those of the industry as a whole are reviewed annually. Derivatives Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices defined in the contract. The Group will enter into derivatives transactions including swaps, forward rate agreements, futures, options and combinations of these instruments. 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 market risk. The Group participates in both exchange traded and OTC derivatives markets. Exchange traded derivatives: Exchange traded derivatives are executed through a registered exchange, for example the Sydney Futures Exchange and the Australian Stock Exchange. The contracts have standardised terms and require lodgment of initial and variation margins in cash or other collateral at the Exchange, which guarantees ultimate settlement. supported by individual transaction confirmations. 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. The Group’s exposure to derivatives is disclosed in Note 39 Market Risk. Business Continuity Management Business Continuity Management (BCM) is defined within the Group as the discipline for developing and maintaining advance action plans to respond to a risk event or disaster so that critical business processes continue with minimal adverse impact on staff, customers, products, services and brand. The Group’s BCM policy requires that appropriate safeguards be established to minimise the impact of disruption to business processes and dependencies, services and products in the event of an impairment of the Group’s business, information and infrastructure. BCM constitutes an essential component of the Group’s risk management process by providing a controlled response to potential operational risks that the Group’s critical have a significant impact on processes and revenue streams. includes both cost-effective responses to mitigate the impact of risk events or disasters and crisis management plans to respond to crisis events. It Each Division in the Group has developed, tested Plans. and maintained Continuity is being A comprehensive BCM education program implemented to further drive the BCM methodologies throughout the Group. Business Government Guarantee In conjunction with the Government’s sale of its remaining shareholding, transitional arrangements were implemented which provide that: (cid:1) all demand and term deposits will be guaranteed for a period of three years from 19 July 1996, 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 instrument executed, issued, endorsed or accepted by the Bank and outstanding at 19 July 1996 will be guaranteed until their maturity. Accordingly, demand deposits are no into before or under an longer (cid:1) guaranteed. Term deposits outstanding at 19 July 1999 remain guaranteed until maturity. The run off of the Government guarantee has had no effect on the Bank’s access to deposit markets. The Bank’s credit ratings were also maintained. Credit Rating The Bank’s credit unchanged for the year and at 30 June 2001 are: ratings have remained Short Term A-1+ P-1 F1+ Long Term AA- Aa3 AA B A/B 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 these transactions are negotiated between the parties, although the majority conform to accepted market conventions. Industry standard documentation is used, most commonly in the form of a master agreement Standard & Poor’s Corporation Moody’s Investors Service, Inc. Fitch Moody’s Bank Financial Strength Rating Fitch Individual Rating 33 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Capital Adequacy Tier One Capital Shareholders’ Equity (excluding asset revaluation reserve) Eligible Loan Capital Total Shareholders’ Equity and Loan Capital Less Goodwill Less Preference shares Less Intangible component of investment in non-consolidated subsidiaries Less Outside equity interest in entities controlled by non-consolidated subsidiaries Total Tier One Capital Tier Two Capital Asset revaluation reserve General provision for bad and doubtful debts (1) FITB related to general provision Note and bond issues (2) Preference shares Total Tier Two Capital Tier One and Tier Two Capital Less Investment in non-consolidated subsidiaries (net of intangible component deducted from Tier 1) Less Other deductions Capital Base 2001 $M 19,843 462 20,305 (5,716) - (4,116) (1,458) 9,015 2000 $M 18,435 418 18,853 (5,905) (86) (2,656) (588) 9,618 1,390 (436) 4,825 - 5,784 14,799 5 - 1,358 (420) 5,120 39 6,097 15,715 (2,005) (114) 12,680 (2,528) (669) 12,518 (1) (2) Excludes general provision for bad and doubtful debts relating to investments in non-consolidated subsidiaries. Includes both upper and lower Tier 2 capital. 2001 vs 2000 % 8 11 8 (3) large 55 large (6) large 2 4 (6) large (5) (6) (21) (83) 1 2000 % 7.49 4.75 (2.49) 9.75 2001 % 6.51 4.18 (1.53) 9.16 Risk Weighted Capital Ratios Tier one Tier two Less deductions Total The Australian Prudential Regulation Authority (APRA) sets minimum capital adequacy ratios for the Group. These ratios compare the capital base of the Group with on and off balance sheet assets, weighted for risk. Capital base consists of shareholders equity plus other capital instruments acceptable to APRA (tier 1 capital) and general provision for credit losses and other hybrid and debt instruments acceptable to APRA (tier 2 capital). The life insurance and funds management businesses are not consolidated for capital adequacy purposes. The decline from the capital ratios at 30 June 2000 can be attributed to: (cid:1) A change in the treatment of the investment in our life insurance and funds management businesses announced by APRA in February 2001. These new rules were applied to the 31 December 2000 capital adequacy calculations. If this change had not occurred the tier 1 ratio at 30 June 2001 would have been 0.39% higher and the total capital ratio would have been 0.20% higher; An increase in goodwill associated with the merger with Colonial amounting to $238 million (refer to the discussion on Restructuring Provision and Fair Value Adjustment); A decrease in tier 1 capital of $464 million relating to the acquisition of a 25% interest in ASB Group in August 2000; A decrease in the lower tier 2 dated notes and bond issues due to the regulatory limitation that this amount does not exceed 50% of tier 1 capital; and A $9.9 billion (8%) increase in the amount of risk weighted assets. (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) its active capital The Group has continued management programme. During the year: (cid:1) issue of 3.5 million PERLS An on-market buyback programme in November 2000 resulted in the purchase of 0.8 million ordinary shares for $23.5 million; An off-market buyback in March 2001 resulted in the purchase of 25.1 million ordinary shares for $700 million; The (Preferred Exchangeable Resettable Listed Shares) in March 2001 raised $687 million net of issue costs; and The shares needed to satisfy the DRP in respect of the interim dividend paid in March 2001 were acquired on-market. This required the purchase of 4.5 million ordinary shares for $143.6 million. In January 2001 the Basle Committee on Banking Supervision the calculation of capital adequacy for banks. These changes will not come into effect until 2005. The changes include a specific requirement for capital to cover operating risk and changes to the capital requirement for credit risk. Under the proposals, the deduction for investment in life insurance and funds management companies currently made from total capital will be split 50% from tier 1 and 50% from tier 2. There is insufficient information available to ascertain whether overall the proposals will result in an increased requirement for regulatory capital or not. The Bank continues to work closely with industry bodies and with APRA to ensure that the changes, when finalised, will require a realistic level of capital. For further detail on capital adequacy see Note 31. issued proposals for changes to 34 Description of Business Environment Competition The Australian banking market is highly transparent and competitive. The banks, life companies and non-bank financial institutions compete for customer deposits, the provision of lending, funds management, life insurance and other services. In all there were 46 banking groups operating in Australia at 30 June 2001. Banks in Australia can be divided into the following categories: Australian owned banks, foreign bank subsidiaries and branches of foreign owned banks. Among the Australian owned banks (of which there are 12) the four largest (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 products and services through branch networks across Australia. Of the other Australian owned banks, there are 5 regional banks. Each of these had their origins as a building society and their operations were initially largely state based. While the smaller of the regional banks have typically limited their activities to servicing customers in a particular state or region, they are now targeting their operations across state borders. The larger regional banks now operate in several states, if not nationally. Over recent years the regional banking sector has undergone substantial consolidation with several of these institutions amalgamating with other regional banks or being acquired by major banks. interstate customers and expanding locally through a There are 13 foreign owned banks operating in incorporated subsidiary. Australia through An additional 25 banks conduct operations a foreign bank branch. While many foreign banks operating in Australia initially focussed their activities on the provision of banking services to the Australian clients of their overseas parent bank, most have now diversified their operations, offering local clients a broad range of financial products and services. Foreign bank branches in Australia are not able to offer retail deposit and transaction accounts to customers. Several foreign banks are represented in Australia by both a locally incorporated subsidiary and a branch. services. Non-bank The Bank also faces competition from non-bank financial for institutions, which compete vigorously customer investments, deposits and the provision of financial lending and other intermediaries such as building societies and credit unions compete strongly in the areas of accepting deposits and residential mortgage lending, mainly for owner-occupied housing. These state-based institutions are making headway in achieving multi-state coverage partly encouraged by a more conducive regulatory environment. Specialist non-bank mortgage originators and brokers have acquired some prominence in the residential lending market. A development over recent years has been the establishment of local single branch banks collectively referred to as ‘community banks’. Under this model, the local community effectively purchases from a regional bank the right to operate a franchise of the bank but within the auspices of the regional bank’s banking authority. The presence of community banks has added another dimension to the competitive dynamics of the market. 35 The Bank operates in the life insurance and funds management markets in competition with a range of non-bank institutions. Similarly, non-bank financial life companies) have financial institutions (including expanded their operations into banking, with a view to financial offering their customers a broad suite of services. (and global investment banks) are also increasing their presence in Australia. fund managers International 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 (depositors) and the users of funds (borrowers). in A significant factor in disintermediation in Australia funds under the superannuation the substantial growth has been management, especially within (pension funds) industry. Australian long-term Government’s continued The encouragement through superannuation, by means of taxation concessions and a mandatory on employers, is expected to underpin strong growth in funds under management. This growth potential continues to attract new entrants to this market. superannuation guarantee saving levy of 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 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 in major infrastructure projects undertaken by the corporate sector. the world. The Bank, Like Australia, the New Zealand banking system is characterised by strong competition. The Group’s activities in New Zealand are conducted through ASB Group Limited. 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. New Zealand banking activities are led by five financial services groups, all owned by UK or Australian-based banks operating through nationwide branch networks. Description of Business Environment 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 Westpac Trust (a wholly-owned subsidiary of Westpac). In addition, there are several financial institutions operating largely in the wholesale banking sector including Deutsche Bank and AMP (Australia’s largest insurance group). Through its wholly-owned subsidiary Sovereign Group, ASB Group also competes in the New Zealand insurance and investment market, where Royal Sun Alliance and Tower Corporation are major competitors. Following the acquisition of Colonial Ltd in June 2000, the Group’s retail operations were extended into the United Kingdom, numerous Asian markets and the Fiji Islands; in these markets, the Bank competes directly with established providers. Financial System Regulation by standards. international Australia has a high quality system of financial regulation Following a comprehensive inquiry into the Australian financial system (the ‘Wallis Inquiry’), the Australian Government introduced a new framework for regulating the financial framework, which applied system. The previous regulations according to the type of institution being regulated, resulted in similar products being regulated differently. The new regulates products equally regardless of the particular type of institutions providing them. functional approach Since July 1998, the new regulatory arrangements have comprised four separate agencies: The Reserve Bank of Australia, the Australian Prudential Regulation Authority, the Australian Securities and Investments the Australian Competition and Commission and Consumer Commission. Each of these agencies has system wide responsibilities for the different objectives of government system. of A description of their general responsibilities and functions is set out below: (cid:1) these agencies and oversight financial the Reserve Bank of Australia (RBA) - responsible for monetary policy, financial system stability and regulation of the payments system; Australian Prudential Regulation Authority (APRA) – has comprehensive powers to regulate prudentially institutions, banks and other deposit-taking insurance companies and 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; Australian Securities and Investments Commission (ASIC) – has responsibility for market conduct, consumer protection and corporate regulation functions across the financial system including for investment, insurance and superannuation products and the providers of these products. Australian Competition and Consumer Commission (ACCC) – has responsibility for competition policy and consumer protection across all sectors of the economy. (cid:1) (cid:1) (cid:1) COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Financial market instability, particularly in various emerging market economies, has led to intense scrutiny of global leveraged financial markets and highly institutions. There is some pressure for fundamental reform of international financial architecture to avert industry future crises. Government officials and practitioners in in Australia are actively international fora in furthering these reforms. involved Supervisory Arrangements 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 adequacy guidelines, capital 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 – ‘Capital Adequacy’. Funding and Liquidity APRA exercises liquidity control by requiring each bank to develop a liquidity management strategy that is appropriate for itself. Each policy is formally approved by APRA. A key element of the Group’s liquidity policy is the holding of a stock of high quality liquid assets to meet day to day fluctuations in liquidity. The liquid assets held are assets that are available for repurchase by the RBA (over and above those required to meet the Real Time Gross Settlement (RTGS) obligations, AUD CDs/Bills of other banks and AUD overnight interbank loans.) More detailed comments on the Group’s liquidity and funding risks are provided in Note 39. 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 to Note 14 to the Financial Statements. financial that regulated Ownership and Control In pursuit of transparency and risk minimisation, the Financial Sector (Shareholding) Act 1998 embodies the principle institutions should maintain widespread ownership. The Act applies a common 15 per cent shareholding limit for authorised deposit taking institutions, 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. 36 Description of Business Environment 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 industry, in particularly in respect of small business lending, has increased sufficiently. financial the 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 that control investments and dealings with 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 that they operate within the prudential framework it has laid down and that they follow sound management practices. 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 life insurance company and general insurance company subsidiaries of the group also come within the supervisory purview of APRA. APRA’s prudential supervision of both life insurance and general insurance companies is exercised through the setting of minimum standards for solvency and financial strength to ensure obligations to policy holders can be met. The financial condition of life insurance companies is monitored through regular financial reporting, lodgment of audited accounts and supervisory inspections. Compliance with APRA regulation for general insurance companies is monitored through regular returns and lodgment of an audited annual return. 37 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Corporate Governance Board of Directors The Board of Directors assumes responsibility for corporate governance of the Bank. It oversees the business and the affairs of the Bank, establishes, with management, the strategies and financial objectives to be the implemented by management and monitors performance of management directly and through the Board committees. The Board currently consists of eleven Directors. Membership of the Board and its Committees is set out below: DIRECTOR BOARD MEMBERSHIP COMMITTEE MEMBERSHIP Nominations Remuneration Audit Risk J T Ralph, AC J M Schubert D V Murray N R Adler, AO R J Clairs, AO A B Daniels, OAM C R Galbraith W G Kent, AO F D Ryan 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 Non executive Chairman Deputy Chairman Managing Director Chairman Member Member Chairman Member Member Member Chairman Member Member Member Member Chairman Member Member Member Details of the experience, qualifications, special the the Directors’ Report on responsibilities and attendance at meetings of Directors are set out in pages 41 to 46. Ms A C Booth the Board on retired 31 December 2000 and Mr K E Cowley retired from the Board on 29 March 2001. from (cid:1) (cid:1) 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 11; 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. The Board has adopted a policy that, with a phasing in provision dealing with existing directors, the maximum term of appointment of directors to the Board would normally be limited to twelve years. (cid:1) the Bank and The Nominations Committee of the Board critically reviews, at least annually, the corporate governance the composition and procedures of 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 the a majority of non executive directors and Chairman of the Committee. that the Bank shall be chairman of 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 levels of demonstrated professional skill and appropriate personal qualities. leadership experience, high Candidates by for appointment as directors are Committee, considered recommended if appointed, stand for election, in accordance with the Constitution, at the next general meeting of shareholders. the Board and, for decision by Nominations the 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 the highest calibre. The latest determination was at the Annual General Meeting held on 28 October 1999 when shareholders approved an aggregate remuneration of $1,500,000 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 45. Directors’ fees do not incorporate a bonus element related to performance. requires In August 2000, the Board approved the introduction of the Non-Executive Directors’ Share Plan which by Non-Executive Directors through the mandatory sacrifice of 20% of their annual fees. Details of this Plan were set out in the Notice of Meeting to the 2000 Annual General Meeting. acquisition shares the of 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. 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. 38 Corporate Governance The Board has established a Remuneration Committee to: (cid:1) (cid:1) (cid:1) consider changes in remuneration policy likely to have a material impact on the Group; consider senior executive appointments; and be informed of leadership performance, legislative compliance industrial agreements and incentive plans operating across the Group. The policy of the Board is that the Committee shall in employment issues, 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. that The Bank’s remuneration policy in respect of executives includes provisions that remuneration will be competitively set so that the Bank can attract, motivate and retain high quality local and international executive staff and to remuneration will 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 the Managing Director and five highest paid other members of the senior executive team who were officers of the Bank at 30 June 2001 are set out in Note 46. incorporate, Audit Arrangements Ernst & Young was appointed as the auditor of the Bank at the 1996 Annual General Meeting and continues to fulfil that office. the chairman of The Board’s Audit Committee consists entirely of non executive Directors and the Committee is not Chairman of the Bank. This structure the Board’s policy. The Managing Director reflects attends Committee meetings by invitation. The Committee oversees the adequacy of the overall internal control functions and the internal audit functions within the Group and their relationship to external audit. (cid:1) (cid:1) (cid:1) laws, relevant In carrying out these functions, the Committee: reviews the financial statements and reports of the Group; reviews accounting policies to ensure compliance with current regulations and accounting standards; and conducts any investigations relating to financial matters, records, accounts and reports which it considers appropriate. In addition, 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 policies established by the Committee. A range of insurance policies maintained by the Group mitigates some operational risks. received by the Committee and, The Committee regularly considers, in the absence of management and the external auditor, the quality of the information in considering the financial statements, discusses with management and the external auditor: (cid:1) 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. (cid:1) The Committee reviews the processes governing advisory work undertaken by the external auditor to ensure that the independence of the external auditor is not affected by conflicts. 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 oversees credit and market risks assumed by the Bank in the course of carrying on its business. The Committee considers the Group’s credit policies and ensures that management maintains a set of credit underwriting standards designed to achieve portfolio outcomes consistent with the Group’s risk/return expectations. In addition, the Committee reviews the Group’s credit portfolios and recommendations by management for provisioning for bad and doubtful debts. The Committee approves risk management policies and procedures for market, funding and liquidity risks incurred or likely to be incurred in the Group’s business. The Committee implementing reviews progress management procedures and identifying new areas of exposure relating to market, funding and liquidity risk. in 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. Ethical Standards (cid:1) (cid:1) The Bank has adopted a Statement of Professional Practice which sets standards of behaviour required including: (cid:1) 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 Employment Opportunity policy and programs; to maintain confidentiality in the affairs of the Bank and its customers; and to be absolutely honest in all professional 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. the Bank’s Equal to (cid:1) (cid:1) 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. 39 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Continuous Disclosure The Corporations Act 2001 and the ASX Listing Rules require that a company disclose to the market matters which could be expected to have a material effect on the price or value of the company’s securities. Management processes are in place throughout the Commonwealth Bank Group to ensure that all material matters which may potentially require disclosure are promptly reported to the Managing Director, through established the deliberations of the Bank’s Executive Committee. Matters reported are assessed and, where required by the Listing Rules, advised to the market. The Company Secretary is responsible for communications with the ASX and for ensuring that such information is not released to any person until the ASX has confirmed its release to the market. lines, or as a part of reporting Corporate Governance 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 three and 30 days after the announcement of half yearly and final results and from three 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. Similar restrictions apply to executives of the Bank. In accordance with the Corporations Act 2001, Directors disclose to the Board any material contract in which they may have an interest. In compliance with section 195 of the Corporations Act 2001 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. the Constitution and 40 Interests: Other International Monetary Conference (Member), Art Gallery of NSW (Member), Asian Bankers’ Association (Member), Australian Bankers’ Association (Chairman), Asian Pacific Bankers' Club (Member), Business Council of Australia (Member), World Economic Forum (Member), General Motors Australian Advisory Council (Member), APEC Business Advisory Council (Member), and the Financial Sector Advisory Council (Member). Mr Murray is a resident of New South Wales. Age 52. 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 was Managing Director of Santos Limited for 16 years and retired on 30 September 2000. He has experience in various commercial enterprises, more recently in the oil and gas industry. Chairman: Austrade. Director: Telstra Corporation Limited, QCT Resources Limited (until October 2000), Tereny Investments Pty Ltd and Shelrey Pty Ltd. Other Interests: Art Gallery of South Australia (Chairman), University of Adelaide (Council Member and Chairman of the Finance Committee), Executive Member of the Australian Japan Business Co-operation Committee and Australian Institute of Company Directors (Member). Mr Adler is a resident of South Australia. Age 56. Reg J Clairs, AO Mr Clairs has been a member of the Board since 1 March 1999 and is a member of the Audit Committee. As the former Chief Executive Officer of Woolworths Limited, he had thirty-three years’ experience in retailing, branding and customer service. Chairman: Agri Chain Solutions Ltd and The Prime Minister’s Supermarket to Asia Board. Deputy Chairman: Woolstock Australia Limited. Director: David Jones Ltd, Howard Smith Ltd and National Australia Day Council. Other Minister’s Supermarket to Asia Council. Mr Clairs is a resident of Queensland. Age 63. Interests: Foundation Member of the Prime A B (Tony) Daniels, OAM Mr Daniels has been a member of the Board since March 2000 and is a member of the Remuneration Committee. He has extensive experience in manufacturing and distribution, being Managing Director of Tubemakers of Australia for eight years to December 1995, during a long career with that company. Director: Australian Gas Light Company, Orica, and O'Connell St Associates. Managing Director: Pacific Dunlop Limited. Mr Daniels is a resident of New South Wales. Age 66. Directors’ Report The Directors of the Commonwealth Bank of Australia submit their report, together with the financial report of the Commonwealth Bank of Australia (the ‘Bank’) and of the Group, being the Bank and its controlled entities, for the year ended 30 June 2001. 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. John T Ralph, AC, Chairman Mr Ralph has been a member of the Board since 1985 and Chairman since 1999. He is also Chairman of the Risk, Remuneration and Nominations Committees. He is a Fellow of the Australian Society of Certified Practising Accountants and has had over forty-seven years’ experience in the mining and finance industries. Chairman: Pacific Dunlop Limited. Deputy Chairman: Telstra Corporation Limited. Director: BHP Billiton Limited and BHP Billiton Plc. Other Interests: Melbourne Business School (Board of Management), Foundation for Young Australians (Deputy National Chairman), and Australian Foundation for Science (Chairman). Mr Ralph is a resident of Victoria. Age 68. John M Schubert, Deputy Chairman Dr Schubert has been a member of the Board since 1991, he was appointed as Deputy Chairman on 31 December 2000 and is Chairman of the Audit Committee and a member of the Nominations Committee. He holds a Bachelor Degree and PhD in Chemical Engineering and has experience in the petroleum, mining and building materials industries. Dr Schubert is the former Managing Director and Chief Executive Officer of Pioneer International Limited. Chairman: G2 Therapies Limited and Worley Limited. Director: BHP Billiton Limited, BHP Billiton Plc, Hanson Plc, Australian Graduate School of Management Ltd and Qantas Limited. President: Business Council of Australia. Other Interests: Academy of Technological Science (Fellow), Salvation Army Territorial Headquarters and Sydney Advisory Board (Member). He is also a Director of the Great Barrier Reef Research Foundation and a Director and a Member of AGSM Consulting Ltd. Dr Schubert is a resident of New South Wales. Age 58. David V Murray, Managing Director and Chief Executive Officer 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-five years’ experience in banking. Mr Murray is a member of the Remuneration, Risk and Nominations Committees. Director: Colonial Ltd, Colonial Holding Company Pty Ltd, Colonial Holding Company (No 2) Pty Ltd, Emerald Holding Company Ltd, Colonial Finance (Australia) Ltd, Colonial International Holdings Pty Ltd and Colonial First State Investments Group Limited. 41 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 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. Chairperson: HWW Limited and Country Energy. Director: Rail Advantage Limited. Other Interests: Sydney Opera House Trust (Trustee), Australia Day Council of New South Wales (Member) and Allens Arthur Robinson (Director). Ms Ward is a resident of New South Wales. Age 47. Infrastructure Corporation and Data Anna C Booth – retired 31 December 2000 Ms Booth had been a member of the Board since 1990 and was a member of the Risk Committee. She holds a Bachelor of Economics (Hons) and has had seventeen years’ experience in the trade union movement. Director: Ausflag Limited and CoSolve Australasia Pty Ltd. Other Interests: Shopping Centre Council of Australia (Special Advisor), Sydney Organising Committee for the Olympic Games (Member) and Labour Management Studies Foundation of Macquarie University (Fellow). Ms Booth is a resident of New South Wales. Age 44. Ken E Cowley, AO – retired 29 March 2001 Mr Cowley had been a member of the Board since September 1997 and was a member of the Remuneration Committee. He has thirty-three years’ experience in the media industry, having been a Director of News Limited since 1976 and until July 1997, was Executive Chairman of that company. Executive Chairman: Zazu Limited. Chairman: PMP Communications Limited, R M Williams Holdings Limited, Tasman Pacific Airways Limited, Tower Lodge Pty Limited and Melbourne Storm Football Club Pty Ltd. Director: The News Corporation Limited, Independent Newspapers Limited and The Foundation for Rural and Regional Renewal. Other Interests: Australian Stockman’s Hall of Fame and Outback Heritage Centre (Chairman) and Royal Agricultural Society (Director). Mr Cowley is a resident of New South Wales. Age 65. Directors’ Report Colin R Galbraith Mr Galbraith has been a member of the Board since June 2000 and is a member of the Risk Committee. He was previously a Director of Colonial Limited, having been appointed in 1996. He is a partner of Allens Arthur Robinson, Lawyers. Chairman: BHP Community Trust. Director: OneSteel Limited. Other Interests: Council of Legal Education in Victoria (Honorary Secretary), Corporate Council of CARE Australia (Member) and The Royal Melbourne Hospital Neuroscience Foundation (Trustee). Mr Galbraith is a resident of Victoria. Age 53. Warwick G Kent AO Mr Kent has been a member of the Board since June 2000 and is a member of the Risk Committee. He was previously a Director of Colonial Limited, having been appointed in 1998. He was Managing Director and Chief Executive Officer of BankWest until his retirement in 1997. Prior to joining BankWest, Mr Kent had a long and distinguished career with Westpac Banking Corporation. Director: Perpetual Trustees Australia Limited, West Australian Newspapers Holdings Limited and Coventry Group Limited. Other Interests: Advisory Board of Blake Dawson Waldron (Member), Walter and Eliza Hall Trust (Trustee), Australian (Fellow), Institute of Company Directors Australian Society of CPAs (Fellow), Australian Institute of Bankers (Fellow) and Chartered Institute of Company Secretaries (Fellow). Mr Kent is a resident of Western Australia. Age 65. Fergus D Ryan Mr Ryan has been a member of the Board since March 2000 and is a member of the Audit Committee. He has extensive experience in accounting, audit, finance and risk management. He was a senior partner of Arthur Andersen until his retirement in August 1999 after thirty-three years’ with that firm including five years as Managing Partner Australasia. Member: Prime Minister's Community Business Partnership. Other Interests: Strategic Investment Co-ordinator and Major Projects Facilitator for the Federal Government, Committee (Counsellor) and Pacific Institute (Patron). Mr Ryan is a resident of Victoria. Age 58. for Melbourne Frank J Swan Mr Swan has been a member of the Board since July 1997 and is a member of the Risk Committee. He holds a Bachelor of Science degree and has twenty-three years’ senior management experience in the food and beverage industries. Chairman: Fosters Group Limited. Director: National Foods Limited and Catholic Ladies College Eltham. Other Interests: Institute of Directors (Fellow), Australian (Fellow), Australian Institute of Company Directors Institute of Institute of Management Management UK (Companion). Mr Swan is a resident of Victoria. Age 60. (Fellow) and 42 Directors’ Report 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 J T Ralph J M Schubert D V Murray N R Adler R J Clairs A B Daniels F D Ryan F J Swan B K Ward W G Kent C R Galbraith A C Booth ** K E Cowley *** DIRECTORS’ MEETINGS No. of Meetings Held* No. of Meetings Attended 10 10 10 10 10 10 10 10 10 10 10 6 7 10 10 10 10 10 10 10 10 10 9 10 6 6 The number of meetings held during the time the Director held office during the year. Ms Booth retired on 31 December 2000. * ** *** Mr Cowley retired on 29 March 2001. 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 5 5 5 5 5 4 5 5 6 6 6 6 4 6 6 6 6 3 J T Ralph J M Schubert Ø D V Murray N R Adler R J Clairs F D Ryan F J Swan B K Ward A B Daniels W G Kent **** C R Galbraith **** A C Booth ** K E Cowley *** 10 4 10 10 7 7 3 10 3 10 8 7 6 2 Nominations Committee No. of No. of Meetings Meetings Held Attended * J T Ralph J M Schubert D V Murray 3 3 3 3 3 3 The number of meetings held during the time the Director was a member of the relevant committee. Ms Booth retired on 31 December 2000. * ** *** Mr Cowley retired on 29 March 2001. **** Mr Kent and Mr Galbraith were appointed to the Risk Committee on 31 December 2000. Ø Dr Schubert retired from the Risk Committee on 12 February 2001. 