Commonwealth Bank of Australia
Annual Report 2003

Plain-text annual report

Which bank? C O M M O N W E A L T H B A N K O F A U S T R A L I A A N N U A L R E P O R T 2 0 0 3 2003 Commonwealth Bank of Australia ACN 123 123 124 Annual Report 2003 Contact Us www.commbank.com.au 13 2221 General Enquiries For your everyday banking 13 1998 Business Line For a full range of business including paying bills using BPAY banking solutions. Available from our automated service is available 8 am to 8 pm, Monday to Friday 24 hours a day, 365 days a year. From overseas call +61 13 2221. Operator assistance is available between 8 am and 8 pm, Monday to Friday 13 2224 Home Loans & Investment Home Loans To apply for a new home 13 2015 Commonwealth Financial Services For enquires on retirement and superannuation products, or managed investments. Available from 8 am to 8 pm (Sydney time), Monday to Friday. Unit prices are available 24 hours a day, loan/investment home loan 365 days a year or to maintain an existing loan. Available from 8 am to 10 pm, 365 days a year 13 1519 CommSec (Commonwealth Securities) Available from 8 am to 7 pm (Sydney time), Monday to Friday. CommInsure – For all your general insurance needs call 13 2423 8 am to 8 pm (Sydney time), Monday to Friday – or visit www.comminsure.com.au – For general claims assistance call 13 2420, 24 hours a day, 365 days a year. CommSec provides the information – For all your life insurance needs and tools to make smart investment easy, accessible and affordable for all Australians. By phone or Internet at www.commsec.com.au 1800 240 889 Telephone Typewriter Service A special telephone banking service for our hearing and speech impaired call 13 1056 8 am to 8 pm (Sydney time), Monday to Friday – or visit www.comminsure.com.au Internet Banking You can apply for a home loan or credit card on the internet by visiting our website at www.commbank.com.au customers. The service covers all available 24 hours a day, the services available on 13 2221. 365 days a year Available from 8 am to 8 pm, Monday to Friday 1800 011 217 Lost or Stolen Cards To report a lost or stolen card 24 hours a day, 365 days a year Do your everyday banking on our internet banking service NETBANK at www.commbank.com.au/netbank available 24 hours a day, 365 days a year To apply for access to NETBANK, call 13 2828 between 8 am and 8 pm (Sydney time), Monday to Friday Corporate Directory Registered Office Level 1, 48 Martin Place Sydney NSW 1155 Telephone (02) 9378 2000 Facsimile (02) 9378 3317 Company Secretary JD Hatton Shareholder Information www.commbank.com.au Share Registrar ASX Perpetual Registrars Limited Locked Bag A14 Sydney South NSW 1232 Telephone (02) 8280 7199 Facsimile (02) 9261 8489 Freecall 1800 022 440 Internet www.asxperpetual.com.au Email registrars@asxperpetual.com.au Telephone numbers for overseas shareholders New Zealand 0800 442 845 United Kingdom 0845 769 7502 Fiji 008 002 054 Other International 612 8280 7199 Australian Stock Exchange Listing CBA Annual Report To request a copy of the annual report please call (02) 9378 3229 e d i a l e d A — e n r u o b l e M — y e n d y S , n e r a L c M + r e l l i M g n o r t s m r A y b d e c u d o r P Commonwealth Bank of Australia ACN 123 123 124 Annual Report 2003 Table of Contents Chairman’s Statement .............................................................................................................................................................3 Highlights .................................................................................................................................................................................5 Banking Analysis ...................................................................................................................................................................11 Funds Management Analysis.................................................................................................................................................18 Life Insurance Analysis ..........................................................................................................................................................22 Shareholder Investment Return .............................................................................................................................................26 Life Company Valuations .......................................................................................................................................................27 Presentation of Financial Information.....................................................................................................................................29 Integrated Risk Management .................................................................................................................................................30 Risk Management ......................................................................................................................................................30 Credit Risk .................................................................................................................................................................30 Market Risk ................................................................................................................................................................30 Operational and Strategic Business Risk ...................................................................................................................32 Insurance Risk ...........................................................................................................................................................32 Derivatives .................................................................................................................................................................32 Off Balance Sheet Arrangements...............................................................................................................................32 Business Continuity Management ..............................................................................................................................32 Description of Business Environment.....................................................................................................................................33 Corporate Governance ..........................................................................................................................................................37 Directors’ Report ....................................................................................................................................................................44 Five Year Financial Summary ................................................................................................................................................50 Financial Statements Statements of Financial Performance ........................................................................................................................53 Statements of Financial Position ................................................................................................................................54 Statements of Changes in Shareholders’ Equity ........................................................................................................55 Statements of Cash Flow ...........................................................................................................................................56 Notes to the Financial Statements..............................................................................................................................57 Directors’ Declaration...........................................................................................................................................................168 Independent Audit Report ....................................................................................................................................................169 Shareholding Information .....................................................................................................................................................170 International Representation ................................................................................................................................................173 Chairman’s Statement The 2003 financial year was characterised by continuing global uncertainty, but this was offset for us by the continuing strong performance of the Australian economy. A buoyant housing sector combined with modest business growth helped to produce very satisfactory results in the banking business. Global and domestic equity markets displayed a high degree of volatility and negative returns for most of the period, which made for quite difficult trading conditions in the insurance and funds management part of our business. During the year, the Bank also responded to its rural customers to help them manage their finances during one of the worst droughts in Australia’s history. These external conditions highlight the importance to the Bank of a strong franchise, backed by a diversified business portfolio and supported by strong systems of corporate governance, which I described at some length in last year’s report. The Commonwealth Bank’s statutory net profit after tax for the year ended 30 June 2003 was $2,012 million, a decrease of 24% on the prior financial year. Net profit from ordinary activities (‘cash basis’) was $2,579 million, an increase of 3% on the prior financial year, after charging against the profit restructuring costs of $214 million and $45 million representing the cost for two years of grants of shares to employees under the employee share plan. The difference between statutory and cash profit comprises two non-cash items; the amortisation of goodwill and an adjustment to the appraisal value of the life and funds management businesses. Growth in cash profit was driven by a strong performance from the banking business and an improved performance from the life insurance business, partly offset by a reduction in the funds management result for the year. Total operating expenses comparable businesses remained relatively stable compared with the prior year. For more information on the Company’s financial performance, please refer the Financial Highlights on pages 5 to 10 and Business Analysis on pages 11 to 28. for to A final dividend of 85 cents per share fully franked will be paid on 8 October, 2003 bringing the total dividend for the year to 154 cent’s per share. For the past eleven years, the Bank has increased each interim and final dividend above those paid in the preceding year. The Company’s ability to increase the dividend on each occasion confirms the maintenance of the underlying momentum of the operations of the business. Earlier this year I wrote to shareholders in the light of some misinformation circulating in the media about the Bank’s acquisition of Colonial Limited and the nature of the payment to a former executive. Although conditions in the wealth management industry have been difficult over the last couple of years because of the correction in share prices and the volatility in stock markets, your Board continues to believe that this acquisition was the correct strategy for the Bank to have adopted. Because of demographic factors and the greater reliance of the community on superannuation and retirement savings, your Board believes that the wealth management business will grow at a faster rate than conventional banking business in the years ahead. It was this factor that contributed to the decision to grow this part 3 of the Bank’s business more quickly by adding Colonial’s wealth management business to that which had already been developed by the Bank. The Commonwealth Bank has a distribution system within the financial services system second to none and on which we are confident we can build our business in wealth management in concert with the other financial services we provide. Colonial was acquired by the Bank issuing shares to a value of $9.12 billion in 2000. The value ascribed to the wealth management businesses was $4.47 billion and the remaining $4.65 billion represented the rest of Colonial’s entities, the principal one being Colonial State Bank. Colonial’s banking businesses, comprising the bank and the banking service subsidiaries, were integrated successfully into the Commonwealth Bank’s banking business. The expected synergy benefits of $450 million per annum, which were mostly banking related, were fully realised and in a shorter time frame than projected, making the Commonwealth Bank and its shareholders. this a very satisfactory transaction for The value of our wealth management businesses have also increased in value since we acquired Colonial Limited. At the date of acquisition these businesses were valued in the accounts at $6.736 billion, comprising $4.472 billion for the acquired businesses, $1.978 billion in for our existing wealth management subsidiaries Australia and $286 million for the ASB Sovereign business in New Zealand. The value of these businesses in the accounts at 30 June 2003 was $8.546 billion. The increase in value of $1.810 billion comprises retained profits in the business, changes to Assessed Value through acquisitions and divestments and changes in net tangible assets since 30 June 2000 of $772 million and a net increase in Assessed Value taken to profit of $1.038 billion since that date. The current accounting standards require the Bank, with the advice of competent actuaries, to make an assessment of the value of the wealth management business based on assumptions of future activity and to bring this into the profit statement at each half year. In the period from 30 June 2000 to 30 June 2002 there was an uplift in this valuation of $1.283 billion. In the first half of the financial year on which we are reporting there was a reduction in the valuation of $426 million and an increase of $181 million in the second half of the year making a net reduction in the year of $245 million. The net result is that this represents an increase of $1.038 billion since we trebled our investment in wealth management by the acquisition of Colonial. It is not totally surprising The Assessed Value declined in the past year in a period when many portfolios have fallen in value, largely as a result of the correction that occurred in world stock markets, and when members of superannuation funds have experienced adverse outcomes in relation to their that wealth savings. management businesses would similar experience. But the Bank is in this business for the long term because of the demographic factors which are likely to cause wealth management businesses to grow strongly in the period ahead. We recognise that there are other factors that will continue to cause volatility in share markets and to see returns reflect this volatility. Overall, however, we expect to be positive. Involvement in this part of the financial services industry is considered by your Board to be an area where we can confidently create value for you, our shareholder. the net result share a Chairman’s Statement Outlook Although reasonably the Australian economy remains dependent on recovery in the United States. While there have been some positive signs, there are potential significant financial imbalances arising from the US current account and fiscal deficits. resilient, The Australian financial services industry remains highly competitive, operating in an environment of reducing margins with the likelihood of slowing credit growth. Notwithstanding this, the longer-term outlook for the banking, insurance and wealth management sectors is for continuing growth. Customers will need more convenient and informed access to financial services, through wealth management advice, products to respond to the aging of the population and personalised banking services for payments, savings and investments. The Board and management of the Bank have been focussing on how the Bank needs to respond in this environment. Page 6 of this report outlines the strategy designed to address these needs. Having acquired Colonial and added significant value, the Bank is extremely well positioned to meet the challenges ahead and to benefit from scale, breadth of services, and the strength of its proprietary distribution system. to be a major transformational change to deliver the outstanding service levels, with enhanced staff engagement and simple and efficient processes required to be more competitive. there needs However, The Bank believes that it has relatively more to gain from such a change and will announce within the next six weeks details of the strategies, proposed investments, expected outcomes and implementation milestones of a program to achieve these goals. Your Board is committed to achieving sustainable growth in all the Bank’s businesses and in growing sustainable and reliable returns for all shareholders, and to this end, the Bank intends to maintain its high dividend payout ratio relative to its peers. I would like to take the opportunity to thank you for your continued support. John Ralph AC Chairman 20 August 2003 4 Highlights Key Performance Indicators Profitability Underlying Segment Profit after Income Tax: Banking Funds Management Life Insurance Underlying Profit after Income Tax Shareholder investment returns (after tax) Operating expenses - included for first time (after tax) Net Profit after Income Tax ("cash basis") Goodwill amortisation Appraisal value (reduction) / uplift Net Profit after Income Tax ("statutory basis") Banking Net interest margin (%) Average interest earning assets Average interest bearing liabilities Funds Management Funds under management Life Insurance Inforce premiums Full Year Ended 30/06/03 $M 30/06/02 $M Increase/ (Decrease) % 2,401 228 58 2,687 73 (181) 2,579 (322) (245) 2,012 2,067 360 41 2,468 33 - 2,501 (323) 477 2,655 2.67 2.76 188,270 170,634 174,737 157,105 94,207 102,838 880 810 Shareholder Investment Returns (before Tax) 91 47 Operating Expenses Comparable business First time Total operating expenses 5,292 5,201 - 259 5,201 5,551 Underlying Productivity Banking expenses to income (%) Funds Management expenses to average funds under management (%) Life Insurance expenses to average inforce premiums (%) 52.0 0.85 57.3 54.1 0.73 68.8 Shareholder Measures EPS - cash basis - basic (cents) Dividend per share (cents) Capital Adequacy Tier 1 (%) Total (%) 202.6 154 197.3 150 6.96 9.73 6.78 9.80 Full-time Staff Equivalent (FTE's) 35,845 37,245 Unde rlying grow th of 9% on prior ye ar 334 (132) 17 2,687 73 (181) 2,579 3,000 2,800 2,600 2,400 2,200 2,000 2,468 Underlying NPAT 2002 Banking Funds Management Life Insurance Underlying NPAT 2003 S'holder Invest Returns First time Expenses (after tax) Cash NPAT 2003 Underlying measures exclude shareholder investment returns and first time operating expenses along with their associated tax if relevant. This represents core operating performance, removing the volatility of shareholder earnings and the impact of strategic initiatives. 5 16 (37) 41 9 large - 3 (0) large (24) (3) 10 11 (8) 9 94 2 - 7 (4) 16 (17) 3 3 3 (1) (4) Highlights (continued) Financial Performance and Business Review After deducting goodwill amortisation of $322 million and a net reduction in appraisal value of $245 million, the Commonwealth Bank recorded a net profit after income tax of $2,012 million, or 24% below the prior year. The net profit after tax (cash basis) for the year ended 30 June 2003 is $2,579 million, an increase of $78 million or 3% on the prior year. This result was achieved inclusive of $259 million of first time expenses related to strategic initiatives of $214 million and $45 million of expense relating to two years allocations of shares issued to employees under the employee share program. This result reflects a strong banking performance primarily driven by the Australian and New Zealand retail banking operations. The housing market has primarily driven the banking performance, with balance growth at over 17% for the year. The New Zealand performance reflects strong industry conditions combined with growth in market shares for retail, business and rural lending. Results for Institutional and Business Banking were industry subdued, primarily conditions. The weakened demand for credit in the institutional segment and conditions in global markets resulted in flat earnings outcomes. the difficult reflecting In Funds Management, falling equity markets globally have reduced funds under management and depressed volumes of inflows, particularly in the first half of the year. The underlying profit performance of the Life Insurance business includes a one off write down of an investment asset within Australia. Excluding this the results of all regions, particularly Asia, were favourable. The Life Insurance result also benefited from a rebound in equity markets in the second half of the year. Underlying operating expenses have increased by 2% over the year, primarily driven by increased volumes, the set up of the new Premium Financial Services Division together with increased regulatory expenses associated with the Funds Management business. The growth in banking income combined with the benefit of strategic initiatives undertaken resulted in an underlying banking productivity improvement of 4% for the year. The underlying banking expense to income ratio is 52.0% compared with 54.1% in 2002. The credit quality of the portfolio has improved with bad debt charge as a percentage of risk weighted assets decreasing from 0.32% at June 2002 to 0.21% at June 2003. This reflects an absence of significant corporate defaults compared with the prior year. The home lending portfolio continues to show low levels of delinquency and write-offs relative to historical trends. 