43 Directors’ Report Principal Activities Consolidated Profit COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES integrated including superannuation, The Commonwealth Bank Group leading providers of is one of financial Australia’s institutional services banking, insurance, general insurance, funds management, broking services and finance company activities. The principal activities of the Commonwealth Bank Group during the financial year were: retail, business and life Banking The Group provides a full range of retail banking services including housing loans, credit cards, personal loans, savings and cheque accounts and demand and term deposits. The Group has leading domestic market shares in home loans, personal loans, retail deposits and discount stockbroking and is one of Australia’s largest issuers of credit cards. The Group also offers a full range of commercial products loans, equipment and trade finance, and rural and agribusiness products. including business The Institutional Banking operations focus on the top 1,000 corporations, government entities and other major institutions operating in Australasia. Corporate customers have access to financial markets services, securities underwriting, trading and distribution, corporate finance, equities, payments and transaction services, investment management and custody. The Group also has full service banking operations in New Zealand and Fiji Funds Management The Group is Australia’s largest fund manager and largest retail funds manager in terms of its total value of funds under management. The Group has two main funds Investment management businesses: Commonwealth Management and Colonial First State Investments. These businesses manage a wide range of wholesale and retail investment, superannuation and funds. Investments are across all major asset classes including Australian and fixed interest and cash. International shares, property, retirement The Group also has funds management businesses in New Zealand, UK and Asia. Life Insurance The Group provides term insurance, annuities, master products. insurance, disability investment trusts and The Group is Australia’s third largest insurer based on life insurance assets held, and is Australia’s largest manager in retail superannuation, allocated pensions and annuities by funds under management. Life insurance operations are also conducted in New Zealand, where the Group has the leading market share, and throughout Asia and the Pacific. Consolidated operating profit after tax and outside equity interests for the financial year ended 30 June 2001 was $2,398 million (2000: $2,700 million, including a net abnormal gain of $987 million). The net operating profit for the year ended 30 June 2001 after tax, and before goodwill amortisation and appraisal value uplift was $2,262 million. This is an increase of $670 million or 42% over the year ended 30 June 2000. Apart from a full year profit contribution from the principal contributing factors to this increase were a growth in net interest income reflecting continued lending asset growth together with growth in commissions, funds management income and trading income, partly offset by increases in a range of expenses. the Colonial acquired entities, Dividends The Directors have declared a fully franked (at 30%) final dividend of 75 cents per share amounting to $933 million. The dividend will be payable on 8 October 2001. Dividends paid since the end of the previous financial year: (cid:1) as provided for in last year’s report, a fully franked final dividend of 72 cents per share amounting to $908 million was paid on 9 October 2000. The payment comprised cash disbursements of $739 million with $169 million being reinvested by participants through the Dividend Reinvestment Plan; and in respect of the current year, a fully franked interim dividend of 61 cents per share amounting to $773 million was paid on 30 March 2001. The payment comprised cash disbursements of $629 million with $144 million being reinvested by participants through the Dividend Reinvestment Plan. (cid:1) Review of Operations An analysis of operations for the financial year is set out in the Results Overview on pages 4 and 5 and Business Analysis on page 15 to 30. Changes in State of Affairs The Commonwealth Bank of Australia has become the successor in law to State Bank of New South Wales (known as Colonial State Bank) effective on 4 June 2001 pursuant to legislation. On that date State Bank of New South Wales ceased to have a separate legal existence and all its assets and liabilities became assets and liabilities of Commonwealth Bank of Australia. The Bank’s shareholders’ equity was reduced by $700 million on 1 April 2001 pursuant to an off market buyback of 25.1 million shares. There were no other significant changes in the state of affairs of the Group during the financial year. Events Subsequent to Balance Date The Directors are not aware of any 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. 44 Directors’ Report Future Developments and Results Directors’ and Officers’ Indemnity the Major developments which may affect operations of the Group in subsequent financial years are referred to in the Strategy and Outlook on page 9. In the further opinion of information on likely developments in operations would be unreasonably prejudicial to the interests of the Group. the Directors, disclosure of any 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, but can liabilities as a lender. The Bank has developed credit policies to ensure this is managed appropriately. incur environmental Directors’ Shareholdings Particulars of shares in the Commonwealth Bank or in a related body corporate are set out in a separate titled section at ‘Shareholding Information’ which is to be regarded as contained in this report. the end of financial report the Options An Executive Option Plan was approved by the Annual General Meeting on shareholders at 8 October 1996 and its continuation was further approved by shareholders at the Annual General Meeting on 29 October 1998. On 13 October 2000, the Bank granted options over 2,002,500 unissued ordinary shares to 50 executives under the Executive Option Plan. At the 2000 Annual General Meeting, shareholders approved the establishment of the Equity Reward Plan and on 7 February 2001, 577,500 options were granted to 23 executives under this Plan. During the financial year 2,435,000 shares were allotted consequent to an exercise of options granted under the Executive Option Plan. Full details of the Plan are disclosed in Note 29 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 170 of the Corporations Act 2001. 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 titled ‘Shareholding Information’ which is to be regarded as contained in this report. 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 interest in any contract or proposed contract that may be made between the Bank and any of those companies. 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 the Court grants relief to the person under the Corporations Act 2001, 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”. An indemnity for employees, who are not directors, is not expressly secretaries or executive officers, restricted in any way by the Corporations Act 2001. The Directors, as named on pages 41 to 42 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 to above and The Commonwealth Bank has, during the financial year, paid an insurance premium in respect of an insurance policy for the benefit of those named and referred the directors, secretaries, executive 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 199B of the Corporations Act 2001. In accordance with insurance policy prohibits commercial practice, disclosure of the terms of the policy including the nature of the liability insured against and the amount of the premium. the Directors’ and other Officers’ Emoluments Details of the Bank’s remuneration policy in respect is set out under ‘Corporate of the Directors and executives ‘Remuneration Arrangements’ within Governance’ section of this report. the Details on emoluments paid to each director are detailed in Note 45 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 46 of the Financial Report. 45 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Directors’ Report Incorporation of Additional Material This report incorporates the Financial Highlights, Business Analysis, 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. J T Ralph AC Chairman 22 August 2001 D V Murray Managing Director 46 2001 $M 4,474 4,350 8,824 385 5,170 3,269 (993) (14) - - 474 (338) 2,398 1,793 320 149 2,262 (338) 474 - 2,398 2000 $M 1999 $M 1998 $M 3,719 2,420 6,139 196 3,407 3,527 1,997 5,524 247 3,070 3,397 1,833 5,230 233 3,039 1997 $M 3,392 1,489 4,881 98 2,924 1,958 2,207 2,536 (641) (714) (820) (20) (38) (24) (570) 967 - 20 - 409 92 - - (46) (47) 1,090 1,422 (57) 2,700 1,859 (588) (22) (200) 72 - (43) 1,078 1,513 129 36 1,678 (57) 1,210 1,342 76 103 11 24 1,297 1,469 (46) (47) 92 - - (161) 1,090 987 - 1,422 2,700 1,174 75 (1) } } 1,249 (43) - (128) 1,078 136,059 230,411 117,355 210,563 18,393 12,677 138,383 160,607 145,978 196,918 20,208 13,285 230,411 132,263 218,259 112,594 199,824 17,472 11,942 128,484 129,163 117,075 187,452 16,661 14,146 218,259 101,837 138,096 93,428 131,134 6,735 6,471 99,556 114,271 103,130 115,510 13,046 9,540 138,096 89,816 130,544 83,886 123,655 6,712 6,358 94,431 102,165 91,650 110,120 10,846 9,578 130,544 81,632 120,103 77,880 113,079 6,846 6,450 86,468 96,163 85,296 101,202 9,994 8,907 120,103 Five Year Financial Summary Profit and Loss Net interest income Other operating income Total operating income Charge for bad and doubtful debts Total operating expenses Operating profit before goodwill amortisation, appraisal value uplift, abnormal items and income tax expense Income tax expense Outside equity interests Abnormal items Income tax credit on abnormal items Appraisal value uplift Goodwill amortisation Operating profit after income tax attributable to members of the Bank Contributions to profit (after tax) Banking Life insurance Funds management Profit on operations (cash basis) Goodwill amortisation Appraisal value uplift Abnormal income (expense) after tax Operating profit after income tax 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 (1) Figure is combined for 1997. 47 Five Year Financial Summary Shareholder Summary Dividends per share (cents) - fully franked Dividends provided for, reserved or paid ($million) Dividend cover (times - before abnormals) Dividend cover (times - cash) Earnings per share (cents) before abnormal items after abnormal items Cash basis (4) Dividend payout ratio (%) (1) before abnormal items after abnormal items Cash basis (4) 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 EzyBanking COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 2001 2000 1999 1998 1997 136 1,720 1.4 1.3 190.1 190.1 179.4 130 1,431 1.2 1.6 184.8 291.3 181.0 115 1,063 1.3 1.3 153.4 153.4 158.5 104 955 1.3 1.1 134.5 117.2 139.4 102 941 1.3 1.1 131.2 117.2 136.2 71.2 71.2 75.5 10.2 1,260m 709,647 83.5 53.0 85.3 9.2 927m 788,791 74.7 74.7 72.4 6.8 927m 404,728 76.3 87.6 73.7 6.7 930m 419,926 78.0 87.3 75.3 6.7 917m 426,229 34.15 26.18 34.15 27.95 22.54 27.69 28.76 18.00 24.05 19.66 13.70 18.84 16.00 9.93 16.00 13.5 13.5 1.1 1.1 6.51 4.18 (1.53) 9.16 2.78 22.1 34.8 1.1 1.7 7.49 4.75 (2.49) 9.75 2.88 31,976 7,161 34,960 1,066 3,928 3,910 122,074 659 34,154 7,383 37,131 1,441 4,020 4,141 116,064 603 20.5 20.5 1.1 1.1 7.05 3.12 (0.79) 9.38 3.09 26,394 6,655 28,964 1,162 3,934 2,602 90,152 n/a 18.5 16.1 1.0 0.9 8.07 2.82 (0.40) 10.49 3.33 18.2 16.4 1.1 0.9 8.64 2.82 (0.57) 10.89 3.53 28,034 30,566 6,968 7,364 30,743 33,543 1,218 1,334 4,015 4,205 2,501 2,301 83,038 63,370 n/a n/a Productivity Total Operating Income per full-time (equivalent) employee ($) Staff Expense/Total Operating Income (%) Total Operating Expenses (3) /Total Operating Income (%) 252,400 26.7 58.6 211,842 27.8 57.2 190,720 29.0 55.6 170,120 31.0 58.1 145,515 34.0 59.9 (1) (2) (3) (4) Dividends paid divided by earnings. The comparative ratios have been amended to the same basis as the current year. Previously this ratio was calculated as Dividend per share divided by Earnings per share. Calculations based on operating profit after tax and outside equity interests applied to average shareholders’ equity/average total assets. Total Operating Expenses excluding goodwill amortisation and charge for bad and doubtful debts. Note the different business mix following the Colonial acquisition impacts comparison with prior years. ‘Cash earnings’ for the purpose of these financial statements is defined as net profit after tax and before abnormal items, goodwill amortisation and life insurance and funds management appraisal value uplift. 48 Financial Statements Statements of Financial Performance ..................................................................................................................................... 50 Statements of Financial Position.............................................................................................................................................. 51 Statements of Changes in Shareholders’ Equity ................................................................................................................... 52 Statements of Cash Flows......................................................................................................................................................... 53 Notes to the Financial Statements ........................................................................................................................................... 54 1 Summary of Significant Accounting Policies........................................................................................................................ 54 2 Acquisition of Colonial........................................................................................................................................................... 63 3 Operating Profit ..................................................................................................................................................................... 64 4 Average Balance Sheet and Related Interest...................................................................................................................... 66 Income Tax Expense ............................................................................................................................................................ 70 5 6 Dividends, Provided For, Reserved or Paid......................................................................................................................... 71 7 Earnings Per Share............................................................................................................................................................... 72 8 Cash and Liquid Assets ........................................................................................................................................................ 72 9 Receivables from Other Financial Institutions .................................................................................................................... 73 10 Trading Securities ................................................................................................................................................................ 73 11 Investment Securities ........................................................................................................................................................... 74 12 Loans, Advances and Other Receivables............................................................................................................................ 77 13 Provisions for Impairment ..................................................................................................................................................... 79 14 Credit Risk Concentrations ................................................................................................................................................... 83 15 Asset Quality ......................................................................................................................................................................... 90 16 Life Insurance Investment Assets ........................................................................................................................................ 95 17 Deposits with Regulatory Authorities ................................................................................................................................... 95 18 Shares in and Loans to Controlled Entities.......................................................................................................................... 95 19 Property, Plant and Equipment............................................................................................................................................. 96 Intangible Assets................................................................................................................................................................... 97 20 21 Other Assets.......................................................................................................................................................................... 98 22 Deposits and Other Public Borrowings ................................................................................................................................ 98 23 Payables to Other Financial Institutions............................................................................................................................... 99 24 Income Tax Liability .............................................................................................................................................................. 99 25 Other Provisions.................................................................................................................................................................. 100 26 Debt Issues ......................................................................................................................................................................... 100 27 Bills Payable and Other Liabilities ...................................................................................................................................... 102 28 Loan Capital ........................................................................................................................................................................ 103 29 Share Capital....................................................................................................................................................................... 105 30 Outside Equity Interests...................................................................................................................................................... 108 31 Capital Adequacy ................................................................................................................................................................ 109 32 Maturity Analysis of Monetary Assets and Liabilities......................................................................................................... 112 33 Financial Reporting by Segments ...................................................................................................................................... 114 34 Life Insurance Business...................................................................................................................................................... 117 35 Remuneration of Auditors ................................................................................................................................................... 123 36 Commitments for Capital Expenditure Not Provided for in the Accounts ......................................................................... 123 37 Lease Commitments - Property, Plant and Equipment ..................................................................................................... 123 38 Contingent Liabilities........................................................................................................................................................... 124 39 Market Risk ......................................................................................................................................................................... 126 40 Superannuation Commitments ........................................................................................................................................... 136 41 Controlled Entities ............................................................................................................................................................... 137 42 Investments in Associated Entities and Joint Ventures..................................................................................................... 139 43 Standby Arrangements and Unused Credit Facilities........................................................................................................ 140 44 Related Party Disclosures .................................................................................................................................................. 140 45 Remuneration of Directors.................................................................................................................................................. 142 46 Remuneration of Executives............................................................................................................................................... 144 47 Statements of Cash Flow.................................................................................................................................................... 147 48 Disclosures about Fair Value of Financial Instruments ..................................................................................................... 149 Directors’ Declaration .............................................................................................................................................................. 151 Independent Audit Report ....................................................................................................................................................... 152 Shareholding Information........................................................................................................................................................ 153 49 Statements of Financial Performance For the Year ended 30 June 2001 Interest income Interest expense Net interest income Other income: Proceeds from sale of assets Written down value of assets sold Other Net banking operating income Premiums and related revenue Investment revenue Claims and policyholder liability expense Life insurance margin on services operating income Funds management fee income Net life insurance and funds management operating income before appraisal value uplift Total net operating income before appraisal value uplift Charge for bad and doubtful debts Operating expenses: Staff expenses Occupancy and equipment expenses Information technology services Other expenses Profit from ordinary activities before appraisal value uplift, restructuring charge, goodwill amortisation and income tax Appraisal value uplift Restructuring charge Goodwill amortisation Profit from ordinary activities before income tax Income tax expense Net profit Outside equity interests in net profit COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Note 3 3 3 3 3 2001 $M 11,900 7,426 4,474 185 (104) 2,300 6,855 958 1,698 (1,388) 1,268 701 2000 $M 8,842 5,123 3,719 61 (36) 1,926 5,670 337 1,066 (1,077) 326 143 1,969 8,824 469 6,139 GROUP 1999 $M 7,745 4,218 3,527 798 (695) 1,640 5,270 236 590 (669) 157 97 254 5,524 2001 $M 8,560 5,261 3,299 149 (39) 2,462 5,871 - - - - - BANK 2000 $M 7,239 4,230 3,009 29 (8) 1,984 5,014 - - - - - - 5,871 - 5,014 3,13 385 196 247 276 191 3 3 3 3 34 1(aa) 5 2,360 604 748 1,458 5,170 3,269 474 - (338) 3,405 993 2,412 (14) 1,705 437 571 694 3,407 2,536 1,165 (1) (106) (1) (57) 3,538 800 (1) 2,738 (38) 1,604 455 505 506 3,070 2,207 - - (47) 2,160 714 1,446 (24) 1,672 392 563 671 3,298 2,297 - - (49) 2,248 549 1,699 - 1,510 371 534 536 2,951 1,872 (26) (106) (39) 1,701 585 1,116 - Net profit attributable to members of the Bank 2,398 2,700 1,422 1,699 1,116 Foreign currency translation adjustment Revaluation of investments and properties Total valuation adjustments Total changes in equity other than those resulting from transactions with owners as owners 98 5 103 (26) - (26) (33) - (33) 6 - 6 (15) 589 574 2,501 2,674 1,389 1,705 1,690 Earnings per share based on net profit distributable to members of the Bank Basic and Fully Diluted Dividends provided for, reserved or paid per share attributable to members of the Bank: 7 6 Cents per share 190 136 291 130 153 115 (1) For comparative purposes it should be noted that these amounts included $987 million reported as a net abnormal gain at 30 June 2000, which is no longer disclosed as such due to the introduction of new accounting standard AASB 1018: Statement of Financial Performance. Refer Note 1 (pp) for details. 50 Statements of Financial Position As at 30 June 2001 Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Life insurance investment assets Deposits with regulatory authorities Shares in and loans to controlled entities Property, plant and equipment Investment in associates Intangible assets 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 Life insurance policyholder liabilities Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Net Assets Shareholders’ Equity Share Capital Ordinary Share Capital Preference Share Capital Reserves Retained profits Shareholders’ equity attributable to members of the Bank Outside equity interests: Controlled entities Life insurance statutory funds Total outside equity interests Total Shareholders’ Equity Note 8 9 10 11 12 16 17 18 19 42 20 21 22 23 6 24 25 34 26 27 28 29 29 30 30 2001 $M 3,709 4,622 6,909 9,705 136,059 12,075 31,213 61 - 919 400 10,852 13,887 230,411 117,355 6,903 12,075 - 779 1,355 1,007 27,029 24,484 13,872 204,859 5,704 210,563 19,848 12,455 687 4,091 1,160 18,393 (3) 1,458 1,455 19,848 GROUP 2000 $M 2,575 5,154 7,347 9,149 132,263 11,107 27,036 46 - 1,073 403 10,227 11,879 218,259 112,594 4,633 11,107 - 708 1,823 1,554 25,282 25,275 11,549 194,525 5,299 199,824 18,435 12,521 - 3,265 1,686 17,472 375 588 963 18,435 2001(1) $M 3,286 3,795 5,020 6,873 112,634 12,158 - 4 16,425 688 258 3,151 11,876 176,168 103,475 6,349 12,158 8,225 779 414 837 - 10,690 11,547 154,474 5,624 160,098 16,070 12,455 687 2,278 650 16,070 - - - 16,070 BANK 2000 $M 2,103 4,329 4,692 7,169 90,661 10,674 - 3 17,349 739 297 412 8,255 146,683 88,240 4,136 10,674 4,326 708 550 808 - 8,205 8,428 126,075 4,803 130,878 15,805 12,521 - 2,304 980 15,805 - - - 15,805 (1) The Commonwealth Bank of Australia became the successor in law to all the assets and liabilities of State Bank of New South Wales (known as Colonial State Bank) effective on 4 June 2001 pursuant to legislation. 51 Statements of Changes in Shareholders’ Equity For the year ended 30 June 2001 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Note 29 29 Ordinary Share Capital Opening balance Transfer from share premium reserve Buyback Buyback for dividend reinvestment plan Dividend reinvestment plan Employee share ownership schemes Issue costs Share issue to Colonial shareholders Closing balance Preference Share Capital Opening balance Issue of shares Issue costs Closing balance Retained profits Opening balance Adjustment on adoption of new life insurance standard Assumption of Colonial State Bank profits Buyback Transfers from reserves Operating profit attributable to members of Bank Total available for appropriation Transfers to reserves (1) Interim dividend - cash component Interim dividend - appropriated to dividend reinvestment plan reserve Provision for final dividend - cash component Final dividend - appropriated to dividend reinvestment plan reserve Other dividends 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 Opening balance Revaluation of investments and properties Transfers to capital reserve Closing balance Share Premium Reserve Opening balance Transfer to Ordinary Share Capital Closing balance Dividend Reinvestment Plan Reserve Opening balance Conversion to ordinary share capital and cash dividend Appropriation from profits Closing balance Foreign Currency Translation Reserve Opening balance Currency translation adjustments Transfer to retained profits Closing balance Total Reserves Shareholders’ equity attributable to members of the Bank (1) Undistributable profits in respect of life insurance businesses. 52 2001 $M 2000 $M GROUP 1999 $M 12,521 - (275) (140) 313 40 (4) - 12,455 3,526 - (553) - 253 23 (2) 9,274 12,521 - - - - 1,698 432 - - - 2,700 4,830 (1,713) (405) (118) (708) (200) - 1,686 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 2001 $M 12,521 - (275) (140) 313 40 (4) - 12,455 - 700 (13) 687 980 - 140 (449) - 1,699 2,370 - (642) (131) (765) (168) (14) 650 570 - - 570 1,080 1,713 - 2,793 2,069 99 (1,088) 1,080 289 - 289 289 - 289 1,531 - 1,531 - - - - - - - 133 (251) 318 200 9 (26) - (17) - - - - 1,499 (1,499) - 214 (397) 316 133 41 (33) 1 9 - - - - - - - 200 (331) 299 168 3 6 - 9 BANK 2000 $M 3,526 - (553) - 253 23 (2) 9,274 12,521 - - - - 1,295 - - - - 1,116 2,411 - - (118) (1,113) (200) - 980 570 - - 570 942 589 1,531 - 589 (589) - - - - 133 (251) 318 200 18 (15) - 3 - 700 (13) 687 1,686 - - (449) 125 2,398 3,760 (880) (642) (131) (765) (168) (14) 1,160 2,793 880 (125) 3,548 289 - 289 - 5 - 5 - - - 200 (331) 299 168 (17) 98 - 81 4,091 18,393 3,265 17,472 1,511 6,735 2,278 16,070 2,304 15,805 Statements of Cash Flows For the Year ended 30 June 2001 Cash Flows From Operating Activities Interest received Dividends received Interest paid Other operating income received Expenses paid Income taxes paid Net decrease (increase) in trading securities Life insurance: Investment income Premiums received Policy payments Net Cash provided by Operating Activities 2001 $M 2000 $M 12,059 14 (7,704) 2,800 (5,583) (1,252) (262) 900 6,286 (5,423) 1,835 7,949 20 (4,538) 2,210 (3,215) (976) (50) 428 2,771 (2,112) 2,487 GROUP 1999 $M 7,796 6 (4,071) 1,972 (2,756) (363) (408) 2001(1) $M 8,567 404 (5,299) 1,558 (3,296) (947) 171 - - - 2,176 - - - 1,158 BANK 2000 $M 7,314 83 (4,027) 1,768 (2,785) (850) (892) - - - 611 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 Withdrawal (lodgement) 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 Life insurance: Purchases of investment securities Proceeds from sale/maturity of investment securities Net Cash used in Investing Activities (414) (46) (196) (378) (46) (19,676) 28 19,654 15 (4,181) - 157 (132) (184) (16,852) 17 15,212 950 (8,791) - 44 (94) (3,697) (13,337) 146 11,993 (121) (11,819) - 652 (81) 229 (17,937) 84 18,587 1 (4,311) 1,809 65 (41) (190) (15,050) 7 14,954 949 (7,789) (1,011) 22 (81) (3,060) (891) (433) (465) (891) (433) 1,504 (2,424) (423) 909 879 (21,229) 20,556 (4,793) (11,356) 10,863 (16,607) - - (13,422) - - (2,293) - - (10,659) Cash Flows from Financing Activities Buy back of shares Proceeds from issue of shares (net of costs) Net increase (decrease) in deposits and other borrowings Net movement in debt issues Dividends paid Net movements in other liabilities Net increase (decrease) in payables due to other financial institutions not at call Net increase (decrease) in securities sold under agreements to repurchase Issue 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 period Cash and Cash Equivalents at end of period (724) 723 5,246 (2,099) (1,368) (1,010) 1,396 (553) 4 6,043 5,834 (882) 461 2,470 (650) 6 9,476 399 (571) (138) (477) (724) 723 1,565 (1,137) (1,368) (378) 1,378 (553) 4 6,991 1,865 (875) 44 2,361 (485) 327 (43) (485) 327 - (69) 1,610 (1,348) 1,386 38 2,053 306 16,063 1,943 (557) 1,386 (317) 1,041 8,726 (2,520) 1,963 (557) - 293 (133) (1,268) 848 (420) 1,975 (956) 11,183 1,135 (287) 848 (1) There were no cash flows associated with the Commonwealth Bank of Australia becoming the successor in law to all the assets and liabilities of State Bank of New South Wales (known as Colonial State Bank) effective on 4 June 2001 pursuant to legislation. Details of Reconciliation of Cash and Reconciliation of Operating Profit After Income Tax to Net Cash Provided by Operating Activities are provided in Note 47. It should be noted that the Group does not use this accounting Statement of Cash Flows in the internal management of its liquidity positions. 53 Notes to the financial statements 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 Act 2001, applicable Accounting Standards and other the mandatory requirements are considered appropriate to a banking corporation. requirements so reporting far as The accounting policies applied are consistent with those of the previous year, except as noted below. the requirements The Group adopted of AASB 1038: Life Insurance Business for the first time from 1 July 1999, refer note 1(jj). From 1 July 2000 outside equity interests in managed investment funds controlled by the life insurance statutory funds have been brought to account. As a result life insurance investment assets and outside equity interests have increased by $1,458 million at 30 June 2001 ($588 million at 30 June 2000). This change has no impact on operating profit after tax attributable to the Bank. Comparative figures have been restated. The Group has elected to apply revised accounting standard AASB 1005: Segment Reporting prior to its operative date in accordance with Section 334(5) of the Corporations Act 2001, refer Note 33. The Group has elected to apply revised accounting standard AASB 1041: Revaluation of Non-Current Assets prior to its operative date in accordance with Section 334(5) of the Corporations Act 2001, refer Note 19. Further, in accordance with revised International Accounting Standard IAS 1: 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. The Statements of Cash Flows has been prepared in accordance with the International Accounting Standard IAS 7: Cash Flow Statements. 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 for AASB 1038: Life The financial statements of the Bank and the consolidated financial statements have been prepared in accordance with the historical cost convention and, except Insurance Business requirements and where indicated, do not reflect current valuations of non monetary assets. Domestic bills discounted which are included in loans, advances and the Company and other receivables and held by 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. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 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 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 it is determined that there is a capacity to control as defined in AASB 1024: Consolidated Accounts. All balances and transactions between Group entities have been eliminated on consolidation. The Commonwealth Bank of Australia became the successor in law to State Bank of New South Wales (known as Colonial State Bank) effective on 4 June 2001 pursuant to legislation. On that date State Bank of New South Wales ceased to have a separate legal existence and all its assets and liabilities became assets and liabilities of the parent entity Commonwealth Bank of Australia. This succession in law has no effect on the consolidated Group. One outcome of this process is that the carrying amount of the Bank’s investment in Colonial Group has been reduced to reflect the net tangible assets and goodwill ($2,742 million, refer Note 20) now within Commonwealth Bank of Australia. There is no effect on the amount of goodwill in the consolidated financial statements. (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 42. 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 from ordinary activities. (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 results. The foreign currency assets and liabilities of overseas branches and overseas controlled entities are converted to Australian currency at 30 June 2001 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. Translation differences arising from conversion of opening balances of shareholders’ 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 Group 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. 54 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (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. (m) Loans, advances and other receivables Loans, advances and other receivables include overdrafts, home, credit card and other personal lending, term loans, leasing, bill financing, redeemable preference shares and leverage leases. They are carried at the 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 leveraged leases. Interest and yield related fees are reflected in profit when earned. Yield related fees received in advance are deferred, included as part of the carrying value of the loan and amortised to profit 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 income. Upon recognition of classification as non accrual, all interest charged in the current financial period is reversed from profit and reserved if it has not been received in cash. for 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. terms modified, Restructured Facilities When facilities (primarily loans) have the original contractual 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 restructured terms. If performance is not maintained, or collection of longer interest and/or principal 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. is no 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. (f) 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. (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 facilities referred to in Note 1(m), financial instruments are transacted on a commercial basis to derive an interest yield/cost with terms and conditions having due regard to the nature of the transaction and the risks involved. (h) Cash and liquid assets Cash and liquid assets includes cash at branches, cash at bankers and money at short call. They are brought to account at the face value or the the outstanding balance where gross value of appropriate. Interest is taken to profit when earned. (i) Receivables due from other financial institutions Receivables from other financial institutions includes loans, nostro balances and settlement account balances due from other banks. They are brought to account at the gross value of the outstanding balance. Interest is taken to profit when earned. (j) Trading securities Trading securities are short and long term public, bank and 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 fair value adjustments are reflected in ‘Other Income’. Interest on trading securities is reported in net interest earnings. Trading securities are recorded on a trade date basis. losses on disposal and unrealised (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 date of purchase so that securities attain their redemption values by maturity date. Interest is reflected in profit when earned. Dividends on equities are brought to account in profit on declaration date. Any profits or losses arising from disposal prior to maturity are taken to profit in the period in which they are realised. The cost of securities sold is calculated on a specific identification basis. Unrealised losses related to permanent diminution in the value of investment securities are recognised in profit and the those securities adjusted accordingly. recorded values of 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. 55 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES General provisions for bad and doubtful debts are maintained to cover non identified probable losses and latent risks inherent in the overall portfolio of advances and other credit transactions. The provisions are determined having regard to the 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. 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. (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 when earned. (q) Deposits with regulatory authorities In several 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 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 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 At year end, independent market valuations, reflecting current use, were obtained for all individual property holdings (other than leasehold improvements). Directors adopt a valuation based on independent advice. 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 minimal 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. The amounts charged for the year are shown in Note 3. 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. 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 through the general provision. Any subsequent cash recovery is credited to the general provision. (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 arrangements. Where a change occurs in the 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 accordance with amendments to AASB 1008: Leases, all leveraged leases with a lease term beginning from 1 July 1999 are accounted for as finance leases with income brought to account progressively over the lease term. 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 than to the unremitted lease rentals and the equipment under lease. Operating lease rental revenue and expense is recognised in the profit 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, and liabilities, contingent investments and assets acquired through security enforcement. instruments financial full Specific provisions are established where 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 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 funded primarily by reference to historical ratios of write offs to balances in default. in 56 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (s) Property, plant and equipment (v) Deposits and other public borrowings Deposits and other public borrowings includes certificates of deposits, term deposits, savings 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 when incurred. (w) Payables due to other financial institutions Payables due to other financial institutions includes deposits, vostro balances and settlement account balances due to other banks. They are brought to account at the gross value of the outstanding balance. Interest is taken to profit when incurred. (x) Provision for dividend The provision for dividend represents the maximum expected cash component of the declared final dividend. The remaining portion of the dividend is appropriated to the Dividend Reinvestment Plan Reserve where new shares are to be issued under the plan. (y) Income taxes The Group has adopted the liability method of tax effect accounting. The tax effect of 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 utilised (Notes 5 and 21). (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 outstanding liability as at balance date. Actual payments made during the year are included in 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 restructuring Provision for Restructuring (2000) In June 2000 the Group acquired a 100% interest in the Colonial Limited Group of companies. This resulted in within consequent Commonwealth Bank’s existing business. The provision for restructuring covers the integration of the Colonial operations into the existing Group and rationalisation of existing processing and administrative functions. The principal costs associated with this programme are in the area of redundancy, property and systems. Refer Note 2 for further details on the Colonial acquisition. requirements 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 Security surveillance systems Furniture Equipment - - - Office machinery - EFTPOS machines Maximum 30 years 10 years 20 years 10 years Lesser of unexpired lease term or lives as above 10 years 8 years 5 years 3 years its The Bank has outsourced the majority of information processing and does not own any material amounts of computer or communications equipment. (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 resulting from the acquisition of the Colonial Group in June 2000 and the amortisation policy is set out in Note 2. Purchased goodwill arising from the merger with the State Bank of Victoria in 1991 is being amortised over 20 years. Purchased goodwill arising from the acquisition of the 25% minority interest in ASB Group in New Zealand in August 2000 is being amortised over 20 years. 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. (u) Other assets Other assets includes all other financial assets and includes interest, fees, market revaluation of trading derivatives and other unrealised income receivable and securities sold not delivered. These assets are recorded at the cash value to be realised when settled. for the American Capitalisation of Computer Software Costs In accordance with Institute of Certified Public Accountants Statement of Position 98-1 ‘Accounting the Costs of Computer Software Developed or Obtained for Internal Use’, the Group carries net unamortised capitalised computer software costs of $77 million as at 30 June 2001. The amortisation period for software is 2½ years except for certain longer term projects. Software maintenance costs continue to be expensed as incurred. 57 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Restructuring Costs (2000) The integration of Colonial the Group’s structure resulted in an expense for restructuring of $106 million ($86 million after tax) being charged to the Bank’s result in the year ending 30 June 2000 (Refer Note 25). into (bb) Provision for self insurance The provision for self insurance covers certain non lending losses and non transferred insurance risks. Actuarial reviews are carried out at regular intervals with provisioning effected in accordance with actuarial advice. (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 their redemption values by maturity date. Interest is reflected in profit as incurred. Any profits or losses arising from redemption prior to maturity are taken to profit in the period in which they are realised. It was not available Share premium reserve was derived from the premium over par value received from the issue of shares. to shareholders in the form of a cash dividend. Following changes to the Corporation Law on 1 July 1998, shares have no par value and the related Share Premium Reserve became part of share capital. for distribution Dividend reinvestment plan reserve is appropriated from revenue profits when the Bank is expecting to satisfy the dividend reinvestment by the issue of new shares. 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 treatment reflects the probability that a fairly stable proportion of the Bank’s final dividend will be reinvested in equity via the dividend reinvestment plan. No entry is passed to this reserve when the Bank has determined to satisfy the dividend reinvestment by an on market purchase of existing shares. Further details of share capital, outside equity interests and reserves are shown in Notes 29, 30 and Statements of Changes in Shareholders’ Equity. Further details of the Group’s debt issues are (gg) Derivative financial instruments shown in Note 26. (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 expenses payable and securities purchased not delivered. 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. issue Premiums, discounts and associated expenses are amortised through profit each year from the date of issue so that securities attain their redemption values by maturity date. Interest is reflected in profit as incurred. Any profits or losses arising from redemption prior to maturity are taken to profit in the period in which they are realised. Further details of the Group’s loan capital debt issues are shown in Note 28. (ff) Shareholders’ equity Ordinary share capital is the amount of paid up capital from the issue of ordinary shares. Preference Share Capital is the amount of paid up capital from the issue of preference shares. General reserve is derived from revenue profits and is available for dividend except for undistributable profits in respect of the Group’s life insurance businesses of $2,699 million, the appraisal value uplift (2000: $1,944 million, 1999: $231 million). including Capital reserve is derived from capital profits and is available for dividend. The Group enters into a significant volume of derivative financial instruments which include foreign 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 Traded derivative financial 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 immediately they occur. is in holding or Derivative financial instruments held or issued for purposes other than trading The principal objective to manage balance sheet issuing derivative financial instruments for purposes other than interest rate, trading exchange rate and credit risk associated with certain assets and liabilities such as loans, investment 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 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. the Swaps Interest rate swap receipts and payments are accrued to profit 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 over the term for which the swap is effective as a hedge of the underlying hedged item or class of items. 58 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued 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 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. Equity swaps are utilised to manage the risk associated with both the capital investment 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. Forward rate agreements and futures losses on Realised gains and 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 as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. forward 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 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 as interest of the hedged item or class of items being hedged over the period for which the hedge would have been effective. Where the 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 39. (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 the probability of default. They are recorded as contingent liabilities at their face value. Further information is shown in Note 38. reflects (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 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. Lending fees Material non refundable front end loan fees that are yield related and do not represent cost recovery, are taken to profit over the period of the loan. Associated costs incurred in these lending 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. Commission and other fees When commission charges and fees relate to specific transactions or events, they are recognised as income in which they are received. However, when they are charged for services provided over a period, they are taken to income on an accrual basis. in the period Other income Trading income is brought to account when earned financial based on changes instruments and recorded trade date. Further information is included in Notes 1(e) Foreign currency transactions, 1(j) Trading securities and 1(gg) Derivative financial instruments. Life insurance business income recognition is explained in Note 1(jj) below. fair value of in net from (jj) they are designated as Life Insurance Business The Group’s life insurance business is accounted for in accordance with the requirements of Accounting Standard AASB 1038: Life Insurance Business which is summarised below: (i) All assets, liabilities, revenues, expenses and equity are included in the financial report irrespective of whether to policyholders or to shareholders. (ii) All assets are measured at net market values. (iii) All liabilities are measured at net present values. Policy liabilities are calculated in accordance with the principles of Margin on Services (MoS) profit reporting as set out in Actuarial Standard AS 1.02: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board. Other Liabilities are measured at net present value at reporting date. relating (iv) Any life insurers within the Group that are parent entities recognise and disclose any excess or deficiency of the net market values of interests in subsidiaries over those subsidiaries as an item in the financial report of the life insurer economic entity. the net assets of 59 Notes to the financial statements COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 1 Summary of Significant Accounting Policies continued (cid:1) (v) Premiums and claims are separated on a product basis into their revenue, expense and change in liability components unless the separation is not practicable or the components cannot be reliably measured. (vi) Returns on all investments controlled by a life insurer entity in the Group are recognised as revenues. (vii) Participating benefits vested in relation to the financial year, other than transfers from unvested policyholder benefits liabilities, are recognised as expenses. (viii) Reinsurance contracts taken are recognised on a gross basis. The Group conducts life insurance business through Commonwealth Insurance Holdings Limited (CIHL), Commonwealth Life Limited (CLL) and The Colonial Mutual Life Assurance Society Limited (CMLA) in Australia, ASB Life Assurance Limited (ASB Life), Sovereign Assurance Company, Metropolitan Life Assurance Company of NZ Limited and Colonial Holding Company No2 (NZ) Limited in New Zealand and several subsidiaries and joint ventures throughout Asia. CIHL, CMLA and ASB Life are the top tier life insurance companies within the life insurance corporate structure and they market value their interests in their controlled entities at each reporting date. Accounting policies and disclosures specific to life insurance business are required under AASB 1038. These are provided in this note and Notes 16, 20 and 34. Premiums and Claims Investment linked business (i) recognised as an Premiums received, which are in the nature of investment deposits, have the fee portion of the premium recognised as revenue and the deposit in policy portion liabilities. Premiums with no due date are recognised on a cash received basis. Fees earned by the Shareholder for managing the funds invested are revenue. Claims under investment linked businesses represent withdrawals of investment deposits and are recognised as a reduction in policy liabilities. recognised as increase (ii) Non-investment linked business Premiums received for providing services and bearing risks are recognised as revenue. Premiums with a regular due date are recognised as revenue on an accruals basis. Non-investment linked claims are recognised as an expense when a liability has been established. Market Value Accounting All assets are valued at net market value (NMV) and all liabilities at net present value at balance date. Consistent with the principles of market value accounting, movements in the net market value of assets and net the period are present value of immediately recognised in profit. liabilities during Life insurance investment assets Investments are measured at net market values at balance date. Listed securities are valued at the price ruling at balance date. Where no quoted market exists, the Directors adopt various methods determined by internal and external valuers. In these cases the values are deemed equivalent to net market value. Details of particular methods adopted are as follows: 60 (cid:1) sales about future Valuation of the investment in the life insurance controlled entities is based on the appraisal value. The appraisal value comprises the present value of future profits from in force business, the estimated value of profits from future business and the shareholders interest in the net worth of the life insurance Statutory and Shareholder Funds. Non life insurance controlled entities are valued using a discounted cash flow method applied to anticipated future income streams, allowing for assumptions growth, redemptions, expenses, investment returns and fee margins. This method allows the values so calculated to be expressed in the form of appraisal values, consistent with those calculated for the life insurance controlled entities. Valuation of the investment in the non life insurance controlled entities is then based on these calculated appraisal values as at reporting date. Properties are valued annually by qualified independent valuers. Excess of Net Market Value over Net Assets of Controlled Entities Interests in controlled entities held by the life insurance companies are subject to revaluation each period, such that the investment in the controlled entity is recorded at market value. On consolidation in controlled the entities is eliminated and the excess of market value of controlled entities over their underlying net assets is separately recognised in Intangible Assets (Note 20) on the balance sheet as ‘Excess of Net Market Value over Net Tangible Assets of Life Insurance Controlled Entities’. This amount is assessed periodically as part of the valuation of investments with changes in value taken to profit. This excess does not require amortisation in the financial statements. investment (cid:1) Life insurance policy liabilities and margin on services profit Policy liabilities are calculated in accordance with the principles of Margin on Services (MoS) profit reporting as set out in Actuarial standard AS 1.02: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board. Policy liabilities are calculated in a way which allows for the systematic release of planned profit margins as services are provided to policyowners and the revenues received. Selected profit carriers including premiums and anticipated annuity payments are used to determine profit recognition. Profit Life insurance business operating under this profit those services are relating to recognition methodology can be analysed as follows: (i) Emergence of planned profit margins: In setting premium rates, life insurers will revenues over include planned margins of expenses. When the life insurer has performed the services necessary to establish a valid claim to those margins and has received the revenues relating to those services, the planned margins are in profit. Where actual experience recognised replicates planned margin assumptions, the planned profit margin will be released over the life of the policy. Notes to the financial statements from NOTE 1 Summary of Significant Accounting Policies continued (cid:1) (ii) Difference between actual and planned experience: Experience profits/(losses) are realised where actual experience differs the expected performance used to determine planned margins. Circumstances experience in profits/(losses) claims, expenses, mortality, discontinuance and investment returns. For example, an experience profit will emerge when the expenses of maintaining all in force business in a year are lower than those allowed for in the planned margin. Loss recognition on groups of related products or reversals of previously recognised losses: include experience variations giving rise (iii) to (cid:1) is recognised Where future expenses for a group of related products exceeds future revenues, the anticipated If unprofitable loss business becomes profitable, previously recognised losses are reversed immediately. Investment earnings on assets in excess of policy liabilities: immediately. (iv) liabilities. to meet policy Investment assets are held in excess of those Investment required earnings are directly influenced by market conditions and as such this component of profit will vary from year to year. Participating Policies Policy liabilities attributable to participating policies include the value of future planned shareholder profit margins and an allowance future supportable bonuses. The value of supportable bonuses and planned shareholder profit margins account for all profit on participating estimate based assumptions. policies best for on Under Margin on Services profit recognition methodology, the value of supportable bonuses and the shareholder profit margin relating to a reporting year will emerge as planned profits in that year. Policy Acquisition Costs Policy acquisition costs include the fixed and variable costs of acquiring new business. These costs are effectively deferred through the determination of policy liabilities at the balance date to the extent that they are deemed recoverable from premium or policy charges. Deferred acquisition costs are effectively amortised over the life of the policy. Changes in Accounting Policy (2000) The Group adopted the requirements of AASB 1038 for the first time from 1 July 1999. AASB 1038 prescribes the methods to be used in the reporting of life insurance business and establishes disclosure requirements with respect to that business in the financial report. The following accounting policy changes were implemented: (cid:1) financial report includes to assets, The consolidated the financial statements of controlled life insurance subsidiaries, comprising both shareholders and policyholders entitlements liabilities, revenues, and expenses. Adoption of AASB 1038 increased liabilities by total assets and $26.5 billion and $25.3 billion respectively. Revenue and expense items of life insurance businesses are consolidated on a line by line basis in the consolidated profit and loss statement. Initial adoption of AASB 1038 had no effect on reported profits as shareholders entitlements to profits emerging from the Statutory Funds were recognised in the Group’s consolidated financial report in previous periods. total (cid:1) in life insurance policy the Statutory Funds of the underlying net assets retained earnings and other reserves The attributable to policyholders have been disclosed as part of liabilities. Profit attributable to policyholders is included in ‘increase in policy liabilities’. This approach recognises the separate entitlements of policyholders and shareholders life insurance entities as required by the Life Insurance Act 1995. Controlled entities of Life Insurance companies, under AASB 1038, are required to be valued at net market value. AASB 1038 requires the differences between the net market value of the controlled entities and to be recognised as the ‘excess’ of net market value over net assets of life insurance controlled entities (the ‘excess’) report. Several internal Group restructurings have occurred placing funds management controlled entities under insurance Insurance companies, namely Commonwealth Holdings Limited (CIHL) and The Colonial Mutual Life Assurance Society Limited (CMLA). The impact of the restructuring that occurred during the year to 30 June 2000 was: - required Initial adoption of AASB 1038 Commonwealth Life Limited (CLL) to be marked to market. The resultant excess of $432 million was taken directly to retained earnings as required under the standard. the consolidated insurance financial certain and life in - - Various Colonial Group companies were transferred into CMLA and this resulted in an increase in the excess by $551 million at 30 June 2000. This includes $212 million transferred from goodwill into excess. Transfer of Commonwealth Funds Management businesses under CIHL resulting in an increase in the excess by $537 million at 30 June 2000. - Alignment of the valuation bases of CLL with those used for the Colonial Group resulted in an increase in the excess by $536 million at 30 June 2000. Consistent with the principles of market value accounting, the excess is not amortised. The movement in the excess is recognised in the consolidated statement of financial performance. The financial effect increased earnings per share by 126 cents to 291 cents per share. (kk) Loan Securitisation The Group conducts a loan securitisation program through which it packages and sells loans as securities to investors. For its services to the program, the Group receives loan servicing, program management and trustee fees on an arms length basis. Fee income is recognised in income on an accruals basis in relation to the period in which the costs of providing these services are incurred. fees such as Interest rate swaps and facilities are provided at arms length to the program by the Group in accordance with APRA Prudential Guidelines. liquidity The Group is entitled to any residual income of the program after all payments due to investors and costs of the program have been met. 61 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Due to the significant uncertainties inherent in estimating the underlying loan repayment rates and interest margins, future cash flows cannot be reliably measured. Therefore, no asset/liability or gain/loss on sale of the loans has been recognised. The residual income is recognised in Other Income when receivable. Interest rates swaps are recognised in income on an accruals basis. (ll) Fiduciary activities The Bank and designated controlled entities act as Trustee and/or Manager and/or Custodian for a number of Wholesale, Superannuation and Investment Funds, Trusts and Approved Deposit Funds. Further details are shown in Note 38. 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 of the Group and the designated controlled entity. (mm) 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. The contributions superannuation 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. (nn) Comparative figures Where necessary, comparative figures have been adjusted to conform with changes in presentation in these financial statements. (oo) Definitions ‘Overseas’ represents amounts booked in branches and controlled entities outside Australia. Borrowing Corporation’ as defined by Section 9 of the Corporations Act 2001 is CBFC Limited, Colonial Finance Limited and their controlled entities. ‘Net Fair Value’ represents the fair or market value adjusted for transaction costs. ‘Cash Basis’ is defined as net profit after tax and before abnormal items adjusted for goodwill amortisation and life insurance and funds management appraisal value uplift. (pp) Abnormal Items (2000) With the introduction of new accounting standard AASB 1018: Statement of Financial Performance, abnormal items are no longer included in this statement. For comparative purposes the details of the Group’s abnormal items disclosed at 30 June 2000 are set out below: Restructuring costs (Note 1(aa)) Net market valuation of funds management businesses (Note 1 (jj)) Change of valuation bases of Commonwealth Life insurance businesses (Note 1 (jj)) Total Abnormal Gains Before Tax Abnormal tax credit items: Restructuring costs (Note 1 (aa)) Total Abnormal Gains After Tax $M (106) 537 536 967 20 987 62 Notes to the financial statements NOTE 2 Acquisition of Colonial On 13 June 2000, pursuant to a Scheme of Arrangement, the Group acquired a 100% interest in Colonial Limited, a life insurance, funds management and banking group. Under the scheme, Colonial ordinary shareholders accepted 7 new Commonwealth Bank shares for every 20 Colonial ordinary shares held. As a result, 351,409,450 new Commonwealth Bank shares were issued and allotted to Colonial shareholders and option holders, and $800 million paid to Colonial income security holders. The assets acquired and the liabilities assumed were initially measured at their fair values at 13 June 2000, including adjustments to bring accounting policies onto a consistent basis. Provisions for restructuring covering the Colonial operations into the existing Group and rationalisation of existing processing and administrative functions were booked as a pre-acquisition cost in Colonial or as a charge in Commonwealth Bank, as applicable. integration of the planned Consideration 351,409,450 new Commonwealth Bank shares @ $26.39 Income securities payout Transaction costs Preacquisition dividend received Cost of Acquisition Fair value of net tangible assets acquired As at 30 June 2000 Revisions to fair value adjustments and restructuring costs provisioned Revised as at 30 June 2001 Outside equity interests in net assets acquired Excess of net market value over net assets of life insurance controlled entities Goodwill on acquisition 2000 $M 9,274 800 46 (1,000) 9,120 1,303 (238) 1,065 (155) 2,548 5,662 9,120 The costs principal associated with this restructuring are staff redundancy payments, property and rental break costs, systems costs and supply contract renegotiation costs. The fair value adjustments principally relate to write off of capitalised systems costs and additional general provisioning to bring Colonial onto a consistent provisioning methodology. restructuring and In the 12 months subsequent to acquisition further information has been obtained in respect of the initial estimated costs of fair value adjustments which has resulted in the following revisions. The revisions to costs associated with the restructuring principally relate to additional staff redundancy payments and information technology contract termination and data centre relocation costs driven by more extensive consolidation of IT services to EDSA. The revisions to fair value adjustments principally relate to asset write downs, additional general provisioning and tax adjustments. These revisions to the provision for restructuring and fair value adjustments result in an increase to goodwill on acquisition of $238 million. 2001 Revision 2000 $M $M $M The fair value adjustments comprised: - Write off of capitalised costs - Doubtful debt provisioning - general - specific - Investments write down - Legal - Asset write off - Other Income tax benefit - fair value adjustments Restructuring costs provisioned comprised - Staff - Occupancy and equipment - Information technology services - Other Income tax benefit - restructuring costs 299 170 29 43 15 26 55 637 24 275 50 - 43 15 26 4 162 120 29 - - - 51 475 (159) 478 (11) 151 (148) 327 119 93 123 104 439 (108) 331 33 3 70 39 145 (58) 87 86 90 53 65 294 (50) 244 Fair value adjustments and restructuring costs after tax 809 238 571 63 Notes to the financial statements NOTE 2 Acquisition of Colonial continued Excess of net market value over net tangible assets of life insurance controlled entities. An internal group restructuring of Colonial’s life and funds management businesses was completed in June 2000, whereby all these businesses, except for some Asian businesses, were transferred to The Colonial Mutual Life Assurance Society Limited (CMLA), a life insurance controlled entity. These funds management businesses are valued at market value by CMLA. Consistent with the principles of market value accounting, as specified by AASB 1038: Life Insurance Business, the above resulting excess of net market value over net tangible assets of life insurance controlled entities is not amortised. life and NOTE 3 Operating Profit Operating profit before income tax has been determined as follows: COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Goodwill The goodwill emerging on the acquisition amounts to $5,662 million and is amortised over a period of 20 years, representing the assessed life of the ongoing business. Cost and revenue synergies, planned on acquisition of Colonial, are being achieved from the integration of life insurance businesses. the Commonwealth and Colonial Changes in the excess of net market value over net assets of life insurance controlled entities that are directly attributable to progressive recognition of these cost and revenue synergies as they are implemented have been recorded as a realisation of goodwill. Refer Note 20. Interest Income Loans Other financial institutions Cash and liquid assets Trading securities Investment securities Dividends on redeemable preference shares Controlled entities 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 income (refer note 34) Funds management income General insurance premium income Less general insurance claims paid Other Total Other Operating Income Total Net Operating Income Charge for Bad and Doubtful Debts (Note 13) General provisions Total Charge for Bad and Doubtful Debts 2001 $M 2000 $M 10,246 280 110 548 655 54 - 7 11,900 7,663 191 78 295 586 24 - 5 8,842 3,773 297 671 171 - 210 1 5,123 3,719 GROUP 1999 $M 6,806 165 58 246 425 42 - 3 7,745 3,353 207 393 106 - 155 4 4,218 3,527 2001 $M 7,072 252 99 369 423 (44) 386 3 8,560 BANK 2000 $M 6,126 176 76 224 437 (39) 238 1 7,239 3,547 323 191 412 431 342 3,136 235 188 151 316 204 15 - 4,230 3,009 5,261 3,299 554 946 474 807 525 888 517 768 146 105 60 - 20 12 13 326 143 103 (55) 47 2,420 6,139 155 66 52 - 6 79 24 195 121 62 385 19 84 26 157 - 97 - 94 - (63) - 267 2,572 5,871 49 1,997 5,524 130 91 60 182 13 7 14 - - - - 223 2,005 5,014 196 196 247 247 276 276 191 191 5,042 328 902 759 - 374 21 7,426 4,474 602 1,173 222 140 64 - 14 56 25 1,268 701 107 (57) 35 4,350 8,824 385 385 64 Notes to the financial statements NOTE 3 Operating Profit continued Staff Expenses Salaries and wages Superannuation contributions Provision for long service 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 Revenue from Operating Activities Banking Interest income Fee and commissions Trading income Dividends Proceeds from sale of property, plant and equipment Proceeds from sale of investment securities Other income Life Insurance and Funds Management Life insurance - premium and related income - investment revenue Funds management fee income Appraisal value uplift -recurrent basis -change of valuation basis of Commonwealth Life Insurance businesses -corporate restructure of funds management business Total revenue from ordinary activities There were no sources of revenue from non operating activities. Operating Expenses – Year Ended 30 June 2000 Staff Occupancy and equipment Information technology services Other (1) Recurrent excludes exceptional items. 