2002/03 Restructuring Initiatives During the year the Bank implemented a number of significant strategic initiatives with the aim of improving service levels and productivity. The initiatives undertaken during the year included: 6 (cid:1) (cid:1) (cid:1) Re-organisation within the retail banking operations aimed at eliminating duplication, inefficiencies and some back office processing. Empowerment of front line retail sales staff with information and decision-making capabilities to better meet customer needs. Redesign of system and relationship management processes in the business and corporate segments. Simplification and consolidation of legacy systems and processes within the Investment and Insurance business. The gross expense of these initiatives in the current year, combined with the current year benefits and expected annualised future benefits are set out in the table below: (cid:1) Pre Tax $M Full year to 30 June 2003 Expenses Benefits Net Expense Annual Benefit 214 69 145 165 The gross expense for the year of $214m is lower than the previously reported expectation of $227m. Initiatives were achieved at a lower expense. The value of future expected benefits exceeds that previously reported. As reported in the June 2002 profit announcement, it was anticipated that the above initiatives would result in a net reduction in the Bank’s staff numbers of 1,000. This comprised a reduction of 1,500 from the retail and business-banking initiatives partly offset by the creation of customer facing positions in the premium division. Net staff numbers have reduced by 1,400 over the year. This comprised a reduction of 1,740 in back office positions partly offset by the creation of 340 customer-facing positions. Bank Strategy (cid:1) for customers The CBA vision is to excel in customer service. To achieve this we are progressing our strategy to provide a consistently good range of services to meet the integrated financial needs of our customers. Implementation is centred on five key themes. (cid:1) Engage our people to provide consistently good service through our proprietary distribution network. Implement a service and sales based management culture. Deepen customer based bundling. Simplify our processes and systems to improve service and productivity. Optimise the business mix. There will be a strong focus on listening to our customers and supporting our people to deliver customer service results with improved tools and processes as well as more closely aligning our people and systems to our service aspirations. through needs relationships (cid:1) (cid:1) (cid:1) Highlights (continued) Profit Summary Net Profit after Income Tax ("statutory basis") Net Profit after Income Tax ("cash basis") Income Interest income Interest expense Net Interest Income Other banking operating income Total Banking Income Funds management income (1) Life insurance income (1) Total Income Expenses Operating expenses - comparable business Operating expenses - included for first time Total Expenses Charge for bad and doubtful debts Net profit before income tax, outside equity interests, goodwill amortisation and appraisal value (reduction)/uplift Income tax expense (1) Net profit after income tax, outside equity interests, goodwill amortisation and appraisal value (reduction)/uplift Outside equity interests Net Profit after Income Tax ("cash basis") Appraisal value (reduction)/uplift Goodwill amortisation Net Profit after Income Tax ("statutory basis") Contributions to Profit (after income tax) Banking Funds Management Life Insurance Underlying Profit after Income Tax Shareholder Investment Returns (after tax) Operating Expenses - included for first time (after tax) Net Profit after Income Tax ("cash basis") Goodwill amortisation Appraisal value (reduction)/uplift Net Profit after Income Tax ("statutory basis") Full Year Ended 30/06/03 $M 30/06/02 $M Increase/ (Decrease) % 2,012 2,579 2,655 2,501 (24) 3 11,528 6,502 5,026 2,697 7,723 1,042 634 9,399 5,292 259 5,551 305 3,543 958 2,585 (6) 2,579 (245) (322) 2,012 2,401 228 58 2,687 73 (181) 2,579 (322) (245) 2,012 10,455 5,745 4,710 2,552 7,262 1,147 659 9,068 5,201 - 5,201 449 3,418 916 2,502 (1) 2,501 477 (323) 2,655 2,067 360 41 2,468 33 - 2,501 (323) 477 2,655 10 13 7 6 6 (9) (4) 4 2 - 7 (32) 4 5 3 large 3 large (0) (24) 16 (37) 41 9 large - 3 (0) large (24) (1) Included within funds management and life insurance income and income tax expense is a $58 million tax credit relating to policyholder losses (30 June 2002: $36 million tax credit). These amounts were offsetting and therefore the impact on the net profit after tax is nil. 7 Highlights (continued) 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 internal funds management assets Off Balance Sheet Funds under management Shareholder Summary Dividends per share - fully franked (cents) Dividend cover - cash (times) Earnings per share (cents) Statutory - basic Statutory - fully diluted Cash basis - basic Cash basis - fully diluted Dividend payout ratio (%) Statutory Cash basis Weighted average number of shares (basic) (number) Weighted average number of shares (fully diluted) (number) Productivity and Efficiency Banking Expense to income (%) Underlying expense to income (%) Funds Management Expense to average funds under management (%) Underlying expenses to average funds under management (%) Life Insurance Increase/ (Decrease) % 6 6 5 9 (10) (1) 6 (8) 3 Increase/ (Decrease) % 3 - 30/06/03 $M 30/06/02 $M 265,110 242,958 22,152 249,648 228,592 21,056 229,289 22,800 13,021 265,110 71,407 336,517 211,130 25,355 13,163 249,648 77,483 327,131 Full Year Ended 30/06/03 30/06/02 154 1.3 157.4 157.3 202.6 202.5 97.7 75.9 1,253 1,254 150 1.3 209.6 209.3 197.3 197.0 71.7 76.2 1,250 1,252 Full Year Ended 30/06/03 30/06/02 Increase/ (Decrease) % 54.8 52.0 54.1 54.1 0.89 0.85 0.73 0.73 1 (4) 22 16 Expense to average inforce premiums (%) 57.3 68.8 (17) Underlying staff expense/total operating income (%) Total operating income per FTE ($) Full time staff equivalent (FTEs) 26.14 262,212 35,845 26.35 243,469 37,245 (1) 8 (4) 8 Highlights (continued) First Time Expenses and Shareholder Investment Returns Full Year Ended Underlying measures exclude the following items: Banking Strategic initiatives ESAP Funds Management Strategic initiatives ESAP Investment returns Life Insurance Investment returns Total Strategic initiatives ESAP Investment returns Before Tax 30/06/03 $M After Tax 30/06/03 $M Before Tax 30/06/02 $M After Tax 30/06/02 $M (176) (41) (124) (28) - - - - (38) (4) 13 (26) (3) 9 - - 12 - - 8 78 64 35 25 (214) (45) 91 (150) (31) 73 - - 47 - - 33 The current year benefits from strategic initiatives of $69 million were reflected in “operating expenses – comparable businesses”. Throughout the report underlying measures exclude shareholder investment returns and first time operating expenses, being strategic initiatives and the cost of ESAP. Other Items Dividends The total dividend for the year is 154c, an increase of 4 cents or 3% on the prior year. The dividend payout ratio for the year is 75.9% on a cash basis, consistent with the prior year payout ratio of 76.2%. The Bank purchased on market the shares needed to satisfy shareholder participation in the Dividend Re-investment Plan (DRP) in respect of the interim dividend for 2002/03. It expects to do the same in respect of the final dividend for 2002/03. The dividend payment for the second half of the year is 85 cents per share. This dividend payment is fully franked and will be paid on 8 October 2003 to owners of ordinary shares at the close of business on 29 August 2003 (record date). Shares purchased on or after 25 August 2003 (ex-dividend date) do not qualify for the dividend. Dividends were based on Cash Profit Per Share, having regard to the following: (cid:1) Rate of business growth; (cid:1) Capital adequacy; (cid:1) Investment requirements; (cid:1) The cyclical nature of life insurance investment returns and expectations of long term investment returns; and A range of other factors. Subject to these factors, the Bank will continue to (cid:1) maintain a high payout ratio relative to its peers. Capital Management The Bank maintains a strong capital position. This is recognised in its credit ratings. The Bank’s credit ratings remain unchanged for the year. 9 Long- term AA Aa3 Short- term F1+ P-1 Affirmed Feb 03 Oct 01 AA- A-1+ Dec 02 Fitch Ratings Moody’s Investor Services Standard and Poor’s The risk weighted capital ratios of the Bank are detailed below. Risk Weighted Capital Ratios Tier one Tier two Less deductions Total capital 30/06/03 % 30/06/02 % 6.96 4.21 (1.44) 9.73 6.78 4.28 (1.26) 9.80 (cid:1) Tier 1 capital is one of the key measures the Bank uses to manage capital. The increase in the tier one ratio from 30 June 2002 can be attributed to: (cid:1) An increase of $652 million principally due to retained earnings and the issue of NZD200 million (AUD181 million) of preference shares by ASB Bank (included in outside equity interest on the balance sheet). An increase in risk weighted assets from $141 billion to $147 billion. Housing loans secured by residential mortgages, which attract a concessionary risk weighting of 50%, increased by $14.4 billion. investment As required by APRA, the life insurance and funds management is deducted from regulatory capital to arrive at the ratios shown above. This treatment does not recognise the surplus capital held in the life insurance and funds management businesses, nor does it give credit for the risk diversification benefits provided by these businesses. in Highlights (continued) In August 2003, the Bank raised USD550 million (AUD 824 million) of Perpetual non call 12 year Tier 1 hybrid capital which would have increased Tier 1 capital at 30 June 2003 from 6.96% to 7.52%. These securities offer a non-cumulative fixed rate distribution of 5.805% per annum payable semi-annually. The transaction was an opportunistic response to favourable credit markets in the United States. Market Shares The table below sets out the market share holding for the current and prior year along key product lines. We remain a leader in most product lines and have generally increased our shares, however there has been a reduction in home loans, and business lending and Australian retail funds management market shares. The acceleration of our strategic initiatives relating to customer service will be key in improving these positions. Line of Business 30/06/03 30/06/02 Banking Retail Deposits Credit Cards Home Loans New Zealand Lending New Zealand Deposits Merchant Acquiring Transaction Services Business Lending Asset Finance Funds Management Australia Retail New Zealand Australia Property Life Insurance New Zealand Australia Hong Kong 24.8%(1) 22.9%(1) 19.5%(3) 20.4%(2) 16.3%(2) 33.9%(2) 22.7%(4)(7) 14.3%(6) 15.1%(8) 14.8% 14.0%(3) 6.3% 28.3%(2) 15.0%(3) 2.5% 24.7% 22.8% 19.9%(5) 19.6% 15.5% 34.5% 21.8% 15.2% 16.5% 15.5% 13.0% 5.2% 26.2% 14.9% 2.1% (1) (2) (3) (4) (5) (6) as at May 2003 as at April 2003 as at March 2003 as at Feb 2003 as at March 2002 Previously reported 20.1%, which was revised by APRA to 19.9% Adjusted to reflect changes in APRA data series (7) Mid corporate segment (8) Business written by CBFC only 10 Banking Analysis Key Performance Indicators Profitability Underlying Profit after Income Tax Operating expenses - included for first time (after tax) Net Profit after Income Tax ("cash basis") Full Year Ended 30/06/03 $M 30/06/02 $M Increase/ (Decrease) % 2,401 (152) 2,249 2,067 - 2,067 Operating Income Net interest income ($m) Net interest margin (%) Other operating banking income ($m) Total banking income ($m) Other operating banking income/Total banking income (%) 5,026 2.67 2,697 7,723 34.92 4,710 2.76 2,552 7,262 35.14 Operating Expenses Comparable businesses ($m) First time ($m) Productivity and Other Measures Expense to income (%) Expense to income - underlying (%) Effective corporate tax rate (%) Balance Sheet Lending assets ($m) Average interest earning assets ($m) Average interest bearing liabilities ($m) Asset Quality Charge for bad and doubtful debts ($m) Risk weighted assets ($m) Net impaired assets ($m) General provision/Risk weighted assets (%) Total provisions/Gross impaired assets (net of interest reserved) (%) Bad debt expense/Risk weighted assets (%) 4,014 217 3,929 - 54.8 52.0 29.4 54.1 54.1 28.3 175,074 188,270 174,737 161,216 170,634 157,105 305 146,808 434 0.90 449 141,049 614 0.96 239.4 0.21 183.9 0.32 Underlying Banking profit growth of 16% 145 316 144 85 186 2,401 152 2,249 2,900 2,700 2,500 2,300 2,100 1,900 1,700 1,500 2,067 Underlying NPAT 2002 Net Interest Income Other Banking Income Bad Debts Expenses Tax Underlying NPAT 2003 First time Expenses (af ter tax) Cash NPAT 2003 16 - 9 7 (3) 6 6 (1) 2 - (1) 4 (4) 9 10 11 (32) 4 (29) (6) 30 (34) Financial Performance and Business Review Banking operations produced a very strong result. The cash profit contribution increased by $182 million or 9% to $2,249 million. first Excluding in underlying profit is 16% or $334 million. This was time expenses, the growth achieved through strong balance growth, fee initiatives and an improvement in asset quality. Underlying operating expenses have remained relatively flat, increasing by $85m or 2%, which includes increased volume and the expense of establishing the new premium financial services division. 11 Banking Analysis Financial Performance and Business Review Retail Asia Pacific for Performance the year was driven by a combination of strong revenue growth and expense efficiencies flowing from process simplification. The buoyant housing market and increased volumes of credit card transactions drove the strong retail revenue and balance performance for the year. Several key initiatives were implemented during the improve customer service and efficiency to year outcomes. These included: (cid:1) the Development of the premium financial services distribution model. This added new expenses to the Bank, primarily funded by the benefits from other strategic initiatives. The premium distribution model is team-based and involves providing clients with access to a team of advisers, all of whom were aware of the clients’ relationships with the Bank and equipped to satisfy the customers financial needs full range of wealth management utilising services. This has been specifically developed to facilitate superior client experience and over 195,000 banking clients were now being serviced through this model. The introduction of a new telling system, improving service and efficiency levels across the branch network. A new home loan system introduced for branch and mobile lenders, with automatic linkages to back- office processing areas for significant improvement in customer service and efficiency levels. The acquisition of TD Waterhouse. This business has been in aggregate now has over one million Equities Trading Accounts. Refinement of the credit card loyalty program, Commonwealth Awards, enhancing many of its features for customers. Fee structures for all credit cards were reviewed and changes implemented effective January 2003. During into CommSec which integrated the year the Reserve Bank proposed substantial reforms to credit card schemes in Australia. The impact of these changes combined with an expected slowing of the housing market will reduce the opportunities for market driven revenue growth going forward. (cid:1) (cid:1) (cid:1) (cid:1) Asia Pacific Banking incorporates the Bank’s retail and commercial banking operations in New Zealand, Fiji and Indonesia. ASB in New Zealand represents the majority of the Asia Pacific Banking business. the financial year. The New Zealand economy grew strongly throughout Interest rates were increased modestly, which attracted international investors and resulted in a stronger NZ currency. As a result, lending and funding growth rates contributed to good balance sheet growth. During the year, ASB continued to make progress in its core business objectives of quality growth, best service, best team, best processes and best distribution. Key achievements during the year were: (cid:1) Lending growth at well above market rates in the retail, commercial and rural sectors. The successful spring and summer lending campaigns, strong customer service emphasis and the success of the ‘One Team’ referral program were key factors contributing to this achievement; Leading customer service in the Banking sector. For the fifth consecutive year, ASB was recognised as the top major retail bank in terms of satisfied and very satisfied customers in the Auckland University Bank Customer Satisfaction survey. For the third consecutive year, ASB was rated the top business bank for the same criteria; The focus on process efficiencies has led to many improved operational improvements, which also service levels and lowered expenses to serve, an example being the approval of housing loans within an hour of application; and A focus on the development of distribution capability led to the launch of ‘financial markets online’, which provides business and institutional customers with the ability to purchase foreign exchange on-line, replacing the telephone ordering service. (cid:1) (cid:1) (cid:1) Banking operations in Fiji and Indonesia performed well with modest profit growth for the year. Institutional & Business The business climate was subdued over the year The specific focus in the forthcoming years will be and as a result, market competition has intensified. on: (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) to ensure every Enhancing the premium service experience for our clients by enhancing systems and further investment in the training of our people. Re-designing and refurbishing the branch network to better service customer needs. simplifying processes and Streamlining and procedures interaction with customers is as efficient as possible – from simple over-the-counter deposits and withdrawals to the establishment of a new home loan. Continuing to upgrade key systems, including ATMs and NetBank, to further improve service delivery. Simplifying products and better aligning these to the needs of our customers. Creating an environment where our people were continually encouraged, supported, empowered and motivated to perform at their best. 12 In light of the business environment the focus for the year was on the continued delivery of innovative solutions and transforming the business for future growth. into implemented. This During the year, a new client-servicing model, based involved on client need was segmentation of Institutional, the client base Corporate and Business Banking groups, with distinct Regional segments within business banking established to meet the needs of clients based outside the metropolitan the new segmentation, areas. simplified technology platforms and streamlined credit processes for all client segments were rolled out. These measures enable a more responsive service to clients, improved productivity and focus on generating new business, while preserving the overall risk profile of the Bank. In conjunction with increase the Banking Analysis (continued) include specialised Supporting the client-servicing model, a range of new or expanded products were launched during the year. These infrastructure financing products, environmental, agricultural and precious metal offerings. We were the first bank in Australia to launch the “Verified by Visa” and “MasterCard SecureCode” online security programs to make Internet transactions safer for both clients and merchants. leasing and Profit Summary Net interest income Other operating income Total Operating Income Operating expenses - comparable businesses Operating expenses - included for the first time Total Operating Expenses Charge for bad and doubtful debts Net Profit before Income Tax Income tax expense Outside equity interests Net Profit after Income Tax ("cash basis") Net Interest Income Central to the success of the business over the next year will be the continued transformation of product offerings, services, processes and systems and the ongoing promotion of a high performance culture, which enables our people to excel in client service. Full Year Ended 30/06/03 $M 30/06/02 $M 5,026 2,697 7,723 4,014 4,710 2,552 7,262 3,929 217 - 3,929 449 2,884 816 1 2,067 4,231 305 3,187 938 - 2,249 Increase/ (Decrease) % 7 6 6 2 - 8 (32) 11 15 large 9 Average Interest Earning Assets & NIM Trends NIM Compre ssion 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - ) m $ ( s t e s s A i g n n r a E t s e r e t n I e g a r e v A 2.78% 24,698 2.76% 28,183 135,909 142,451 33,641 2.67% 154,659 3.00% 2.80% 2.60% 2.40% 2.20% 2.00% 1.80% 1.60% 1.40% ) % ( M N I 2.80% 2.76% 2.72% 2.68% 2.64% 2.60% 0.02% (0.08)% 2.76% (0.01)% (0.01)% (0.01)% 2.67% NIM 2002 Official rates Grow th in liquid assets Product margin compression Asset Mix Funding Mix NIM 2003 Jun-01 Jun-02 Jun-03 Lending Assets (excl Bank Accept) Trading Securities & other NIM Net Interest Income for the year increased by 7% or $316 million from $4,710 million in the prior year to $5,026 million in the current year. The increase in net