65 2001 $M 2,061 12 47 (10) 99 48 103 2,360 329 29 45 76 60 65 604 205 219 152 172 748 2000 $M 1,498 2 38 6 75 33 53 1,705 208 31 28 58 46 66 437 186 144 103 138 571 GROUP 1999 $M 1,406 1 42 - 77 34 44 1,604 158 51 26 68 64 88 455 145 141 90 129 505 2001 $M 1,498 - 50 (16) 79 38 23 1,672 211 26 26 26 52 51 392 129 180 131 123 563 108 107 535 708 1,458 5,170 81 75 176 362 694 3,407 76 69 112 249 506 3,070 83 67 186 335 671 3,298 11,900 1,775 426 14 157 28 85 14,385 8,842 1,500 311 20 44 17 95 10,829 7,745 1,281 273 6 652 146 80 10,183 8,560 1,413 378 404 65 84 267 11,171 958 1,698 701 3,357 337 1,066 143 1,546 474 92 236 590 97 923 - - - - - - - BANK 2000 $M 1,330 - 37 4 72 32 35 1,510 191 28 26 34 42 50 371 169 133 102 130 534 75 63 136 262 536 2,951 7,239 1,285 281 195 22 7 223 9,252 - - - - - - - 474 18,216 536 537 1,165 13,540 - - - 11,106 - - - 11,171 - - - 9,252 Recurrent Restructuring Charge Basis(1) 1,705 437 571 694 3,407 20 3 32 51 106 Total 1,725 440 603 745 3,513 Notes to the financial statements NOTE 4 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, 1999, 2000 and 2001. Averages used are predominantly daily averages. The overseas component comprises overseas branches COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES of the Bank and overseas domiciled controlled entities. Overseas intergroup borrowings have been adjusted in the interest spread and margin calculations to more funds. appropriately Non-accrual loans are included in Interest Earning Assets under loans, advances and other receivables. the overseas cost of reflect 2001 2000 Average Interest Average Average Interest Average Average Interest Average Balance Rate $M % Rate Balance $M Rate Balance $M 1999 $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 Overseas 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 Life insurance investment assets 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 2,428 273 2,658 1,595 107 3 159 121 - - 4.4 1.1 6.0 7.6 1,860 42 78 - 4.2 - 1,468 119 58 - 4.0 - 1,839 1,307 112 79 6.1 6.0 1,481 1,522 79 86 5.3 5.7 29 - - n/a - 6 - - n/a - 892 2 - - - - 5,616 2,587 3,244 6,268 387 161 242 413 6.9 6.2 7.5 6.6 3,754 1,929 4,082 5,331 196 99 260 326 5.2 5.1 6.4 6.1 2,720 1,700 3,052 4,659 149 97 171 254 118,917 16,992 - 8,983 1,317 7 7.6 94,913 7.8 14,100 n/a - 6,701 986 5 7.1 83,350 7.0 13,306 n/a - 5,899 949 3 - - 191 3,198 n/a - 6.0 2,825 - 168 n/a 414 5.9 - 23 - 163,805 (3,198) 12,091 (191) 7.4 131,988 6.0 (2,825) 9,010 (168) 6.8 114,685 (414) 5.9 7,768 (23) 160,607 11,900 7.4 129,163 8,842 6.8 114,271 7,745 5.5 5.7 5.6 5.5 7.1 7.1 n/a 5.6 n/a 6.8 5.6 6.8 9,971 32 - - 1,240 211 9,739 2,085 (1,210) (158) 21,910 136,181 17.2% 12,074 109 26,580 3,062 1,024 240 21,676 1,835 (1,493) (84) 65,023 225,630 16.0% 10,533 21 9,732 240 755 187 9,309 1,158 (1,213) (174) 30,548 159,711 15.0% 66 Notes to the financial statements NOTE 4 Average Balance Sheet and Related Interest continued 2001 2000 Average Interest Average Average Interest Average Average Interest Average Balance Rate $M % Rate Balance $M Rate Balance $M 1999 $M $M $M % % 1,271 4,238 17,130 9,965 42,226 9,882 23,813 1,911 27,835 2,027 5,564 116 - 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 Debt issues Australia Overseas Loan capital Australia Overseas Other interest bearing liabilities Intragroup borrowings Australia 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 Life insurance policy liabilities Australia Overseas Other liabilities Australia Overseas Total average non interest 61,455 bearing liabilities Total average liabilities and loan capital 207,433 18,197 Shareholders’ equity Total average liabilities, loan capital and shareholders’ equity Percentage of total average liabilities applicable to overseas operations 149,176 (3,198) 23,584 2,617 12,077 109 13,536 2,890 3,198 - 6,034 608 145,978 225,630 16.6% 2,519 711 603 83 1,064 62 65 263 1,099 562 367 7 21 191 - 6.0 7.2 2.2 4.1 4.5 3.2 5.1 6.2 6.4 5.6 6.6 6.0 n/a 6.0 n/a 38,176 8,665 2,022 484 25,248 2,017 17,662 1,954 961 3,718 7,615 7,655 3,336 68 - 460 67 696 44 56 241 413 429 204 6 1 5.3 5.6 1.8 3.3 3.9 2.3 5.8 6.5 5.4 5.6 31,119 9,201 1,597 591 24,378 2,120 17,247 1,682 643 3,367 7,689 2,938 418 81 626 40 35 172 395 104 6.1 2,746 8.8 - n/a - 155 - 4 2,825 - 168 - 5.9 - 414 n/a - 23 7,617 (191) 5.1 119,900 6.0 (2,825) 5,291 (168) 4.4 103,544 (414) 5.9 4,241 (23) 5.1 6.4 1.7 3.8 3.6 2.4 5.4 5.1 5.1 3.5 5.6 n/a n/a n/a 5.6 4.1 5.6 7,426 5.1 117,075 5,123 4.4 103,130 4,218 4.1 4,698 72 10,533 21 9,458 201 5,964 4,005 34,952 152,027 7,684 159,711 18.7% 3,952 76 9,971 32 - - 9,632 2,383 26,046 129,176 7,005 136,181 16.9% 67 Notes to the financial statements NOTE 4 Average Balance Sheet and Related Interest continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 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 Overseas Change in interest income including intragroup Intragroup eliminations Change in interest income 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 Debt issues Australia Overseas Loan capital Australia Overseas Other interest bearing liabilities Intragroup borrowings Australia Overseas Change in interest expense including intragroup Intragroup eliminations Change in interest expense Change in net interest income Change due to variation in time periods 30/06/01 vs 30/06/00 Changes due to 30/06/00 vs 30/06/99 Changes due to Volume $M Rate $M Total $M Volume $M Rate $M Total $M 24 1 49 20 5 2 (2) 22 29 16 3 - 4 - 20 - 47 42 20 (13) 13 6 33 (7) - - - - - - - - - - - - 79 25 41 29 548 121 2 192 62 (17) 88 55 12 62 39 2,300 334 817 56 2 - (8) (10) 27 33 (15) (19) 2 47 2 89 72 802 37 2 - 1 848 (1) 844 - 24 3,106 (24) 3,082 - 139 1,177 (139) 1,014 - 6 65 (6) 83 - 145 1,242 (145) 1,097 275 150 92 16 112 19 (8) (10) 125 4 23 (3) 20 503 228 144 16 370 18 9 23 687 134 368 (32) 15 (4) 16 6 18 20 (4) 216 164 1 35 3 20 - 57 (75) 27 (10) 54 (2) 3 49 22 109 14 3 (3) 425 (107) 42 (14) 70 4 21 69 18 325 49 6 (3) 2 - 949 (1) 951 (107) 24 - 2,341 (24) 2,317 765 (10) 139 - 696 (139) 590 424 6 - 354 (6) 315 (232) 145 - 1,050 (145) 905 192 113 37 (58) 59 1,752 213 - - 22 2,257 (22) 2,238 228 78 52 - 258 (1) 17 33 563 130 141 4 - 22 - 1,392 (22) 1,366 872 68 Notes to the financial statements NOTE 4 Average Balance Sheet and Related Interest continued Changes in Net Interest Income: Volume and Rate Analysis table shows The preceding in interest income and expense due to changes in volume and changes in interest rates. Volume variances reflect the change in interest from the prior period due to movement in the average balance. Rate variance reflects the movement Net interest income Average interest earning assets Interest Margins and Spreads the change in interest from the prior year due to changes in interest rates. Volume and rate variance for total interest earning assets and liabilities have been calculated separately (rather than being the sum of the individual categories). 2001 $M 2000 $M 4,474 3,719 160,607 129,163 GROUP 1999 $M 3,527 114,271 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 (1) Interest forgone on non accrual and restructured loans Interest Spread (2) Benefit of net free liabilities, provisions and equity (3) Australia Interest Margin (4) Overseas Interest spread adjusted for interest forgone on non accrual and restructured loans (1) Interest forgone on non accrual and restructured loans Interest Spread (2) Benefit of net free liabilities, provisions and equity (3) Overseas Interest Margin (4) Group Interest spread adjusted for interest forgone on non accrual and restructured loans (1) Interest forgone on non accrual and restructured loans Interest Spread (2) Benefit of net free liabilities, provisions and equity (3) Group Interest Margin (4) % 2.56 - 2.56 0.43 2.99 1.06 - 1.06 0.55 1.61 2.32 - 2.32 0.46 2.78 % 2.71 - 2.71 0.42 3.13 1.24 (0.02) 1.22 0.30 1.52 2.48 (0.01) 2.47 0.41 2.88 % 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 (1) (2) (3) (4) 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. 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 interest income divided by average interest earning assets for the period. 69 Notes to the financial statements 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. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Operating profit from ordinary activities before income tax Banking Life insurance Funds Management Prima facie income tax at 34% (30 June 2000 and prior 36%) Banking Life insurance Funds Management Add (or deduct) permanent differences expressed on a tax effect basis: Current Period Tax rate change Specific provisions for offshore bad and doubtful debts not tax effected Taxation rebates (net of accruals) Tax adjustment referable to policy holder income (1) Non assessable income - life insurance surplus (1) Change in excess of net market value over net assets of life insurance controlled entities (1) Non deductible goodwill amortisation Non-assessable capital gains Tax losses recognised Employee share acquisition plan Other Prior Periods Other Total income tax expense Income tax attributable to operating profit Banking Life insurance Funds management 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 2001 $M 2000 $M GROUP 1999 $M 2001 $M BANK 2000 $M 2,174 988 243 3,405 739 336 83 1,158 3 8 (35) 62 (43) (161) 115 (38) (65) (8) 26 (136) (29) 993 705 194 94 993 820 193 (35) 11 4 993 765 55 820 168 5 173 2,147 1,341 50 3,538 773 483 18 1,274 2,033 99 28 2,160 732 36 9 777 23 (22) (38) 28 (62) (402) 21 - (11) (9) (3) (475) 1 800 739 47 14 800 730 137 (109) 34 8 800 677 52 729 73 (2) 71 - 1 (27) - (36) - 17 - (10) - (2) (57) (6) 714 704 1 9 714 744 (24) (34) 8 20 714 710 34 744 (46) 16 (30) 2,248 - 1,701 - 2,248 1,701 764 - - 764 (11) 7 (138) - - - 17 (38) (64) (8) 38 (197) (18) 549 549 - - 549 416 184 (63) 7 5 549 416 - 416 133 - 133 612 - - 612 38 (24) (75) - - - 14 - (11) (9) 40 (27) - 585 585 - - 585 536 128 (115) 29 7 585 535 - 535 50 - 50 (1) The prima facie life insurance income tax of $336 million less these permanent differences equals the life insurance tax expense of $194 million for 30 June 2001. 70 Notes to the financial statements NOTE 5 Income Tax Expense continued 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 21) Deferred income tax liabilities arising from: Leveraged leasing Lease financing Accelerated tax depreciation Other Total deferred income tax liabilities (Note 24) 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 arising during the year not recognised Closing balance (Note 21) NOTE 6 Dividends Provided For, Reserved or Paid Ordinary Shares Interim ordinary dividend (fully franked) of 61 cents per share (2000: 58 cents, 1999: 49 cents) Provision for interim ordinary dividend - cash component only Declared final ordinary dividend (fully franked) of 75 cents per share (2000: 72 cents, 1999: 66 cents) Provision for final ordinary dividend - cash component only Other provision Preference Shares Provision for preference dividend Dividends provided for payments in cash or paid Appropriations to Dividend Reinvestment Plan Reserve Interim ordinary dividend Final ordinary dividend Dividends appropriated to Dividend Reinvestment Plan Reserve Total Dividends Provided for, Reserved or Paid 2001 $M 2000 $M GROUP 1999 $M 2001 $M BANK 2000 $M 488 206 694 108 369 12 613 1,102 743 156 899 383 247 28 541 1,199 255 78 333 461 209 41 222 933 296 62 358 71 42 8 256 377 282 (45) 237 139 50 28 147 364 - 181 - - - 173 (2) (65) 40 146 146 7 (11) 31 173 132 (12) (10) 36 146 167 4 (64) 14 121 140 7 (11) 31 167 642 405 275 642 405 765 5 708 - 472 - 765 708 5 - 9 1,421 - 1,113 - 747 9 - 1,113 1,421 131 168 299 1,720 118 200 318 1,431 183 133 316 1,063 131 168 299 1,720 118 200 318 1,431 The Bank changed its dividend policy for the year ended 30 June 2000. The amount of dividend to be paid is now based on profit after tax before goodwill amortisation and appraisal value uplift. Previously it was based on profit after tax. Dividend Franking Account After fully franking the final dividend to be paid for the year ended 30 June 2001 the amount of franking credits available as at 30 June 2001 to frank dividends for subsequent financial years is nil (30 June 2000: franking account $450 million). The 30 June 2000 balance was fully utilised by the March 2001 share buyback which was in part paid out of retained earnings. This figure is based on the combined franking accounts of the Group at 30 June 2001 and has been adjusted for franking credits that will arise from the payment of income tax payable on profits of the year ended 30 June 2001, franking debits that will arise from the payment of dividends proposed as at 30 June 2001 and franking credits that the Group may be prevented from distributing. The Bank expects that future tax payments will generate sufficient franking credits for the Bank to be able to continue to fully frank future dividend payments. Dividend payments on or after 1 July 2001 will be franked at the 30% tax rate. 71 Notes to the financial statements NOTE 6 Dividends Provided For, Reserved or Paid continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Dividend History Half Year Ended 31 December 1998 30 June 1999 31 December 1999 30 June 2000 31 December 2000 30 June 2001 Cents Per Share Half Year Payout Ratio(1) Full Year Full Year Payout Payout Ratio Ratio(1) Cash Basis(2) DRP DRP Price Participation Rate(3) $ 49 66 58 72 61 75 64.3% 85.3% 62.3% 48.8% 68.2% 74.0% - 74.7% - 53.0% - 71.2% - 72.4% - 85.3% - 75.5% 24.50 24.75 24.42 27.31 30.82 - 43.6% 22.3% (4) 22.6% 18.6% 18.6% - (1) (2) (3) (4) Dividend Payout Ratio: dividends provided for, reserved or paid divided by earnings after abnormals. Payout ratio based on net profit after tax before goodwill amortisation and appraisal value uplift. DRP Participation Rate: the percentage of total issued share capital participating in the Dividend Reinvestment Plan. The decline in the participation rate from 43.6% to 22.3% in 1999 was due to the introduction of the cap on the participation in the DRP. 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: Preference share dividend Less: Outside equity interests Earnings used in calculation of earnings per share 2001 c 190 $M 2000 c 291 $M GROUP 1999 c 153 $M 2,412 (9) (14) 2,389 2,738 - (38) 2,700 1,446 - (24) 1,422 Number of Shares M M Weighted average number of ordinary shares used in the calculation of earnings per share Cash Basis Earnings Per Ordinary Share (basic and fully diluted) - Before abnormal items (1) 1,260 c 179 (1) Abnormal income of net $987 million after tax was recorded in the year ended 30 June 2000. 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 Agreements to resell Total Overseas Total Cash and Liquid Assets 2001 $M 850 86 1,979 282 3,197 198 175 1 138 512 3,709 GROUP 2000 $M 944 147 1,226 189 2,506 35 32 2 - 69 2,575 72 927 c 181 2001 $M 830 - 1,979 282 3,091 - 57 - 138 195 3,286 M 927 c 159 BANK 2000 $M 680 - 1,226 189 2,095 - 8 - - 8 2,103 Notes to the financial statements NOTE 9 Receivables from Other Financial Institutions Australia Overseas Total Receivables from Other Financial Institutions NOTE 10 Trading Securities Australia Listed: Australian Public Securities Commonwealth and States Local and semi-government Bills of exchange Other Securities Unlisted: Commercial paper Certificates of deposit Medium term notes Total Australia Overseas Listed: Government securities Eurobonds Bills of exchange Other securities Unlisted: Commercial paper Other securities Total Overseas Total Trading Securities (1) This reduction reflects the run-off of the Colonial State Bank trading portfolio. 2001 $M 2,858 1,764 4,622 GROUP 2000 $M 4,159 995 5,154 99 340 1,588 36 187 745 1,100 4,095 (1) 168 590 2,771 340 121 885 605 5,480 2001 $M 2,724 1,071 3,795 99 340 1,588 1,039 187 736 296 4,285 BANK 2000 $M 3,697 632 4,329 90 309 1,444 204 121 1,599 488 4,255 356 617 950 53 375 463 2,814 6,909 5 17 20 617 322 322 763 - - 53 77 77 349 - - 60 21 336 735 437 1,867 5,020 4,692 7,347 73 Notes to the financial statements NOTE 11 Investment Securities Australia Listed Australian Public Securities Commonwealth and States Other securities and equity investments Unlisted Bills of exchange Medium term notes Other securities and equity investments Total Australia Overseas Listed Government securities Treasury notes Eurobonds Other securities Unlisted: Government securities Treasury notes Certificates of deposit Eurobonds Medium term notes Commercial paper Floating rate notes Other securities and equity investments Total Overseas Total Investment Securities COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 2001 $M 2000 $M GROUP 1999 $M 2001 $M BANK 2000 $M 1,919 354 85 976 2 3,336 252 - 1,118 666 116 6 1,417 212 174 29 1,422 957 6,369 9,705 2,670 285 30 1,050 111 4,146 287 - 951 767 - 5 1,181 141 171 159 578 763 5,003 9,149 2,635 282 - 160 70 3,147 234 5 583 484 1 - 1,228 317 27 228 470 463 4,040 7,187 1,913 349 - 90 - 2,352 252 - 1,118 215 - 6 1,417 212 174 29 823 275 4,521 6,873 2,665 278 - 163 25 3,131 287 - 951 712 - 5 1,181 141 171 159 126 305 4,038 7,169 74 Notes to the financial statements NOTE 11 Investment Securities continued Market Value Australia Australian Public Securities Commonwealth and States Bills of exchange Medium term notes Other securities and equity investment Total Australia Overseas Government securities Treasury notes Certificates of deposit Eurobonds Medium Term Notes Floating rate notes Other securities and equity investments Total Overseas Total Investment Securities Net Unrealised Surplus/(Deficit) GROUP Market Value At 30 June 1999 $M 2000 $M 2001 $M 1,926 85 982 463 3,456 379 6 1,416 1,343 172 1,422 1,627 6,365 9,821 116 2,672 30 1,057 407 4,166 295 5 1,181 1,094 153 578 1,677 4,983 9,149 - 2,637 - 171 333 3,141 243 5 1,236 924 20 470 1,157 4,055 7,196 9 Gross Unrealised Gains and Losses of Group The following table sets out the gross unrealised gains and losses of the Group’s Investment Securities. At 30 June 2001 Amortised Cost $M Gross Unrealised Losses Gains $M $M Fair Amortised Cost $M Value $M Gross Unrealised Losses Gains $M $M At 30 June 2000 Fair Value $M Australia Australian Public Securities Commonwealth and States Bills of exchange Medium term notes Other securities and equity investments (1) Total Australia Overseas Government securities Treasury notes Certificates of deposit Eurobonds Medium term notes Floating rate notes Other securities and equity investments Total Overseas Total Investment Securities 1,919 85 976 356 3,336 368 6 1,417 1,330 174 1,422 1,652 6,369 9,705 24 - 6 107 137 11 - - 43 1 5 8 68 205 17 - - - 17 - - 1 30 3 5 33 72 89 1,926 85 982 463 3,456 379 6 1,416 1,343 172 1,422 1,627 6,365 9,821 2,670 30 1,050 396 4,146 287 5 1,181 1,092 171 578 1,689 5,003 9,149 13 - 8 11 32 9 - - 40 - 1 20 70 102 11 - 1 - 12 1 - - 38 18 1 32 90 102 2,672 30 1,057 407 4,166 295 5 1,181 1,094 153 578 1,677 4,983 9,149 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. (1) Equity derivatives are in place to hedge equity market risk in respect of structured equity products for customers. There are $107 million of net deferred losses on these contracts (2000: $11 million net deferred losses) which offset the above unrealised gains and these are disclosed within Note 39. At the end of the financial year $21 million of net deferred gains (2000: $71 million of deferred losses) are included in the amortised cost value. 75 Notes to the financial statements NOTE 11 Investment Securities continued Maturity Distribution and Average Yield The table analyses the maturities and weighted average yields of the Group’s holdings of investment securities. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 1 to 12 months % $M 1 to 5 years % $M 5 to 10 years % $M Maturity Period at 30 June 2001 Total $M 10 years or more % $M Australia Australian Public Securities Commonwealth and States Bank Bills Medium Term Notes Other securities, commercial paper and equity investments Total Australia Overseas Government securities Treasury Notes Certificates of Deposit Eurobonds Medium Term Notes Floating rate notes Other securities, commercial paper and equity investments Total Overseas Total Investment Securities Maturities at Fair Value 90 85 20 277 472 116 6 1,417 101 35 59 717 2,451 2,923 3,022 5.91 5.25 6.35 5.17 17.81 1.99 4.21 8.16 6.52 5.36 5.30 717 - 956 37 1,710 174 - - 771 139 598 625 2,307 4,017 3,899 5.76 - 13.17 6.67 3.86 - - 5.45 5.75 5.27 5.32 1,112 - - 42 1,154 78 - - 458 - 607 241 1,384 2,538 2,674 6.32 - - 7.09 1.15 - - 5.54 - 5.07 5.41 - - - - - - - - - - 158 69 227 227 226 - - - - - - - - - 5.19 5.77 1,919 85 976 356 3,336 368 6 1,417 1,330 174 1,422 1,652 6,369 9,705 9,821 Additional Disclosure Proceeds at or close to maturity of investment securities were $19,697 million (2000: $15,212 million, 1999: $12,431 million). Proceeds from sale of investment securities were $28 million (2000: $17 million, 1999: $146 million). Realised capital gains were $3 million and realised capital losses were $1 million (2000: realised capital gains $12 million, 1999: realised capital gains $85 million and realised capital losses $6 million). 76 Notes to the financial statements 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 Term loans 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 2001 $M GROUP 2000 $M 2001 $M 2,785 65,466 3,962 4,497 1,556 40,650 306 1,536 1,301 122,059 1,304 8,045 232 256 6,790 509 17,136 139,195 2,816 63,471 3,501 4,863 (1) 991 40,281 (1) 641 1,659 1,708 119,931 2,785 65,300 3,962 2,421 1,556 34,604 6 543 785 111,962 1,080 7,266 208 228 6,837 218 15,837 135,768 - 55 - 94 2,390 - 2,539 114,501 (1,399) (233) (1,358) (431) (1,240) (190) (643) (514) (186) (68) (93) (3,136) 136,059 (558) (691) (216) (131) (120) (3,505) 132,263 (64) (282) (22) (60) (9) (1,867) 112,634 BANK 2000 $M 2,435 51,761 3,033 1,706 991 27,779 50 617 942 89,314 - 65 - 73 2,703 - 2,841 92,155 (1,004) (175) - (226) (37) (34) (18) (1,494) 90,661 1,419 2,820 4,239 1,695 3,407 5,102 727 1,505 2,232 507 1,046 1,553 (1) Prior year figures have been adjusted to align with categories as at 30 June 2001 following the amalgamation of Colonial operations and product systems. Leasing arrangements Retail Financial Services provides vehicle and equipment lease finance to a broad range of industries including transport, service, earthmoving, construction, finance manufacturing and mining. Most arrangements are for terms between 3 and 5 years and rentals are generally payable monthly in advance. lease Institutional Banking provides leasing services and hire purchase to corporate clients for a range of equipment. They also arrange off balance sheet finance for large scale long life plant and equipment across different tax jurisdictions. Finance Leases Minimum lease payments receivable: No later than one year Later than one year but not later than five years Later than five years Lease financing Leverage Leases Minimum lease payments receivable: No later than one year Later than one year but not later than five years Later than five years Equity participation in leveraged lease 77 2001 $M 1,696 2,786 271 4,753 246 640 650 1,536 GROUP 2000 $M 1,704 3,276 111 5,091 119 697 843 1,659 2001 $M 838 1,506 171 2,515 221 279 43 543 BANK 2000 $M 562 1,179 38 1,779 67 426 124 617 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to the financial statements NOTE 12 Loans, Advances and Other Receivables continued Maturity Distribution of Loans The following table sets forth the contractual maturity distribution of the Group’s loans, advances and other receivables (excluding bank acceptances) at 30 June 2001. GROUP Maturity Period at 30 June 2001 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 Australia Overseas Total Variable Interest Rates Australia Overseas Total Fixed Interest Rates Gross Loans, Advances and Other Receivables Maturing One Year or Less $M Maturing Between One & Five Years $M Maturing After Five Years $M 385 1,618 3,038 933 1,432 4,076 2,497 13,476 27,455 21 193 703 1,277 52 332 146 1,944 4,668 32,123 21,029 3,784 24,813 6,426 884 7,310 32,123 757 2,036 1,029 13,711 872 6,317 3,508 9,022 37,252 138 544 1,797 2,795 71 45 - 972 6,362 43,614 19,731 3,278 23,009 17,521 3,084 20,605 43,614 513 1,080 603 50,822 244 183 623 3,284 57,352 6 521 324 3,973 54 63 - 1,165 6,106 63,458 35,738 2,451 38,189 21,614 3,655 25,269 63,458 Total $M 1,655 4,734 4,670 65,466 2,548 10,576 6,628 25,782 122,059 165 1,258 2,824 8,045 177 440 146 4,081 17,136 139,195 76,498 9,513 86,011 45,561 7,623 53,184 139,195 (1) (2) 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. Financing real estate and land development projects. 78 Notes to the financial statements NOTE 13 Provisions For Impairment Provisions for Impairment General Provisions Opening balance Abnormal charge Charge against profit Acquired provisions, including fair value adjustments Transfer to specific provisions Bad debts recovered Adjustments for exchange rate fluctuations and other items Bad debts written off Closing balance Specific Provisions Opening balance Charge against profit New and increased provisions Write-back of provisions no longer required Acquired provisions, including fair value adjustments Transfer from general provision for New and increased provisioning Less write-back 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 2001 $M 2000 $M 1999 $M 1998 $M GROUP 1997 $M 2001 $M BANK 2000 $M 1,358 - 385 51 (411) 88 (29) 1,442 (43) 1,399 1,081 - 196 214 (140) 54 (3) 1,402 (44) 1,358 1,076 - 247 - (239) 51 (7) 1,128 (47) 1,081 690 370 165 - (155) 48 - 1,118 (42) 1,076 613 - 36 - - 80 2 731 (41) 690 1,004 - 276 229 (291) 54 (6) 1,266 (26) 1,240 932 - 191 - (137) 45 1 1,032 (28) 1,004 432 275 279 241 318 175 209 - - 6 - - 219 - - - 105 (37) - 152 - - (90) 28 - - - - 495 (84) 411 (17) 832 (598) 234 1,633 236 (96) 140 5 639 (207) 432 1,790 284 (45) 239 (8) 510 (235) 275 1,356 175 (20) 155 - - - (6) 458 (179) 279 1,355 6 386 (145) 241 931 312 (21) 291 21 515 (325) 190 1,430 208 (71) 137 (3) 343 (168) 175 1,179 233 1 234 431 1 432 275 - 275 279 - 279 241 - 241 190 - 190 175 - 175 % % % % % % % 36.06 43.03 46.69 37.60 30.24 36.19 34.93 251.62 178.29 230.22 182.61 116.81 272.38 235.14 0.92 0.79 0.94 1.06 1.01 1.14 1.09 $M $M $M $M $M $M $M 385 - 385 196 - 196 247 - 247 165 68 233 276 36 62 - 276 98 191 - 191 0.28% 0.16% 0.25% 0.26% 0.11% 0.27% 0.22% (1) Ratios have been restated for 1998 based on the amended definition of non accruals introduced with effect from 31 December 1998. 79 Notes to the financial statements 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 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 2001 $M 385 495 (84) 411 (411) - 35 (88) 27 411 385 385 GROUP 2000 $M 196 236 (96) 140 (140) - 34 (54) 76 140 196 196 2001 $M 276 312 (21) 291 (291) - 26 (54) 13 291 276 276 BANK 2000 $M 191 208 (71) 137 (137) - 28 (45) 71 137 191 191 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 1997, 1998, 1999, 2000 and 2001. 2001 $M 2000 $M 1999 $M 1998 $M At 30 June 1997 $M 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 - - - - - 8 24 4 6 28 7 77 154 15 35 23 8 6 17 6 110 205 15 23 20 16 21 22 4 35 15 3 8 14 4 - 4 11 12 - 82 178 113 174 152 222 13 - - - - - - 1 4 1 - - 1 2 7 - 3 - 3 - 69 - 3 - - 2 - - 5 - 10 - - - 51 80 234 141 227 432 92 97 275 89 105 279 16 19 241 (1) (2) Principally owner occupied housing. Financing real estate and land development projects. 80 Notes to the financial statements 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 1997, 1998, 1999, 2000 and 2001. 2001 $M 2000 $M 1999 $M Year ended 30 June 1997 1998 $M $M 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 Bad Debts Written Off Bad Debts Recovered Australia Overseas Bad Debts Recovered Net Bad Debts Written Off - 10 1 10 14 142 16 301 494 - - 6 1 - 38 - 102 147 641 59 29 88 553 - 6 2 8 24 104 11 90 245 - - - 1 - 4 - 1 6 251 46 8 54 197 - 7 4 9 7 94 11 71 203 - - - 1 14 - 3 61 79 282 48 3 51 231 - 9 4 11 6 86 6 79 201 - - 3 1 - 6 - 10 20 221 46 2 48 173 - 15 4 9 14 58 5 69 174 - - - 1 2 3 - 6 12 186 63 17 80 106 (1) (2) Principally owner occupied housing. Financing real estate and land development projects. 81 Notes to the financial statements 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 1997, 1998, COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 1999, 2000 and 2001. 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 2001 $M 2000 $M 1999 $M Year ended 30 June 1997 $M 1998 $M - - 9 1 1 30 1 17 59 - - - - 1 3 - 25 29 88 - 2 1 1 2 28 2 10 46 - - 2 - 1 3 - 2 8 - 2 2 - 1 27 2 14 48 - - - - - 3 - - 3 - 4 6 - 1 21 2 12 46 - - - - - 2 - - 2 54 51 48 - 5 8 - 1 16 2 31 63 - - 2 - 2 1 - 12 17 80 (1) (2) Principally owner occupied housing. Financing real estate and land development projects. 82 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 reviewed more 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. for facilities are generally Facilities in the credit risk rated managed segment remedial management by become classified 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. These those classified as troublesome (which equate to the APRA classifications of special mention and substandard) and impaired assets. 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 realisable market value of the security net of estimated realisation costs. A centralised exposure management system records all significant credit risks borne by the Group. 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 every two months, and more often if required. to The Group uses a portfolio approach the management of its credit risk. A key element is a well diversified portfolio. The Group is using various portfolio management tools to assist in diversifying the credit portfolio. The Bank is involved in credit derivative transactions, has purchased various assets in the market and has carried out various asset securitisations and a Collateralised Loan Obligation issue. Notes to the financial statements NOTE 14 Credit Risk Concentrations Management of the Credit Business The Group has clearly defined credit policies for the risk. Credit approval and management of credit incorporate underwriting terms and income/repayment capacity, acceptable security and loan documentation tests exist for all products. standards, which integrity and ability of The Group relies, in the first instance, on the assessed the debtor or counterparty to meet its contracted financial obligations for repayment. Collateral security, in the form of real property or a floating charge is generally taken for business credit except for major 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. The credit two segments, statistically managed and credit risk rated managed. risk portfolio is divided into Statistically managed exposures generally comprise consumer facilities of less than $250,000. 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. in for the statistically managed segment Facilities become classified 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. Most of these facilities are written off immediately on becoming past due 180 days or more. Credit risk rated managed exposures generally comprise business and corporate exposures, including bank and government exposures. 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. 83 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to the financial statements 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 1997, 1998, 1999, 2000 and 2001. The industry profile of the loans, advances and other receivables content for the five financial years to 30 June 2001 is shown on page 89. 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 Charge for Bad and Doubtful Debts Loss Rate (1) 2001 $M 2000 $M 1999 $M 1998 $M At 30 June 1997 $M 6,012 6,308 22,490 73,800 4,547 10,979 6,628 42,893 173,657 385 1,564 11,897 8,085 198 449 146 10,359 33,083 206,740 (1,343) 205,397 385 0.19 6,195 6,141 20,908 63,696 4,205 12,911 6,937 47,297 168,290 1,152 1,017 8,008 7,268 152 1,487 217 10,300 29,601 197,891 (1,465) 196,426 196 0.11 6,162 5,303 15,430 49,150 3,830 10,688 3,100 34,955 128,618 493 833 5,631 7,152 579 542 191 7,945 23,366 151,984 (1,169) 150,815 247 0.16 5,200 4,791 17,654 41,231 2,790 8,659 1,940 34,145 116,410 819 640 7,012 6,275 505 290 173 8,091 23,805 140,215 (1,193) 139,022 233 0.17 6,686 3,743 14,878 37,498 2,705 7,183 4,277 29,116 106,086 1,048 595 7,147 5,983 166 412 - 6,759 22,110 128,196 (1,019) 127,177 98 0.08 (1) The loss rate is the charge as a percentage of the credit risk. The Group has a well diversified credit portfolio in Australia of good quality, with 42% of the exposure in mortgage loans and a further 13% to finance, investment and insurance (primarily banks). 16% of exposure is overseas, of which 24% is in mortgage loans. Overall over 60% of individually rated exposures in the commercial portfolio (including government and finance) are of investment grade or equivalent quality. 84 Notes to the financial statements NOTE 14 Credit Risk Concentrations continued The following tables set out the credit risk concentrations of the Group. Industry Trading Investment Loans Advances and Other Acceptances Contingent Bank Risk Concentration of the Group By Asset Class 30 June 2001 Securities Securities Receivables of Customers $M $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 439 - 2,397 2,837 - 86 - - - - - - 1,259 4,095 413 3,336 1,655 4,734 4,670 65,466 2,548 10,576 6,628 25,782 122,059 295 1,384 2,929 137 1,191 167 618 105 3,512 8,197 648 229 5,858 11,961 6,306 19,615 168 85 6,038 6,012 6,308 19,632 - 160 7 73,800 4,547 10,979 6,628 3,275 42,893 9,733 170,799 45 - 1,820 142 - 2,512 165 - 1,258 - 17 2,824 32 306 803 1 - 2,096 385 1,564 10,072 - - - - 949 2,814 6,909 - - - - 3,715 6,369 9,705 8,045 - 177 - 440 - 146 - 97 114 12,075 4,081 17,136 139,195 40 21 9 - 1,411 2,622 22,237 - - - - 106 2,203 8,085 198 449 146 10,359 31,258 11,936 202,057 4,622 61 206,740 Risk concentrations for contingent liabilities and derivatives are based on the credit equivalent balance in Note 38, Contingent Liabilities and Note 39, Market Risk respectively. 85 Notes to the financial statements NOTE 14 Credit Risk Concentrations continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Industry Trading Investment Loans Advances and Other Acceptances Contingent Bank Risk Concentration of the Group by Asset Class 30 June 2000 Securities Securities Receivables of Customers $M $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 857 - 2,380 - - - - 2,243 5,480 351 21 935 - - 16 - 544 1,867 7,347 2,674 - 125 - - - - 1,347 4,146 290 - 1,561 - - - - 3,152 5,003 9,149 1,681 4,686 5,167 63,471 2,627 11,759 6,937 23,603 119,931 204 996 2,278 7,266 152 1,470 217 3,254 15,837 135,768 376 1,113 2,633 117 962 189 - 5,717 11,107 - - - - - - - - - 11,107 144 151 1,868 108 532 962 - 11,197 14,962 304 - 598 2 - 1 - 3,171 4,076 19,038 463 191 4,576 6,195 6,141 16,749 63,696 - 4,205 84 12,911 1 6,937 - 3,190 47,297 8,505 164,131 3 - 1,595 1,152 1,017 6,967 - - - - 179 1,777 7,268 152 1,487 217 10,300 28,560 10,282 192,691 5,154 46 197,891 86 Notes to the financial statements NOTE 14 Credit Risk Concentrations continued Industry Total Risk $M Risk Concentration of the Group’s Impaired Assets 30 June 2001 Net Recoveries Write offs $M Impairment Write offs $M Impaired Assets $M Provisions for $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 Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 6,012 6,308 19,632 - 68 69 - 8 24 - - 10 - (9) 1 - 10 (8) 73,800 4,547 10,979 6,628 42,893 170,799 - 23 14 13 332 519 4 6 28 7 77 154 10 14 142 16 301 494 (1) (1) (30) (1) (17) (59) 9 13 112 15 284 435 385 1,564 10,072 62 - 14 - 4 15 - - - - 6 - - - 6 - 38 1 - (1) (3) - - (25) (29) (88) 102 147 641 1 (1) 35 - 77 118 553 - - 1 - 121 198 717 7 - 3 - 51 80 234 8,085 198 449 146 10,359 31,258 202,057 4,622 61 206,740 87 Notes to the financial statements NOTE 14 Credit Risk Concentrations continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 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 Gross Balances Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk Risk Concentration of the Group’s Impaired Assets 30 June 2000 Net Write offs $M Impaired Provisions for Impairment $M Write offs Recoveries $M Assets $M $M Total Risk $M 6,195 - 101 6,141 53 16,749 - 35 23 - 6 2 - (2) (1) - 4 1 8 6 17 6 110 205 8 24 104 11 90 245 (1) (2) (28) (2) (10) (46) 7 22 76 9 80 199 63,696 4,205 12,911 6,937 47,297 164,131 1,152 1,017 6,967 37 60 10 18 445 724 55 85 1 - 13 - - 1 - - - (2) - - (2) 1,487 7,268 - 152 - 53 217 - 217 411 1,135 10,300 28,560 192,691 3 - 69 - 141 227 432 - 4 - 1 6 251 1 - (1) (3) - (2) (8) (54) 1 (1) 1 - (1) (2) 197 5,154 46 197,891 Large Exposures Concentration of exposure to any debtor or counterparty is controlled by the Large Credit Exposure Policy. All exposures outside the policy are approved by the Board Risk Committee. 10% to less than 15% of Group's capital resources 5% to less than 10% of Group's capital resources 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): 2001 Number 2000 Number 1999 Number 1998 Number 1997 Number - 2 - 1 1 7 1 7 1 4 88 Notes to the financial statements 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 1997, 1998, 1999, 2000 and 2001. 2001 $M 2000 $M 1999 $M 1998 $M At 30 June 1997 $M 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 1,655 4,734 4,670 65,466 2,548 10,576 6,628 25,782 122,059 165 1,258 2,824 8,045 177 440 146 4,081 17,136 1,681 4,686 5,167 63,471 2,627 11,759 6,937 23,603 119,931 204 996 2,278 7,266 152 1,470 217 3,254 15,837 1,727 4,203 4,048 45,495 2,105 10,144 3,100 20,253 91,075 157 833 1,507 7,151 427 539 191 2,686 13,491 139,195 135,768 104,566 1,216 4,128 2,490 41,137 1,197 8,360 1,940 19,559 80,027 105 640 1,449 6,273 318 248 173 3,342 12,548 92,575 1,955 3,185 1,859 37,400 1,138 6,863 4,277 16,044 72,721 28 547 1,494 5,983 151 397 - 2,469 11,069 83,790 (3,136) (3,504) (2,729) 136,059 132,264 101,837 (2,759) 89,816 (2,158) 81,632 (1) (2) Principally owner occupied housing. Financing real estate and land development projects. 