interest income is due to a 10% or $18 billion increase in average interest earning assets between 30 June 2002 and 30 June 2003. This has been partially offset by a reduction in the net interest margin of 9 basis points from 2.76% at June 2002 to 2.67% in the current year. The growth in average interest earning assets reflects an increase of $13 billion in lending assets and $2 billion in investment and trading securities. The strong housing market in Australia and New Zealand has primarily driven the lending asset growth, while the opportunity to obtain overseas funding has driven the growth in investment and trading securities. The growth in average lending assets contributed an additional $479 million volume benefit in net interest income. Further analysis of the movement in interest earning assets is provided on page 15. The reduction in the net interest margin from 2.76% at June 2002 to 2.67% in the current year has had a negative effect on interest income of $163 million. The decline in margin can be attributed as follows: (cid:1) A benefit of two basis points from the movement in Australian official rates in June 2002, which was fully reflected in the current year and New Zealand cash rate increases. This was offset by: The global environment of low overseas interest rates, combined with favourable exchange rates created opportunities for acquiring overseas funding through Debt Issues. The funding acquired more than exceeded the lending asset growth. The excess funding was deposited in high quality liquid assets, reducing the Bank’s net interest margin by eight basis points. Further penetration of the home lending broker market and strong competition across all lending products reduced the bank margin by one basis point. (cid:1) (cid:1) 13 Banking Analysis (continued) (cid:1) The higher mix of home lending assets and trading and investment securities, lower yielding products, as a percentage of the total portfolio reduced the margin by one basis point. Institutional and business deposits combined with the growth in Debt the proportion of funding sources compared with retail funding, thus reducing the margin by one basis point. from wholesale Issues has increased funding (cid:1) Other Banking Operating Income 3,000 m $ 2,500 ) I B O ( e m o c n I g n i k n a B r e h t O 2,000 1,500 1,000 500 0 Other Banking Operating Income 180 426 602 203 489 618 1,173 1,242 120 502 652 1,423 39% 37% 35% 33% 31% 29% 27% 25% % e m o c n I g n i k n a B l a t o T / I B O Jun-01 Jun-02 Jun-03 Commissions Trading Income Other Banking Income/Total Banking Income Lending fees Other Other banking operating income has increased by $145 million or 6% on the prior year, increasing from $2,552 million for 2002 to $2,697 million for 2003. Included within other banking income is non-interest income earned on transaction accounts for the Bank’s personal, business and corporate customers. The principal reasons for the increase were set out below: Growth in commissions and other fees of 15% or $181 million, was primarily driven by new fee structures on retail transaction and savings accounts introduced in the prior financial year. This initiative reflected a simplified fee structure for customers and a more stable income structure for the Bank, which were less dependent on interest income and transactional volumes. The result also includes strong growth in credit card transactions, reflecting market growth combined with successful campaigns targeted at specific customer segments. Growth in lending fees of $34 million or 6% reflects a growth in bank acceptance fees combined with growth in home lending establishment and service fees. The growth in home lending fees is partly offset by an increase in up-front 3rd party broker commissions. Trailing commissions were netted against net interest income. This channel now accounts for 19% of new home lending fundings, up from 12% in the prior financial year. Trading income moderately increased by $13 million or 3% over the prior year. The reduced currency volatility and weaker credit market adversely this business particularly in the first half of the financial year. impacted Other banking income of $120 million has decreased by $83 million on the prior year. The prior year included a profit on sale of strategic investments, while the current year includes a provision against a strategic investment, and insurance increased claims within business on Canberra bush fires. the general Operating Expenses – Comparable Business Expenses from comparable businesses have increased by 2% or $85 million from $3,929 million at 30 June 2002 to $4,231 million at 30 June 2003. Expenses in the current period reflect: 14 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) The benefits from strategic initiatives implemented during the year, offset by: Expenses associated with the development of the Premium Business model. Volume related increases in credit cards and home lending. Increased software amortisation charges following the implementation of the Bank’s new financial and HR systems. Increased expenses on New Zealand operations as a result of the appreciation of its currency relative to the Australian dollar. Enterprise Bargaining Agreement (EBA) increases have been met through other expense efficiencies. Productivity Efficiency The underlying banking expense to income ratio has improved by 4% from 54.1% for the year ended 30 June 2002 to 52.0% for the year ended 30 June 2003. This reflects strong revenue growth generated primarily through housing and fee initiatives combined with the benefits of the strategic initiatives and overall productivity improvements. Underlying Banking Expense to Income Ratio 57.4% 57.7% 58% 56% 54% 52% 50% 54.2% 54.0% 52.6% 54.1% 51.4% 52.0% Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Annual Half Yearly The expense to income ratio for the six months ended 30 June 2003 is 51.4% an improvement from 52.6% for the six months ended 31 December 2002. Operating Expenses – Included for the First Time Operating expenses included for the first time within the banking business were $217 million. This includes the expense of ESAP of $41 million and strategic initiatives of $176 million. The key banking initiatives were the re-organisation within the retail banking and the redesign of system and relationship management processes the business banking and corporate banking segments. in Bad and Doubtful Debts The total charge for bad and doubtful debts for the year ended 30 June 2003 was $305 million, a decrease of $144 million from $449 million in 2002. The prior year included a small number of large lending exposures, which corporate and commercial became impaired during the first half of that financial year. Taxation Expense The corporate is $938 million, an tax charge increase of 15% or $122 million on the prior financial year. The primary cause of the increased tax charge has been increased profits. The effective rate of taxation for the current year is 29.4%, an increase from 28.3% in the prior year. This reflects the utilisation of capital losses in the prior year, which has not recurred in the current year. Banking Analysis (continued) Major Balance Sheet Items Major Balance Sheet Items (gross of impairment) - by Product Gross housing Securitisation Housing (net of securitisation) Personal (1) Business and Corporate (1) Bank acceptances Total Lending Assets 30/06/03 $M 106,683 (6,480) 100,203 12,369 49,305 13,197 175,074 30/06/02 $M 92,886 (7,047) 85,839 11,551 51,309 12,517 161,216 Trading & Investment Securities 21,471 19,155 Deposits and Other Public Borrowings 140,974 132,800 Debt Issues 30,629 23,575 (1) Balances have been restated in 2002 due to reclassification of some products from Business and Corporate to Personal. Major Balance Sheet Items (gross of impairment) - by Business Retail: Lending assets Deposits Total Asia Pacific: Lending assets Trading & investment securities Debt issues Deposits Total Institutional and Business: Lending assets Trading & investment securities Debt issues Deposits Total 30/06/03 $M 100,134 68,702 168,836 19,880 2,953 2,570 17,168 42,571 55,060 18,518 28,059 55,104 156,741 30/06/02 $M 87,531 65,835 153,366 16,951 2,126 2,405 13,916 35,397 56,735 17,029 21,170 53,049 147,983 Increase/ (Decrease) % 15 (8) 17 7 (4) 5 9 12 6 30 Increase/ (Decrease) % 14 4 10 17 39 7 23 20 (3) 9 33 4 6 Home Loan Balances by Product Type Lending Assets Line of Credit 8% Investment 28% ) m $ ( 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 12,075 53,785 10,405 73,511 12,517 51,309 11,551 85,839 13,197 49,305 12,369 100,203 2001 2002 2003 Housing Personal Business Lending Bank Acceptances Ow ner Occupied 64% 15 Banking Analysis (continued) Retail Lending Assets Retail banking lending assets was $100 billion, an increase of $12 billion or 14% over the prior year. Lending assets comprises Australian Home Lending and Personal Lending. Housing Home loan outstandings have increased by 16% over the prior year. This reflects strong performance in proprietary networks and a growing share of the 3rd party broker market. This growth was primarily achieved in line with market demand as a result of the low interest rate environment and increased demand for investment home loans influenced by the volatile equity markets. This was combined with customer service and retention initiatives undertaken during the year. The Bank maintained its position as Australia’s leading home loan provider, however market share declined from 19.9% at 31 March 2002 to 19.5% at 31 March 2003 (Source: APRA Residentially Secured All Lenders). The Bank has increased its share of the 3rd party broker market to 15% at March 2003 compared with 12% at March 2002. Recent approvals and fundings have remained strong. Personal Lending Personal lending includes Personal loans, Credit Cards and Margin Loans. The Banks market share of personal credit cards increased from 22.8% at 30 June 2002 to 22.9% at 31 May 2003 (Source: RBA Credit Card Balances). The above market growth was driven by effective sales and marketing campaigns. Margin approximately 10%. lending balances have increased by Personal loan balances declined marginally over the year although the second half performance was stronger. The market for traditional personal lending products remains under pressure from alternative financing options such as credit cards and home loan redraw facilities. Retail Deposits Retail deposit balances at 30 June 2003 were $68.7 billion, an increase of $2.9 billion over the prior year. This growth was driven by for cash management products and is reflective of weak equity markets and new compliance requirements on the sale of cash management trusts. This has been partly offset by a slight reduction in transaction account balances. increased demand The Bank is the largest acceptor of retail deposits in Australia with a market share of 24.8% at 31 May 2003 compared with 24.7% at June 2002 (Source: RBA) Asia Pacific Lending Assets Lending volumes growth was high primarily driven by the New Zealand business. Within this business the growth in housing lending was 18%, rural lending grew total 24%, business-lending growth was 19%, and advances increased by 12%. This compared with the annual market growth rate of 9.1% as measured by Private Sector Credit (Residents only) (Source: Reserve Bank of New Zealand). including Record growth in ASB’s home loan approvals was the result of its significant presence in the more rapidly growing Auckland market, effective Spring and Summer together with positive market marketing campaigns, dynamics favourable economic conditions, stable interest rates, and high immigration levels. ASB’s share of the retail lending market nationwide increased to 20.4% by 30 April 2003 (30 June 2002, 19.6%) and its share of the rural lending market reached 12.9% by 30 April 2003 (30 June 2002, 12.5%) (Source: Reserve Bank of New Zealand). Deposits ASB’s total deposit growth was 13% compared with market growth of 8.2% (Source: Reserve Bank of New Zealand). The majority of ASB’s deposits were sourced from term investments, with safety and security of capital being the primary drivers. Institutional and Business Lending Assets Lending assets of $55.1 billion have declined by 3% from $56.7 billion in the prior year. This is primarily due to lower foreign currency lending balances, reflecting activity as well as the strengthening of the Australian dollar relative to other currencies. Domestic lending balances were flat over the year; however this included the effect of syndication in the current year of bridge finance advanced shortly prior to 30 June 2002, as well as continued credit portfolio management, in particular with respect to large exposures. The Bank’s market share of Domestic Business Lending is 14.3% at June 2003 compared with 15.2% at June 2002 (Source: RBA). Trading and Investment Securities Trading and investment securities have increased 9% on the prior year. This is primarily due to short-term treasury deposits arising as a result of funding operations. Debt Issues Debt Issues were $28 billion, an increase of $7 billion on the prior year with the Bank taking advantage of the low interest rate environment and accessible funding markets offshore. This provides the Bank with greater liquidity to fund future lending asset growth. Deposits Deposits were $55 billion, an increase of $2 billion or 4% on the prior year. This is due to strong growth in business and corporate deposits, as a result of strong growth in business cheque accounts and cash deposit accounts, through market share growth in transaction services. 16 Banking Analysis (continued) Provisions for Impairment General provisions Specific provisions Total Provisions Total provisions for impairment/gross impaired assets net of interest reserved (%) Specific provisions for impairment/gross impaired assets net of interest reserved (%) General provisions/risk weighted assets (%) Bad debt expense/risk weighted assets (%) Total provisions for impairment for the Bank at 30 June 2003 were $1,530 million, down 5.9% from 30 June 2002. 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 24.1% from $270 million at 30 June 2002 to $205 million at 30 June 2003, primarily as a result of lower corporate defaults in the year as well as a number of provision reductions due to better than anticipated recoveries and provision write-offs. 30/06/03 $M 30/06/02 $M 1,325 205 1,530 239.4 32.08 0.90 0.21 1,356 270 1,626 183.9 30.54 0.96 0.32 The general provisions for impairment have reduced to $1,325 million at 30 June 2003 from $1,356 million at 30 June 2002, a decrease of 2.3%. The general provision as a percentage of Risk Weighted Assets reduced to 0.90% from 0.96%. This level is consistent with that of other major Australian banks. The general provision as a percentage of risk weighted assets has declined over the last 3 years reflecting the fact that the major growth in credit has been in home loans which have lower credit risk than other portfolios. Gross impaired assets less interest reserved have decreased 27.7% from $884 million to $639 million over the year. This has been primarily due to lower corporate defaults in the year as well as a number of provision reductions due than anticipated recoveries and provision write-offs. to better 250,000 200,000 150,000 100,000 50,000 - A - A - A - B B B B B B - A - A - A + A + A - A A - A A A A + B B B - B B B + B B A + B B B B B B + B B B i l t n e a v u q E r o g n i t a R P & S Growth in assets of $15bn drives grow th on balance sheet RWA of $5bn 199,568 77,474 86,378 13,401 22,315 +7% ($15bn) 214,718 -$3bn 74,472 +$18bn 103,987 12,427 23,832 Jun-02 Face Value Jun-03 123,343 77,474 43,189 Jun-02 Risk Weighting 0% Risk Weighting 20% Risk Weighting 50% +4% ($5bn) -$3bn 128,950 74,472 +$9bn 51,993 Risk Weighted Value Risk Weighing 100% Jun-03 T o p 2 0 E x p o s u r e s t o C o r p o r a t e s ( C o m m it t e d ) Top 2 0 Ex pos ure s a s a % of Tota l Com m itte d Ex pos ure 4 .2 0 % 3 .6 3 % 3 .4 4 % 3 .3 0 % 4 .5 0 % 4 .0 0 % 3 .5 0 % 3 .0 0 % 2 .5 0 % 2 .0 0 % 1 .5 0 % 1 .0 0 % 0 .5 0 % 0 .0 0 % 0 1 0 0 2 0 0 3 0 0 4 0 0 5 0 0 6 0 0 $ m illio n s D e c 0 1 Ju n 0 2 D e c 0 2 Ju n 0 3 17 (37) 13 - (43) (9) (1) 6 - (8) (8) large 22 16 (5) Funds Management Analysis Key Performance Indicators Profitability Underlying Profit after Income Tax Shareholder investment returns (after tax) Operating expenses - included for first time (after tax) Net Profit after Income Tax ("cash basis") Full Year Ended 30/06/03 $M 30/06/02 $M Increase/ (Decrease) % 228 9 (29) 208 360 8 - 368 Operating Income Operating income Operating income to average funds under management (%) 1,104 1.16 1,213 1.17 Operating Expenses Comparable business First time Funds Under Management Funds under management - average Funds under management - spot Net flows 807 42 761 - 95,333 94,207 (3,725) 104,027 102,838 4,776 Productivity and Other Measures Expenses to average funds under management - actual (%) Expenses to average funds under management - underlying (%) Effective corporate tax rate (%) 0.89 0.85 20 0.73 0.73 21 Financial Performance and Business Review Performance Highlights The results for the funds management business were impacted by market conditions, with cash profit contribution for the year of $208 million after tax. Excluding the expenses from restructure initiatives and shareholder investment returns the underlying profit is $228 million a 37% decrease on the prior year. This primarily reflects the effect of depressed equity markets for most of the year on funds under management, lower fund flows and the impact of increased compliance and regulatory expenses. Business Review investment products and The year was characterised by declining world for equity markets; changing customer preferences managed the to regulatory environment. The uncertainty for consumers created by the third straight year of negative equity returns and the effects of other world events such as the war on terrorism placed pressure on net fund flows for the industry as a whole. The negative returns on equity markets also impacted on the existing funds under management and associated fee revenue. reforms In addition to these external influences the changes in management in the earlier part of the year and the resultant downgrading of ratings on certain Colonial First State funds by some research houses contributed to the adverse the business. The scheduled withdrawal of funds by Winterthur in the UK and the sale of the UK private clients business had a structural impact on the business. flow of fund Against this background increased emphasis was placed on customer retention and improving product and distribution offerings. The key initiatives included: (cid:1) First Choice product, which was launched in May 2002, performed strongly, achieving $3.2 billion in funds by 30 June 2003. The business retained more than 60% of these funds to manage internally. (cid:1) (cid:1) (cid:1) In September 2002, the respective unit holders approved the merger of Colonial First State Property Trust Group (CFT) with the Commonwealth Property Office Funds (CPA) and Gandel Retail Trust (GAN). The merger resulted in CPA and GAN creating two leading sector specific listed property trusts and the addition of $2.2 billion in FUM. These businesses have now been successfully integrated and further strengthen the Bank’s position as a leading property fund manager. The establishment of a strategic alliance with 452 Capital, giving exposure to the growing boutique segment of the funds management industry. Extension of the First Choice product offering into the business superannuation market with the launch of “First Choice Employer Super”. Rationalising our position in the UK market with the sale of the Stewart Ivory Private Client business funds giving a clearer management business in the UK. The investment team in the UK continues to deliver solid investment results against benchmark, and fund flows in the second half of the year increased substantially. The key strategic initiatives implemented during the year were focused on process and system simplification and eliminating duplication. The key initiatives included: (cid:1) integration of focus on our core (cid:1) (cid:1) Successful the Commonwealth Investment Management business with Colonial First State Investments, achieved with minimal loss of FUM. Rationalisation of the on-sale product range. In particular the Colonial First State product suite has largely been adopted as the on-sale product suite, with most of the older products from other entities being closed to new business. Commencement of a migration product within the closed products, aimed at reducing the number of products and systems. (cid:1) (cid:1) 18 Funds Management Analysis (continued) (cid:1) (cid:1) The continued migration of closed products into First State products and onto the First State platform. The sale of the Bank’s custody business to National Australia Bank. Going forward, the funds management business is positioned well for future growth through its: (cid:1) Strong market position and scale across all segments of the value chain with the number one market share of retail funds under management at 14.8% at 30 June 2003, a decrease from 15.5% at June 2002 (Source: Plan for Life). Profit Summary (cid:1) (cid:1) Broad and diversified distribution, including further sales growth opportunities through the retail branch and premium distribution channels. A strong brand in both the investor and adviser market places through Colonial First State. Funds Management Operating income - external Operating income - internal Total Operating Income Shareholder investment returns Policyholder tax benefits Funds Management Income Operating expenses - comparable business Operating expenses - included for the first time Total Operating Expenses Net Profit before Income Tax Policyholder tax benefits Corporate tax expense Outside equity interests Net Profit after Income Tax ("cash basis") Full Year Ended 30/06/03 $M 30/06/02 $M Increase/ (Decrease) % 1,091 13 1,104 13 (62) 1,055 807 42 849 206 (62) 54 6 208 1,200 13 1,213 12 (65) 1,160 761 - 761 399 (65) 96 - 368 (9) - (9) 8 (5) (9) 6 - 12 (48) (5) (44) - (43) Operating Income Productivity Efficiency Operating income for the year is $1,104 million, a $109 million or 9% decrease on the prior year. Despite market conditions and significant changes in the product mix, the operating income to average funds under management ratio has been stable at 1.16%. The key driver of the reduction in operating income has been the decline in funds under management, which has been adversely affected, by the decline in equity markets. Shareholder Investment Returns Shareholder investment returns of $13 million were consistent with the prior year. Operating Expenses – Comparable Businesses Expenses for the year were $807 million, a $46 (cid:1) million or 6% increase on the prior year. This reflects: (cid:1) An increase in expenses associated with ASB’s funds management business whose share of retail managed fund inflows remained consistently in the top three of all fund managers in New Zealand. Increased expenses in complying with new regulatory changes, increased compliance expenses on legacy business and underlying staff expense increases. This was partly offset by lower commissions as a result of lower volumes of inflows. in Australia, incurred ) m $ ( M U F e g a r e v A 110,000 100,000 90,000 80,000 70,000 60,000 Underlying Expenses to Average FUM 0.81% 0.85% 0.73% 104,027 94,832 95,333 Jun-01 Jun-02 Jun-03 Average FUM Underlying Exp/Average FUM 0.96% 0.86% 0.76% 0.66% 0.56% 0.46% 0.36% 0.26% ) % ( M U F / e g a r e v A p x E g n i y l r e d n U Expenses as a percentage of average FUM increased over the year, reflecting the fall in funds and an increase in expenses. Operating Expenses – Included for the First Time These expenses include the expenses of strategic initiatives. The strategic initiatives undertaken during the year were the sale of the Bank’s custody business, integration of the Commonwealth and Colonial First State Funds Management business and commencement of a migration and rationalisation program for closed products. 