89 Notes to the financial statements NOTE 15 Asset Quality Impaired Assets The Group adopted for the Australian disclosure in requirements AASB 1032: Specific Disclosures by Financial Institutions with effect from Financial Year 1997. Impaired Assets contained There are three classifications of Impaired Assets: (a) Non accruals, comprising: (cid:1) (cid:1) (cid:1) 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 loss of principal or interest is anticipated. (c) 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 impaired assets at 30 June 1998 have been disclosed under the amended definition. Impaired Asset Ratios Gross impaired assets net of interest reserved as % of credit risk net of unearned income Net impaired assets as % of: Risk weighted assets Total shareholders’ equity Accounting by Creditors for Impairment of Loans (US GAAP definitions) Impaired Loans (non accrual) 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 (1) Excluding Colonial COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES All interest charged in the relevant 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 then only taken to profit if received in cash. (b) Restructured Facilities to the borrower. Credit risk facilities on which the original contractual financial terms have been modified due difficulties of these facilities is taken to profit and loss. Failure to comply fully with the modified terms will result in immediate reclassification to non accrual. Assets Acquired Through Security Enforcement (AATSE), comprising: (cid:1) Interest on or ownership Other Real Estate Owned (OREO), comprising real estate where the Bank has assumed in settlement of a debt; and Other Assets Acquired Through Security Enforcement (OAATSE), comprising assets other than real estate where the Bank has assumed in settlement of a debt. foreclosed foreclosed ownership or 2001 % 0.32 0.30 2.09 2001 $M 699 514 203 185 911 51 2000 % 0.51 0.44 3.10 GROUP 1999 % 0.39 0.32 4.52 Year ended 30 June 1999 (1) $M 2000 $M 1,123 760 411 363 880 636 505 255 131 778 51 (1) 33 (1) (cid:1) 90 Notes to the financial statements NOTE 15 Asset Quality continued Impaired Assets The following table sets forth the Group’s impaired assets as at 30 June 1997, 1998, 1999, 2000 and 2001. 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 Assets Acquired Through Security Enforcement (AATSE): Gross balances Less provisions for impairment Net AATSE 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 Asset Acquired Through Security Enforcement Less provisions for impairment Net AATSE Net overseas impaired assets Total net impaired assets 2001 $M 518 (63) 455 (154) 301 2000 $M 722 (128) 594 (205) 389 1999 $M 495 (66) 429 (178) 251 1 1 1 - - - 1 - - - 1 1 1 1 1 - 1 - - - - 1 - 252 - 302 391 1998(1) $M At 30 June 1997 $M 616 (85) 531 (174) 357 831 (100) 731 (222) 509 - - - - - - - - - - - - - 357 - - - 509 197 (5) 192 (79) 113 410 (3) 407 (226) 181 147 (2) 145 (97) 48 310 (17) 293 (105) 188 75 (9) 66 (19) 47 - - - - - - - - - - - - - - - 1 (1) - - 181 572 113 415 1 14 (1) - 14 62 314 - - - - - - - - - - - - - 188 545 - - - 47 556 (1) Under revised definition of non accrual assets introduced 31 December 1998 net impaired assets at 30 June 1998 would have been $466 million. The Group has improved its asset quality position. Ongoing management of impaired assets has resulted in a significant reduction in impaired assets, both through write off and realisation or return to performing status. 91 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to the financial statements 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 1997, 1998, 1999, 2000 and 2001. Gross impaired assets at period beginning New and increased Balances written off Returned to performing or repaid Colonial impaired assets Gross impaired assets at period end 2001 $M 1,135 707 (666) (459) 717 - 717 2000 $M 657 414 (226) (194) 651 484 1,135 1999 $M 926 415 (280) (404) (1) 657 - 657 Year Ended 30 June 1997 $M 1998 $M 906 689 (216) (453) 926 - 926 1,185 487 (190) (576) 906 - 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 on Impaired Assets Australia Non Accrual Facilities Restructured Facilities Overseas Non Accrual Facilities OREO Total Interest taken to Profit (2) Excluding Colonial 2001 $M 218 90 308 2000 $M 211 64 275 2001 $M 2000(2) $M 8 8 16 4 5 9 1999 $M 182 23 205 1999 $M 17 10 27 1998 $M 249 41 290 at 30 June 1997 $M 267 37 304 Year Ended 30 June 1997 $M 1998 $M 34 7 41 52 3 55 2001 $M 2000(2) $M 1999 $M Year Ended 30 June 1997 $M 1998 $M 37 - 45 - 33 - 34 - 50 - 14 - 51 6 - 51 - - 33 - - 34 - 5 55 92 Notes to the financial statements 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 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. Australia Overseas 2001 $M 2001 $M 334 184 518 (63) 455 (154) 301 196 1 197 (5) 192 (79) 113 GROUP Total 2001 $M 530 185 715 (68) 647 (233) 414 Australia 2000 $M Overseas 2000 $M 378 344 722 (128) 594 (205) 389 391 19 410 (3) 407 (226) 181 GROUP Total 2000 $M 769 363 1,132 (131) 1,001 (431) 570 1 - 1 - 1 - - - - - 1 - 1 - 1 1 - 1 - 1 - - - - - 1 - 1 - 1 - - - - - - - - - 1 - 1 - - - 1 - 1 - - - 1 (1) - 1 (1) - - - - 1 (1) - 1 (1) - 519 (63) 456 (154) 302 146 196 176 518 292 198 (5) 193 (80) 113 3 37 157 197 16 717 (68) 649 (234) 415 149 233 333 715 308 724 (128) 596 (205) 391 324 217 181 722 262 411 (3) 408 (227) 181 54 35 321 410 13 1,135 (131) 1,004 (432) 572 378 252 502 1,132 275 93 Notes to the financial statements NOTE 15 Asset Quality continued Colonial State Bank loan losses Indemnified loan book Pursuant to the Sale Agreement between Colonial and the New South Wales Government, Colonial State Bank’s loan book as at 31 December 1994 and any further interest) arising are (including indemnified by the NSW Government. This indemnity is to the extent of 90% of the losses after an initial $60 million (which was provided for by Colonial State Bank as at 31 December 1994). All loans (other than impaired loans) are covered for a period of three years from 31 December 1994 and for the duration of the loan in the case of impaired loans so classified as at 31 December 1997. to be The Sale Agreement also allows withdrawn from the indemnity provided the withdrawal is loans for COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES approved by Colonial State Bank and Government and the due processes are followed. the NSW Pursuant to the Sale Agreement, the costs of funding and managing Non-Performing loans which are covered by the loan indemnities are reimbursed by the NSW Government on a quarterly basis. Selected Regional Exposures Asia Over 48% of total exposures relate to financial institutions. Exposures to Indonesia, Thailand and Korea have reduced by 10% in the Financial Year 2001 and represent approximately 19% of the Bank’s Asian credit risk. The Group’s credit risk exposure to Asian countries as at 30 June 2001 is set out below. The exposures exclude Group equity investments. CUSTOMER TYPE Country Finance Corporate/ Government China Hong Kong Japan Malaysia Singapore Taiwan Other Indonesia South Korea Thailand Total Multinational $M 171 662 833 241 116 152 - 3 512 107 140 95 342 1,687 $M 65 472 537 1,259 6 123 8 4 1,400 8 262 3 273 2,210 $M - - - 161 41 19 - - 221 62 - 25 87 308 Project Finance $M - - - - - - - - - 139 - - 139 139 APL/NZPL $M 1 186 187 - 2 27 - - 29 32 - - 32 248 2001 Total Exposure $M 2000 Total Exposure $M 237 1,320 1,557 1,661 165 321 8 7 2,162 348 402 123 873 4,592 75 861 936 1,309 74 768 37 7 2,195 420 402 151 973 4,104 Other Regional Exposures CUSTOMER TYPE Project Finance $M - - - APL/NZPL $M - - - 2001 Total Exposure $M 2000 Total Exposure $M 63 - 108 50 5 100 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. Region Finance Corporate/ Government Eastern Europe Latin America Middle East Multinational $M - - - $M 22 - 108 Total Exposure - The maximum of the limit or balance utilised for committed facilities, whichever is highest, and for uncommitted facilities. For derivative facilities, balances are reported on a ‘mark to market plus potential exposure’ basis. the balance utilised $M 41 - - 94 Notes to the financial statements NOTE 16 Life Insurance Investment Assets Equity Security Investments Direct Indirect Debt Security Investments Direct Indirect Property Investments Direct Indirect Cash on Deposit Total Life Insurance Investment Assets the issuer of investment. Direct investments refer to investments that are directly with the Indirect investments refer to investments that are held through unit trusts or similar investment vehicles. Disclosure on Asset Restriction Investments held in the Statutory Funds can only be used within the restrictions imposed under the Life Insurance Act 1995. The main restrictions are that assets in a Fund can only be used to meet the liabilities and expense of the Fund, to acquire investments to further 2001 $M 9,349 5,024 14,373 8,815 5,224 14,039 1,085 1,354 2,439 362 31,213 GROUP 2000 $M 7,754 3,530 11,284 8,525 4,160 12,685 1,276 1,048 2,324 743 27,036 the business of the Fund or as distributions when solvency and capital adequacy requirements are met. Participating policyholders can receive a distribution when solvency requirements are met, whilst shareholders can only receive a distribution when the higher level of capital adequacy requirements are met. These investment assets held in the Statutory Funds are not available for use by the Commonwealth Bank’s operating businesses. NOTE 17 Deposits With Regulatory Authorities Central Banks Overseas Total Deposits with Regulatory Authorities 2001 $M 61 61 GROUP 2000 $M 46 46 2001 $M 4 4 BANK 2000 $M 3 3 NOTE 18 Shares in and Loans to Controlled Entities Shares in controlled entities Loans to controlled entities Total Shares in and Loans to Controlled Entities - - - - - - 9,847 6,578 16,425 12,198 5,151 17,349 95 Notes to the financial statements NOTE 19 Property, Plant and Equipment (a) Land and Buildings Land At 30 June 2001 valuation At 30 June 2000 valuation Closing balance Buildings At 30 June 2001 valuation At 30 June 2000 valuation Closing balance Total Land and Buildings COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 2001 $M GROUP 2000 $M 2001 $M BANK 2000 $M 191 - 222 - 179 222 179 - 208 208 - 191 389 - 508 - 312 508 491 730 312 - 334 334 542 - 389 580 These valuations were established by the Directors and are lower than valuations prepared by independent valuers. (b) Leasehold Improvements At cost Provision for depreciation Closing balance (c) Equipment At cost Provision for depreciation Closing balance Total Property, Plant and Equipment Reconciliation 444 (275) 169 574 (404) 170 919 2001 $M 532 (336) 196 670 (523) 147 1,073 GROUP 2000 $M 388 (251) 137 329 (269) 60 688 2001 $M Reconciliation of the carrying amount of property plant and equipment at the beginning and end of the 2001 and 2000 financial years. Land Opening balance Disposals Net revaluations Closing balance Buildings Opening balance Acquisitions Disposals Depreciation Closing balance Leasehold Improvements Opening balance Acquisitions Disposals Transfers Asset writedown Depreciation Closing balance Equipment Opening balance Acquisitions Disposals Depreciation Closing balance 222 (36) 5 191 508 42 (132) (29) 389 196 46 (2) - (26) (45) 169 147 99 - (76) 170 239 (17) - 222 470 112 (43) (31) 508 153 73 (2) - - (28) 196 139 77 (11) (58) 147 208 (29) - 179 334 41 (37) (26) 312 126 26 (2) 13 - (26) 137 71 15 - (26) 60 96 321 (195) 126 351 (280) 71 739 BANK 2000 $M 216 (8) - 208 358 13 (9) (28) 334 135 50 (1) (32) - (26) 126 87 18 - (34) 71 Notes to the financial statements NOTE 20 Intangible Assets Purchased goodwill - Colonial (refer note 2) Purchased goodwill - Other (1) Realisation of life insurance synergy benefits (refer note 2) Accumulated amortisation Total Goodwill Excess of net market value over net assets of life insurance controlled entities Total Intangibles 2001 $M 5,662 1,132 (332) (746) 5,716 5,136 10,852 GROUP 2000 $M 5,424 888 - (407) 5,905 4,322 (3) 10,227 2001 $M 2,742 (2) 835 - (426) 3,151 - 3,151 BANK 2000 $M - 784 - (372) 412 - 412 (1) (2) Increase in other goodwill principally relates to acquisition of remaining 25% interest in ASB Group in August 2000. Colonial State Bank goodwill arising on Commonwealth Bank of Australia becoming successor in law to all assets and liabilities of Colonial State Bank, refer Note 1(c). Excess of net market value over net assets of controlled entities of the life insurance businesses: Commonwealth entities ASB entities Colonial entities Commonwealth entities ASB entities Colonial entities Further detail is provided in Note 34. GROUP At 30 June 2001 Excess of Market Value Over Net Assets $M 2,135 184 2,817 5,136 GROUP At 30 June 2000(3) Excess of Market Value Over Net Assets $M 1,571 203 2,548 4,322 Net Assets $M 540 136 2,191 2,867 Net Assets $M 407 83 1,924 2,414 Market Value $M 2,675 320 5,008 8,003 Market Value $M 1,978 286 4,472 6,736 (3) Balances at 30 June 2000 include some minor adjustments. Excess disclosed at 30 June 2000 was $4,352 million, which has been restated to $4,322 million. Such adjustments have no effect on the appraisal value uplift for the year. These adjustments were reflected in the published results at 31 December 2000. 97 Notes to the financial statements NOTE 21 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 39) (1) Other Total Other Assets COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 2001 $M 1,155 68 381 1,035 694 9,592 962 13,887 GROUP 2000 $M 1,314 127 187 656 899 6,252 2,444 11,879 2001 $M 1,118 40 400 781 358 8,962 217 11,876 BANK 2000 $M 1,004 41 63 429 237 5,764 717 8,255 (1) The increases in unrealised gains on trading derivatives reflects increased volumes of derivative transactions and falls in interest rates in Australia and the United States and the AUD/USD exchange rate. for deductibility to comply with imposed by The Company continues conditions legislation; and No changes in tax legislation adversely affect the Company the realising in deductions for the losses. the benefit the tax from 2001 $M 12,927 28,102 54,601 6,350 435 6 102,421 2,294 7,849 4,130 635 26 14,934 117,355 GROUP 2000 $M 14,136 29,677 48,975 6,075 946 7 99,816 2,686 6,144 3,419 529 - 12,778 112,594 2001 $M 12,927 25,529 54,854 6,380 434 - 100,124 1,108 2,171 39 7 26 3,351 103,475 BANK 2000 $M 12,686 22,788 43,223 5,803 946 - 85,446 1,269 1,423 98 4 - 2,794 88,240 (cid:1) (cid:1) 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 (2000: $173 million) will only be obtained if: (cid:1) 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; NOTE 22 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 Agreements to repurchase Total Overseas Total Deposits and Other Public Borrowings 98 Notes to the financial statements NOTE 22 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 2001. At 30 June 2001 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 5,720 12,411 18,131 1,403 6,287 7,690 25,821 1,742 8,704 10,446 310 726 1,036 11,482 - 3,953 3,953 530 574 1,104 5,057 (1) All certificates of deposit issued by the Bank are for amounts greater than $100,000. NOTE 23 Payables to Other Financial Institutions Australia Overseas Total Payables to Other Financial Institutions NOTE 24 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 2001 $M 2,816 4,087 6,903 2001 $M 163 1,049 1,212 90 53 143 1,355 GROUP 2000 $M 1,569 3,064 4,633 GROUP 2000 $M 585 1,155 1,740 39 44 83 1,823 5,465 3,034 8,499 51 262 313 8,812 2001 $M 2,675 3,674 6,349 2001 $M 26 377 403 11 - 11 414 Total $M 12,927 28,102 41,029 2,294 7,849 10,143 51,172 BANK 2000 $M 1,306 2,830 4,136 BANK 2000 $M 180 364 544 6 - 6 550 The significant decrease in the provision for income tax is largely due to the impact of the new PAYG instalment system. The new system requires three instalments of tax to be paid prior to year end as opposed to two under the previous system and the change in methodology for calculating instalments has resulted in each instalment paid under the new system being higher than would have been payable under the previous system. 99 Notes to the financial statements NOTE 25 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 NOTE 26 Debt Issues Short term debt issues Long term debt issues Total Debt Issues Short Term Debt Issues AUD Bill Reliquification AUD Promissory Notes AUD Bank Bills NZD Promissory Notes US Commercial Paper Euro Commercial Paper 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 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 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 2001 $M 304 159 158 204 52 46 84 1,007 GROUP 2000 $M 2001 $M BANK 2000 $M 312 163 188 485 289 134 150 174 45 - 44 33 46 328 837 1,554 287 124 188 124 - 33 52 808 16,620 7,864 24,484 16,249 9,026 25,275 4,318 6,372 10,690 5,406 2,799 8,205 639 3,150 679 - 6,111 4,200 639 2,547 2,418 - 546 - 251 - 3,814 - 1,838 3,150 2,547 - - - - 1,647 1,841 16,620 3,523 16,249 1,841 4,318 1,212 5,406 2,937 2,312 255 338 841 1,181 - 7,864 2,286 1,719 197 981 540 3,144 2,346 1,748 255 179 841 1,003 159 - 6,372 9,026 986 494 197 482 540 100 - 2,799 11,349 5,271 7,208 656 24,484 11,618 4,631 7,839 1,187 25,275 2,404 1,914 5,848 524 10,690 4,615 791 2,109 690 8,205 100 Notes to the financial statements NOTE 26 Debt Issues continued The Bank has a Euro Medium Term Note programme under which it may issue notes (Euro MTN’s) up to an aggregate amount of USD5 billion. Notes issued under the programmes are both fixed and variable rate. Interest rate risk associated with the notes is risk the Bank’s interest rate incorporated within framework. Subsequent to 30 June 2001, the Bank has issued 2003 HKD500 million Euro MTN’s due (AUD125 million): July Where any debt issue 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. Where proceeds have been employed in currencies other than that of the ultimate repayment liability, swap or other hedge arrangements have been entered into. Short Term Borrowings The following table analyses the Group’s short term borrowings for the Financial Years ended 30 June 1999, 2000 and 2001. 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 Bill Reliquification (3) 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 2001 Year Ended 30 June 1999 2000 ($ millions, except where indicated) 6,111 7,850 6,571 5.6% 4.0% 4,200 5,579 4,533 4.3% 2.3% 639 2,180 1,097 6.0% 5.0% 3,829 5,117 3,637 5.7% 5.0% 3,814 7,890 6,130 5.7% 6.6% 3,150 4,788 2,855 4.8% 3.7% 4,491 5,408 4,419 5.2% 5.0% 1,582 2,267 1,714 4.5% 4.4% 2,547 - 2,599 - 1,972 - 5.8% 6.2% 3,215 3,304 2,231 5.5% 5.1% - - 695 781 324 4.6% 4.9% (1) (2) (3) The amount outstanding at period end is reported on a book value basis (amortised cost). 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. Any difference between face value and book value would not be material given the short term nature of the borrowings. Commercial bills sold under non recourse arrangements. 101 Notes to the financial statements NOTE 26 Debt Issues continued Exchange Rates Utilised AUD 1.00 = USD GBP JPY NZD HKD DEM CHF IDR 30 June 2001 30 June 2000 0.5982 0.3943 63.155 1.278 4.664 1.229 0.979 5,230 0.5080 0.3612 63.071 1.256 3.962 1.175 0.913 5,796 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 sale of the Commonwealth of Australia’s shareholding in the Bank on 19 July 1996. The transitional arrangements for phasing out the Commonwealth of Australia’s guarantee are contained in the Commonwealth Bank Sale Act 1995. In relation to the Commonwealth of Australia’s transitional the Bank’s liabilities, guarantee of arrangements provided that: (cid:1) (cid:1) all demand deposits and term deposits were guaranteed for a period of three years from 19 July 1996, 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, or under an instrument executed, issued, endorsed or accepted by the Bank at 19 July 1996 will be guaranteed until their maturity. longer Accordingly, demand deposits are no guaranteed. Term deposits outstanding at 19 July 1999 remain guaranteed until maturity. The run off of the Government guarantee has no effect on the Bank’s access to deposit markets. Commonwealth Development Bank On 24 July 1996, the Commonwealth of Australia sold the Commonwealth its 8.1% shareholding Development Bank Limited (CDBL) to the Bank for $12.5 million. in Under the arrangements relating to the purchase by the Commonwealth of Australia’s the Bank of shareholding in the CDBL: NOTE 27 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 39) (1) Other liabilities Total Bills Payable and Other Liabilities COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES (cid:1) (cid:1) (cid:1) all lending assets as at 30 June 1996 have been quarantined in CDBL, consistent with the Charter terms on which they were written; the CDBL’s liabilities continue to remain 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 CDBL is guaranteed by the Commonwealth of Australia under Section 117 of the Commonwealth Banks Act 1959 (as amended). This guarantee will continue to be provided by the Commonwealth whilst quarantined assets are held. The value of the liabilities under the guarantee will diminish as quarantined assets reach maturity and are repaid. State Bank of NSW (known as Colonial State Bank) The enabling legislation for the sale of the State Bank of New South Wales Limited (SBNSW), the State Bank (Privatisation) Act 1994 – Section 12 and the State Bank (Corporatisation) Act 1989 – Section 12 (as amended), provides in general terms for a guarantee by the NSW Government in respect of all funding liabilities and off balance sheet products (other than demand deposits) to 31 incurred or December 1997 by SBNSW until maturity and a guarantee for demand deposits accepted by SBNSW up to 31 December 1997. Other obligations incurred before 31 December 1994 are also guaranteed to their maturity. On 4 June 2001 Commonwealth Bank of Australia became the successor in law to SBNSW pursuant to the Financial Sector (Transfers of Business) Act 1999. The NSW Government guarantee of liabilities and products as described above continues unchanged by the succession. issued prior the 2001 $M 886 1,062 896 1,124 8,759 1,145 13,872 GROUP 2000 $M 825 1,340 760 803 5,605 2,216 11,549 2001 $M 818 900 712 875 8,105 137 11,547 BANK 2000 $M 754 815 558 693 5,284 324 8,428 (1) The increase in unrealised losses on trading derivatives reflects increased volumes of derivative transactions and falls in interest rates in Australia and the United States and the AUD/USD exchange rate. 102 Notes to the financial statements NOTE 28 Loan Capital Tier 1 Capital Exchangeable Exchangeable Undated Tier 2 Capital Extendible Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Total Loan Capital FRNs FRNs FRNs FRNs MTNs FRNs FRNs MTNs FRNs Notes FRNs EMTN’s EMTN’s EMTN’s EMTN’s EMTN’s EMTN’s EMTN’s Loan FRNs FRNs Notes Other Currency Amount (M) USD300 USD400 USD100 AUD300 AUD185 AUD115 AUD25 AUD200 AUD50 USD300 USD450 JPY20,000 USD200 USD75 USD100 USD400 GBP200 JPY30,000 NZD100 AUD210 AUD38 AUD130 AUD39 (1) (2) (3) (4) (5) (5) (6) (7) (7) (8) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) Where a foreign currency hedge is in place to utilise a loan capital issue in a currency other than that of its original issue, the AUD equivalent value is shown net of the hedge. (1) (2) (3) USD 300 million Undated Floating Rate Notes (FRNs) issued 11 July 1988 exchangeable into Dated FRNs. Outstanding notes at 30 June 2001 were: USD1.5 million Due July 2003 USD0.5 million Due July 2004 USD37.5 million undated : : : USD 400 million Undated FRNs issued 22 February 1989 exchangeable into Dated FRNs. Outstanding notes at 30 June 2001 were: USD64 million Due February 2005 USD31 million undated : : 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. 2001 $M 2000 $M GROUP 1999 $M 2001 $M 2000 $M 78 187 197 462 300 185 115 25 200 50 591 882 326 314 115 152 501 408 582 79 210 38 130 39 5,242 5,704 92 159 167 418 300 185 115 25 200 50 502 746 277 314 115 152 501 408 495 79 210 38 130 39 4,881 5,299 113 330 152 595 300 185 115 25 - - - - 251 - - - 501 408 448 - - - - - 2,233 2,828 78 187 197 462 300 185 115 25 200 50 591 882 325 314 115 152 501 408 582 - 210 38 130 39 5,162 5,624 92 159 167 418 300 185 115 25 200 50 502 746 277 314 115 152 501 408 495 - - - - - 4,385 4,803 BANK 1999 $M 113 330 152 595 300 185 115 25 - - - - 251 - - - 501 408 448 - - - - - 2,233 2,828 The Agreements provide that, upon the occurrence of certain events listed below, the Bank may issue either fully paid ordinary shares to the Commonwealth of Australia or (with the consent of the Commonwealth of Australia) 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 of Australia or a rights issue: (cid:1) 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); (cid:1) 103 Notes to the financial statements COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES (6) (7) (8) (9) (15) (17) (18) (19) Any payment made by the Commonwealth of Australia pursuant to its guarantee in respect of the issue will trigger the issue of shares to the Commonwealth of Australia to the value of such payment. (5) issued AUD300 million Subordinated Notes, 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. AUD 250 million Subordinated FRN, issued November 1999, due November 2009; split into $200 million fixed rate notes and $50 million floating rate notes. USD 750 million Subordinated Notes, issued June 2000, due June 2010; split into USD 300 million fixed rate notes and USD 450 million floating rate notes. JPY20 billion Perpetual Subordinated Euro MTN, issued February 1999. (10) USD 200 million Subordinated EMTN, November 1999, due November 2009. (11) USD 75 million Subordinated EMTN, January 2000, due January 2010. (12) USD 100 million Subordinated EMTN, issued issued issued January 2000, due January 2010. (13) USD400 million Subordinated Euro MTN issued June 1996; due July 2006. (14) GBP200 million Subordinated Euro MTN issued (16) NZD100 issued matures Subordinated March 1996; due December 2006. JPY30 billion Subordinated Euro MTN October 1995; due October 2015. million 15 December 2009. AUD210 million Euro FRN issued 3 September 1996, maturing 10 September 2004. AUD38 million FRN issued 15 December 1997, maturing 15 December 2004. AUD130 million Subordinated Notes comprised as follows: AUD10 million fixed rate notes issued 12 December 2005. 1995, 12 AUD110 million issued 12 December 1995, maturing 12 December 2005. AUD5 million fixed rate notes issued 17 December 2005. 12 1996, AUD5 million issued floating 17 December 1996, maturing 12 December 2005. December rate notes December notes maturing maturing floating rate (20) Comprises 16 subordinated Notes and FRN issues. The face value amounts are less than $10 million each and are all in Australian Dollars. The maturity ranges from October 2001 to October 2009. (cid:1) (cid:1) NOTE 28 Loan Capital continued (cid:1) to Dated FRNs, the Bank does not declare a dividend in respect of its ordinary shares; the Bank, if required by the Commonwealth of Australia 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 the Dated FRNs mature. Any payment made by the Commonwealth of Australia pursuant to its guarantee in respect of the relevant notes will trigger the issue of shares to the Commonwealth of Australia 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 of Australia 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 of Australia was not called upon to subscribe for fully paid ordinary shares up to an amount equal to the principal value of the maturing FRNs. (4) AUD 300 million Extendible Floating Rate Stock issued December 1989: due December 2004 : AUD25 million due December 2009 : AUD275 million The Bank has entered into a separate agreement with the Commonwealth of Australia relating to the above 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 of Australia or (with the consent of the Commonwealth of Australia) 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 of Australia or a rights issue: (cid:1) 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 the Bank, if required by the Commonwealth of Australia and subject to the agreement of the APRA, exercises its option to redeem such issue. (cid:1) 104 Notes to the financial statements NOTE 29 Share Capital Ordinary Share Capital Opening balance Buyback Dividend reinvestment plan: 1999/2000 Final Dividend Buyback for DRP: 2000/2001 Interim Dividend Dividend Reinvestment Plan: 2000/2001 Interim Dividend Sell down of remaining shares from DRP: 2000/2001 Interim Dividend Employee Share Subscription Plan Exercise of Executive Options Issue costs 7 for 20 Issue to Colonial Shareholders Closing balance Shares on Issue Opening balance Buyback Dividend reinvestment plan issues: 1999 Final Dividend fully paid ordinary shares at $24.75 2000 Interim Dividend fully paid ordinary shares at $24.42 2000 Final Dividend fully paid ordinary shares at $27.31 Buyback for 2001 Interim Dividend 2001Interim Dividend fully paid ordinary shares at $30.82 Sell down of remaining shares not issued in DRP Exercise under Executive Option Plan Employee Share Subscription Plan issues Employee Share Acquisition Plan issues 7 for 20 Issue to Colonial Shareholders Closing balance 2001 $M 12,521 (275) 169 (144) 144 4 3 37 (4) - 12,455 Number 1,260,201,978 (25,927,367) - - 6,324,869 (4,652,665) 4,514,948 137,717 2,435,000 107,550 873,425 - 1,244,015,455 BANK 2000 $M 3,526 (553) - - 253 - 4 19 (2) 9,274 12,521 Number 915,968,625 (20,486,618) 5,545,990 4,931,782 - - - - 1,609,000 170,550 1,053,199 351,409,450 1,260,201,978 Terms and Conditions of Ordinary Share Capital Ordinary shares have the right to receive dividends as declared and, in the event of winding up the company, to participate in the proceeds from sale of surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the company. Preference Share Capital Issued and Paid Up PERLS Capital Opening balance PERLS issued Issue costs Closing balance PERLS in Issue Opening balance PERLS issued Closing balance 2001 $M - 700 (13) 687 Number - 3,500,000 3,500,000 BANK 2000 $M - - - - Number - - - Commonwealth Bank PERLS (‘PERLS’) are perpetual preference shares that offer a quarterly, floating rate dividend. The issue of PERLS formed part of the continuing capital management strategy of the Bank with proceeds from the issue being used to buyback ordinary share capital, resulting in a more efficient capital structure. PERLS represent a less expensive form of equity funding than ordinary shares and increase the diversity and flexibility of the Bank’s capital base. The issue has also attracted new investors to the Bank. PERLS are listed and traded on the Australian Stock Exchange. Terms and Conditions of Preferred Exchangeable Resettable Listed Shares (Commonwealth Bank PERLS) A holder of PERLS on the relevant record date is entitled to receive on each relevant Dividend Payment Date, if determined by the Directors to be payable, a Dividend. Holders of Commonwealth Bank PERLS will rank ahead of holders of ordinary shares in a winding up to the extent of the issue price of the Commonwealth Bank PERLS. Holders of PERLS are entitled to vote at a general meeting of the issuer in limited circumstances. 105 Notes to the financial statements NOTE 29 Share Capital continued Employee Share Plans The Bank has in place the following employee share plans: (cid:1) (cid:1) (cid:1) (cid:1) Commonwealth Bank Employee Share Acquisition Plan (ESAP); Commonwealth Bank Equity Participation Plan (EPP); Commonwealth Bank Equity Reward Plan (ERP); and Commonwealth Bank Non-Executive Directors Share Plan (NEDSP). COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES The ESAP 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%. Whenever annual profit growth exceeds CPI change, the Board may use its discretion in determining whether any grant of shares will be made. Details of issues under this plan are: Employee Share Acquisition Plan (ESAP) The ESAP and ERP were each approved by shareholders at the Annual General Meeting (AGM) on 26 October 2000. Shareholders consent was not required for either the EPP or NEDSP but details were included in the Explanatory Memorandum to the meeting to ensure shareholders were fully informed. Offer Issue Date Ordinary Shares Issued(1) Bonus Ordinary Shares Issued(2) No. of Participants Shares issued to each Participant 1996 1997 1999 2000 (1) 2 Jan 1997 18 Mar 1997 11 Dec 1997 3 Feb 1998 24 Sep 1999 13 Oct 2000 20 Dec 2000 27,755 13 3,025 - - - - 2,275,910 1,066 1,637,273 232 1,053,199 872,620 805 27,755 13 28,281 4 24,493 24,932 23 83 83 58 58 43 35 35 Issue Price(3) $12.04 $12.04 $17.16 $17.16 $23.12 $27.78 $27.78 For the 1996 and 1997 Offers, new employee shareholders were granted one ordinary share with the remainder of shares issued as Bonus Ordinary Shares. For subsequent Offers both new and existing shareholders were granted Bonus Ordinary Shares. (2) (3) For the 1996 and 1997 Offers the bonus shares were fully paid up as issued shares utilising the Share Premium Reserve. With the removal of the Share Premium Reserve the bonus shares are issued from the Share Capital Account. The Issue Price x Shares Issued to each Participant effectively represents $1,000 of free shares. (cid:1) (cid:1) 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 ‘Banks 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 5 years from the Commencement Date. Shares acquired under the share component of the ERP are purchased on-market at the current market price. Equity Reward Plan (ERP) The ERP is in two parts, comprising grants of shares and grants of options. The option component of the ERP is similar to the Executive Option Plan (EOP) which was previously approved by shareholders with the only difference being the maximum number of executives to whom the Board envisages the Plan will apply (up from 50 to 100). The Board also envisages that up to 500 employees will participate in the share component of the Plan (including the up to 100 executives receiving options). The exercise of options and the vesting of the employees legal title to the shares is conditional on the Bank achieving a prescribed performance hurdle, which is: 106 Notes to the financial statements NOTE 29 Share Capital continued Details of options issued and shares acquired under this plan are: Options Commencement Date Issue Date Options Issued Options Outstanding Participants 13 Sep 2000 7 Feb 2001 577,500 560,000 23 Exercise Price $26.97(1) Exercise Period(2) 14 Sep 2003 to 13 Sep 2010 (1) (2) Exercise price will be adjusted by the premium formula (based on the actual difference between the dividend and bond yields at the date of the vesting). Performance hurdle must be satisfied between 14 September 2003 and 13 September 2005, otherwise options will lapse. Shares Purchase Date Shares Purchased Shares Outstanding Participants Vesting Period Average Purchase Price 20 Feb 2001 361,100 358,100 61 14 Sep 2003 to 13 Sep 2005 $29.72 17,500 options and 3,000 shares granted under the ERP have lapsed as at 30 June 2001. Equity Participation Plan (EPP) Non-Executive Directors Share Plan (NEDSP) The EPP will facilitate the voluntary sacrifice of both fixed salary and annual bonus to be applied in the acquisition of shares. The Plan will also facilitate the mandatory sacrifice of part of annual performance bonuses. All shares acquired by employees under this Plan will be purchased on-market at the current market price. The first purchase of shares for this scheme is scheduled for October 2001. through The NEDSP provides for the acquisition of shares by Non-Executive Directors the mandatory sacrifice of 20% of their annual fees (paid on a quarterly basis). Shares purchased are restricted for sale for 10 years or when the Board, the Director whichever is earlier. Shares are purchased on-market at the current market price and details of shares purchased under this Plan so far are: leaves Quarter Ending 31/12/2000 31/03/2001 30/06/2001 Total Fees Sacrificed $63,517 $65,917 $61,331 Participants Shares Purchased Average Purchase Price 11 11 10 1,989 2,359 1,820 $31.93 $27.94 $33.45 Note - Trading restrictions on 317 shares acquired on behalf of Mr Ken Cowley were lifted subsequent to Mr Cowley’s exit from the Board. Shareholders were also informed at the AGM on 26 October 2000 that two plans were to be discontinued: (cid:1) Commonwealth Bank Employee Share Subscription Plan (ESSP); and Commonwealth Bank Executive Option Plan (EOP). (cid:1) Employee Share Subscription Plan The Employee Share Subscription Plan provided 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. A total of 1,092,650 shares were issued under this scheme to 4,907 employees in offers during the period March 1997 to October 2000. Executive Option Plan Under the EOP, the Bank granted 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, were declared by the Board of Directors to be eligible to participate in the Plan. Non-Executive Directors were not eligible to participate in the Plan. Options cannot be exercised before each respective exercise period and 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 ‘Banks and Finance Accumulation Index’, excluding the Bank. the ASX’s in If the performance hurdle is not reached within that 3 years (4 years for the second tranche of options granted to the Managing Director on 24 August 1999), the options may nevertheless be exercisable only where the hurdle is subsequently reached within five years (six years for the second tranche of options granted to the Managing Director on 24 August 1999) from the Commencement Date. The option plan did not grant rights to the option holders to participate in a share issue of any other body corporate. 107 Notes to the financial statements NOTE 29 Share Capital continued Details of issues made under this plan are: COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Commencement Date Issue Date Options Issued Options Outstanding Participants Exercise Price(1) Exercise Period 12 Nov 1996 3 Nov 1997 25 Aug 1998 24 Aug 1999 13 Sep 2000 16 Dec 1996 11 Dec 1997 30 Sep 1998 24 Sep 1999 13 Oct 2000 2,100,000 2,875,000 3,275,000 3,855,000 2,002,500 50,000 125,000 2,975,000 3,700,000 1,952,500 25 27 32 38 50 $11.85 $15.53(2) $19.58(3) $23.84(3) $26.97(3) 13 Nov 1999 to 12 Nov 2001 4 Nov 2000 to 3 Nov 2002 26 Aug 2001 to 25 Aug 2003 25 Aug 2002 to 24 Aug 2009 14 Sep 2003 to 13 Sep 2010 (1) (2) (3) Market Value at the Commencement Date. 