19 Funds Management Analysis (continued) Taxation The corporate taxation charge for the year is $54 million a reduction of 44% on the prior year. This reduction is in line with the reduction in profits with the effective tax rate stable at 20%. The effective tax rate in the funds management business is below the standard tax rate of 30% primarily as a transitional concessions on business written within life insurance legal entities. result of Funds Under Management First Choice Cash management trusts Retail Wholesale Total FUM First Choice Cash management trusts Retail Wholesale Total FUM Opening Balance 30/06/02 $M 561 5,634 51,089 45,554 102,838 Opening Balance 30/06/01 $M - 6,172 51,902 43,407 101,481 Full Year Ended 30 June 2003 Inflows Outflows $M (578) (1,970) (12,630) (16,506) (31,684) $M 3,206 1,121 11,052 12,580 27,959 Investment Acquisitions & Disposals $M - - 2,158 (5,000) (2,842) Income $M 22 178 (562) (501) (863) Full Year Ended 30 June 2002 Inflows Outflows $M - (6,464) (12,407) (12,181) (31,052) $M 561 5,637 14,509 15,121 35,828 Investment Acquisitions & Disposals $M - - - - - Income $M - 289 (1,720) (1,557) (2,988) Other Movements & Transfers(1) $M - - (638) (563) (1,201) Other Movements & Transfers(1) $M - - (1,195) 764 (431) Closing Balance 30/06/03 $M 3,211 4,963 50,469 35,564 94,207 Closing Balance 30/06/02 $M 561 5,634 51,089 45,554 102,838 (1) Includes foreign exchange gains and losses from translation of UK Funds Management business Funds Under Management Funds under management were $94 billion at 30 June 2003, a decline of $8 billion or 8% on the prior year. This result is comprised of net outflows of $4 billion, investment return losses of $1 billion and net disposals of $3 billion. The majority of these movements occurred in the first half of the year. First Choice First Choice Funds have increased to $3.2 billion as at 30 June 2003. This product was launched in May 2002 and enhanced during the year with the launch of the First Choice Corporate super product. The performance has been very positive, with the business retaining over 60% of these funds to manage internally. Cash Management Trusts Funds in the Cash Management Trust were $5 billion, a decrease of 12% or $0.6 billion on the prior year. The reduction in funds invested in the cash management trust was more than offset by the flow of funds into the banking retail deposit product and largely reflected the higher rates available on the banking products as well as new, more onerous compliance requirements on the sale of cash management trusts. Retail Retail funds under management were $50 billion, a decrease of 1.2% over the prior year. This result includes $2.2 billion acquired as part of the Gandel transaction. 20 The net flows from other retail products were impacted by some substitution of sales from these products into First Choice, the combined impact was a funds inflow of $1 billion. The other primary cause of the outflows has been customer sentiment regarding investment markets, and a slowing of inflows and increased redemptions on equity based products. Consistent with this change in sentiment the business has also seen a shift from international and Australian equity products to more defensive investments such as property and fixed interest. Wholesale Wholesale funds under management were $35 billion, a decrease of $10 billion from the prior year. Included within this decline was an outflow of $3.5 billion following the previous sale of the UK life business to Winterthur and $1.5 billion in relation to the sale by First State UK of its private client business. The underlying reduction of $5 billion includes $0.5 billion of investment losses as a result of market volatility and $4 billion in net outflows. The net out flows occurred primarily in the Australian business as a result of lost equity mandates following the departure of personnel in the first half of the financial year. Consistent with the trend in retail products, there was also a slowing of inflows and increased redemptions of equity products generally, which was exacerbated by some downgrades in researcher ratings of the Colonial First State Australian equity funds. Funds Management Analysis (continued) Funds Under Management Geographical Segment Australia United Kingdom New Zealand Asia Total 30/06/03 $M 78,359 6,908 6,063 2,877 94,207 30/06/02 $M 81,670 12,089 5,690 3,389 102,838 Increase/ (Decrease) % (4) (43) 7 (15) (8) 21 Life Insurance Analysis Key Performance Indicators Profitability Underlying Profit after Income Tax Shareholder investment returns (after tax) Net Profit after Income Tax ("cash basis") Regional Net Profit after Income Tax - ("cash basis") Australia New Zealand Asia Operating Income Operating income Operating Expenses Comparable business Annual Inforce Premiums Australia New Zealand Asia Productivity and Other Measures Expenses to average inforce premiums (%) Effective corporate tax rate (%) Financial Performance and Business Review Performance Highlights The Life Insurance profit increased by $56 million or 85% over the prior year to $122 million. Excluding investment returns the underlying operating performance was $58 million, a $17 million or 41% improvement on the prior year. The improvement in underlying performance reflected a turnaround in the Asian business and strong profit growth in New Zealand, partly offset by a one off write down of an asset in the Australian Business. Business Review Australia The Australian business grew strongly (9% inforce premiums) in a difficult market to become Australia’s largest writer of Life risk premium with 15.0% market share. During Growth was achieved through product innovation, diversifying distribution and focusing on customer service. introduced some innovative new benefits and options on personal risk products, with several firsts in the market such as cash back, accidental death top ups and loyalty benefits. the year CommInsure In addition, diversification of new business sales has been achieved by an increase in the business volumes being written through the network channel and also from increased telemarketing capacity. Initiatives in improving customer service and productivity implemented during the year were: (cid:1) Assistance to customers in completing disability income tax statements. 22 Full Year Ended 30/06/03 $M 30/06/02 $M Increase/ (Decrease) % 58 64 122 71 46 5 41 25 66 84 28 (46) 634 659 484 524 575 221 84 527 187 96 57.3 16 68.8 38 41 large 85 (15) 64 large (4) (8) 9 18 (13) (16) (58) (cid:1) (cid:1) Development of a new front end delivery system for use in the retail network. Introduction of continuation of insurance cover when loans were paid out or refinanced. The business was impacted by a failure of a large investment that resulted in a $30 million loss. New Zealand The life insurance operations in New Zealand trade predominantly under the Sovereign brand. Sovereign maintained its market leadership position with market share of in-force business premium income increasing to 28.3% at April 2003 compared with 26.2% at April 2002 (source: ISI). This was achieved through product re-pricing, above market persistency rates and the continued roll out of Sovereign’s distribution model. The major focus during the year was streamlining and improving customer service, a review of key business processes and legacy systems, the creation of ASB Group Investments providing synergies between Sovereign and ASB’s investment business and Phase 1 of a product rationalisation and simplification program. Asia Asia covers our insurance and pension life administration operations in Hong Kong, and our life businesses in China, Vietnam, Indonesia and Fiji. During the year the Philippines life insurance operation was divested. Life Insurance Analysis (continued) North Asian economies faced difficult market conditions during the financial year due to the impact of the SARS crisis. The life industry across the region also suffered from volatility in international equity markets. these the Asian business improved its results, primarily as a result of the following key initiatives: Notwithstanding conditions, (cid:1) (cid:1) (cid:1) third party pension The Hong Kong pension administration business (Commserve Financial) became Hong Kong’s largest fund administrator following the insourcing of additional third party pension administration business. This provides the business with a stronger income stream. Expense control operations, and Disposal of the loss making Philippines business. the Hong Kong initiatives in Profit Summary Summary Financial Performance (excluding appraisal value (reduction)/uplift) Life Insurance Operating income Shareholder investment returns Policyholder tax Total Life Insurance Income Operating expenses - comparable business external Operating expenses - comparable business internal Net Profit before Income Tax Income tax expense attributable to: Policyholder Corporate Net Profit after Income Tax ("cash basis") Full Year Ended 30/06/03 $M 30/06/02 $M Increase/ (Decrease) % 552 78 4 634 471 13 150 4 24 122 595 35 29 659 511 13 135 29 40 66 (7) large (86) (4) (8) - 11 (86) (40) 85 Operating Income Operating Expenses Operating Income was $552 million for the year, a decrease of 7% or $43 million on the prior year. This is primarily due to a significant write down of an individual asset in the Australian annuity fund of $30 million combined with a reduction in income in Asia following the sale of the Philippine business. Underlying performance has been positive across all regions. Shareholder Investment Returns Shareholder investment returns were $78 million for the year, an increase of $43 million or 123% on the prior year. This reflected the rebound in global equity markets in the second half of the year. Operating expenses were $484 million, a decline of $40 million on the prior year. This primarily reflected the sale of the Philippine business in Asia, a reduction in operating expenses in Hong Kong as a result of expense control initiatives, and a reduction in business start up expenses. Corporate Taxation The corporate tax expense was $24 million a reduction from the prior period of $16 million. The effective tax rate in the prior year reflected losses in the Asian business. There was no tax benefit booked in respect of these losses, as it was not considered to be virtually certain that the losses would be recovered. The current year result reflects a small profit from the Asian business. Sources of Profit from Life Insurance Activities The Margin on Services profit from ordinary activities after income tax is represented by: 30/06/03 $M Full Year Ended 30/06/02 $M Increase/ (Decrease) % Planned profit margins Experience variations New business losses / reversal of capitalised losses Operating margins After tax shareholder investment returns Operating (Loss)/Profit after Income Tax 104 (38) (8) 58 64 122 94 (43) (10) 41 25 66 11 (12) 20 41 large 85 23 Life Insurance Analysis (continued) Experience variations for the year were $38 million. This comprised negative experience of $48 million for the first half of the year, partly offset by favourable experience of $10m in the second half of the year. The following experiences contributed to the first half results: (cid:1) Write down on an investment within the Australian business of $30 million. (cid:1) Worse than long term plan persistency within the (cid:1) Asian and New Zealand business. Start up expenses in the Asian Business, being primarily China, Vietnam and the Pension Retirement business in Hong Kong. The second half favourable experiences reflect: Geographical Analysis of Business Performance (cid:1) Reduction in start up expenses in Asia, following cost control initiatives and the sale of the Philippine business, partly offset by (cid:1) Worse than long term plan persistency within the Asian and New Zealand business. The prior full year experience variations of $43 million included: (cid:1) (cid:1) Adverse claims experience in the New Zealand business. Although continuing to improve, worse than long term plan persistency within the Asian Business. Start up expenses in Asia. The magnitude of the Asian persistency and start up expenses reduced in the current year, contributing to the improved Asian result. (cid:1) Underlying Profit after Income Tax Australia New Zealand Asia Total Full Year Ended 30/06/03 30/06/02 30/06/03 30/06/02 30/06/03 30/06/02 30/06/03 30/06/02 $M $M $M $M $M $M $M $M Operating margins Investment earnings on assets in excess of policyholder liabilities Net Profit after Income Tax 36 35 71 66 18 84 Australia 31 15 46 Asia 25 3 28 (9) 14 5 (50) 4 (46) 58 64 122 41 25 66 The Australian result for the year was $71 million, a The Asian result for the year was $5 million reduction of $13 million or 15% on prior year. Operating margins were $36 million a reduction of $30 million on the prior year, reflecting the write off of a significant asset in the first half of this year. New Zealand The profit contribution of the New Zealand business was $46 million, a 64% increase on the prior year. investment The operating margin was $31 million, a 24% the prior year. Adverse morbidity and increase on disability claims and losses on annuity business impacted the prior period result. The current period result reflected favourable foreign exchange benefit and claims experience as a result of improved claims management, partly offset by higher than planned lapses. The lapse rate was however, below that experienced in the industry. compared with a loss of $46 million in the prior year. Operating margins were a loss of $9 million compared with a prior year loss of $50 million. The improvement reflected the following: (cid:1) result of income stream as a the Stronger development of the pension fund administration business. One-off charges and new business losses, primarily in the Philippines, adversely impacted the prior year result. The current period result reflects improved expense control, particularly in maintenance expenses, and improved persistency compared with the prior year. (cid:1) (cid:1) Annual Inforce Premiums Personal Group Total Australia New Zealand Asia Total Full Year Ended 30 June 2003 Opening Sales/New Balance Business 30/06/02 $M $M 581 128 229 59 810 187 527 187 96 810 128 43 16 187 24 Lapses $M (78) (30) (108) (80) (16) (12) (108) Other Movements $M (6) (3) (9) - 7 (16) (9) Closing Balance 30/06/03 $M 625 255 880 575 221 84 880 Life Insurance Analysis (continued) Annual Inforce Premiums Personal Group Total Australia New Zealand Asia Total Full Year Ended 30 June 2002 Opening Sales/New Balance Business 30/06/01 $M $M 525 137 189 62 714 199 463 161 90 714 124 52 23 199 Lapses $M (81) (22) (103) (60) (26) (17) (103) Other Movements $M - - - - - - - Closing Balance 30/06/02 $M 581 229 810 527 187 96 810 Annual inforce premiums increased by $70 million or 9% on the prior year. This reflected an improvement in the lapse rate from 14.4% in the prior year to 13.3% in the current year. The Bank’s Australian market share of inforce premiums was 15.0% at March 2003, an increase from 14.9% at June 02 (Source: Plan for Life). Sovereign’s market share of inforce premiums was 28.3% at April 2003, compared with 26.2% at June 2002. Market share of new business was stable at 27.0% (Source ISI). 25 Shareholder Investment Returns Shareholder Investment Returns Funds Management Business Life Insurance Business Shareholder Investment Returns before Tax Taxation Shareholder Investment Returns after Tax Full Year Ended 30/06/03 $M 13 78 91 18 73 30/06/02 $M 12 35 47 14 33 Increase/ (Decrease) % 8 large 94 29 large Shareholder Investments Asset Mix (%) Local equities International equities Property Other (1) Subtotal Fixed interest Cash Subtotal Total Australia 30/06/03 % 27 7 15 - 49 11 40 51 100 New Zealand 30/06/03 % 1 12 3 10 26 19 55 74 100 Asia 30/06/03 % 17 - - 29 46 54 - 54 100 Total 30/06/03 % 22 6 10 7 45 20 35 55 100 Shareholder Investments Asset Mix ($M) Local equities International equities Property Other (1) Subtotal Fixed interest Cash Subtotal Total Australia 30/06/03 $M 561 141 302 - 1,004 235 778 1,013 2,017 New Zealand 30/06/03 $M 5 45 11 38 99 72 209 281 380 Asia 30/06/03 $M 89 1 - 236 326 283 - 283 609 Total 30/06/03 $M 655 187 313 274 1,429 590 987 1,577 3,006 (1) Asia other primarily includes the excess of carrying value over net tangible assets 26 Life Company Valuations The following table sets out the components of the carrying values of the Bank’s life insurance and funds management businesses. These were Directors’ valuations, based on appraisal values using a range of economic and business assumptions determined by management, which were reviewed by independent actuaries, Trowbridge Deloitte. In determining the carrying value, Directors have taken account of a number of market based factors which result in the adoption of a more conservative valuation that is $450 million lower at 30 June 2003 ($780 million lower at 31 December 2002; $748 million lower at 30 June 2002) than that determined by Trowbridge Deloitte. The Directors have considered the potential impacts to the appraisal value from continued volatility and uncertainty within world equity markets and the subdued levels of industry funds flows. Some of the key factors allowed for within the Directors valuation at 31 December 2002, to reflect current market conditions, have now been incorporated into the Trowbridge Deloitte valuation at 30 June 2003. This has led to a reduction in the difference between the Directors valuation and the Trowbridge Deloitte valuation of $330 million. Carrying Value at 30 June 2003 Shareholders net tangible assets Value of inforce business Embedded Value Value of future new business Carrying Value (Decrease)/Increase in Carrying Value since 30 June 2002 Analysis of Movement Since 30 June 2002 Profits Capital movements (2) Dividends paid Disposals/Acquisitions of business(3) FX Movements Change in Shareholders NTA Acquired excess Appraisal value (decrease)/uplift (Decrease)/Increase to 30 June 2003 Funds Management $M 754 1,123 1,877 3,596 5,473 (110) Australia $M 1,264 245 1,509 79 1,588 178 Life Insurance New Zealand $M 380 191 571 278 849 61 Funds Management $M Life Insurance Australia $M New Zealand $M 208 154 (196) (110) (4) 52 129 (291) (110) 71 98 (111) - (3) 55 - 123 178 46 1 - - (1) 46 - 15 61 Asia (1) $M 608 4 612 24 636 Total $M 3,006 1,563 4,569 3,977 8,546 (163) (34) Asia (1) $M 5 36 - (20) (92) (71) - (92) (163) Total $M 330 289 (307) (130) (100) 82 129 (245) (34) (1) The Asian life businesses were not held in the market value environment and were carried at net assets plus any 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. Includes capital injections and movements in intergroup loans. (2) (3) Represents the purchase of management rights in CFS Retail Property Trust, the acquisition of Avanteos, investment in a Chinese funds management joint venture, disposal of some Colonial First State UK business and disposal of the Philippines life insurance business. 27 Life Company Valuations (continued) Change in valuations The valuations adopted have resulted in a total value reduction of $34 million since 30 June 2002. This comprised a reduction in carrying value of $222 million in the period 30 June 2002 to 31 December 2002, partly offset by an increase in value of $188 million in the period 31 December 2002 to 30 June 2003. The main components of the reduction of $34 million between 30 June 2002 and 30 June 2003 comprised: (cid:1) A $82 million increase in net tangible assets as shown above. Acquired excess of $129 million primarily in relation to the merger of the Colonial First State Property Trust. (cid:1) (cid:1) (cid:1) Group (CFT) with the Commonwealth Property Office Fund (CPA) and Gandel Retail Trust (GAN) (“the property trust merger”). Appraisal value reduction of $245 million. The capital movements the current period primarily include an injection of capital into the funds management business in relation to the property trust merger. in The appraisal value reduction for the year of $245 million reflects: (cid:1) Uncertainty and low returns in world equity markets and their effect on industry flows. The performance of the business during the year. (cid:1) 28 Presentation of Financial Information Definitions "Cash basis" net profit after In this annual report, the Bank presents its profit from ordinary activities after tax on a “statutory basis”, which is calculated in accordance with Australian GAAP, and on a “cash basis”. "Cash basis" is defined by management as net profit after tax and outside equity funds interests, before goodwill amortisation and value management and insurance appraisal life (reduction)/uplift. tax represents profit derived from business operating income and operating expenses after tax. The only items excluded from the net profit after tax are goodwill amortisation and appraisal value (reduction)/uplift. Management believes "cash basis" is a meaningful measure of the Bank’s performance and provides the basis for the determination of the Bank’s dividends. The goodwill amortisation is an annual accounting charge to profit, with amortisation principally over a 20-year period. The appraisal value reduction or uplift is a movement in the value of the funds management and life insurance businesses which in part is driven by external economic factors and markets, such as world equity markets and interest rates. The Bank also presents its earnings per share on a statutory basis and on a cash basis. Earnings per share on a statutory basis are affected by the impact of changes in the appraisal value of our funds management and life insurance businesses. "Earnings per share (cash basis)" is defined by management as net profit after tax and outside equity interests, before goodwill amortisation and funds management and life insurance appraisal value (reduction)/uplift, divided by the weighed average of the Bank’s ordinary shares outstanding over the relevant period. This measure shows the "cash basis" net profit after tax, as described above, per share. "Operating Expenses — included for the first time" refers to one-off costs associated with the strategic initiatives as outlined in the Bank’s annual report for the year ended 30 June 2002 as well as additional share- based compensation following changes to the Bank’s remuneration structures and policy. These one-off costs principally relate to restructuring expenses. “Operating expenses — included for the first time” plus “operating expenses — comparable businesses” is equal to the Australian GAAP measure "operating expenses". Management believes it is meaningful to highlight these items in an analysis of our results. the (cid:1) (cid:1) "Underlying profit" refers to profit after tax, cash basis, before operating expenses included for the first time and shareholder investment returns. "Underlying profit" is referred to across all our businesses. The underlying profit is result of our core operating performance. Management believes it is meaningful to highlight the underlying profit in order to show performance on a comparable basis, in particular excluding the volatility of equity markets and restructuring expenses. "Underlying" productivity ratios Exclude expenses included for the “first time”. Exclude shareholder investment returns from funds management and life insurance income. Exclude funds management income and life insurance income lines. In providing ratios, comparatives for the prior period have also been adjusted. "Underlying" productivity ratios have been presented to provide what management believes to be a more relevant presentation of our productivity ratios. Management believes that these adjustments enable comparison of our productivity ratios from period to period to be more meaningful as it reflects our core operating performance. "underlying" productivity policyholder from the tax (cid:1) . 29 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 the difference between capital available to absorb loss and risk as assessed by economic equity required. is measured by “Economic equity” is defined as the potential risk of loss of one year’s earnings, measured at a standard consistent with an AA credit rating. is derived Economic equity from underlying exposures to credit, market, operational and 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. funds management businesses, economic equity is a measure of the potential risk of loss of the fair value of the business. insurance and the life In The composition of economic equity of the Group during the financial year ended 30 June 2003 was 53% credit risk, 13% market risk, 33% operational risk and 1% insurance risk. The component measures of economic equity for the funds management insurance and banking, life businesses were as follows: (cid:1) (cid:1) (cid:1) Banking; 76% credit risk, 4% market risk and 20% operational risk. Life insurance; 41% market risk, 53% operational risk, 3% credit risk and 3% insurance risk. Funds Management; 10% market risk and 90% operational risk. The following sections describe the integrated risk management framework components. Credit Risk Credit risk is the potential for loss arising from failure of a debtor or counterparty to meet their 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 transactions 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 does not generally involve credit risk from a shareholder perspective. The measurement of credit risk is based on an internal credit risk rating system, and utilises analytical tools to calculate expected and unexpected loss for the credit portfolio. The Group uses a diversified portfolio approach for the management of credit risk (refer also Note 14) comprised of the following: (cid:1) A system of industry limits and targets for exposures by industry; A process for considering the risk associated with correlations between large exposures; A for aggregate large credit exposure policy exposures to individual commercial and industrial client groups tiered by credit risk rating and loan duration; and A system of country limits for geographic exposures. (cid:1) (cid:1) (cid:1) These policies assist in the diversification of the credit portfolio. The credit portfolio is managed in two distinct segments: (cid:1) (cid:1) Statistically Managed Segment Comprises exposures that are generally less than $250,000 and is dominated by the housing loan portfolio. Other products in this segment are credit cards, personal loans and some leasing business. Credit facilities are approved using scoring and check sheet techniques. Risk Rated 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 re-assessed 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 regularly monitored. A centralised portfolio model is used to assess risk and return on an overall portfolio basis and for segments of the portfolio. The model also assists in determining economic equity and general provision requirements, and credit portfolio stress testing. 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 and from controlled trading undertaken in pursuit of profit. 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 2 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 in another. Actual results are backtested to check the validity of the VaR model. In addition, because the VaR model cannot encompass all possible outcomes, tests covering a variety of stress scenarios are regularly performed to simulate the effect of extreme market conditions. 30 Integrated Risk Management (continued) 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 to the financial statements for further details. Average VaR During June 2003 Half Year $M Average VaR During December 2002 Half Year $M Average VaR During June 2002 Half Year $M Average VaR During December 2001 Half Year $M Group (excluding ASB Bank) Interest rate risk Exchange rate risk Implied volatility risk Equities risk Commodities risk Prepayment risk ASB Bank Diversification benefit Total 3.43 1.31 0.62 0.73 0.32 0.38 0.15 (2.32) 4.62 Trading income for 30 June 2003 increased by 2.7% over 30 June 2002 without a significant 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 eligible 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 Bank’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 are offered on some classes of policy. These liabilities may not be capable of being easily hedged through matching assets. In addition, market risk may arise from 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. the Bank possible, Wherever 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. The ability to match asset characteristics with policy obligations may be constrained by a number of factors including regulatory constraints, the lack of suitable investments as well as by the nature of the policy liabilities themselves. 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 Bank earns fees on investment linked policies that are based on the amount of assets invested, it may receive lower fees should markets fall. Asset allocation for investment linked policies is decided by the policyholder. 31 3.37 1.47 0.59 0.32 0.35 0.30 0.19 (2.14) 4.45 3.23 2.07 0.59 0.42 0.31 0.21 0.17 (2.39) 4.61 2.60 1.54 0.48 0.47 0.48 0.32 0.14 (2.45) 3.58 A smaller proportion of policyholder assets is held to support policies where life companies have guaranteed either the principal invested or the investment return (‘guaranteed policies’). Investment mandates for these classes of policies emphasise investment in lower volatility assets such as cash and fixed interest. The Bank 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. Thus, it is likely to be several years before the Australian and New Zealand inforce book of guaranteed policies will decline significantly as the policy payments on maturing policies continues to be offset by the premium income on 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 varies from company to company. Policyholder to meet policyholder reasonable expectations without putting the shareholder at undue risk. funds are invested Market risk in the funds management business is the risk that an adverse movement in market prices will result in a reduction of that element of fee income related to earnings performance. in issue Liquidity risk is not a significant life insurance companies. The life insurance companies in the Bank hold substantial investments in highly liquid assets such as listed shares, government bonds and bank deposits and continue to receive substantial premium income. Furthermore, processing time for claims and redemptions enables each company to forecast and manage its liquidity needs with a high degree of accuracy. Integrated Risk Management (continued) Operational and Strategic Business Risk The Group’s operational and strategic business risk management framework supports the achievement of the Group’s financial and business goals. Operational Risk is defined as the risk of economic (cid:1) (cid:1) (cid:1) failed internal processes and gain or loss resulting from: (cid:1) Inadequate or methodologies, People, Systems, or from External events. Strategic Business Risk is defined as the risk of economic gain or loss resulting from changes in the business environment caused by the following factors: (cid:1) (cid:1) (cid:1) (cid:1) Economic, Competitive, Social trends, or Regulatory. Business owners for the throughout the Group are responsible identification, assessment and treatment of these risks. These business owners are supported by the Group’s framework consisting of a governance structure, a suite of risk mitigating policies, a measurement methodology and skilled operational risk professionals embedded throughout the Group. The Bank’s risk measurement operational methodology provides the basis for the expert assessment the calculation of of operational risk economic equity. individual risk exposures and for Economic capital the banking business is calculated using a quantitative-based expert assessment of individual operational risk scenarios. For the life insurance and funds management businesses economic capital is calculated using worst-case scenarios that impact upon business risk factors such as pricing, margins and business volumes. risk transfer program The Group continues to benchmark and monitor its for efficiency and insurance effectiveness. This is primarily achieved through a methodology to optimise total shareholder returns in determining the most appropriate blend of insurance risk transfer and economic capital. Insurance Risk There are two risk types that are considered to be unique to life insurance businesses. These are the risks that the incidence of mortality (death) and morbidity (illness and injury) claims are 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 Bank enters 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 32 is integral to the Group’s financial markets activities. Derivatives are also used to manage the Group’s own exposure to market risk. The Bank 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. terms and conditions of OTC traded derivatives: The Bank buys and sells financial instruments that are traded ‘over-the-counter’, rather than on recognised exchanges. The 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 supported by individual transaction confirmations. The documentation protects the Group’s interests should the counterparty default, and provides in jurisdictions where the relevant law allows. to net outstanding balances the ability The Group’s exposure to derivatives is disclosed in Note 39 Market Risk. Off Balance Sheet Arrangements The Group is involved with a number of special purpose entities in the ordinary course of business, primarily to provide funding and financial services to our customers. Under Australian GAAP these entities are consolidated in the financial statements if they meet the criteria of control. The definition of control depends upon accordingly, substance determination of involves management judgment. The Group has no off balance sheet financing entities that it is considered to control. form, the existence of control rather than and As detailed in Note 1 (jj), the Group conducts a Loan Securitisation program through which it packages and sells loans as securities to investors. Liquidity facilities are provided at arm’s length to the program by the Group in accordance with the APRA Prudential Guidelines. These liquidity facilities are disclosed within Contingent Liabilities as commitments to provide credit. Business Continuity Management Business Continuity Management (BCM) within the Group involves the development, maintenance and testing of advance action plans to respond to defined risk events. This ensures that business processes continue with minimal adverse impact on customers, staff, products, services and brands. BCM constitutes an essential component of the Group’s risk management process by providing a controlled response to potential operational risks that could have a significant impact on the Group’s critical processes and revenue streams. It includes both cost- effective responses to mitigate the impact of risk events or disasters and crisis management plans to respond to crisis events. Each division in the Group has developed, tested and maintained Business Continuity Plans. A comprehensive BCM education program has been implemented to embed BCM methodologies and capability throughout the Group. 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 financial services. In all there were 45 banking groups operating in Australia at 30 June 2003. 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 13) 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 interstate customers and expanding their operations across state borders. Their growth in mortgage lending has been facilitated by the proliferation of non-bank mortgage originators and brokers. The larger regional banks now operate in several states, if not nationally. Over recent regional banking sector has undergone years substantial consolidation with several of these institutions amalgamating with other regional banks or being acquired by major banks. the locally through a There are 12 foreign owned banks operating in incorporated subsidiary. Australia through An additional 20 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 foreign banks are represented in Australia by both a locally incorporated subsidiary and a branch. to customers. Five Non-bank financial intermediaries such as building societies and credit unions compete strongly in the areas of accepting deposits and residential mortgage lending, mainly for owner-occupied housing. These state-based institutions are also making headway in achieving multi- state coverage, partly encouraged by a more accommodating regulatory environment. A further 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. In addition, international fund managers and global investment banks are also increasing their presence in Australia. Changes in the financial needs of consumers, deregulation, and technology developments have also changed the mode of competition. In particular, the development of electronic delivery channels and the reduced reliance on a physical network facilitate the entry of new players from related industries, such as retailers, 33 telecommunication companies and utilities. Technological change has provided opportunities for new entrants with differing combinations of expertise and has enabled the unbundling of the value chain. funds) Another significant factor in disintermediation in Australia has been the substantial growth in funds under the superannuation management, especially within (pension industry. Future growth will be underpinned by the Australian Government’s continued encouragement through superannuation, a mandatory superannuation guarantee levy on employers and by means of taxation concessions. This growth potential continues to attract new entrants to this market. long-term saving of The pool of capital represented by funds under management provides an alternative source of capital to bank finance for borrowers. The corporate bond market in Australia has benefited from the growth in funds under management with many of the major Australian corporates directly accessing capital markets in Australia and around the world. The Bank, in competition with numerous domestic and foreign banks, is actively involved as an originator of corporate debt in the capital markets, especially in the Euro-AUD and Euro-NZD sector, and in the creation of new financing structures including as arranger and underwriter in major infrastructure projects undertaken by the corporate sector. Like Australia, the New Zealand banking system is characterised by strong competition. The Group’s activities in New Zealand are conducted through ASB Group. 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. 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 Australia has by international standards a high quality system of financial regulation by international standards. Following a comprehensive inquiry into the Australian financial system (the ‘Wallis Inquiry’), the Australian Government introduced a new framework for regulating the financial system. The previous framework, which applied regulations according type of institution being regulated, resulted in similar products being regulated differently. The new functional approach regulates products consistently regardless of the particular type of institutions providing them. the to Description of Business Environment (continued) The prudential framework applied by APRA is embodied in a series of prudential standards including: Capital Adequacy Under APRA capital adequacy guidelines, Australian banks are required to maintain a ratio of capital (comprising Tier 1 and Tier 2 capital components) to risk weighted assets of at least 8%, of which at least half must be Tier 1 capital. These guidelines are generally consistent with the Basel Committee on Banking Supervision. From 1 July 2003, a new Level 3 capital requirement (prescribed by APRA) is being introduced for conglomerate groups. For information on the capital position of the Bank, see Note 31 Capital Adequacy. those agreed upon by 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 25% of the capital base (prior to 1/7/03 the limit was 30%). Exposure to authorised deposit taking institutions (ADIs) is not to exceed 50% of the capital base. Prior notification must be given to APRA if a bank intends to exceed these limits. For information on the Bank’s large exposures refer to Note 14 to the Financial Statements. that financial 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% shareholding limit for authorised deposit taking institutions, insurance companies and their holding companies. The Treasurer has the power to approve acquisitions exceeding 15% 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. 