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 Commencement Date. Premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil. Exercise price will be adjusted by the premium formula (based on the actual difference between the dividend and bond yields at the date of the vesting). 1,235,000 options, from all grants to date, have been forfeited as at 30 June 2001. 1,680,000 options from the 1996 grant, and 2,390,000 options from the 1997 grant, have been exercised as at 30 June 2001. Details of shares issued during the period 1 July 2000 to 22 August 2001 as a result of options being exercised are: Option Issue Date 16 Dec 1996 11 Dec 1997 Shares Issued 145,000 2,290,000 Price paid per Share Total Consideration Paid $11.85 $15.53 $1,718,250 $35,563,700 Share Buyback During the financial year ending 30 June 2001, the Bank’s shareholders equity was reduced by $723 million pursuant to the buyback of 25.9 million shares. In March 2001 the Bank made an off market buyback of $700 million of ordinary shares. The price per share paid by the Bank for the buyback shares was $27.84 calculated in accordance with the buyback offer. In accordance with an agreement reached with the the Australian Taxation Office $10 per share of consideration for each share bought back has been charged to paid up capital ($251 million). The balance of NOTE 30 Outside Equity Interests Controlled Entities: Share Capital Reserves Retained profits Life Insurance Statutory funds Total Outside Equity Interests $17.84 per share is deemed to be a fully franked dividend and charged to retained profits ($449 million). This buyback coincided with the new issue of preference shares as detailed previously. The balance of the equity reduction occurred by way of an on market buyback. The Bank’s shareholders’ equity was reduced by $553 million on 8 November 1999 pursuant to the buyback of 20.5 million shares. The price per share paid the buyback shares was $27.00 by calculated in accordance with the buyback offer. the Bank for 2001 $M 6 - (9) 1,458 1,455 GROUP 2000 $M 355 11 9 588 963 In August 2000 the Group purchased the remaining 25% of ASB Group. 108 Notes to the financial statements NOTE 31 Capital Adequacy Entities within the Group are subject to regulation by a variety of regulators. The Bank is subject to regulation by the Australian Prudential Regulation Authority (APRA) and is required to maintain certain minimum ratios of capital to assets. These ratios are applied to the Bank as a stand-alone entity and on a consolidated basis to the Group. The minimum ratios are 4% for Tier 1 capital and 8% for the Capital Base. Under APRA Prudential Standards, capital falls into two categories, known as Tier 1 and Tier 2. Tier 1 capital consists of shareholders funds and certain capital instruments that meet the standards set by APRA. The aggregate amount of capital instruments may not exceed 25% of shareholders funds. Intangible assets and future income tax benefits are deducted to arrive at Tier 1 capital. When calculated on a consolidated basis, goodwill and part of the Group’s investment in its life insurance and funds management businesses are also deducted to arrive at Tier 1 capital. Tier 2 capital is divided into Upper Tier 2 (consisting of revaluation reserves, general provisions for doubtful debts, cumulative irredeemable preference shares and other hybrid capital instruments approved by APRA), and Lower Tier 2 (consisting of mandatory convertible notes, redeemable life term subordinated debt, preference shares and other capital instruments approved by APRA). Tier 2 capital may not exceed Tier 1 capital and Lower Tier 2 capital may not exceed 50% of Tier 1 capital. limited Investments The sum of Tier 1 and Tier 2 capital forms Total Capital. in other banks and similar institutions are deducted from Total Capital to arrive at the Capital Base. When calculated on a consolidated basis, part of the Group’s investment in its life insurance and funds management businesses is deducted to arrive at the Capital Base. in holding companies intermediate The Group’s investment in its life insurance and funds management businesses is carried at the values disclosed in Note 34. Part of the investment is funded by on debt a non-recourse basis (i.e. obligations to pay interest or repay principal are not guaranteed by the Bank). The part of the investment represented by shareholders’ net tangible assets and the value of in force business acquired on the merger with Colonial in 2000, net of the non-recourse debt, is deducted from Total Capital. The part of the investment represented by self-generated value of business in force and the value of future new business is deducted from Tier 1 capital. to recognise the credit risk attached For the purposes of calculating the ratios, risk weights are applied to balance sheet assets. These are intended to categories of assets. There are four risk weights (0, 20, 50 or 100 per cent). Off balance sheet exposures are converted to on balance sheet credit equivalents using credit conversion factors relating to the nature of the exposure, then weighted in the same manner as balance sheet assets. 109 In addition to the capital requirements for credit risk, the Bank is also required to hold sufficient capital to cover market risk in its trading activities. Market risk is defined as the risk of losses in both 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 (i.e. the reciprocal of the minimum capital ratio of 8 per cent) to determine a notional risk weighted asset figure. APRA capital requirements to Commonwealth Bank of Australia Limited and CBFC Limited. regulatory applies similar ASB Bank Limited is subject to regulation by the Reserve Bank of New Zealand (RBNZ). RBNZ applies similar methodology in calculating the regulatory capital requirement. Although there are minor differences in the regulations applied by APRA and RBNZ, these are not material. Banks may not pay dividends if immediately after payment, they are unable to meet the minimum capital requirements. APRA does not normally permit banks to pay dividends in excess of current year earnings. for for framework life The Group’s life insurance businesses in Australia are also regulated by APRA. The Life Insurance Act has established a the regulatory capital insurance companies. These requirements requirements are based on tests aimed at ensuring each statutory fund in each life insurance company has sufficient assets to meet policy and other liabilities under a range of adverse circumstances. There are two tiers to the regulatory capital requirements – ‘solvency’ and ‘capital adequacy’. The solvency test is made assuming each fund is closed to new business. Failure to meet the solvency test may result in the appointment of a judicial manager by APRA. The capital adequacy test assumes each fund remains open to new business and the reasonable expectations of policyholders are met. Failure to meet the capital adequacy test means capital or retained profits may not be transferred from the statutory funds and may result in closer regulatory monitoring by APRA. The capital adequacy test is always equal to or greater than the solvency test. At 30 June 2001, all statutory funds of the Group’s life insurance companies in Australia met the capital adequacy test. In aggregate, at 30 June 2001, the excess over capital adequacy amounted to $338 million. There are no regulatory capital requirements for life insurance companies in New Zealand. However the Group determines capital requirements on a basis similar to the requirements in Australia. The life insurance business in Hong Kong is regulated by the Insurance Authority of Hong Kong. The minimum regulatory requirement comprises a solvency test defined in local regulations and ordinances. Funds managers in Australia are subject to regulation by The Australian Securities and Investment Commission (ASIC) through their role in supervising Responsible Entities. The minimum regulatory capital requirements vary for Responsible Entities depending on the licence held but a minimum requirement of $5 million of net tangible assets usually applies. type of dealer COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to the financial statements NOTE 31 Capital Adequacy continued Risk Weighted Capital Ratios Tier one Tier two Less deductions Total Tier One Capital Shareholders’ Equity (excluding asset revaluation reserve) Eligible Loan Capital Total Shareholders’ Equity and Loan Capital Less Goodwill Less Preference shares Less Intangible component of investment in non-consolidated subsidiaries Less Outside equity interest in entities controlled by non-consolidated subsidiaries Total Tier One Capital Tier Two Capital Asset revaluation reserve General provision for bad and doubtful debts (1) FITB related to general provision Note and bond issues (2) Preference shares Total Tier Two Capital Tier One and Tier Two Capital Less Investment in non-consolidated subsidiaries (net of intangible component deducted from Tier 1) Less Other deductions Capital Base 2001 Actual % 6.51 4.18 (1.53) 9.16 2001 $M 19,843 462 20,305 (5,716) - (4,116) (1,458) 9,015 5 1,390 (436) 4,825 - 5,784 14,799 (2,005) (114) 12,680 GROUP 2000 Actual % 7.49 4.75 (2.49) 9.75 GROUP 2000 $M 18,435 418 18,853 (5,905) (86) (2,656) (588) 9,618 - 1,358 (420) 5,120 39 6,097 15,715 (2,528) (669) 12,518 (1) (2) Excludes general provision for bad and doubtful debts relating to investments in non-consolidated subsidiaries. Includes both upper and lower Tier 2 capital. For an analysis of the movements in the capital ratios see page 34. 110 Notes to the financial statements NOTE 31 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 Claims on OECD banks and local governments Advances secured by residential property (1) All other assets (2) (3) Total on balance sheet assets - credit risk 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 (1) loans secured by For 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’. Face Value 2001 $M 2000 $M Risk Weights % Risk Weighted Balance 2000 $M 2001 $M 16,604 10,927 77,909 77,028 182,468 16,157 9,714 75,656 71,914 173,441 20% 50% 100% 0% - 2,185 38,954 77,028 118,167 - 1,943 37,828 71,914 111,685 Face value 2001 $M 2000 $M Credit Equivalent 2000 $M 2001 $M Risk-weighted Balance 2000 $M 2001 $M 5,183 1,496 44,030 3,540 1,795 42,442 407,014 457,723 381,438 429,215 4,446 670 17,121 11,407 33,644 3,540 828 14,671 9,358 28,397 3,687 660 11,467 3,758 19,572 137,739 644 138,383 2,825 819 9,634 2,785 16,063 127,748 736 128,484 (2) (3) 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, general provisions for bad and doubtful debts, and investments in life insurance and funds management businesses. Total on-balance sheet assets exclude debt and equity securities trading book and all the on-balance sheet positions in commodities as they are included in the calculation of notional market risk weighted assets. in 111 Notes to the financial statements COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 32 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, with actual maturities shorter than the contractual terms. Therefore this information is not relied on by the Bank in the management of its interest rate risk. GROUP Maturity Period At 30 June 2001 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 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 Life Assets Other Monetary assets Total Monetary assets Liabilities Deposits and other public borrowings (3) Payables due to other financial institutions Bank acceptances Life Liabilities Debt issues and loan capital Other monetary liabilities Total monetary liabilities 1,193 848 - - 1,408 - 4,694 32 8,175 62,416 358 - - - 81 62,855 (1) (2) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months. $65 billion of this figure represents 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 has historically been less than 5 years. - 2,516 - - - - 3,709 2 - - 4,089 - - - 4,091 - 215 - - - - 215 2,636 6,909 1,062 12,934 10,868 582 11,106 48,613 29,588 4,095 10,868 - 11,349 13,077 68,977 587 - 1,861 12,787 1,207 1,832 75 18,349 16,539 2,235 1,207 - 5,271 208 25,460 477 - 4,017 42,963 - 3,327 9 50,793 7,114 - - - 7,862 51 15,027 - - 2,764 63,277 - 2,767 - 68,808 72 - 1 4,622 6,909 9,705 (1,399) 136,059 12,075 31,213 11,478 16,941 215,770 - 18,011 256 1,693 - - - 5,095 1 6,789 5 117,355 6,903 - 12,075 - 27,029 27,029 30,188 611 13,661 243 27,888 207,211 (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 39. During the financial year, significant growth in variable rate, long-term loans occurred. This has been funded principally by at call variable rate retail deposits. 112 Notes to the financial statements NOTE 32 Maturity Analysis of Monetary Assets and Liabilities continued 3 to 12 At Call Overdrafts months Months $M 0 to 3 $M $M $M GROUP Maturity Period At 30 June 2000 1 to 5 Not Over years 5 years specified $M $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 Life Assets (4) Other Monetary assets Total Monetary assets Liabilities Deposits and other public borrowings (3) Payables due to other financial institutions Bank acceptances Life Liabilities Debt issues and loan capital Other monetary liabilities Total monetary liabilities 1,041 - 1,534 - - - - 2,575 2,200 - - 510 - 16 - - 4,719 - 2,037 - 1,024 - 4,735 6,812 204 2,699 7,347 - 1,787 1,757 18,315 8,351 1,554 9,553 4,924 25 133 8,854 26,917 40,120 864 - - - 55,494 - 126 - - - 201 - 126 56,559 27,577 3,050 10,030 - 11,647 11,565 63,869 19,744 592 1,077 - 4,142 317 25,872 - - 3,027 49,826 - 2,996 13 55,862 7,408 - - - 8,855 137 16,400 - - 2,575 51,853 - 3,048 15 57,491 35 - 3 (1,311) - 14,006 244 12,977 - - 314 5,371 2,371 - 1 - 24,968 559 30 - 25,528 8,086 5,154 7,347 9,149 132,263 11,107 27,036 10,283 204,914 112,594 4,633 11,107 25,282 30,574 12,250 196,440 (1) (2) (3) (4) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within three months. $49 billion of this figure represents 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 has historically been less than 5 years. 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 39. Prior year figures have been adjusted to align with categories as at 30 June 2001 following the amalgamation of Colonial operations and product systems. 113 Notes to the financial statements NOTE 33 Financial Reporting by Segments COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Year Ended 30 June 2001 Primary Segment Business Segments Profit and Loss Interest income Premium and related revenue Other income Appraisal value uplift Total Revenue Interest Expense Profit before tax, appraisal value uplift, goodwill amortisation Income tax expense Profit after tax and before goodwill amortisation and appraisal value uplift Outside equity interest Profit after tax and outside equity interest before goodwill amortisation and appraisal value uplift Goodwill amortisation Appraisal value uplift Profit after tax Non-Cash Expenses Goodwill amortisation Charge for bad and doubtful debts Depreciation Other Balance Sheet Banking $M 11,900 - 2,485 14,385 7,426 2,512 (705) 1,807 (14) 1,793 1,793 (385) (108) (28) Life Funds Insurance Management $M $M - 958 1,698 2,656 - 514 (194) 320 - 320 320 - (37) (5) - - 701 701 - 243 (94) 149 - 149 149 - (5) (4) GROUP Total $M 11,900 958 4,884 474 18,216 7,426 3,269 (993) 2,276 (14) 2,262 (338) 474 2,398 (338) (385) (150) (37) Total Balance Sheet Assets Acquisition of Property, Plant & Equipment and Intangibles Associate Investments Total Balance Sheet Liabilities 191,333 129 249 179,733 37,278 - 128 30,329 1,800 3 23 501 230,411 391 (1) 400 210,563 (1) Includes intangible assets of $259 million on acquisition of 25% interest in ASB Group. 114 GROUP Total $M 8,842 337 3,196 1,165 13,540 5,123 2,536 (800) 1,736 (38) 1,698 (57) (106) 1,165 (1) 2,700 (57) (196) (106) (117) (44) 218,259 8,137 (2) 403 199,824 - - 143 143 - 50 (14) 36 - 36 36 - - (1) 509 - 32 195 Notes to the financial statements NOTE 33 Financial Reporting by Segments continued Year Ended 30 June 2000 Life Funds Insurance Management $M $M Profit and Loss Interest income Premium and related revenue Other income Appraisal value uplift Total Revenue Interest Expense Profit before tax, appraisal value uplift, goodwill amortisation Income tax expense Profit after income tax and before goodwill amortisation and appraisal value uplift Outside equity interest Profit after tax and outside equity interest before goodwill amortisation and appraisal value uplift Goodwill amortisation Restructuring provision Appraisal value uplift Profit after tax Non-Cash Expenses Goodwill amortisation Charge for bad and doubtful debts Restructuring provision Depreciation Other Balance Sheet Banking $M 8,842 - 1,987 10,829 5,123 2,310 (739) 1,571 (38) 1,533 - 337 1,066 1,403 - 176 (47) 129 - 129 1,533 129 (196) (115) (41) - (2) (2) Total Balance Sheet Assets Acquisition of Property, Plant & Equipment and Intangibles Associate Investments Total Balance Sheet Liabilities 185,108 94 263 171,489 32,642 - 108 28,140 (1) (2) $1,073 million of this amount was reported as abnormal income in this year. Includes intangible assets of $8,043 million on acquisition of Colonial Group. 115 Notes to the financial statements NOTE 33 Financial Reporting by Segments continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Year Ended 30 June 1999 Profit and Loss Interest income Premium and related revenue Other income Total Revenue Interest Expense Profit before tax, appraisal value uplift, goodwill amortisation Income tax expense Profit after tax and before goodwill Profit after income tax and before goodwill Outside equity interest Profit after tax and outside equity interest before goodwill amortisation and appraisal value uplift Goodwill amortisation Profit after tax Non Cash Expenses Goodwill amortisation Charge for bad and doubtful debts Depreciation Other Balance Sheet Banking $M 7,745 - 2,438 10,183 4,218 2,075 (709) 1,366 (24) 1,342 1,342 (247) (145) (39) Life Funds Insurance Management $M $M - 236 590 826 - 99 4 103 - 103 103 - - (2) - - 97 97 - 33 (9) 24 - 24 24 - - (1) GROUP Total $M 7,745 236 3,125 11,106 4,218 2,207 (714) 1,493 (24) 1,469 (47) 1,422 (47) (247) (145) (42) Total Balance Sheet Assets Acquisition of Property, Plant & Equipment and Intangibles Associate Investments Total Balance Sheet Liabilities 136,787 81 258 130,195 1,157 - - 841 152 - 23 97 138,096 81 281 131,134 Secondary Segment Geographical Segment GEOGRAPHICAL SEGMENTS Revenue Australia New Zealand Other Countries * Operating profit after tax and outside equity interests Australia New Zealand Other Countries * Assets Australia New Zealand Other Countries * 2001 $M 2000 $M % 1999 $M % % 15,150 1,499 1,567 18,216 2,228 159 11 2,398 83.2 8.2 8.6 100.0 92.9 6.6 0.5 100.0 11,614 1,171 755 13,540 2,536 105 59 2,700 85.8 8.6 5.6 100.0 93.9 3.9 2.2 100.0 9,470 976 660 11,106 1,270 80 72 1,422 196,918 20,208 13,285 230,411 85.5 187,452 16,661 14,146 100.0 218,259 8.8 5.7 85.9 115,510 13,046 9,540 100.0 138,096 7.6 6.5 Acquisition of Property, Plant & Equipment and Intangibles Australia New Zealand Other Countries * 360 29 2 391 7,906 (1) 231 (1) 92.1 7.4 0.5 - 8,137 100.0 97.2 81 2.8 - - 81 - 100.0 * (1) Other Countries are: United Kingdom, United States of America, Japan, Singapore, Hong Kong, Grand Cayman, the Philippines, Fiji, Thailand, Indonesia, Malaysia, China and Vietnam. The geographical segments represent the location in which the transaction was booked. Includes intangible assets of $8,043 million on acquisition of Colonial Group. 116 85.3 8.8 5.9 100.0 89.3 5.6 5.1 100.0 83.6 9.5 6.9 100.0 100.0 - - 100.0 Notes to the financial statements NOTE 34 Life Insurance Business The following information, in accordance with AASB 1038, is provided to disclose life insurance business transactions contained in the Group financial statements and the underlying methods and assumptions used in their calculation. Also refer Notes 1 (jj) and 20. Summarised Profit and Loss Statement Premium and related revenue Outward reinsurance premiums expense Claims expense Reinsurance recoveries Investment revenue (excluding investments in subsidiaries) Equity securities Debt securities Property Other Life insurance policy liabilities expense Margin on services operating income Change in excess of net market values over net assets of life insurance controlled entities Life Insurance operating income Administration expense Operating profit before income tax Income tax attributable to operating profit Operating profit after income tax Outside equity interest in operating profit after income tax Operating profit after outside equity interest and income tax Sources of life insurance operating profit The Margin on Services operating profit after income tax is represented by: Emergence of planned profit margins Difference between actual and planned experience Movement in excess of net market value over net assets of controlled entities Reversal of previously recognised losses or loss recognition on groups of related products Investment earnings on assets in excess of policyholder liabilities Other Operating profit after income tax Life insurance premiums received and receivable Life insurance claims paid and payable 2001 $M 1,122 (164) (621) 141 552 902 277 (33) (908) 1,268 474 1,742 (754) 988 (194) 794 - 794 257 (63) 474 (2) 126 2 794 6,510 5,671 GROUP 2000 $M 459 (122) (310) 89 592 442 32 - (856) 326 92 418 (150) 268 (47) 221 (2) 219 121 (8) 92 1 13 2 221 2,927 2,279 An analysis of this financial result is contained in the Life Insurance – Business Analysis section of this report. 117 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to the financial statements NOTE 34Life Insurance Business continued Carrying Values of Life Insurance and Funds Management Business The following table sets out the components of the carrying values of the Group’s life insurance and funds management businesses, together with the key actuarial assumptions that have been used by the independent actuaries. These are Directors’ valuations based on appraisal values determined by independent actuaries Trowbridge Consulting. Analysis of Movement since 30 June 2000 Australia $M Life Insurance New Zealand $M Funds Asia Management $M $M Profits (1) Opening Fair Value Adjustments (2) Net Capital Movements Transfers / Acquisitions of Business (3) Change in Shareholders NTA Synergies Credited to Goodwill (4) Transfers / Acquisitions of Business Net Appraisal Value Uplift Increase to 30 June 2001 30 June 2000 balance (5) Opening fair value adjustment (2) Profits Less profit on strategic holding (4) Net capital movements Transfers/acquisitions of business (3) 30 June 2001 balance 30 June 2000 balance (5) Synergies credited to goodwill (4) Transfers/acquisitions of business (4) Uplift 30 June 2001 balance 30 June 2000 balance (5) Synergies credited to goodwill (4) Transfers/acquisitions of business (4) Uplift 30 June 2001 balance Shareholders' net tangible assets Value in force business Embedded value Value future new business Carrying Value Total $M 423 (30) 26 34 453 332 8 474 1,267 273 - (269) - 4 332 (183) (33) 120 19 - 39 - 58 - - (26) 32 (18) (30) 179 - 131 - - (63) 68 149 - 77 34 260 - 191 596 1,047 SHAREHOLDERS’ NET TANGIBLE ASSETS Australia 1,639 - 319 (46) (269) - 1,643 Life Insurance New Zealand 178 - 19 - 39 - 236 Asia 588 (30) (18) - 179 - 719 VALUE IN FORCE BUSINESS Australia 686 - - 20 706 Life Insurance New Zealand 186 - - (51) 135 Asia 101 - - n/a 101 VALUE FUTURE NEW BUSINESS Australia 690 332 (183) (53) 786 Life Insurance New Zealand 240 - - 25 265 Asia 186 - - (63) 123 Funds Total 9 - 149 - 77 34 269 2,414 (30) 469 (46) 26 34 2,867 Funds Total 624 - 2 (8) 618 1,597 - 2 (39) 1,560 Funds Total 1,609 - 189 604 2,402 2,725 332 6 513 3,576 CARRYING VALUE AT 30 JUNE 2001 Australia 1,643 706 2,349 786 3,135 Life Insurance New Zealand 236 135 371 265 636 Asia 719 101 820 123 943 Funds Total 269 618 887 2,402 3,289 2,867 1,560 4,427 3,576 8,003 (1) (2) (3) (4) (5) Total Australian life insurance profit is $320 million, comprising $274 million in the life insurance corporate structure and $46 million relating to certain strategic investments transferred from the Bank to the life insurance operations. Fair value adjustments totalling $30 million have been made to the opening value of the Asian operations representing changed assumptions on tax and investment earnings in the opening valuation. Represents the net tangible assets of a number of funds management entities not held in a life insurance corporate structure ($34 million). This item includes a transfer of business from the Life insurance business to the Funds Management business ($183 million) and goodwill arising on acquisition of new businesses during the year ($8 million). Cost and revenue synergies arising from the Colonial Integration were achieved during the year with a value of $332 million. The value of these synergies is credited against goodwill. Balances at 30 June 2000 include some minor adjustments principally related to the re-allocation of value between in force business and future new business. Such adjustments have no effect on the Appraisal Value Uplift for the year. 118 Notes to the financial statements NOTE 34 Life Insurance Business continued The following table reconciles the carrying values of the life and funds management businesses to the value of investments in non-consolidated subsidiaries as shown in the capital adequacy calculation. Reconciliation of the components of the carrying value to the value of investments in non-consolidated subsidiaries Intangible component of investment in non-consolidated subsidiaries deducted from Tier 1 capital comprises: Value future new business Value of self-generated in force business (2) Adjustments (1) Investment in non-consolidated subsidiaries deducted from Total Capital comprises: Shareholders’ NTA in life and funds management businesses Shareholders’ NTA in other non-consolidated subsidiaries Debt recognised as capital per APRA regulations Value of in force business (2) Value of acquired in force business (2) Less non-recourse debt Other (1) 30 June 2001 $M 30 June 2000(1) $M 3,576 540 - 4,116 2,867 41 96 - 1,020 (2,019) - 2,005 2,725 - (69) 2,656 2,414 78 140 1,597 - (1,698) (3) 2,528 (1) (2) Balances at 30 June 2000 include some minor adjustments principally related to the re-allocation of value between in force business and future new business. Refer Note 31 of the financial statements for an explanation of the change in treatment between 30 June 2000 and 30 June 2001 relating to the value of self-generated business in force. Key Assumptions Used in Appraisal Values The following Key Assumptions have been used by Trowbridge in determining the appraisal values. Other actuarial assumptions used in the valuation are described in the section Actuarial Methods and Assumptions. 30 June 2001 Life insurance entities Australia New Zealand Asia - Hong Kong - Other Funds management entities Australia As at 30 June 2000 Life insurance entities Australia New Zealand Asia - Hong Kong - Other Funds management entities Australia New Business Multiplier(1) Risk Discount Rate % Value of Franking Credits % 9 9 9 Various n.a. New Business Multiplier 10 8 9 various 11.5 12.0 HKD13.5 (2) USD12.5 Various 12.5 Risk Discount Rate % 12 13 HKD15 (2) USD12.5 various n.a. 13 70 - - - 70 Value of Franking Credits % 70 - - - 70 (1) (2) Changes in multipliers reflect changes in risk discount rates, changes to business mix and changes to views on future new business growth. These are the risk discount rates for Hong Kong dollar business and US dollar business. 119 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to the financial statements NOTE 34 Life Insurance Business continued Policy Liabilities Appropriately qualified actuaries have been appointed in respect of each life insurance business and they have reviewed and satisfied themselves as to the accuracy of the policy liabilities included in this financial report, including compliance with the regulations of the Life Insurance Act 1995 where appropriate. Details are set out in the various statutory returns of these life insurance businesses. Components of policy liabilities: Future policy benefits (1) Future bonuses Future expenses Future profit margins Future charges for acquisition expenses Balance of future premiums Provisions for bonuses not allocated to participating policyholders Total policy liabilities (1) Including bonuses credited to policyholders in prior years. 2001 $M 29,727 1,583 2,209 1,224 (648) (7,112) 46 27,029 2000 $M 28,983 1,751 1,648 1,170 (616) (7,701) 47 25,282 Taxation Actuarial Methods and Assumptions Taxation has been allowed for in the determination of policy liabilities in accordance with the relevant legislation applicable in each territory. On 1 July 2000 a new tax regime for life insurance companies commenced in Australia. The primary effect of this regime is to tax profits that had previously not been subject to taxation. Allowance has been made in the appraisal values and policy liabilities of the life insurance businesses for the impact of the new tax requirements. Policy liabilities have been calculated in accordance with the Margin on Services (MoS) methodology as set out in Actuarial Standard 1.02 – Valuation Standard Insurance Actuarial (‘AS1.02’) Standards Board (‘LIASB’). There has been no change in the principal methods and profit carriers used for particular product groups which are as follows: issued by the Life Product Type Individual Conventional Investment account Investment linked Lump sum risk Income stream risk Immediate annuities Group Investment account Investment linked Lump sum risk Income stream risk Method Profit Carrier Projection Projection Projection Accumulation Projection Projection Projection Projection Projection Projection Accumulation Projection Bonuses / dividends or expected claim payments Bonuses or asset charges Asset charge Not applicable Premiums/claims Expected claim payments Bonuses or annuity payment Bonuses or asset charges Asset charge Claims Premiums (implied) Expected claim payments 120 Actuarial Assumptions Set out below is a summary of the material assumptions used in the calculation of policy liabilities. These assumptions are also used in the determination of appraisal values. Discount Rates These are the rates used to discount further cash flows to determine their net present value in the policy liabilities. The discount rates are determined with reference to the expected earnings rate of the assets that support the policy liabilities adjusted for taxation where relevant. The following table shows the applicable rates for the major classes of business in Australia and New Zealand. The changes relate to changes in long term earnings rates, asset mix and reflect the new tax regime for Australian business. Discount Rates June 2001 Rate Range % 6.38-6.72 7.80-8.23 6.51-7.97 4.20-4.55 4.20-4.55 4.20-4.55 5.86-6.36 7.34-7.92 8.34-9.12 4.51 5.49 June 2000 Rate Range % 6.11 7.88 6.40-8.25 3.20-5.28 4.50-5.28 6.15 5.70-5.82 7.00-7.80 8.35-8.63 4.44 5.72 Notes to the financial statements NOTE 34 Life Insurance Business continued The ‘Projection Method’ measures the present values of estimated future policy cash flows to calculate policy incorporate investment income, premiums, expenses, redemptions and benefit payments. liabilities. The policy cash flows The ‘Accumulation Method’ measures the accumulation of amounts invested by policyholders plus investment earnings less fees specified in the policy to calculate policy liabilities. Deferred acquisition costs are offset against this liability. Bonuses are amounts added, at the discretion of the life insurer, the benefits currently payable under Participating Business. Under the Life Act, bonuses are a distribution to policyholders of profits and may take including reversionary bonuses, a number of interest credits and capital growth bonuses (payable on the termination of the policy). forms to Class of Business Traditional – ordinary business (after tax) Traditional – superannuation business (after tax) Annuity business (after tax) Term life insurance – ordinary business (after tax) Term life insurance – superannuation business (after tax) Disability business (before tax) Investment linked – ordinary business (after tax) Investment linked – superannuation business (after tax) Investment linked – exempt (after tax) Investment account – ordinary business (after tax) Investment account – superannuation business (after tax) 121 Notes to the financial statements COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 34 Life Insurance Business continued Bonuses Unit price growth The valuation assumes long-term supportable bonuses will be paid, which is in line with company bonus philosophy. There have been no significant changes to these assumptions. that the Unit prices are assumed to grow in line with assumed investment earnings assumptions, net of asset charges as per current company practice. There have been no significant changes to these assumptions. Maintenance expenses Mortality and Morbidity Rates vary by sex, age, product type and smoker status. Rates are based on standard mortality tables applicable to each territory e.g. IA90-92 in Australia for risk, IM/IF80 for annuities, adjusted for recent company and industry experience where appropriate. The only significant change has been an the assumption for disability claims. increase in Solvency Australian Life Insurers Australian life required to be held insurers are to hold prudential reserves in excess of the amount of policy liabilities. These reserves are required to support capital adequacy requirements and provide protection against the adverse experience. Actuarial Standard AS2.02 ‘Solvency Standard’ (‘AS2.02’) prescribes a minimum capital requirement and the minimum level of assets required fund. in each All controlled Australian life insurance entities complied with the solvency requirements of AS2.02. Further information is available from the individual statutory returns of subsidiary life insurers. Overseas life insurers Overseas life insurance subsidiaries are required to hold reserves in excess of policy liabilities in accordance with local Acts and prudential rules. Each of the overseas subsidiaries complied with local requirements. Further information is available from the individual statutory returns of subsidiary life insurers. insurance life Managed assets & fiduciary activities Arrangements are in place to ensure that asset management and other fiduciary activities of controlled entities are independent of the life insurance funds and other activities of the Group. Disaggregated Information Life is conducted insurance business through a number of life insurance entities in Australia and overseas. Under the Australian Life Insurance Act 1995, life insurance business is conducted within one or more separate statutory funds which are distinguished from each other and from the shareholders’ fund. The financial in statements of Australian accordance with AASB 1038, (and which are lodged with the relevant Australian regulators) show all major components of the financial statements disaggregated between the various life insurance statutory funds and their shareholder funds. insurers prepared life For the Australian and New Zealand operations of the Colonial Group, maintenance expense assumptions are based on the contractual fees (inclusive of an allowance for inflation) as set out in the service company agreements. These have increased in line with inflation. For other operations maintenance expense assumptions are based on an analysis of experience over the past year taking into account future business plans. ‘One-off’ expenses are excluded. Investment management expenses Investment management expense assumptions are based on the contractual fees (inclusive of an allowance for inflation) as set out in Fund Manager agreements. There have been no significant changes these assumptions. to Inflation The inflation assumption is consistent with the investment earning assumptions. There have been no significant changes to these assumptions. Benefit indexation The indexation rates are based on an analysis of past experience and estimated long term inflation and vary by business and product type. There have been no significant changes to these assumptions. Taxation The taxation basis and rates assumed vary by territory and product type. For the Australian business it reflects the new regime for life insurance companies effective 1 July 2000. Voluntary discontinuance Discontinuance rates are based on recent company and industry experience and vary by territory, product, age and duration inforce. The only significant change has been an increase in the assumption for New Zealand and Asia. Surrender values Current surrender value bases are assumed to apply in the future. There have been no significant changes to these assumptions. 