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. Since July 1998, the new regulatory arrangements have comprised four separate agencies: The Reserve Bank of Australia, the Australian Prudential Regulation Authority, Investments the Australian Securities and Commission and the Australian Competition and Consumer Commission. Each of these agencies has system wide responsibilities for the different objectives of system. government of A description of their general responsibilities and functions is set out below. these agencies and oversight financial the Reserve Bank of Australia (RBA) - is responsible for monetary policy, financial system stability and regulation of the payments system. Australian Prudential Regulation Authority (APRA) – has comprehensive powers to regulate prudentially banks and other deposit-taking institutions, 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. Consistent with its functional approach to regulation, the Wallis Inquiry proposed a single licensing regime for financial sales, advice and dealings in relation to financial products, consistent and comparable financial product disclosure and a single authorisation procedure for financial exchanges and clearing and settlement facilities. The Financial Services Reform Act 2001 enacted these proposals and when it comes into force in March 2004 should facilitate innovation and promote business while at the same time ensuring adequate levels of consumer protection and market integrity. The Government is expected to pass into law this year a package of proposals (known as CLERP 9) dealing with audit regulation and corporate disclosure designed to ensure Australia has an effective regulatory and disclosure framework that provides the structures and incentives for a fully informed market. 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. 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. 34 Description of Business Environment (continued) from 1/7/03) limits applicable Banks’ Association With Non-Banks There are formal guidelines (including maximum that control exposure 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. 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 policyholders can be met. to prudential standards covering capital adequacy, liability valuation, reinsurance arrangements. insurance companies are subject risk management General and The financial condition of life insurance companies is monitored through regular financial reporting, lodgment of inspections. audited Compliance with APRA regulation for general insurance companies is monitored through regular returns and lodgment of an audited annual return. supervisory accounts and Critical Accounting Policies and Estimates The Notes to the Financial Statements contain a summary of the Group’s significant accounting policies. Certain of these policies are considered to be more important in the determination of the Group’s financial position, since they require management to make difficult, complex or subjective judgements, some of which may relate to matters that are inherently uncertain. These decisions are reviewed by a Committee of the Board. These policies include judgements as to levels of provisions for impairment for loan balances, actuarial assumptions in determining life insurance policy liabilities and market valuations of life insurance controlled entities. An explanation of related judgements and estimates involved is set out below. these policies and the Provisions for Impairment Provisions for impairment 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, contingent liabilities, financial instruments and investments and assets acquired through security enforcement. Specific Provisions Specific provisions are maintained where full recovery of principal is considered doubtful. Specific provisions are made against individual facilities in the credit risk rated managed segment where exposure aggregates to $250,000 or more, and a loss of $10,000 or more is expected. The provisions are established based primarily on estimates of the realisable (fair) value of collateral taken. Specific provisions (in bulk) are also made against each statistically managed segment to cover facilities which are not well secured and past due 180 days or more, against the credit risk rated segment for exposures aggregating to less than $250,000 and 90 days or more past due, and against emerging credit risks identified in 35 specific segments in the credit risk rated managed portfolio. These provisions are derived primarily by reference to historical ratios of write-offs to balances in default. Specific provisions are provided for from the general provision. All facilities subject to a specific provision for impairment are classified as non-accrual, as set out in Note 15. General Provision The general provision represents management’s estimates of non-identifiable probable losses and latent risks inherent in the overall portfolio of loans and other credit transactions. The evaluation process is subject to a series of estimates and judgements. In the Credit Risk Rated Managed segment, the risk rating system, including the frequency of default and loss given default rates, loss history, and the size, structure and diversity of individual credits are considered. Current developments in portfolios (industry, geographic and term) are reviewed. In the Statistically Managed segment the history of defaults and losses, and the size, structure and diversity of portfolios are considered. In addition management considers overall indicators of portfolio performance, quality and economic conditions. Changes in these estimates could have a direct impact on the level of provision determined. The amount required to bring the general provision to the level assessed is taken to profit and loss as set out in Note 13. Life Insurance Policyholder Liabilities Life Insurance policy liabilities are accounted for under AASB 1038: Life Insurance Business. A significant area of judgement is in the determination of policyholder liabilities, which involve actuarial assumptions. All policyholder liabilities are recognised in the Statement of Financial Position and are measured at net present values or, if not materially different, on an accumulation basis after allowing for acquisition expenses. They are calculated in accordance with the principles of Margin on Services (MoS) profit reporting as set out in Actuarial Standard AS 1.03: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board. The areas of judgement where key actuarial assumptions are made in the determination of policyholder liabilities are: (cid:1) Business assumptions including: - amount, timing and duration of claims/policy payments; - policy lapse rates; and - acquisition and long term maintenance expense levels; (cid:1) (cid:1) Long term economic assumptions for discount and interest rates, inflation rates and market earnings rates; and Selection of methodology, either projection or accumulation method. The selection of the method is generally governed by the product type. The determination of assumptions relies on making judgements on variances from long-term assumptions. Where experience differs from long term assumptions: (cid:1) Recent results may be a statistical aberration; or (cid:1) There may be a commencement of a new paradigm requiring a change in long term assumptions. Description of Business Environment (continued) The Group’s actuaries arrive at conclusions regarding the statistical analysis using their experience and judgement. Additional information on the accounting policy is set out in Note 1 (jj) Life Insurance Business, and Note 34 Life Insurance Business details the key actuarial assumptions. Insurance Controlled Market Valuation of Life 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 the investment in controlled entities is eliminated and the excess of market value of controlled entities over their underlying net assets is separately recognised in Other Assets (Note 21) 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. Appraisal valuations are used to assist the directors in setting the market value. There are several key economic and business assumptions involved in the appraisal valuations, the selection of which involves actuarial judgement. Economic assumptions are the long term view on key economic drivers and comprise investment earnings rates, risk discount rates and inflation. The economic assumptions are reviewed as a suite to take account of the correlation between the movements in each factor. Business assumptions relate to the performance of the Group’s businesses, both stand alone and relative to the market. These assumptions are only altered when there is a long-term change in views, which is supported by clearly discernible trends. The assumption setting process is similar to that used for Margin on Services policyholder liabilities. The major business assumptions for life businesses are: (cid:1) (cid:1) (cid:1) (cid:1) Sales/new business Claims Persistency Expenses The major business assumptions for funds management businesses are: (cid:1) Sales/new business (cid:1) Margins/business mix (cid:1) Redemptions (cid:1) Cost to income ratio Details of the valuations are set out in Note 34 Life Insurance Business. the key assumptions used in International Accounting Standards to support The Financial Reporting Council has announced a decision the adoption by Australia of International Accounting Standards (IAS) by 1 January 2005. The Bank will be required to adopt these standards for the financial year commencing 1 July 2005. The major new IAS standards that are expected to most impact the Bank are in the areas of financial instruments, goodwill, pension accounting and insurance contracts. A project has been established to identify all issues associated with these accounting standard changes. It is too early in the process to estimate the full financial effect of these new accounting requirements. 36 Corporate Governance Board of Directors Charter The role and responsibilities of Directors are set out responsibilities include: (cid:1) in the Board Charter. the Board of The The corporate governance of the Bank, including the establishment of Committees; Oversight of the business and affairs of the Bank by: − establishing, with management, the strategies (cid:1) (cid:1) Appointment of the Chief Executive Officer; and Approval of the Bank’s major HR policies and overseeing the development strategies for senior and high performing executives. There in place a comprehensive set of management delegations to allow management to carry on the business of the Bank. is (cid:1) (cid:1) and financial objectives; − approving major corporate initiatives; − establishing appropriate systems of risk management; and − monitoring the performance of management; Communicating with the and community, results of, and developments in, the operations of the Bank; shareholders Composition There are currently 12 Directors of the Bank and details of their experience, qualifications, special responsibilities and attendance at meetings are set out in the Directors report. Membership of the Board and Committees is set out below: DIRECTOR BOARD MEMBERSHIP COMMITTEE MEMBERSHIP 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, AM S C Kay W G Kent, AO F D Ryan F J Swan B K Ward Non-executive, Independent Non-executive, Independent Executive Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Nominations Remuneration Audit Risk Chairman Chairman Chairman Chairman Deputy Chairman Member Chief Executive Officer Member Member Member Chairman Member Member Member Member Member Member Member Member (cid:1) At each Annual General Meeting one-third of Directors (other than the chief executive officer) shall retire from office and may stand for re-election. The Board have established a policy that, with a phasing in provision for existing Directors, the term of directors’ appointments would be limited to 12 years (except where succession planning for Chairman and appointment of Chairman requires an extended term. On appointment, to be available for that position for five years). Directors do not stand for re-election after attaining the age of 70. the Chairman will be expected Ms S C Kay was appointed as a non-executive Director on 5 March 2003. In accordance with the Bank’s Constitution and the ASX Listing Rules, she will stand for election at the Annual General Meeting to be held on 31 October 2003. (cid:1) (cid:1) The Constitution of the Bank specifies that – The Chief Executive Officer and any other executive director shall not be eligible to stand for election as Chairman of the Bank; The number of Directors shall not be less than 9 nor more than 13 (or such lower number as the Board may from time to time determine). The Board have determined that for the time being, the number of directors shall be 12; and 37 Corporate Governance (continued) Independence The Board regularly assesses the independence of each Director. For this purpose an independent Director is a non-executive Director whom the Board considers to be independent of management and free of any business or other relationship that could materially interfere with the exercise of unfettered and independent judgment. In addition to being required to conduct themselves in accordance with the ethical policies of the Bank, Directors are required to be meticulous in their disclosure of any material contract or relationship in accordance with the Corporations Act and this disclosure extends to the interests of family companies and spouses. Directors are required to strictly adhere to the constraints on their participation and voting in relation to matters in which they may have an interest in accordance with the Corporations Act and the Bank's policies. Each Director may from time to time have personal dealings with the Bank. Each Director is involved with other companies or professional firms which may from time to time have dealings with the Bank. Details of offices held by Directors with other organisations are set out in the Directors' Report and on the Bank's website. Full details of related party dealings are set out in notes to the Company's accounts as required by law. (cid:1) (cid:1) All the current non-executive Directors of the Bank have been assessed as independent Directors. In reaching that determination, the Board have taken into account (in addition to the matters set out above): (cid:1) The specific disclosures made by each Director as referred to above; the that (cid:1) Where applicable, related party dealings those to each Director, noting referrable dealings are not material under accounting standards; That no Director is, or has been associated directly with, a substantial shareholder of the Bank; That no non-executive Director has ever been employed by the Bank or any of its subsidiaries; That no Director is, or has been associated with a supplier, professional adviser, consultant to or customer of the Bank which is material under accounting standards; and That no non-executive Director personally carries on any role for the Bank otherwise than as a Director of the Bank. The Bank does not consider that term of service on the Board is a factor affecting a Director's ability to act in the best interests of the Bank. Independence is judged against the ability, integrity and willingness of the Director to act. The Board have established a policy limiting Directors' that skill sets remain appropriate in a dynamic industry. to ensure tenures (cid:1) (cid:1) Education Directors participate in an induction programme upon appointment and in a refresher programme on a regular basis. The Board have established a programme of continuing education to ensure that it is kept up to date with developments in the industry both locally and globally. This includes sessions with local and overseas experts in the particular fields relevant to the Bank’s operations. Review The Board have in place a process for annually reviewing its performance, policies and practices. These reviews seek to identify where improvements can be made and also assess the quality and effectiveness of (cid:1) (cid:1) 38 information made available to Directors. Every 2 years, this process is facilitated by an external consultant, with an internal review conducted in the intervening years. The review includes an assessment of the performance of each Director. After consideration of the results of the performance assessment, the Board will determine its endorsement of the Directors to stand for re-election at the next Annual General Meeting. The non-executive Directors meet at least annually, without management, in a forum intended to allow for an open discussion on Board and management performance. This is in addition to the consideration of the Chief Executive Officer’s performance and remuneration which is conducted by the Board in the absence of the Chief Executive Officer. The Chairman meets annually with team executive performance and perspective. to discuss with them level of involvement the senior the Board’s their from Selection of Directors The Nominations Committee have 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 the ongoing effectiveness of the Board, have the ability to exercise sound business judgment, to think strategically and have levels of demonstrated professional skill and appropriate personal qualities. leadership experience, high to contribute is able to The Committee regularly reviews the skill base and experience of existing Directors to enable identification of attributes required in new Directors. An executive search firm is engaged to identify potential candidates based on the identified criteria. Candidates for appointment as Directors are considered by the Nominations Committee, recommended for decision by the Board and, if appointed, stand for election, in accordance with the Constitution, at the next general meeting of shareholders. On appointment, a letter is provided from the Chairman to the new Director setting out the terms of appointment. Policies Board policies relevant to the composition and functions of Directors include: (cid:1) The Board will consist of a majority of independent non-executive Directors and the membership of the Nominations, Remuneration and Audit Committees should consist solely of independent non-executive Directors. The Risk Committee should consist of a majority of independent non-executive Directors. The Chairman will be an independent non-executive Director who should also chair the Nominations, Remuneration and Risk Committees. The Audit Committee will be chaired by an independent non- executive Director other than the Board Chairman. The Board will generally meet monthly with an agenda designed to provide adequate information about the affairs of the Bank, allow the Board to guide and monitor management and assist involvement in discussions and decisions on strategy. Matters having strategic implications are given priority on the agenda for regular Board Corporate Governance (continued) (cid:1) (cid:1) meetings. In addition, ongoing strategy is the major focus of at least two of the Board meetings annually. The Board have an agreed policy on the circumstances in which Directors are entitled to obtain access to company documents and information and to meet with management. The Bank have in place a procedure whereby, after appropriate consultation, directors are entitled to seek the independent professional advice, at 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. Ethical Standards Conflicts of Interest In accordance with the Constitution and 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. Share Trading 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 or family trust. The guidelines provide, that in addition to the requirement that Directors not deal in the securities of the Bank or any related company when they have or may be perceived as having relevant unpublished price sensitive information, Directors are only permitted to deal within certain periods. These periods include between 3 and 30 days after the announcement of half yearly and final results and from 3 days after release of the annual report until 30 days after the Annual General Meeting. Further, the guidelines require that Directors not deal on the basis of considerations of a short term nature or to the extent of trading in those securities. Similar restrictions apply to executives of the Bank. (cid:1) (cid:1) In addition, Bank policy prohibits: For Directors and executives who report to the Chief Executive Officer, any hedging of publicly disclosed shareholding positions; and For executives, any trading (including hedging) in positions prior to vesting of shares or options. Remuneration Arrangements Remuneration Committee The Board have established a Remuneration Committee to: (cid:1) (cid:1) (cid:1) (cid:1) Consider changes in remuneration policy likely to have a material impact on the Group; Consider senior executive appointments; Determine remuneration for senior management; 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 consist entirely of independent non-executive Directors. The Chief Executive Officer attends Committee meetings by invitation but does not attend in relation to matters that can affect him. in employment issues, The Committee have an established work plan which allows it to review all major human resource policies, strategies and outcomes. Director Remuneration The Constitution and the ASX Listing Rules specify that remuneration of non-executive the aggregate 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 are set out in Note 45. Directors’ fees do not incorporate any bonus or incentive element. In August 2000, the Board approved the introduction of the Non-Executive Directors’ Share Plan which requires the acquisition of shares by non-executive Directors at market price through the mandatory application of 20% of their annual fees. Details of this Plan were set out in the Notice of Meeting to the 2000 Annual General Meeting. In July 2002, the Board discontinued the retirement scheme which provided for benefits to be paid to non- executive Directors. The terms of this scheme, which were approved by shareholders at the 1997 Annual General Meeting, allowed for a benefit on a pro rata basis to a maximum of four years’ total emoluments after 12 years’ service. The entitlements of the non-executive Directors at the time of discontinuance will not be affected but no new members after that time will be admitted to the scheme. Chief Executive Officer Remuneration The remuneration of Mr Murray (Chief Executive Officer) is fixed by the Board, pursuant to the Constitution, as part of the terms and conditions of his appointment. Those terms and conditions are established in a contract of employment with Mr Murray which was effective from 2 July 2001, with remuneration subject to review, from time to time, by the Board. Executive Remuneration 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 calibre local and international executive staff; Remuneration will to a significant degree, variable pay for performance elements, both short term and long term focused as appropriate, which will: − incorporate, reward executives for Group, business unit and individual performance against appropriate benchmarks and targets; 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 considers Group, business unit and individual performance, relevant comparative remuneration in the market and internal and, where appropriate, external advice on policies and practices; (cid:1) (cid:1) (cid:1) 39 Corporate Governance (continued) (cid:1) (cid:1) long term incentive and 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. The relationship of remuneration, potential short term incentive payments is established for each level of executive management by the Remuneration Committee. For managers within the Bank potential incentive payments as a proportion of total potential remuneration the increases with organisation. The structure for some specialists differs from that which applies generally to executive management. Incentive payments for executives, including the Chief Executive Officer, are related to performance. Short term incentives actually paid depend on the extent to which operating targets set at the beginning of the financial year are achieved. Half of the short term incentive earned is paid in cash and the balance in two instalments at yearly These instalments are only paid if the Executive is still in the employ of the Bank on the relevant dates. in shares. intervals level in Vesting of options and shares allocated under the long term incentive plan is directly related to shareholder value, measured by Total Shareholder Return over a minimum 3 year period, which requires the return to be equal to or higher than the average return of peer institutions for vesting to occur. As approved by the shareholders at the 2000 Annual General Meeting, vesting of options and restricted shares allocated to executives is dependent on the Bank meeting the performance hurdles in the plan. The Bank has restructured its long-term executive incentive plan, effective from the beginning of the 2003 financial year. Previously half the value of long term incentive benefits under the shareholder approved Bank’s Equity Reward Plan were paid in options, valued on the Black-Scholes method, and the other half in Performance shares valued at market price at the date of allocation. These options and shares only vest to the executive provided the prescribed performance hurdles are met. From the beginning of the 2003 financial year options have been eliminated from the remuneration package of executives and the total value of the long term incentives allocated under the Equity Reward Plan from that date is in the form of Reward shares. A is introduced further change that whereas previously allocated options and shares vested upon the average Total Shareholder Return of peer institutions being exceeded, a sliding scale has been introduced so that 50% of allocated shares vest if the Bank’s TSR is equal to the average return, 75% vest at the 67th percentile in the index and 100% when the return exceeds the 75th percentile, ie. when the Bank’s return is in the top quartile. Options and shares previously allocated under the Equity Reward Plan will continue until they vest upon the prescribed performance hurdles being met or they lapse. Currently, restricted shares purchased on market to satisfy incentives earned by executives are charged against profit and loss as are incentives paid in cash and in deferred shares. As from the beginning of the 2003 financial year, total remuneration, which includes the full cost of the plan and also the distribution of shares to employees under the ESAP, have been expensed against profits. 40 Details of the remuneration paid to the Chief Executive Officer and the five highest paid other members of the senior executive team who were officers of the Bank at 30 June 2003 are set out in Note 46. (cid:1) (cid:1) (cid:1) to be the chief the Chairman of Audit Arrangements Audit Committee The Charter of the Audit Committee incorporates a number of policies and practices to ensure that the Committee is independent and effective. Among these are: (cid:1) consists entirely of The Audit Committee independent non-executive Directors, all of whom have familiarity with financial management and at least one has expertise in financial accounting and reporting. The Chairman of the Bank is not the Audit permitted Committee. At least twice a year the Audit Committee meets the external auditors and internal audit executive and also separately with the external Auditors independently of management. The Audit Committee is responsible for nominating the external auditor to the Board for appointment by shareholders. The Audit Committee approves the terms of the contract with the external auditor, agrees the annual audit plan and approves payments to the Auditor. The Audit Committee discusses and receives assurances from the external auditors on the quality of the Bank’s systems, its accounting processes and its financial results. It also receives a report from the Auditors on any significant matters raised by the Auditors with management. All material accounting matters requiring exercise of judgement by management are specifically reviewed by the Audit Committee and reported on by the Committee to the Board. Certified assurances are received by the Audit Committee and the Board that the Auditors meet the independence requirements as recommended by the Blue Ribbon Committee of the SEC of the USA. 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 laws, accounting standards; Conducts any investigations relating to financial matters, records, accounts and reports which it considers appropriate; and Reviews all material matters requiring exercise of judgment by management and reports those matters to the Board. 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. relevant (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Corporate Governance (continued) The Committee regularly considers, in the absence of management and the external auditor, the quality of the information received by the Committee and, 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 judgments made. 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 approved and signed. (cid:1) Non-Audit Services The Board have in place policies and procedures governing the nature of non-audit services which can and cannot be undertaken by the Bank’s Auditors for the Bank or its subsidiaries. These policies and procedures incorporate approval by the Audit Committee of all non- audit services. The objective of this policy is to avoid prejudicing the independence of the Auditors and to prevent their developing undue reliance on revenue from the Bank. (cid:1) (cid:1) (cid:1) The policy ensures that the Auditor does not: Assume the role of management; Become an advocate for their client; or Audit their own professional expertise. Under the policy, the Auditor shall not provide the following services: (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) on and deal related structuring Bookkeeping or services relating to accounting records; Appraisal or valuation and fairness opinions; Advice documentation Tax planning and strategic advice; Actuarial advisory services; Executive recruitment or extensive human resource functions; Acting as a broker-dealer, promoter or underwriter; or Provision of legal services. For non-audit services that are not expressly following Audit Committee approval prohibited, the processes apply: (cid:1) (cid:1) Pre-approved - the Audit Committee have pre- approved certain types of services that do not impair Auditor independence up to a limit of $250,000 per engagement; and Specific approval - all other services, including pre- approved services exceeding $250,000, require specific formal approval by the Audit Committee, or a member thereof under delegation, before the Auditor may be engaged. Non-audit services are defined as any service provided by the external Auditor under engagement with the Bank outside the scope of the external audit. The scope of the external audit is outlined in the Bank’s annual audit engagement letter. The Bank currently the partner managing the audit for the external Auditor be changed within a period of five years. requires that Auditor Ernst & Young was appointed as the Auditor of the Bank at the 1996 Annual General Meeting and continues in that office. 41 The Chief Executive Officer is authorised to appoint in remove internal audit executive and consultation with the Audit Committee. the chief Risk Management Risk Committee 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 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 Group’s 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 Framework The Bank has risk management framework to identify, assess, manage and report risks and risk adjusted returns on a consistent and reliable basis. in place an integrated A full description of the functions of the framework and the nature of the risks is set out in the section of the Annual Report entitled Integrated Risk Management and in Notes 14 and 39 to the Financial Statements. Nominations Committee the Bank and The Nominations Committee of the Board critically reviews, at least annually, the corporate governance procedures of the composition and effectiveness of the Commonwealth Bank Board and the boards of the major wholly owned subsidiaries. The policy of the Board is that the Committee shall consist solely of the independent non executive directors and Chairman of the Committee. The Chief Executive Officer attends the meeting by invitation. that the Bank shall be Chairman of In addition to its role in proposing candidates for director appointment for consideration by the Board, the Committee to non-executive directors and reviews, and advises the Board in relation to Chief Executive Officer succession planning. fees payable reviews 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 Chief Executive Officer, through the established 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 have confirmed its release to the market. lines, or as a part of reporting Corporate Governance (continued) Ethical Policies US Sarbanes-Oxley Act Values Statement The Bank demands the highest standards of honesty and loyalty from all its people and strong governance within the Bank. Our values statement – “trust, honesty and integrity” - reflects this standard. (cid:1) (cid:1) Statement of Professional Practice The Bank have adopted a code of ethics, known as a Statement of Professional Practice, which sets standards of behaviour required of all employees 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 have established insider trading guidelines for staff to ensure that unpublished price sensitive the Bank or any other information about company is not used in an illegal manner. the Bank’s Equal to (cid:1) (cid:1) Our People The Bank is committed to providing fair, safe, challenging and the rewarding work, importance of attracting and retaining the best staff and consequently, being in a position to provide good service to our customers. recognising There are various policies and systems in place to enable achievement of these goals, including : (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Fair Treatment Review systems; Equal Employment Opportunity policy; Occupational Health and Safety Systems; Recruitment and selection policies; Performance feedback and review processes; Career assessment and succession planning; Employee Share Plan; and Supporting Professional Development. Behaviour Issues The Bank is strongly committed to maintaining an ethical workplace, complying with legal and ethical responsibilities. Policy requires staff to report fraud, corrupt conduct, mal-administration or serious and substantial waste by others. A system has been established which allows staff to remain anonymous if they wish for reporting of these matters. The policy has been extended to include reporting of auditing and accounting issues which will be reported directly to the Chief Compliance Officer. The Chief Compliance Officer reports any such matters to the Audit Committee, noting the status of resolution and actions to be taken. Governance Philosophy The Board have consistently placed great importance on the governance of the Bank, which it believes is vital to the well-being of the corporation. The framework of Bank has adopted a comprehensive Corporate Governance Guidelines which are designed to properly balance performance and conformance and thereby allow the Bank to undertake, in an effective manner, the prudent risk-taking activities which are the basis of its business. On 30 July 2002, a broad US financial reporting and corporate governance reform law, called the Sarbanes- Oxley Act of 2002 (the SOX Act), was enacted. By its terms, this Act applies to the Group because it has certain securities registered with the US Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the Exchange Act). Under the Exchange Act, the Bank files periodic reports with the SEC, including an annual report on Form 20-F. Pursuant to the requirements of the SOX Act, the SEC have adopted rules requiring that the Group’s Chief Executive Officer and Chief Financial Officer personally provide certain certifications with respect to the disclosure contained in the annual report on Form 20-F. Some of the more significant certifications generally include: (cid:1) That based on their knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact and the financial statements and other financial information included within the report fairly present in all material respects the financial condition, results of operations and cash flows of the Group; That they have ensured that appropriate disclosure controls and procedures have been put in place such that all material information has been disclosed and made known to them and they have evaluated the effectiveness of those disclosure controls and procedures as of the end of the Group’s fiscal year and presented in the annual report on Form 20-F their conclusions about the effectiveness of the disclosure controls and procedures as of the end of the most recent fiscal year; That in respect of internal controls over financial reporting the Group’s external auditors and to the Audit Committee of the board of directors all significant deficiencies and material weaknesses in the design or operation of those internal controls over financial reporting which are reasonably likely to adversely affect the Group’s ability to record, process, summarise and report financial information, and any fraud, whether or not material, involves management or other employees who have a significant role in the Group’s internal control over financial reporting; and The annual report on Form 20-F discloses whether or not there were any changes in internal control over financial reporting during the period covered by the annual report on Form 20-F that has materially affected, or is reasonably likely to materially affect, the Group’s internal control over financial reporting. in addition The Group will they have disclosed to providing that to these certifications make the following disclosures in its annual report on Form 20-F: (cid:1) the effectiveness of The Group’s Chief Executive Officer and Chief Financial Officer, with the assistance of other the Group’s management, have members of evaluated the Group’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Group’s Chief Executive Officer and Chief Financial Officer have concluded that the Group’s disclosure controls and procedures are effective. The Group’s Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Group’s internal control over financial reporting that have materially (cid:1) (cid:1) (cid:1) (cid:1) 42 − − likely reasonably all significant deficiencies in the design or operation of internal controls over financial reporting which are to adversely affect the Group’s ability to record, process, summarise and report financial data; and that fraud, whether or not material, any involves management or other employees who have a significant role in the Group’s internal control over financial reporting. Evaluation of disclosure controls and procedures Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Group’s management, have evaluated the effectiveness of the Group’s disclosure controls and procedures as of 30 June 2003. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded the Group’s disclosure controls and procedures are effective. that Changes in internal control over financial reporting No changes in our internal controls over financial reporting occurred during the year ended 30 June 2003 that have materially affected, or are reasonably likely to materially affect, our financial reporting. internal controls over Corporate Governance (continued) affected, or is reasonably likely to materially affect, the Group’s internal control over financial reporting. The SOX Act prohibits an issuer from extending or maintaining credit, arranging for the extension of credit, or renewing an extension of credit, in the form of a personal loan to or for any director or executive officer of the Group, unless one of the limited exceptions is available. Loans maintained by the Group before 30 July 2002 are exempt so long as there is no material modification to any term of the extension of credit or any renewal of the extension of credit. The Group is also required to disclose in its annual report on Form 20-F for the 2004 financial year, whether it has adopted a written code of ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Certifications and Disclosures In respect of this annual report and as at the date of this annual report, the Group’s Chief Executive Officer and Chief Financial Officer make the following Sarbanes-Oxley related certifications: (cid:1) (cid:1) That they have reviewed the report; That based on their knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; That based on financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Group as of, and for, the periods presented in the report; That they are responsible for establishing and maintaining disclosure controls and procedures (as defined in the US Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Group and have: − their knowledge, the designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that material information relating to the Group, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the report is being prepared; evaluated the effectiveness of those disclosure controls and procedures and presented in this report their conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and disclosed in this report any change in the Group’s internal control over financial reporting that occurred during the period covered by this is report reasonably the Group’s financial reporting; and that has materially affected, or to materially affect, likely internal control over − − (cid:1) (cid:1) (cid:1) That they have disclosed, based on their most recent evaluation of internal control over financial reporting, to the Group’s auditors and the Audit Committee of the Group’s Board of Directors: 43 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 2003. 