122 Notes to the financial statements NOTE 35 Remuneration of Auditors Amounts paid or due and payable for audit and review of the financial report by: Ernst & Young Other Auditors Amounts paid or due and payable for other services to Ernst & Young Total Remuneration of Auditors Other services provided by Ernst & Young during the year primarily related to regulatory and other statutory services, accounting taxation advisory services. related services and Other services provided by Ernst & Young during to once-off the the previous year substantially related initiatives including GST preparedness and 2001 $’000 4,518 89 4,607 GROUP 2000 $’000 2001 $’000 BANK 2000 $’000 1,864 3,165 1,878 - 1,864 5,043 1,993 - 1,993 5,113 17,953 4,089 17,779 9,720 22,996 5,953 19,772 acquisition of Colonial Limited. A significant proportion of the other services was provided by Ernst & Young’s management consulting division. Effective 23 May 2000 Ernst & Young sold its management consulting business. From that date Ernst & Young no longer provides those management consulting services to the Group. NOTE 36 Commitments for Capital Expenditure Not Provided for in the Accounts 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 37 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 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 five years Later than five years Total Lease Commitments - Property, Plant and Equipment Lease Arrangements Leases entered into by the Group are for the purpose of accommodating the business need. Leases may be over retail, commercial, industrial and residential premises and reflect the needs of the occupying business and market conditions. All leases are negotiated with external professional property resources acting for the Group. Rental payments are determined terms of relevant lease requirements – usually reflecting market rentals as described by standard valuation practice. in 2001 $M 12 - - - 12 2001 $M 216 595 227 1,038 BANK 2000 $M 19 - - - 19 BANK 2000 $M 168 469 215 852 2001 $M GROUP 2000 $M 30 2 - - 32 22 - - - 22 2001 $M GROUP 2000 $M 277 730 311 1,318 309 784 341 1,434 7 16 7 30 8 22 10 40 The Group as lessee has no purchase options over premises occupied. For properties sold and leased back by the Group, the Group does have the right of first refusal to purchase the property. There is no obligation on the Bank to do so, and there has never been an instance of purchase. There are no restrictions imposed on the Group’s lease of space other than those forming part of the negotiated lease arrangements for each specific premise. 123 Notes to the financial statements NOTE 38 Contingent Liabilities The Group is involved in a range of transactions that give rise to contingent and/or future liabilities. These transactions meet requirements of customers and include endorsed bills of exchange, letters of credit, guarantees and commitments to provide credit. financing the COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 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 39) 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 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. Performance involve undertakings by if a customer fails to fulfil a contractual non-monetary obligation. related the Group third parties contingents to pay Face Value 2000 $M 2001 $M GROUP Credit Equivalent 2000 $M 2001 $M 2,104 673 1,096 238 1,236 42,874 2,488 50,709 2,554 558 428 231 1,564 41,324 1,118 47,777 2,104 673 1,096 48 618 15,970 1,728 22,237 2,554 558 428 46 782 13,579 1,091 19,038 The credit equivalent exposure from direct credit substitutes (guarantees, standby letters of credit and bill endorsements) is the face value of the transaction, whereas the credit equivalent 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. 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 raised. the potential Where 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. Commitments include all obligations on the part of the Group to provide funding facilities. to provide credit Other commitments include the Group’s obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities. 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. 124 Notes the financial statements NOTE 38 Contingent Liabilities continued Indemnities under UK Sale Agreement Fiduciary Activities The Group has contingent liabilities that relate to indemnities given under an agreement for the sale of Colonial Life (UK) Ltd and Colonial Pension Fund Ltd to the Winterthur Group. These indemnities cover potential claims that could arise from mis-selling activities in the UK for pension products and mortgage endowment products. Under the liabilities are shared between sales agreement Winterthur and the Group on a pre-determined basis. the Funds under management Australia United Kingdom New Zealand Asia Funds under trusteeship Australia Funds under custody and investment administration Australia 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 Group companies are engaged to act in more than one capacity (e.g. as trustee and fund manager). retail trusts Certain entities within the Group act as responsible trustee of various managed schemes entity or (‘schemes’), wholesale and (‘trusts’). Liabilities are incurred by these entities in their capacity as responsible entity or trustee. Rights of indemnity are held against the schemes and trusts whose assets exceeded their liabilities at 30 June 2001. Where entities within trusts, the Group act as manager of unit obligations exist under the relevant Trust Deeds, whereby upon request from a unit holder, the manager has an obligation to repurchase units from the trust or to arrange for the relevant trustee to redeem units from the assets of those trusts. It is considered unlikely that these entities will need to repurchase units from their own funds. The Commonwealth Bank of Australia does not its the performance or obligations of guarantee subsidiaries. The Group and its associated entities conduct investment management and other fiduciary activities as responsible entity, trustee, custodian or manager for numerous including superannuation and approved deposit funds, wholesale and retail trusts. The amounts of funds concerned which are not reported in the Group’s balance sheet are as follows: funds and investment trusts, 2001 $M 58,018 14,614 2,227 2,095 76,954 2000 $M 43,400 19,202 947 1,717 65,266 22,768 21,150 73,513 66,510 Long Term Contracts the Bank entered In 1997, the Bank entered into a ten year contract with an associated entity, EDS (Australia) Pty Ltd, relating to the provision of information technology services. In 2000, into a telecommunications services agreement with TCNZ Australia Pty Ltd for five years. The exact amounts of these contracts is unable to be reliably determined as they are dependent upon business volumes over the period of the contracts. Liquidity support In accordance with the regulations and procedures governing clearing arrangements contained within the Australian Paper Clearing Stream (Clearing Stream 1) and the Bulk Electronic Clearing Stream (Clearing Stream 2) of the Australian 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. Service agreements The maximum contingent liability for termination benefits in respect of service agreements with the Managing Director and other executives of the Company and its controlled entities at 30 June 2001 was $12 million (2000: $8 million). 125 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES The Bank’s policy framework differentiates normal operational liquidity management (corresponding to the ‘going concern’ scenario in APRA’s Prudential Statement D1 on Liquidity) from a crisis event. Three types of crisis are dealt with ie, systemic, founded and unfounded. The policy sets out the controls and cash flow assumptions appropriate in all cases. The key elements of the liquidity policy cover: (cid:1) Detailed daily forecasts out to 3 months including mismatch limits; Development of reliable funding sources; The holding of a stock of high quality liquid assets ie, assets held that are available for repurchase by the RBA (over and above those required to meet Real Time Gross Settlement (RTGS) obligations), AUD CDs/Bills of other banks and AUD overnight interbank loans; and The use of standby lines of funding. included Subsidiaries are also the Group’s in (cid:1) (cid:1) (cid:1) liquidity policy framework. Foreign currency liquidity risk is managed by ensuring that a positive cumulative cash flow 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 a change in that funding source could increase overall funding costs or cause difficulty in funding raising funds. The Group has a policy of diversification. This Funding Policy augments the Group’s Liquidity Policy. Its aim is to assure that the Group has a stable diversified funding base without over-reliance on any one market sector. Central to this is the determination of the most appropriate mix of deposits and other liabilities to fund the balance sheet. A target has been set for the preferred minimum level of retail deposits. A minimum level of long-term (greater than 12 months) funding has also been set. Domestically, the Group 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 risen from 60% in June 2000 to 62% in June 2001. The relative size of the Group’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 Group’s retail network and the Group’s large share (approximately 48%) of pensioner deeming accounts. In recent years, the Group has experienced a movement of retail deposit balances into higher yielding facilities. This reflects 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 cycles of the 1980s and early 1990s. Notes to the financial statements NOTE 39 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 Group, e.g. an adverse interest rate movement. Under the authority of the Bank’s Board, the Risk Committee of the Board ensures that all the Group’s market risk is consistent with the Group business strategy and within Group risk tolerance. Regular market risk reports are tabled before Risk Committee. Within the Group, market risk exists in the balance sheet structure and arises in the course of its intermediation activities in financial services and in financial markets trading. Market risk in the balance sheet The Risk Committee of the Board recommends for Board approval all balance sheet market risk policies and limits. Implementation of the policy is through the Asset Liability Committee, with operational management of the risk delegated to the Group General Manager, Financial & Risk Management. 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 Australian Dollar (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. APRA has revised its Prudential Standard for the supervision of liquidity in banks. This standard has been expanded to cover all Approved Deposit-taking Institutions (ADIs). The previous policy has been superseded and the Prime Assets Requirements (PAR) has been abolished. Each bank is required to develop a liquidity management strategy that is appropriate for itself, based on its size and the nature of its operations. The prime objective is to ensure that each bank has sufficient liquidity to meet its financial obligations as they fall due. The Bank has developed a liquidity policy, relevant to its own circumstances and this has formally been approved by APRA. The objectives of the Bank’s funding and liquidity policies are to: (cid:1) (cid:1) (cid:1) Ensure all financial obligations are met when due; Provide adequate protection at lowest cost; and Achieve sustainable, lowest-cost funding within the limitations of funding diversification requirements, without over-reliance on any particular market segment. 126 Notes to the financial statements NOTE 39 Market Risk continued funds The cost of for Financial Year 2001, calculated as the percentage of interest expense to average interest bearing liabilities, was 5.1% on a Group basis compared with 4.4% on a Group basis for Financial Year 2000. The Group obtains a significant proportion of its funding for the domestic balance sheet from wholesale sources – approximately 23%, excluding Bank Acceptances. The cost of funds raised in the wholesale markets is affected by independently assessed credit ratings. Australia Cheque Accounts Savings Accounts Term Deposits Cash Management Accounts Debt Issues Bank Acceptances Certificates of Deposit Life Insurance Policy Liabilities Loan Capital Securities Sold Under Agreements to Repurchase Other Total Australia Overseas Deposits and Interbank Commercial Paper Life Insurance Policy Liabilities Other Debt Issues Bank Acceptances and Other Total Overseas Total Funding Sources Provisions and Other Liabilities Total Liabilities A funding diversification policy is particularly important in offshore markets where the absence of any is ‘natural’ offshore 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. funding base means the Bank 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. 2001 $M 19,644 30,248 28,102 11,080 14,719 11,960 12,927 23,477 5,704 435 2,798 161,094 19,021 8,471 3,552 1,294 118 32,456 193,550 17,013 210,563 GROUP 2000 $M 15,289 29,543 29,677 9,985 17,520 11,107 14,136 21,975 5,299 946 1,809 157,286 15,842 6,070 3,307 1,685 - 26,904 184,190 15,634 199,824 127 Notes to the financial statements NOTE 39 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 Group 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 achieve 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 The risk to the net interest earnings over the next 12 months from a change in interest rates is measured on a monthly basis. Risk is measured assuming an immediate 1% parallel 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 to net interest earnings are measured using a simulation model which takes into account the projected change in balance sheet asset and liability levels 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 the products have repriced in the past as well as the expected change in price based on the current competitive market environment. to net The figures in the table represent the potential (expressed as interest earnings change 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 2001 % 1.8 2.4 0.9 2000 % 1.8 2.3 1.4 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES the net present value of cashflows of assets and liabilities. Cashflows for fixed rate products are included on a contractual basis, after adjustment for forecast prepayment activity. Cashflows for products repriced at the discretion of the Group are based on the expected repricing characteristics of those products. 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, VaR 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 all existing assets and liabilities held for purposes other than trading. Exposure as at 30 June Average monthly exposure High month exposure Low month exposure 2001 $M 42 23 42 11 2000 $M 19 27 45 15 for the two framework A stress-test interest rate risk risk-management perspectives augments outlined above. The results of the stress tests are used to refine policy and limits where appropriate and are reported to Asset Liability Committee and Risk Committee. The table following represents the Group’s contractual interest rate risk sensitivity from repricing mismatches as at 30 June 2001 and the corresponding weighted average effective interest rates. The net mismatch represents the net value of assets, liabilities and off balance sheet instruments that may be repriced in the time periods shown. (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 months earnings, as the risk is beyond the next 12 months. To measure longer-term sensitivity, the Group utilises an economic value-at-risk analysis. This analysis measures the potential change in this The Bank does not use this contractual 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 128 Notes to the financial statements NOTE 39 Market Risk continued Interest Rate Risk Sensitivity Balance 3 to 6 6 to 12 1 to 3 Sheet Total month months months months $M $M 0 to 1 $M $M $M Repricing Period at 30 June 2001 Not Weighted over 5 Interest Average Rate Years Bearing % $M 1 to 5 years $M $M 3,197 1,979 Australia Assets Cash and liquid assets Receivables due from other 1,815 financial institutions 4,095 Trading securities 253 Investment securities Loans, advances and other receivables 118,939 65,183 - Bank acceptances of customers 3,219 Life insurance investment assets - Deposits with regulatory authorities - Property, plant and equipment - Intangible assets - Other assets Total Assets 855 - 365 9,087 - 229 - - - - 196,903 76,544 10,536 11,960 27,401 - 721 10,848 13,548 2,858 4,095 3,336 - - 10 - - 1,208 39 - 28 149 - - - - 1,677 5,168 13,058 26,138 - 3,171 - - - - 5,572 14,621 30,986 - 1,486 - - - - - 255 - - - - - - - - 1,012 1 1,696 (1,391) - 11,960 2,441 16,600 - - - 721 - 10,848 - 13,548 5,149 53,495 Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Provision for dividend Income tax liability Other provisions Life insurance policy liabilities Debt issues Bills payable and other liabilities 102,421 65,923 7,941 9,373 4,881 6,143 1,720 6,440 2,816 11,960 779 1,212 881 23,477 14,719 12,679 1,500 - - - - - 2,452 - 269 - - - - - 4,897 - 456 - - - - - 1,676 - 591 - - - - - 1,157 - - - - - - - 4,420 - - - - 11,960 779 - 1,212 - - 881 - 23,477 (3) 117 - - 12,679 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 5,624 1,744 176,568 70,368 14,851 493 213 11,718 - 406 6,629 10,969 2,768 - 4,605 57,428 18,362 1,449 19,811 700 - 700 - - - - - - - - - - - - - 17,662 - 1,449 - 19,111 (2) (2) (2) (2) (2) - - 2,472 (11,560) - - 7,948 (15,875) 7,948 (7,927) (13,273) 800 - - 3,014 - - (5,346) 11,077 23,031 3,085 - - 2,189 - - - - - 2,733 (23,044) 524 (2,196) 20,835 23,568 2.60 4.89 4.97 8.40 7.18 2.42 5.03 3.47 4.98 5.56 6.40 2.76 (1) (1) (1) (1) (1) (1) (2) (3) no rate applicable no balance sheet amount applicable Technically, the life insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly so with investment linked policies. 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. The Group has a significant portfolio of loans with fixed interest rates maturing in the one to five years repricing period. Funding is principally raised from retail deposits with at call variable interest rates. The interest rate risk exposure is managed in accordance with the principles outlined above in this note. 129 Notes to the financial statements NOTE 39 Market Risk continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Balance Sheet 6 to 12 1 to 3 Total month months months months $M $M 3 to 6 0 to 1 $M $M $M Repricing Period at 30 June 2001 Not Weighted over 5 Interest Average Rate years Bearing % $M 1 to 5 years $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 Life insurance investment assets Deposits with regulatory authorities Property, plant and equipment Intangible assets 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 Life insurance policy liabilities 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 (1) (2) no rate applicable no balance sheet amount applicable 1.97 5.62 5.70 5.19 7.50 2.85 5.95 4.94 4.87 4.43 8.29 4.05 (1) (1) (1) (1) (1) 512 375 121 7 - - - 9 1,764 2,814 6,369 17,120 115 3,812 61 198 4 739 33,508 626 789 573 6,845 - 666 - - - - 9,874 188 823 1,281 1,535 - 58 - - - - 4,006 177 314 1,884 1,232 - 95 - - - - 3,709 237 367 83 2,264 - 177 - - - - 3,128 478 439 1,744 4,822 - 518 - - - - 8,001 - 57 803 430 - 53 - - - - 1,343 58 25 1 (8) 115 2,245 61 198 4 739 3,447 14,934 8,516 3,440 995 1,154 4,087 115 - 143 126 3,552 9,765 1,193 2,906 - - - - - 449 - 756 - - - - - 6,338 - 80 - 33,995 11,871 - 10,534 286 - - - - - 1,506 - - 2,787 88 - - - - - 557 - - 1,799 - - - - - - - - - - - - 193 51 - - - - - 544 - 80 868 - - - - 636 - - - - - - 326 - - 326 - - - - 115 - 143 126 3,552 45 1,193 - 5,810 31 6 37 (222) - - - - - 795 (2,400) (524) 1,876 999 (299) - (1,297) (1,297) 3,700 199 74 (2,555) (3,852) 96 (1,222) - 92 199 (2,701) 100 (166) 952 (2,900) (3,351) - - 3,782 1,081 130 31 6 37 (2) (2) (2) (2) (2) Notes to the financial statements NOTE 39 Market Risk continued Balance Sheet 3 to 6 6 to 12 1 to 3 Total month months months months $M 0 to 1 $M $M $M $M Repricing Period at 30 June 2000 Not Weighted over 5 Interest Average Rate years Bearing % $M 1 to 5 years $M $M 1,548 2,506 Australia Assets Cash and liquid assets Receivables due from other 2,540 financial institutions 5,480 Trading securities Investment securities 1,288 Loans, advances and other receivables 116,747 65,192 11,107 - Bank acceptances of customers Life insurance investment assets (3) 3,110 23,385 - Deposits with regulatory authorities - 861 - Property, plant and equipment Goodwill 5,899 - 14,448 - Other assets 188,738 79,158 Total Assets 4,159 5,480 4,146 - 7 - - - 951 3.59 1,508 - 220 8,130 - 890 - - - - 10,748 18 - 413 8 - - - 1,323 108 7,193 12,714 23,174 - - 2,735 555 - - - - - - - - 7,701 13,385 27,232 - 70 - - - - - - 788 85 - 6 1,724 (1,380) 6.64 6.07 8.13 7.55 11,107 - 2.86 12,257 - - 861 - 5,899 - 14,448 - 5.58 44,234 - 3,768 - - - - 6,280 Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Provision for dividend Income tax liability Other provisions Life insurance policy liabilities Debt issues Bills payable and other liabilities 99,816 57,491 9,448 10,607 7,394 6,654 2,244 5,978 4.27 1,569 1,145 11,107 - 708 - 1,740 - 1,321 - 21,975 - 17,520 5,514 10,942 - 424 - - - - - - 872 - - - - - - 5,140 - - - - - - - 1,609 - - - - - - - 4,001 - - - - - - - - 6.05 - 11,107 - 708 - 1,740 - 1,321 - 21,975 - 6.26 10,942 - 384 - Loan Capital Total Liabilities 5,220 795 171,918 64,945 1,845 16,857 182 - 394 9,003 11,049 11,661 2,004 - 53,771 4,632 7.31 3.39 Shareholders Equity Outside equity interests in controlled entities Total Shareholders’ Equity Off Balance Sheet Items Swaps FRAs Futures Net Mismatch Cumulative Mismatch 17,472 - - - - - - 17,472 744 - 18,216 - - - - - - - - - - - 744 18,216 (2) (2) (1,158) - 181 (5,774) - - (2) 13,236 (11,883) (2) 13,236 1,282 - (595) (3,273) 1,353 (1,920) 719 - 446 2,199 - (37) 5,547 18,345 3,627 21,972 - 2,732 - - 5 - 4,385 (27,753) 26,357 (1,396) (1) (1) (1) (1) (1) no rate applicable no balance sheet amount applicable (2) (3) With the introduction of Australian Accounting Standard AASB 1038: Life Insurance Business, the contractual repricing of Life insurance investment assets has been included in the Interest Rate Risk Sensitivity table for the first time for the financial year ended 30 June 2000. The interest income on these assets supports the life insurance policies issued by the Group’s life companies and does not contribute to market risk within the banking book. 131 Notes to the financial statements NOTE 39 Market Risk continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Balance Sheet 6 to 12 1 to 3 Total month months months months $M $M 3 to 6 0 to 1 $M $M $M Repricing Period at 30 June 2000 Not Weighted over 5 Interest Average Rate years Bearing % $M 1 to 5 years $M $M 69 - 8 24 - - - 37 2.13 995 1,867 5,003 15,516 - 3,651 46 479 483 201 6,338 - 115 240 790 1,710 1,453 - 301 10 - - - - 4,502 216 254 171 1,470 - 193 - - - - 2,328 23 - 144 1,281 4,076 - 354 - 37 59 - 1,476 - (174) - 1,899 3 5.85 6.62 7.91 7.86 - 3.17 1.59 212 - 6 - 2,156 - 6.49 4,176 391 - 595 33 - - - - 2,521 - - - 5,888 137 164 1,962 - 194 - - - - 2,480 212 - 6 - 2,156 - 7,626 29,521 12,778 6,626 3,581 1,221 972 315 1 62 5.50 3,064 - - 1,652 - - 83 - 233 - 3,307 - 650 7,755 607 - 816 - - - - - 4,530 - 370 - - - - - 640 - 226 - - - - - - 709 - - - - - - 818 - - - - - - - - - - - 6.12 - - 83 - 233 - 3,307 - 5.26 607 - 408 - 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 Life insurance investment assets 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 Life insurance policy liabilities Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Shareholders Equity Outside equity interests in controlled entities Total Shareholders’ Equity 79 - 8,928 27,906 - 8,927 - 2,231 - 2,016 79 - 409 1,103 - 4,292 7.46 4.67 - - - - - - - - 219 - 219 - - - - - - - - - - - 219 219 Off Balance Sheet Items Swaps Options FRAs Futures Net Mismatch Cumulative Mismatch (1) (2) no rate applicable no balance sheet amount applicable (2) (2) (2) (2) (2) (2) (261) - 94 - (1,469) (1,469) 2,032 670 1 - (1,722) (3,191) 463 (670) (252) - (362) (3,553) (185) - (1,323) - 157 - - 3,462 345 - 436 (3,117) (726) - - - 1,386 1,731 - - - - (335) 1,396 (1) (1) (1) (1) (1) (1) Net deferred gains and losses Net deferred unrealised gains and losses arising from derivative hedging contracts entered into in order to liabilities, manage commitments or anticipated future transactions, together with the expected term of deferral are shown below. from assets, risk arising the 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% (2000: less than 0.3%) 132 Notes to the financial statements NOTE 39 Market Risk continued As at 30 June Within 6 months Within 6 months - 1 year Within 1-2 years Within 2-5 years After 5 years Net deferred gain (loss) Exchange rate Related contracts 2001 2000 $M $M Interest rate Related contracts 2001 2000 $M $M 167 (5) (229) (69) 19 (117) (1) 341 31 24 (33) (226) 137 349 (184) (90) (38) (26) 11 (45) (49) (28) (27) (230) (379) 2001 $M 516 (189) (319) (107) (7) (106) Total 2000 $M 296 (18) (4) (60) (456) (242) (1) The increase in net deferred losses in exchange rate derivative contracts predominantly reflects falls in the AUD/USD exchange rate over the year. These losses are offset by unrecognised net gains in assets and liabilities in the balance sheet. 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 $107 million of net deferred losses on derivatives (2000: $11 million net deferred investments losses) used disclosed within Note 11. to hedge equity risk on Market risk in financial services Market risk in the life insurance business arises liabilities from mismatches between assets and guaranteed returns offered on some classes of policy (which may not be capable of being hedged through matching assets), adverse movements in market prices affecting fee income on investment-linked policies and from the returns obtained from investing the shareholders capital held in each life company. Shareholders funds in the life insurance business are on average invested 50% in income assets (cash and fixed interest) and 50% in growth assets (shares and property), although the asset mix may vary from company to company. Policyholder funds are invested to meet policyholder reasonable expectations without putting the shareholder at undue risk. Market risk in the funds management business is the risk of an adverse movement in market prices which leads to a reduction in the amount of funds under management and a consequent reduction in fee income. Market Risk in Financial Markets Trading The Group’s policy is that exposure to market risk Institutional from trading activities Banking. The Group trades and distributes financial markets products and provides risk management services to clients on a global basis. is managed by The objectives of the Group’s financial markets activities are to: (cid:1) Provide risk management products and services to customers; (cid:1) (cid:1) 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 and carries an inventory of treasury and capital market instruments, 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. Trading securities are further detailed in Note 10 of the financial statements. Income is earned from spreads achieved through market-making and from taking market risk. 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. is controlled by liquidity concentrating trading activity in highly liquid markets. Market risk Note 3 of the financial statements details Financial Markets Trading Income contribution of $426 million (2000: $311 million) to the income of the Group. The contribution important diversification benefits to the Group. is significant and provides Residual Value Risk on Operating Leases The Group provides operating leases 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. In managing the risk the Group utilises industry experts to 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. 133 Notes to the financial statements NOTE 39 Market Risk continued Derivative contracts The following table details the Group’s outstanding derivative contracts as at the end of the year. Each derivative type is split between those held for ‘Trading’ purposes and those for ‘Other than Trading’ purposes. Derivatives classified as ‘Other than Trading’ are transactions entered into in order to manage the risks arising and non-traded commitments in Australia and offshore centres. liabilities assets, from The ‘Face Value’ is the notional or contractual amount of the derivatives. This amount is not necessarily exchanged and predominantly acts as reference value upon which interest payments and net settlements can be calculated and on which revaluation is based. 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 Swaps Other than trading Total equity risk related contracts Total derivatives exposures COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES The ‘Credit Equivalent’ is calculated using a standard APRA 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 instruments is set out in Note 1(gg). for derivative financial 2001 $M Face Value 2000 $M GROUP Credit Equivalent 2000 $M 2001 $M 114,962 1,771 116,733 23,196 8,661 31,857 417 - 417 34,261 - 34,261 183,268 23,477 7,074 30,551 97,822 79,989 177,811 45,367 20 45,387 12,265 79 12,344 266,093 278 278 449,639 112,949 1,323 114,272 14,151 12,010 26,161 324 - 324 39,375 - 39,375 180,132 18,002 6,192 24,194 119,120 51,060 170,180 33,583 1,142 34,725 12,292 737 13,029 242,128 278 278 422,538 4,295 17 4,312 1,946 1,588 3,534 - - - 704 - 704 8,550 2 1 3 1,671 1,510 3,181 - - - 123 79 202 3,386 3,374 1 3,375 1,235 1,726 2,961 - - - 626 - 626 6,962 4 2 6 1,865 1,254 3,119 - - - 128 67 195 3,320 - - 11,936 - - 10,282 134 Notes to the financial statements NOTE 39 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 trading derivatives and realised and unrealised gains and losses on trading securities, are reported within trading income under foreign exchange earnings or other financial instruments (refer Note 3). In aggregate, derivatives trading was profitable for the Group during the year. 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 on Trading Derivative Contracts Fair Value 2000 $M 2001 $M Average Fair Value 2000 $M 2001 $M 3,125 (2,020) 1,105 2,990 (3,025) (35) 2 - 2 504 (283) 221 1,293 2,263 (1,828) 435 1,509 (1,389) 120 3 (5) (2) 381 (255) 126 679 4,066 (3,120) 946 2,535 (2,663) (128) 1,829 (1,446) 383 1,364 (1,316) 48 3 (2) 5 (5) 1 - 579 (354) 225 1,044 342 (252) 90 521 7 (7) - 6 (5) 1 5 (6) (1) 10 (10) - 2,874 (3,324) (450) 2,029 (2,056) (27) 2,736 (3,082) (346) 1,759 (1,922) (163) 19 (27) (8) 71 (73) (2) (460) 833 14 (22) (8) 47 (45) 2 (32) 647 33 (24) 9 67 (57) 10 (328) 716 14 (13) 1 35 (46) (11) (173) 348 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 21) Unrealised losses on trading derivatives (Note 27) Net unrealised gains on trading derivatives 9,592 8,759 833 6,252 5,605 647 135 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to the financial statements NOTE 40 Superannuation Commitments The Group sponsors a range of superannuation plans for its employees world wide. Details of major defined benefit plans with assets in excess of $10 million are: Name of Plan Type Form of Benefit Date of Last Assessment Officers’ Superannuation Fund (OSF) Commonwealth Bank of Australia (UK) Staff Benefits Scheme (CBA(UK)SBS) The Colonial Group Staff Superannuation Scheme (CGSSS) Colonial UK Staff Pension Scheme (CUKSPS) Stewart Ivory & Company Limited Retirement Benefits Scheme (SI&CRBS) Defined Benefits and Accumulation Defined Benefits and Accumulation Defined Benefits and Accumulation Defined Benefits Defined Benefits Indexed pensions and lump sums Indexed pensions and lump sums Indexed pensions and lump sums Indexed pensions and lump sums Indexed pensions and lump sums 30 June 2000 1 May 1999 30 June 1998 5 April 2000 1 September 1998 Financial Details of Defined Benefits Plans Net Market Value of Assets Present Value of Accrued Benefits Difference between Net Market of Assets and Present Value of Accrued Benefits Difference as a percentage of plan assets Value of Vested Benefits OSF $M 5,566 3,812 CBA (UK) SBS CGSSS(1)(2) CUK SPS(3) $M $M $M 126 60 610 310 341 312 SI& CRBS $M 24 22 Total $M 6,667 4,516 1,754 66 52% 61 32% 3,812 300 49% 337 29 2 2,151 32% 4,522 9% 292 8% 20 (1) (2) (3) The Colonial Group Staff Superannuation Scheme values include the values, as at 30 June 1996, of the former Prudential Australia Superannuation Scheme, the Prudential Australia Superannuation Scheme No. 2 and the Prudential Australia Staff Pension Scheme. Members of these funds were transferred to the Colonial Scheme effective 1 April 1999. The Colonial Group Staff Superannuation Scheme values also include the values, as at 30 June 1999, of the former Trust Bank Staff Superannuation Scheme. Members of this fund were transferred to the Colonial Scheme effective 30 June 2000. The Colonial UK life insurance business was sold in June 2000, which will result in a significant portion of these vested benefits being transferred out of this plan. An actuarial assessment is currently in progress. Initial indications are that there may be a small deficit in the scheme; however, this deficit would be immaterial in a Group context. from The above values have been extracted 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 in the accordance with the Trust Deeds following the receipt of actuarial advice. respective plans to With the exception of contributions relating to salary sacrifice benefits, the Bank ceased contributions to the OSF from 8 July 1994. Further, the Bank ceased contributions to the OSF relating to salary sacrifice benefits from 1 July 1997. An actuarial assessment of the OSF, as at 30 June 2000 was completed during the year ended 30 June 2001. In line with the actuarial advice contained in the assessment, to make contributions to the OSF until after consideration of the next actuarial assessment of the OSF as at 30 June 2003. the Bank does not intend No employer contributions were made the CGSSS during the year and the Bank does not intend to make contributions to the CGSSS until after consideration of the next actuarial assessment of CGSSS. Further, contributions ceased to the CGSSS relating to salary sacrifice benefits from 1 July 1999. to Transfer Offer During the year, the Group provided members of the defined benefit divisions of the OSF with an opportunity to voluntarily move their superannuation to the accumulation division. This resulted in $965 million (26%) of defined benefit liabilities being transferred to the accumulation division. 136 Notes to the financial statements NOTE 41 Controlled Entities Entity Name AUSTRALIA (a) Banking Commonwealth Bank of Australia Controlled Entities: Commonwealth Development Bank of Australia Limited CBA Investments Limited CBA Specialised Financing Limited Share Investments Pty Limited CBA Investments (No 2) Pty Limited CBA International Finance Pty Limited CBCL Australia Limited CBFC Limited Collateral Leasing Pty Limited Commonwealth Securities Limited Homepath Pty Limited Chullora Equity Investments (No.2) Pty Limited * Chullora Equity Investments (No.3) Pty Limited * Commonwealth Insurance Limited Commonwealth Investments Pty Limited * Commonwealth Property Limited Infravest (No. 2) Limited Commonwealth Fleet Lease Pty Limited Micropay Pty Limited Retail Investor Pty Limited Sparad (no. 20) Pty Limited Sparad (no. 24) Pty Limited Colonial Employee Share Plan Limited Colonial Finance Limited Colonial Financial Services Pty Limited CST Securitisation Management Limited Emerald Holding Company Limited (b) 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 Commonwealth Diversified Credit Fund (1) CMG Asia Pty Limited CMG First State Investment Managers (Asia) Limited Colonial AFS Services Pty Limited Colonial Financial Corporation Limited Colonial First State Investments Group Limited Colonial First State Managed Services Limited Colonial First State Property Limited Colonial Holding Company Pty Limited Colonial Holding Company (No.2) Pty Limited Colonial Insurance Services Pty Limited Colonial International Holdings Pty Limited Colonial Investments Holding Pty Limited Colonial Investment Services Limited Colonial LGA Holdings Limited Colonial Mutual Funds Limited The Colonial Mutual Life Assurance Society Limited Colonial Mutual Superannuation Pty Limited 137 Incorporated in Extent of Beneficial Interest if not 100% 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 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Notes to the financial statements NOTE 41 Controlled Entities continued Entity Name (b) Life Insurance and Funds Management continued Colonial PCA Holdings Pty Limited Colonial PCA Services Limited Colonial Portfolio Services Limited Colonial Promotions Pty Limited Colonial Services Pty Limited Comsec Trading Limited Jacques Martin Pty Limited NEW ZEALAND (a) Banking ASB Group Limited ASB Bank Limited ASB Finance Limited ASB Management Services Limited ASB Properties Limited ASB Superannuation Nominees Limited CBA Funding (NZ) Limited (b) Life Insurance and Funds Management ASB Group Limited ASB Life Limited Sovereign Limited Colonial First State Investment Managers (NZ) Limited Colonial First State Investments (NZ) Limited Colonial Holding Company NZ Limited Colonial Life (NZ) Limited Colonial Service Corporation New Zealand Limited COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Incorporated in Extent of Beneficial Interest if not 100% 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 New Zealand New Zealand New Zealand New Zealand New Zealand Singapore United Kingdom USA USA USA USA Hong Kong United Kingdom Japan Hong Kong United Kingdom United Kingdom Fiji Indonesia OTHER OVERSEAS (a) Banking CBA Asia Limited CBA (Europe) Finance Limited CBA (Delaware) Finance Incorporated Central Real Estate Holdings Group Central Real Estate Holdings Corporation Wilshire 10880 Corporation Wilshire 10960 Corporation CTB Australia Limited Senator House Investments (UK) Limited (2) Commonwealth Securities (Japan) Pty Limited SBV Asia Limited Colonial (UK) Trustees Limited Colonial Finance (UK) Limited National Bank of Fiji Limited PT Bank Commonwealth (b) Life Insurance and Funds Management CMG Asia Life Holdings Limited CMG Asia Limited CMG Asia Pensions and Retirements Limited CMG First State Investments (Hong Kong) Limited CMG First State Singapore Limited CMG Life Insurance Co Inc Colonial Fiji Life Limited Colonial First State International Assets Limited Colonial First State Investments (Fiji) Limited Colonial First State Investment Managers (UK) Limited Colonial Healthcare (Fiji) Limited Colonial Services (Fiji) Limited Colonial First State UK Holdings Limited Stewart Ivory Holdings Limited CMG Holdings (Thailand) Co. Ltd Non-operating and minor operating controlled entities and investment vehicles holding policyholder assets are excluded from the above list. (1) Wholly owned unit trust. (2) Wholly owned subsidiary of CBA International Finance Pty Limited. * Bermuda Bermuda Hong Kong Hong Kong Singapore Philippines Fiji United Kingdom Fiji United Kingdom Fiji Fiji United Kingdom United Kingdom Thailand 74 51 Small proprietory companies not requiring audit. 138 Notes to the financial statements NOTE 42 Investments in Associated Entities and Joint Ventures Extent of Principal Activities GROUP Ownership 2001 2000 $M $M Interest % Balance Date EDS (Australia) Pty Limited IPAC Securities Limited (1) PT Bank BII Commonwealth (2) Electronic Financial Technologies Pty Ltd (1) 238 - - - 238 23 10 - Computer Fleet Management Property Internet PLC Alliance Group Holdings Cyberlynx Procurement Services EON CMG Life Assurance Bhd PT Astra CMG Life Ayudhya CMG Life Assurance PLC China Life CMG Life Assurance Company Limited Bao Minh CMG Life Insurance Company CMG Mahon (China) Investment Management Limited Mahon and Associates Limited CMG CH China Funds Management Limited Avanteos Pty Ltd Colonial First State Private Ltd (2) (3) Jacques Martin Industry Funds Administration Pty Limited (’JMIFA’) TOTAL 3 5 2 1 16 9 61 36 6 - - - 22 - 1 5 8 2 - 13 7 48 35 5 - - - - 4 5 400 403 35 50 50 50 50 24 33 30 40 50 48 49 50 50 50 50 50 50 50 30 June 31 December 30 June Information Technology Services 31 December Funds Manager Banking in Indonesia Financial Technology Development Desktop IT Lease Management 30 June Online residential property information provider Receivables Management Procurement Services Life insurance - Malaysia Life insurance - Indonesia Life insurance - Thailand Life insurance - China 30 June 30 June 31 December 31 December 31 December 31 December 31 March Life insurance - Vietnam Direct investment in China 31 December 30 June Investment management Investment management Technology and Development Investment management Industry superannuation 30 June 31 March 31 December 30 June 30 June (1) (2) (3) Sold during financial year 2001. The Group acquired control during the financial year 2001. These investments are now consolidated in the Group accounts. Changed its name from Hambro Gratham Ltd following the Group’s acquisition of the remaining 50%. The Group also holds investments in the Colonial First State Property Trust Group and Colonial Mastertrust Wholesale equity funds (including the Fixed Interest, International Share, Property Australian Share, Securities, Capital Stable, Balanced and Diversified Growth funds) through controlled life insurance entities which are not accounted for under the equity accounting method. Instead, the market values for these investments are calculated at balance date and are brought to account at this value in compliance with the requirements of AASB 1038: Life Insurance Business. These investments are classified as property or equity investments and are not material components of these asset categories. Share of associates' profits (losses) after notional goodwill amortisation Operating profits (losses) before income tax Income tax expense Operating profits (losses) after income tax Carrying amount of investments in associated entities Opening balance New investments Disposals / transfers Writedown value of investments Fair value adjustments Investments arising from Colonial Acquisition Share of associates' profits (losses) Foreign exchange adjustment Closing Balance 139 2001 $M (4) - (4) 403 39 (16) (2) (20) - (4) - 400 GROUP 2000 $M (1) - (1) 281 10 - - - 117 (1) (4) 403 Notes to the financial statements NOTE 43 Standby Arrangements and Unused Credit Facilities (of controlled entities that are borrowing corporations) Financing arrangements accessible Bank overdraft Revolving credit Other COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Available 2001 $M Unused 51 100 29 180 22 - 29 51 Available 964 480 560 2,004 GROUP 2000 $M Unused 553 400 1 954 Bank overdraft facilities ($913 million), revolving credit facilities ($380 million) and other facilities of ($559 million) relating to Colonial were cancelled 29 June 2001. NOTE 44 Related Party Disclosures Directors The name of each person holding the position of Director of the Commonwealth Bank during the financial year is: J T Ralph, AC J M Schubert D V Murray N R Adler, AO R J Clairs, AO A B Daniels, OAM C R Galbraith W G Kent, AO F D Ryan F J Swan B K Ward A C Booth K E Cowley, AO (Chairman) (Deputy Chairman) (Managing Director) (retired 31 December 2000) (retired 29 March 2001) Details of remuneration received or due and receivable by Directors are set out in Note 45. 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. to the aggregate amount of Under the Australian Securities and Investments Commission Class Order referred to above, disclosure is limited loans made, guaranteed or secured by: (cid:1) (cid:1) the Bank to its Directors; banks which are controlled entities Directors; and non bank controlled entities to Directors (and their related parties) of those entities; The aggregate amount of such loans outstanding at their to (cid:1) 30 June 2001 was: (cid:1) $50,000 (2000: $1,850,527); and $2,418,363 (2000: $3,842,338). to (cid:1) Directors of the Bank to Directors of related entities 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. the Australian Securities and A condition of the Class Order is that the Bank must lodge a statutory declaration, signed by two directors, with Investments the annual report. The Commission accompanying 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. 140 Notes to the financial statements NOTE 44 Related Party Disclosures continued 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) Loans Received 2000 $ 2001 $ Repayments Made 2001 2000 $ $ - - 318,000 63,418 3,693,546 132,356 2,482,653 354,517 (1) (2) Directors: K E Cowley, F D Ryan and B K Ward. Directors: G J Judd, R J Norris, R Boven, P Polson, A Hanna, R G Wilkie, C B Millett, S Vuetaki, C Kamea, J Wong and A V Villamor. 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 2001, were: Director J T Ralph J M Schubert D V Murray N R Adler R J Clairs A B Daniels C R Galbraith W G Kent F D Ryan F J Swan B K Ward A C Booth (retired 31 December 2000) K E Cowley (retired 29 March 2001) Held 30 June 2000 Ordinary 11,192 9,914 50,387 9,543 10,000 11,823 3,874 7,519 4,000 1,922 1,837 1,131 8,000 Shares Acquired Ordinary 1,066 947 501,916 611 334 778 495 371 334 441 420 693 Shares Disposed Of Ordinary - (505,195) (2,198) (293) (1,000) Held 30 June 2001 Ordinary 12,258 10,861 47,108 7,956 10,334 12,601 4,369 7,890 4,334 2,070 2,257 n/a n/a 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 financial and investment services by non bank controlled entities. the provision of involve All such transactions that have occurred with Directors, director related entities and other related parties have been trivial or domestic and were principally in the nature of lodgement or withdrawal of deposit and superannuation 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. All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Directors Share Plan (or in the case of Mr D V Murray the Executive Option Plan). Mr D V Murray exercised 500,000 options during the year, leaving his total holdings of options at 1,500,000 under the Executive Option Plan. For further details on the Non-Executive Directors Share Plan and the Executive Option Plan refer Note 29. Additionally, Mr J T Ralph beneficially holds 100,000 units in the Commonwealth Property Trust, a related entity. 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 Commission Class Order referred to above, disclosure of financial transactions regularly made by a bank is limited to disclosure of such transactions with a Director of the entity concerned. instrument 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. 141 Notes to the financial statements COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES NOTE 44 Related Party Disclosures continued 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 41 for details of controlled entities. The Bank’s aggregate investment in and loans to controlled entities are disclosed in Note 18. 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 3. All transactions between Group entities are eliminated on consolidation. NOTE 45 Remuneration of Directors Total amount received or due and receivable by non-executive Directors of the Company for the year ended 30 June 2001 was: Non-Executive Directors Mr J T Ralph, AC Dr J M Schubert Mr N R Adler, AO Mr R J Clairs, AO Mr A B Daniels, OAM Mr F D Ryan Mr F J Swan Ms B K Ward Mr W G Kent, AO Mr C R Galbraith Ms A C Booth (3) Mr K E Cowley (4) Executive Director Mr D V Murray (refer Note 46) Base Fee/Pay Committee Fee Salary Sacrifice(2) Superannuation(1) $ 204,099 83,901 68,033 68,033 68,033 68,033 68,033 68,033 68,033 68,033 39,671 52,077 $ 34,016 34,904 12,756 17,008 12,756 17,008 21,260 17,008 9,918 9,918 12,603 9,764 $ 41,885 21,510 14,211 14,959 14,211 14,959 15,707 14,959 14,447 14,447 - 9,474 $ 19,049 9,504 6,463 7,401 7,031 7,401 7,771 6,803 7,369 7,128 4,234 5,326 Total Remuneration $ 299,049 149,819 101,463 107,401 102,031 107,401 112,771 106,803 99,767 99,526 56,508 76,641 (1) (2) (3) (4) 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. Under the Non-Executive Directors Share Plan detailed in the Explanatory Memorandum to the Notice of Meeting for the 2000 Annual General Meeting, Non-Executive Directors are required to receive 20% of their remuneration in shares. This was implemented from the second quarter of the year. Also refer Note 29 for further details. Ms Booth retired 31 December 2000. Mr Cowley retired 29 March 2001. 142 Notes to the financial statements NOTE 45 Remuneration of Directors continued Retirement Benefit The aggregate amount of retirement benefits given by the Bank during the year ended 30 June 2001 was $386,397 (2000: $667,073) being: a payment of $296,065 made to Ms A C Booth and; a payment of $90,332 made to Mr K E Cowley in accordance with the Corporations Act 2001 and pursuant to the Directors’ Retirement Allowance Scheme approved by shareholders at the 1997 Annual General Meeting. 2001 $ BANK 2000 $ Total amount received or due and receivable by executive and non executive Directors (includes accumulated benefits due to Directors who retired during the year) 4,115,750 3,761,277 The number of executive and non-executive Directors whose remuneration fell within these bands was: Remuneration (Dollars) 10,000 0 - $ $ 30,000 20,001 - $ $ 80,001 - $ $ 90,000 $ 90,001 - $ 100,000 $ 100,001 - $ 110,000 $ 110,001 - $ 120,000 $ 120,001 - $ 130,000 $ 140,001 - $ 150,000 $ 160,001 - $ 170,000 $ 220,001 - $ 230,000 $ 290,001 - $ 300,000 $ 350,001 - $ 360,000 $ 730,001 - $ 740,000 $2,040,000 - $2,049,999 $2,310,000 - $2,319,999 Number - - - 2 5 1 - 1 1 ** - 1 1 *** - - 1 13 Number 2 2 2 2 2 - 1 - - 1 - - 1 * 1 - 14 Remuneration includes retirement payment to Mr M A Besley who retired on 28 October 1999. Remuneration includes retirement payment to Mr K E Cowley who retired on 29 March 2001. * ** *** Remuneration includes retirement payment to Ms A C Booth who retired on 31 December 2000. Total amount received or due and receivable by executive and non executive Directors of the Bank and controlled entities 2001 $ GROUP 2000 $ 11,194,438 6,202,912 143 COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES Notes to the financial statements NOTE 46 Remuneration of Executives The following table shows remuneration for the executive director and five highest paid other members of the senior executive team directly reporting to the Managing Director, who were officers of the Bank and the Group for the year ended 30 June 2001. The table does not include individuals, who are not direct reports to the Managing Director, whose incentive based remuneration in any given year may be in excess of that received by a member of the senior executive team. Senior Executive Team Name & Position D V Murray Managing Director & CEO P L Polson Head of Colonial First State Investments Group M A Katz Head of Institutional Banking M J Ullmer Group General Manager Financial & Risk Management J F Mulcahy Head of Australian Financial Services R J Norris Head of International Financial Services & Managing Director & CEO of ASB Group Base Pay(1) Bonus(2) Paid Vested This in CBA Year Shares $ 1,450,000 450,000 300,000 $ $ Superann- Total uation(3) Compensation(4) Remuneration Other Option Grant(5) Share Grant(5) $ 99,773 $ 10,400 $ 2,310,173 Number - (6) Number - (6) 600,000 550,000 - 144,480 456,000 1,750,480 100,000 16,800 750,000 336,000 224,000 67,500 10,400 1,387,900 125,000 20,900 735,000 276,000 184,000 132,300 10,400 1,337,700 125,000 20,900 700,000 246,000 164,000 63,000 10,400 1,183,400 125,000 20,900 680,000 350,000 - n/a n/a 1,030,000 125,000 20,900 (1) (2) (3) (4) (5) Base pay is calculated on a Total Cost basis and includes any FBT charges related to employee benefits including motor vehicles. For the 2000/2001 payment and future bonus payments, the Group has implemented a vesting (deferral) arrangement for most executives. A portion of the bonus payment is paid immediately and the remaining portion is deferred and vested in the Bank’s shares. Half of the shares will vest after one year (in 2002) and half will vest after two years (in 2003). In the event of resignation from the Group before the vesting dates, unvested shares will lapse. The Bank is currently not contributing to the Officers’ Superannuation Fund or to the Colonial Group Staff Superannuation Scheme – refer Note 40. Notional cost of superannuation has been determined on an for each executive. Other compensation includes, where applicable, car parking (including FBT) and other payments. Option Grants are a right to subscribe for ordinary shares at an exercise price which is the Market Value (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 Commencement Date) plus a premium representing the time value component of the value of options (based on the actual differences between the dividend and bond yields at the date of the vesting of the right to exercise the options). Share Grants are awarded under the Equity Reward Plan. individual basis (6) 144 in (broadly, growth Shares are registered in the name of the Trustee. No consideration is payable by the executive for the grant of shares. The transfer of legal title to the executive is subject to vesting conditions. The ability to exercise options and the vesting of the shares is conditional on the Bank achieving a prescribed performance hurdle. To reach the performance hurdle, the Bank’s Total Shareholder Return 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 the ASX Banks and Finance Accumulation Index, excluding the Bank. If the performance hurdle is not reached within that three years, the options and shares may nevertheless be exercisable or vest as appropriate only where the hurdle is subsequently reached within five years from the Commencement Date. If the performance hurdle is not met, the options will have nil value and the shares will be forfeited. The options and shares are subject the achievement uncertain. The approximate value of options and shares at the time of grant was $4.50 and $27 respectively. For further details on the Executive Option Plan and the Equity Reward Plan refer Note 29. At the 2000 Annual General Meeting shareholders approved that, prior to the 2001 Annual General Meeting, the Managing Director be invited to take up no more than 250,000 options and be given the right to acquire up to 42,000 shares under the Equity Reward Plan. to a performance hurdle, is of which Notes to the financial statements NOTE 46 Remuneration of Executives continued The following table shows the number of executives whose remuneration fell within the stated bands: 2001 Number GROUP 2000 Number 2001 Number BANK 2000 Number Remuneration (Dollars) $ 100,000 $ 290,000 $ 310,000 $ 320,000 $ 350,000 $ 370,000 $ 420,000 $ 450,000 $ 460,000 $ 510,000 $ 520,000 $ 530,000 $ 540,000 $ 550,000 $ 570,000 $ 600,000 $ 650,000 $ 690,000 $ 720,000 $ 770,000 $ 780,000 $ 790,000 $ 820,000 $ 850,000 $ 890,000 $ 970,000 $1,030,000 $1,150,000 $1,180,000 $1,240,000 $1,290,000 $1,330,000 $1,380,000 $1,500,000 $1,750,000 $1,870,000 $2,040,000 $2,050,000 $2,310,000 - $ 109,999 - $ 299,999 - $ 319,999 - $ 329,999 - $ 359,999 - $ 379,999 - $ 429,999 - $ 459,999 - $ 469,999 - $ 519,999 - $ 529,999 - $ 539,999 - $ 549,999 - $ 559,999 - $ 579,999 - $ 609,999 - $ 659,999 - $ 699,999 - $ 729,999 - $ 779,999 - $ 789,999 - $ 799,999 - $ 829,999 - $ 859,999 - $ 899,999 - $ 979,999 - $1,039,999 - $1,159,999 - $1,189,999 - $1,249,999 - $1,299,999 - $1,339,999 - $1,389,999 - $1,509,999 - $1,759,999 - $1,879,999 - $2,049,999 - $2,059,999 - $2,319,999 Total number of executives 1 - 1 1 - - - 1 - 1 2 1 - - 1 1 - 1 - 1 - 1 - 1 1 1 1 - 1 - - 1 1 1 1 1 - 1 1 25 - 1 - - 1 1 1 - 1 1 - - 1 1 - - 1 - 2 - 1 1 1 - 1 - 1 1 - 1 1 - - - - - 1 - - 20 1 - 1 1 - - - 1 - 1 2 1 - - 1 1 - 1 - 1 - 1 - 1 1 1 1 - 1 - - 1 1 1 1 1 - 1 1 25 - 1 - - 1 1 1 - 1 1 - - 1 1 - - 1 - 2 - 1 1 1 - 1 - 1 1 - 1 1 - - - - - 1 - - 20 145 Notes to the financial statements NOTE 46 Remuneration of Executives continued Total amount received or due and receivable by executives (includes accumulated benefits due to executives who retired, resigned or were retrenched during the year). COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 2001 $ GROUP 2000 $ 2001 $ BANK 2000 $ 23,897,371 (1) 15,714,200 23,897,371 (1) 15,714,200 (1) Includes relevant executives from the combined Group, including Colonial. The comparative figure relates to the Group before acquisition of Colonial. An executive is a person who is directly accountable and responsible to the Managing Director, or is a Group employee responsible for the strategic direction and management of major businesses or risk portfolios. Remuneration is based on amounts paid and accrued in respect of the financial year. (cid:1) (cid:1) The Group’s Policy in respect of executives is that: Remuneration will be competitively set so that the Group can attract, motivate and retain high quality local and international executive staff; Remuneration will to a significant degree, variable pay for performance elements, focused as both short appropriate, which will: (cid:1) reward executives for Group, business unit and against appropriate benchmarks/goals, performance incorporate, term and individual term long (cid:1) (cid:1) (cid:1) align the interests of executives with those of shareholders, link executive reward with the strategic goals and performance of the Group, and ensure total remuneration is competitive by market standards; Remuneration will be reviewed annually by the Remuneration Committee through a process that individual considers Group, business unit and performance, relevant comparative remuneration in the market and 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 individual in an contract of employment and signed by the executive and the Bank. (cid:1) (cid:1) (cid:1) 146 Notes to the financial statements NOTE 47 Statements of Cash Flow 2001 $M 2000 $M GROUP 1999 $M 2001 $M BANK 2000 $M Note (a) Reconciliation of Cash 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 1,048 544 458 (2,012) 38 980 370 1,174 (1,138) 1,386 784 238 912 (2,491) (557) 830 339 262 (1,851) (420) 680 198 986 (1,016) 848 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: (cid:1) customer deposits to and withdrawals from deposit accounts; (cid:1) (cid:1) (cid:1) borrowings and repayments on loans, 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 Operating profit after income tax Decrease (increase) in interest receivable Increase 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 (Decrease) increase in deferred income taxes payable (Increase) decrease in future income tax benefits Amortisation of premium on investment securities Unrealised gain on revaluation of trading securities Change in excess of net market value over net assets of life insurance controlled entities Other assets Other Net Cash provided by Operating Activities 2001 $M 2,412 159 (278) (262) (56) 385 488 (692) (371) (97) 209 24 (186) 2000 $M 2,738 (948) 558 (50) (12) 196 175 528 248 319 (218) 47 (188) (474) (1,165) 400 - 174 259 1,835 2,487 GROUP 1999 $M 2001 $M 1,446 (1) (35) (408) (79) 247 192 68 261 50 (8) 206 57 1,699 7 (38) 171 (84) 276 127 (230) (343) (9) (46) 24 (377) 216 - - - (19) 1,158 - - (36) 2,176 BANK 2000 $M 1,116 (158) 176 (892) (7) 191 127 156 (185) 364 (238) 112 48 (188) - - (11) 611 Note (d) Non cash Financing and Investing Activities Shares issued under the Dividend Reinvestment Plan $313 million (2000: $253 million) and Employee Share Acquisition Plan - $40 million (2000: $24 million). Acquisition of entity by means of an equity issue nil (2000: $9,274 million). 147 Notes to the financial statements NOTE 47 Statements of Cash Flow continued Note (e) Acquisition of Controlled Entities Consideration Cash paid on acquisitions Transaction costs Securities issued Pre-acquisition dividend received Fair value of net tangible assets acquired Cash & liquid assets Receivables from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Life insurance investment assets Deposits with regulatory authorities Property, plant and equipment Investment in associates Other assets Deposits and public borrowings Payables due to other financial institutions Bank acceptances Income tax liability Other provisions Life insurance policy liabilities Debt issues Bills payable and other liabilities Loan Capital Restructuring provision Outside equity interest Excess market value over net assets of life insurance subsidiary Goodwill Outflow (inflows) of cash on acquisitions Cash payments Transaction costs Less cash and cash equivalents acquired Pre-acquisition dividend received COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 2001 $M 418 - - - 418 4 26 501 - 2,812 - 76 - 42 - 109 (2,108) (601) - - (3) (75) (599) (64) - - (12) 108 51 259 418 418 - (4) - 414 2000 $M 844 46 9,274 (1,000) 9,164 373 538 2,154 99 21,635 477 15,504 43 382 117 2,228 (13,123) (267) (477) (702) (398) (14,960) (8,678) (2,886) (418) (294) (155) 1,192 2,548 5,424 9,164 1999 $M 205 - - - 205 9 - - 260 671 - - - 4 - 28 (460) - - - (4) (358) - (72) - - (28) 50 155 - 205 844 46 (373) (1,000) (483) 205 - (9) - 196 Note (f) Financing Facilities Standby funding lines with overseas banks as at 30 June 2001 amounted to AUD equivalent $29 million (2000: $29 million). 148 Notes to the financial statements NOTE 48 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 they cannot be determined with precision. Changes in the assumptions could have a material impact on the amounts estimated. judgment. Therefore, to represent estimates at which While the estimated net fair value amounts are designed these instruments could be exchanged in a current transaction between willing parties, many of the Group’s financial instruments 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. lack an available 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. Because of the wide range of valuation 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 that the many uncertainties discussed above be considered when using the estimated net fair value disclosures and to realise that because of these uncertainties, the aggregate net fair in no way be construed as value amount should representative of the Commonwealth Bank of Australia. the underlying value of Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Life insurance investment assets Deposit accounts with regulatory authorities Other assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Life insurance policy liabilities Debt issues Bills payable and other liabilities Loan Capital Asset and liability hedges - unrealised gains/(losses) (Refer Note 39) Carrying Value $M 3,709 4,622 6,909 9,705 136,059 12,075 31,213 61 13,876 117,355 6,903 12,075 27,029 24,484 13,806 5,704 - 2001 Net Fair Value $M 3,709 4,622 6,909 9,821 137,004 12,075 31,213 61 14,213 117,862 6,903 12,075 27,029 25,308 13,940 5,828 (213) Carrying Value $M 2,575 5,154 7,347 9,149 132,263 11,107 27,036 46 16,198 112,594 4,633 11,107 25,282 25,275 11,490 5,299 - 2000 Net Fair Value $M 2,575 5,154 7,347 9,149 133,257 11,107 27,036 46 16,631 112,993 4,633 11,107 25,282 25,321 11,646 5,106 (253) The net fair value estimates were determined by the following methodologies and assumptions: Liquid assets and bank acceptances of customers Loans, advances and other receivables 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. 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 models (i.e. 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. 149 Notes to the financial statements NOTE 48 Disclosures about Fair Value of Financial Instruments continued COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES 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 prices for similar arrangements. They are not 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 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. reflects Other off-balance sheet financial instruments trading and (foreign exchange The net fair value of contracts investment derivative 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 39. The net fair value of impaired loans was calculated by discounting expected cash flows using a rate which includes a premium for the uncertainty of the flows. For shares in companies, the estimated net fair values are based on quoted market prices. Life Insurance Investment Assets & Policy Liabilities Life insurance investment assets are carried at net fair value. Life insurance policy liabilities are measured on a net present value basis. This treatment is in accordance with accounting standard AASB 1038: Life Insurance Business. 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. All other financial assets income, Included in this category are fees receivable, in associates of investments unrealised $400 million (2000: $403 million), and excess of net market value over net assets of life insurance controlled entities of $5,136 million (2000: $4,322 million), where the carrying amount is considered to be a reasonable estimate of net fair value. Other financial assets are net of goodwill, future tax benefits and prepayments/unamortised financial these do not constitute a income payments as 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 institutions and bank acceptances approximate their net fair value as they are short term in nature and reprice frequently. 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. 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) (b) the financial statements and notes of the Bank and of the Group are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Bank’s and the Group’s financial position as at 30 June 2001 and of their performance for the year ended on that date; and complying with Accounting Standards and Corporations Regulations 2001; and (ii) there are reasonable grounds to believe that the Bank will be able to pay its debts as and when they become due and payable. Signed in accordance with a resolution of the Directors. J T Ralph AC Chairman 22 August 2001 D V Murray Managing Director 151 Independent Audit Report To the members of Commonwealth Bank of Australia Matters relating to the Electronic Presentation of the Audited Financial Report This audit report relates to the Financial Report of Commonwealth Bank of Australia for the year ended 30 June 2001 included on Bank’s web site. The Bank’s directors are responsible for the integrity of the Commonwealth Bank’s web site. The audit report refers only to the statements named below. It does not provide an opinion on any other information which may have been hyperlinked to/from these statements. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited Financial Report to confirm the information included in the audited Financial Report presented on this web site. Scope We have audited the Financial Report of Commonwealth Bank of Australia for the financial year ended 30 June 2001, as set out on pages 50 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 economic entity 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 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 their 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 Act 2001 including: (i) giving a true and fair view of the Bank’s and the Group’s financial position as at 30 June 2001 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and the Corporations Regulation 2001; and (b)other mandatory professional reporting requirements. ERNST & YOUNG Sydney Date: 22 August 2001 S C Van Gorp Partner Shareholding Information Top 20 Holders of Fully Paid Ordinary Shares as at 13 August 2001 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 National Nominees Limited Westpac Custodian Nominees Citicorp Nominees Pty Ltd AMP Life Limited Commonwealth Custodial Services Limited Queensland Investment Corporation Limited ANZ Nominees Limited Perpetual Trustees Victoria Limited Cogent Nominees Pty Limited BT Custodial Services Pty Ltd RBC Global Services Australia Colonial Foundation Limited HKBA Nominees Ltd MLC Limited The National Mutual Life Association of Australasia Limited Perpetual Nominees Limited NRMA Nominees Pty Limited Perpetual Trustees Nominees Limited CSS & PSS Board Number of Shares 129,777,812 80,523,978 73,994,459 50,715,679 20,369,781 19,138,005 18,463,831 16,207,140 14,756,414 10,388,093 9,639,985 9,597,704 8,598,418 8,302,854 4,930,606 4,871,680 4,832,725 4,780,281 4,616,911 4,485,838 % 10.45 6.48 5.96 4.08 1.64 1.54 1.49 1.31 1.19 0.84 0.78 0.77 0.69 0.67 0.40 0.39 0.39 0.38 0.37 0.36 The twenty largest shareholders hold 498,992,194 shares which is equal to 40.18% 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 the home trade symbol CBA, with Sydney being exchange. Details of trading activity are published in most daily newspapers, generally under the abbreviation of CBA or C’wealth Bank. The Bank does not have a current on-market buyback of its shares. Directors Shareholdings as at 22 August 2001 Shares Options J T Ralph, AC J M Schubert D V Murray N R Adler, AO R J Clairs, AO A B Daniels OAM C R Galbraith W G Kent AO F D Ryan F J Swan B K Ward 1,500,000 12,674 7,478 44,372 6,973 10,482 12,741 4,524 6,703 4,482 2,225 2,405 Guidelines for Dealings by Directors in Shares The restrictions imposed by law on dealings by Directors in the securities of the Bank have been the Board of Directors adopting supplemented by 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. Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 13 August 2001 Range 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 Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 78.84 18.79 1.62 0.70 0.05 100.00 186,516,233 269,094,091 80,473,001 100,473,763 607,458,367 1,244,015,455 78,451 15.00 21.63 6.47 8.07 48.83 100.00 566,229 134,969 11,668 4,997 300 718,163 13,928 153 Shareholding Information 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: (cid:1) on a show of hands – to one vote; and (cid:1) on a poll – to one vote for each share held or represented. COMMONWEALTH BANK OF AUSTRALIA AND CONTROLLED ENTITIES If more than one proxy, attorney or official (cid:1) representative is present for a member: (cid:1) 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 Top 20 Holders of Preferred Exchangeable Resettable Listed Shares (PERLS) as at 13 August 2001 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Name of Holder Commonwealth Life Limited The National Mutual Life Association of Australia Commonwealth Custodial Services Limited Dervat Nominees Pty Ltd AMP Life Limited INVIA Custodian Pty Limited National Mutual Funds Management UBS Warburg Private Clients Nominees Pty Ltd Citicorp Nominees Pty Limited National Nominees Limited Perpetual Trustee Company Ltd ANZ Executors and Trustee Company Limited Austrust Limited Perpetual Nominees Limited Boxall Marine Pty Limited Questor Financial Services Limited Flight Centre Limited Livingstone Investments (NSW) Pty Limited Brencorp No. 2 Pty Limited Ms. Thelma Joan Martin-Weber Number of Shares 200,000 131,650 92,591 84,300 80,000 67,000 60,000 52,749 42,000 41,352 36,762 36,073 34,891 31,440 25,000 19,238 15,000 15,000 14,134 12,500 % 5.71 3.76 2.65 2.41 2.29 1.51 1.71 1.51 1.20 1.18 1.05 1.03 1.00 0.90 0.71 0.55 0.43 0.43 0.40 0.36 The twenty largest shareholders hold 1,091,680 shares which is equal to 30.79% of the total shares on issue. Stock Exchange Listing Commonwealth Bank PERLS are listed on the Australian Stock Exchange under the trade symbol CBAPA, 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 (pref). Range of Shares (PERLS): 13 August 2001 The twenty largest shareholders hold 1,019,071 shares which is equal to 29.11% of the total shares on issue. Range 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 Voting Rights meeting of circumstances: (cid:1) The holders will be entitled to receive notice of any general meeting of the Bank and a copy of every circular or other like document sent out by the Bank to ordinary shareholders and to attend any general meeting of the Bank. The holders will not be entitled to vote at a general following the Bank except the in if at the time of the meeting, a dividend has been declared but has not been paid in full by the relevant payment date; on a proposal to reduce the Bank’s share capital; on a resolution to approve the terms of a buy-back agreement; on a proposal that affects rights attached Commonwealth Bank PERLS; on a proposal to wind up the Bank; to (cid:1) (cid:1) (cid:1) (cid:1) Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 19,440 199 26 24 2 98.73 1.01 0.13 0.12 0.01 19,691 100.00 1,764,548 432,255 207,062 764,485 331,650 3,500,000 201 50.41 12.35 5.92 21.84 9.48 100.00 22 (cid:1) (cid:1) (cid:1) on a proposal for the disposal of the whole of the Bank’s property, business and undertaking; during the winding up of the Bank; or as otherwise required under the Listing Rules from time to time, in which case the holders will have the same rights as to manner of attendance and as to voting in respect of each Commonwealth Bank PERLS as those conferred on ordinary shareholders in respect of each ordinary share. At a general meeting of the Bank, holders are entitled: (cid:1) on a show of hands, to exercise one vote when entitled to vote in respect of the matters listed above; and on a poll, to one vote for each Commonwealth Bank PERL. (cid:1) 154 International Representation 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 Telex: NZ60881 Managing Director R J Norris Asia Pacific Fiji Islands Colonial 3 Central Street Private Mail Bag Suva Telephone: (679) 314 400 Facsimile: (679) 302 032 Beijing, China 2910 China World Towers 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 Malaysia EON CMG Life EON CMG Life Building 8th Floor 16 Jalan Silang Kuala Lumpur 50050 Telephone: (60-3) 232 1775 Facsimile: (60-3) 232 5189 The Philippines CMG 30th Floor Philippine Stock Exchange Center West Tower Exchange Road Ortigas Center Pasig City Telephone: (63-2) 636 2721 Facsimile: (63-2) 636 2761 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 D J McGrady Thailand Ayudhya CMG 17th Floor Ploenchit Tower 898 Ploenchit Road Patumwan Bangkok 10330 Telephone: (66-2) 263 0333 Facsimile: (66-2) 263 0313 Vietnam Suite 202-203A Central Building 31 Hai Ba Trung Hanoi Vietnam Telephone: (84 4) 826 9899 Facsimile: (84 4) 824 3961 Chief Representative S R J Holden Indonesia Plaza B11 Tower II (5th Floor) J1 M.H. Thamrin No 51 Kav 22 Jakarta 10350 Indonesia Telephone: (6221) 318 4394 Facsimile: (6221) 318 4391 Chief Representative L Morris 155 Japan 8th Floor Toranomon Waiko Bldg 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 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 Bigg 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 Australia Registered Office Level 1, 48 Martin Place Sydney NSW 1155 Telephone: (02) 9378 2000 Facsimile: (02) 9378 3317 

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