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 over fifty years’ experience in the mining and finance industries. Deputy Chairman: Telstra Corporation Limited. Other Interests: Melbourne Business School (Board of Management), Australian Foundation for Science (Chairman), Australian Institute of Company Directors (Fellow), Australian Institute of Management (Fellow), Academy of Technological Science and Engineering (Fellow) and member of the Council of Xavier College, Melbourne. Mr Ralph is a resident of Victoria. Age 70. John M Schubert, Deputy Chairman Dr Schubert has been a member of the Board since 1991 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: Worley Limited Advisory Board and G2 Therapies Limited. Director: BHP Billiton Limited, BHP Billiton plc, Qantas Airways Limited and Australian Graduate School of Management Ltd. Other Interests: Business Council of Australia (President), Academy of Technological Science and Engineering (Fellow), Salvation Army Territorial Headquarters & Sydney Advisory Board (Member). He is also a Director of the Great Barrier Reef Research Foundation and a Director and a Member of the AGSM Consulting Ltd. Dr Schubert is a resident of New South Wales. Age 60. David V Murray, Managing Director and Chief Executive Officer Mr Murray has been a member of the Board and Chief Executive Officer since June 1992. He holds a Bachelor of Business, Master of Business Administration, an honorary Phd from Macquarie University and has thirty seven years’ experience in banking. Mr Murray is a member of the Risk Committee. Director: Tara Anglican School for Girls Foundation Limited. Interests: International Monetary Conference Other (Member), Asian Bankers’ Association (Member), Australian Bankers’ Association (Member), Asia Pacific Bankers' Club (Member), Business Council of Australia (Member), General Motors Australian Advisory Council (Member), and the Financial Sector Advisory Council (Member). Mr Murray is a resident of New South Wales. Age 54. N R (Ross) Adler, AO Mr Adler has been a member of the Board since 1990 and is a member of the Audit Committee. He holds a Bachelor of Commerce and a Master of Business Administration. He has experience in various commercial enterprises, more recently in the oil and gas and chemical trading industries. Chairman: Austrade and Amtrade International Pty Ltd. Director: Australian Institute of Commercialisation Ltd, AWL Enterprises Pty Ltd and Liberal Club Ltd. Member: Advisory Council of Equity and Advisory Limited. Other Interests: Adelaide Festival (Chairman), University of Adelaide (Council Member and Chairman of the Finance Committee) and Vice President and Executive Member of the Australia Japan Business Co-operation Committee. Mr Adler is a resident of South Australia. Age 58. Reg J Clairs, AO Mr Clairs has been a member of the Board since 1999 and is a member of the Remuneration 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. Director: David Jones Ltd, and National Australia Day Council. Other Interests: Member of the Institute of Company Directors. Mr Clairs is a resident of Queensland. Age 65 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. He has also worked with government in superannuation, competition policy and export facilitation. Director: Australian Gas Light Company, Orica Limited, and O'Connell St Associates. 44 Directors’ Report (continued) Other Interests: Australian Institute of Company Directors (Fellow) and Australian Institute of Management (Fellow). Mr Daniels is a resident of New South Wales. Age 68. Colin R Galbraith, AM Mr Galbraith has been a member of the Board since June 2000. He was previously a Director of Colonial Limited, appointed 1996. He is a partner of Allens Arthur Robinson, Lawyers. Chairman: BHP Billiton Community Trust. Director: GasNet Australia Group and OneSteel Limited. Other Interests: Secretary of Council of Legal Education in Victoria, Deputy Chairman of the Corporate Council of CARE Australia and a Trustee of the Royal Melbourne Hospital Neuroscience Foundation. Mr Galbraith is a resident of Victoria. Age 55. 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, appointed 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. Council of the National Library of Australia, a Counsellor of the Committee for Melbourne and Patron of the Pacific Institute. Mr Ryan is a resident of Victoria. Age 60. Frank J Swan Mr Swan has been a member of the Board since July 1997 and is a member of the Risk and Nomination Committees. He holds a Bachelor of Science degree and has twenty three years senior management experience in the food and beverage industries. Chairman: Foster's Group Limited and Centacare Catholic Family Services. Director: National Foods Limited. Other Interests: Institute of Directors (Fellow), Australian Institute of Company Directors (Fellow) and Australian Institute of Management (Fellow). Mr Swan is a resident of Victoria. Age 62. 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 experience in policy development and public administration as a senior ministerial adviser and in the transport and aviation industries, most recently as Chief Executive of Ansett Worldwide Aviation Services. Chairman: Coventry Group Limited and West Australian Newspapers Holdings Limited. Chairperson: Country Energy. Director: Perpetual Trustees Australia Limited. Other Interests: Trustee of the Walter and Eliza Hall Trust and Fellow of Institute of Company Directors, Australian Society of CPAs, Australian Institute of Bankers and the Chartered Institute of Company Secretaries. the Australian Mr Kent is a resident of Western Australia. Age 67. 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. He was the Strategic Investment Co-ordinator and Major Projects Facilitator for the Federal Government from 1999 – 2002. Director: Rail Infrastructure Corporation, Allens Arthur Robinson and Lion Nathan Limited. Other Interests: Sydney Opera House Trust (Trustee) and Australia Day Council of New South Wales (Member). Ms Ward is a resident of New South Wales. Age 49. S Carolyn H Kay Ms Kay joined the Board this year and is a member of the Risk Committee. She holds Bachelor Degrees in Law and Arts and a Graduate Diploma in Management. She has extensive experience in international finance having been an executive at Morgan Stanley in London and Melbourne for 10 years. Prior to that she worked in international banking and finance both as a lawyer and banker in London, New York and Melbourne. Director: Mayne Group, Treasury Corporation of Victoria and Deputy Chair Victorian Funds Management Corporation. Director: Australian Foundation Limited and Clayton Utz. Investment Company Other Interests: Australian Institute of Company Directors, Morgan Stanley (Advisor). Other Community Business Partnership, a Member of the Interests: Member of the Prime Minister’s Ms Kay is resident in Victoria. Age 42. 45 Directors’ Report (continued) 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 DIRECTORS’ MEETINGS No. of Meetings Held* No. of Meetings Attended 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 S C Kay 11 11 11 11 11 11 11 11 11 11 11 4 11 11 11 11 9 11 11 11 11 11 11 4 * The number of meetings held during the time the Director held office during the year. 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 5 5 5 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 S C Kay** J T Ralph J M Schubert D V Murray F J Swan 6 6 6 6 6 2 6 6 6 6 5 2 8 8 8 8 7 8 8 8 NOMINATIONS COMMITTEE No. of Meetings Held No. of Meetings Attended 2 2 2 2 2 2 2 2 * The number of meetings held during the time the Director was a member of the relevant committee. ** Ms Kay was appointed to the Risk Committee on 5 March 2003 46 Directors’ Report (continued) Principal Activities integrated including superannuation, The Commonwealth Bank Group leading providers of is one of financial Australia’s institutional services banking, 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 insurance, 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’s funds management business the Investment and Insurance Services division. These businesses manage a wide range of wholesale and retail investment, superannuation and funds. Investments are across all major asset classes including Australian and International shares, property, fixed interest and cash. is managed as part of 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. There have been no significant changes in the nature of the principal activities of the Group during the financial year. Consolidated Profit Consolidated operating profit after tax and outside equity interests for the financial year ended 30 June 2003 was $2,012 million (2002: $2,655 million). The net operating profit for the year ended 30 June 2003 after tax, and before goodwill amortisation and appraisal value reduction was $2,579 million. This is an increase of $78 million or 3% over the year ended 30 June 2002 and was after expensing $214 million in respect of restructuring initiatives and after expensing $45 million in respect of the allocation of shares to employees under the 47 ESAP scheme for both 2002 and 2003 against the 2003 profit. Excluding these, for a like for like comparison the ‘cash basis’ profit grew by 9% over the previous year. The principal contributing factors to this increase were a growth in net interest income reflecting strong housing loan growth together with growth in commissions, and a decrease in charge for bad and doubtful debts, whilst underlying operating expenses have increased by 2% over the year, primarily due to the set up of the new premium division in banking. Funds management income fell which reflects the effect of depressed equity markets for most of the year. Dividends The Directors have declared a fully franked (at 30%) final dividend of 85 cents per share amounting to $1,066 million. The dividend will be payable on 8 October 2003 to shareholders on the register at 5pm on 29 August 2003. Dividends paid since the end of the previous financial year: (cid:1) through comprised As provided for in last year’s report, a fully franked final dividend of 82 cents per share amounting to $1,027 million was paid on 8 October 2002. The payment cash disbursements of $832 million with $195 million being reinvested by participants the Dividend Reinvestment Plan; and In respect of the current year, a fully franked interim dividend of 69 cents per share amounting to $865 million was paid on 28 March 2003. The payment cash disbursements of $699 million with $166 million being reinvested by participants the Dividend Reinvestment Plan. Additionally, quarterly dividends totalling $36 million for the year were paid on the PERLS preference shares and $4 million on the ASB Capital preference shares. comprised through (cid:1) (cid:1) Review of Operations An analysis of operations for the financial year is set out in the Financial Highlights on pages 5 to 10 and Business Analysis on pages 11 to 28. Changes in State of Affairs During the year the Bank implemented a number of significant strategic initiatives which aimed at improving future productivity and service levels. (cid:1) (cid:1) (cid:1) (cid:1) The initiatives undertaken during the year included: Re-organisation within the retail banking operations aimed at eliminating duplication, inefficiencies and some back office processing. Empowerment of front line retail sales staff with information and decision-making capabilities to better meet customer needs. Redesign system and relationship management processes in the small to medium sized business segments. Simplification and consolidation of legacy systems and processes within the Investment and Insurance business. The related cost of these strategic initiatives were incurred during the current year. There were no other significant changes in the state of affairs of the Group during the financial year. Directors’ Report (continued) Events Subsequent to Balance Date Environmental Regulation Corporate Restructure The Group (cid:1) (cid:1) is in the the Life the process of a corporate restructure of the legal entities involved in the Funds Management and Life Insurance operations within Australia. The corporate restructure involves: (cid:1) Insurance business of Transferring Commonwealth Life Limited to The Colonial Mutual Life Assurance Society Limited (on 1 July 2003); Transferring former Commonwealth Life Insurance and Funds Management companies into the Colonial sub-group of companies (during July and August 2003); and Simplifying the Colonial sub-group of companies (ongoing, to be substantially completed by December 2003). The restructure will: Align the corporate structure and the management structure; and Simplify the transparency for investors, regulators and creditors. There is no material effect on the regulatory capital position of the Bank, or of any of the life insurance companies, the general insurance company or the funds management companies arising directly the corporate restructure. the corporate structure within increasing corporate structure, from (cid:1) (cid:1) Issue of Trust Preferred Securities On 6 August 2003 a wholly owned entity of the Bank issued USD550 million (AUD824 million) of trust preferred securities, subject to a limited guarantee by the Bank, in the US capital markets. These securities are perpetual in nature and offer a non-cumulative fixed rate distribution of 5.805%p.a., payable semi-annually. Distributions will be paid if determined by Directors, or a committee of the Board, to be payable. If a distribution is not paid the Bank will not be permitted to pay dividends on any of its ordinary shares or shares ranking equally with these securities, including Commonwealth Bank PERLS, until two consecutive semi-annual dividends are paid. The securities which qualify as Tier 1 capital for the Bank may be redeemed by the Bank, subject to the approval of APRA, on 30 June 2015. If the securities are not redeemed on 30 June 2015, the holders of the securities may request for an equivalent value of ordinary shares of the Bank. In certain circumstances, and at any time at the Bank’s discretion, the trust preferred securities may be redeemed for representing American Depository Shares preference shares of the Bank. Where there has been no earlier redemption, the trust preferred securities will be mandatorily redeemed for ADSs on 30 June 2053. their securities be exchanged (ADSs) The issue of trust preferred securities provided a cost-effective opportunity to supplement the Bank’s Tier 1 Capital and broaden its investor base. The Directors are not aware of any other matter or circumstance that has occurred since the end of the financial year that has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Future Developments and Results the Major developments, which may affect operations of the Group in subsequent financial years, are referred to in the Chairman’s Statement on page 3. In the opinion of further information on likely developments in operations would be unreasonably prejudicial to the interests of the Group. the Directors, disclosure of any 48 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 shareholders at the Annual General Meeting on 8 October 1996 and its continuation was further approved by shareholders at the Annual General Meeting on 29 October 1998. At the 2000 Annual General Meeting, shareholders approved the establishment of the Equity Reward Plan. On 31 October 2001, 31 January 2002 and 15 April 2002 a total of 3,007,000 options were granted by the Bank to 81 executives under this Plan. During the financial year and for the period to the date of this report 972,500 shares were allotted by the Bank consequent to the 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 option holders 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. Directors’ and Officers’ Indemnity Article 19 of the Commonwealth Bank’s Constitution provides: “To the extent permitted by law, the company indemnifies every director, officer and employee of the company against any liability incurred by that person (a) in his or her capacity as a director, officer or employee of the company and (b) to a person other than the company or a related body corporate of the company. The company indemnifies every director, officer and employee of the company against any liability for costs and expenses incurred by the person in his or her capacity as a director, officer or employee of the company (a) in defending any proceedings, whether civil or criminal, in which judgment is given in favour of the person or in which the person is acquitted or (b) in connection with an application, in relation to such proceedings, in which 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”. Directors’ Report (continued) An indemnity for employees, who are not directors, secretaries or executive officers, is not expressly restricted in any way by the Corporations Act 2001. The Directors, as named on pages 44 to 45 of this report, and the Secretaries of the Commonwealth Bank, being J D Hatton (Secretary) and H J Broekhuijse (Assistant Company Secretary) are indemnified under Article 19 as are all the executive officers of the Commonwealth Bank. Deeds of Indemnity have been executed by Commonwealth Bank in terms of Article 19 above in favour of each Director. Directors’ and Officers’ Insurance The 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 to above and 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. the insurance policy prohibits disclosure of the terms of the policy including the nature of the liability insured against and the amount of the premium. In accordance with commercial practice, 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. Incorporation of Additional Material This report incorporates the Financial Highlights, and Business Analysis, Corporate Governance 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 20 August 2003 D V Murray Managing Director and Chief Executive Officer 49 Five Year Financial Summary Financial Performance 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 Net Profit after Tax ("cash basis") Abnormal items Income tax credit on abnormal items Appraisal value (reduction)/uplift Goodwill amortisation Operating profit after income tax attributable to members of the Bank Contributions to profit (after tax) Banking Funds management Life insurance Profit on operations ("cash basis") Goodwill amortisation Appraisal value uplift Abnormal income after tax Operating profit after income tax Financial Position Loans, advances and other receivables Total assets Deposits and other public borrowings Total liabilities Shareholders' equity Net tangible assets Risk weighted assets 2003 $M 5,026 4,373 9,399 305 5,551 2002 $M 4,710 4,358 9,068 449 5,201 3,543 (958) (6) 2,579 - - (245) (322) 3,418 (916) (1) 2,501 - - 477 (323) 2001 $M 4,474 4,350 8,824 385 5,170 3,269 (993) (14) 2,262 - - 474 (338) 2000 $M 3,719 2,420 6,139 196 3,407 1999 $M 3,527 1,997 5,524 247 3,070 2,536 (820) (38) 1,678 2,207 (714) (24) 1,469 967 - 20 - 92 - (47) (57) 2,012 2,655 2,398 2,700 1,422 2,249 208 122 2,579 (322) (245) - 2,012 2,067 368 66 2,501 (323) 477 - 2,655 1,793 323 146 2,262 (338) 474 - 2,398 1,513 36 129 1,678 (57) 1,342 24 103 1,469 (47) 92 - 987 - 1,422 2,700 160,347 265,110 147,074 249,648 136,059 230,411 132,263 218,259 101,837 138,096 140,974 242,958 132,800 228,592 117,355 210,563 112,594 199,824 93,428 131,134 20,024 14,995 19,030 13,639 18,393 12,677 17,472 11,942 6,735 6,471 146,808 141,049 138,383 128,484 99,556 Average interest earning assets Average interest bearing liabilities 188,270 174,737 170,634 157,105 160,607 145,978 129,163 117,075 114,271 103,130 Assets (on balance sheet) Australia New Zealand Other Total Assets 221,248 27,567 16,295 265,110 208,673 24,579 16,396 249,648 196,918 20,208 13,285 230,411 187,452 16,661 14,146 218,259 115,510 13,046 9,540 138,096 50 Five Year Financial Summary (continued) Shareholder Summary Dividends per share (cents) - fully franked Dividend cover (times) - statutory Dividend cover (times) - cash Earnings per share (cents) Basic before abnormal items after abnormal items cash basis (4) Fully Diluted before abnormal items after abnormal items cash basis (4) Dividend payout ratio (%) (1) before abnormal items after abnormal items cash basis (4) Net tangible assets per share ($) Weighted average number of shares (basic) Weighted average number of shares (fully diluted) Number of shareholders Share prices for the year ($) Trading high Trading low End (closing price) Performance Ratios (%) Return on average shareholders' equity (2) (5) before abnormal items after abnormal items cash basis Return on average total assets (2) before abnormal items after abnormal items cash basis Capital adequacy - Tier 1 Capital adequacy - Tier 2 Deductions Capital adequacy - Total Net interest margin Other Information (numbers) Full time staff equivalent(6) Branches/service centres (Australia) Agencies (Australia) ATMs (Proprietary) EFTPOS terminals EzyBanking 2003 2002 2001 2000 1999 154 0.9 1.3 157.4 157.4 202.6 157.3 157.3 202.5 97.7 97.7 75.9 12.0 1,253m 1,254m 746,073 32.75 23.05 29.55 10.7 10.7 13.3 0.8 0.8 1.0 6.96 4.21 (1.44) 9.73 2.67 35,845 1,014 3,893 3,116 125,959 760 150 1.4 1.3 209.6 209.6 197.3 209.3 209.3 197.0 71.7 71.7 76.2 10.9 1,250m 1,252m 722,612 34.94 24.75 32.93 14.7 14.7 13.1 1.1 1.1 1.0 6.78 4.28 (1.26) 9.80 2.76 136 1.4 1.3 189.6 189.6 178.8 189.3 189.3 178.6 71.2 71.2 75.5 10.2 1,260m 1,262m 709,647 34.15 26.18 34.15 13.5 13.5 12.0 1.1 1.1 1.0 6.51 4.18 (1.53) 9.16 2.78 130 1.2 1.6 184.8 291.2 181.0 184.4 290.7 180.6 115 1.3 1.3 153.4 153.4 158.5 153.1 153.1 158.1 83.5 53.0 85.3 9.2 927m 929m 788,791 74.7 74.7 72.4 6.8 927m 929m 404,728 27.95 22.54 27.69 28.76 18.00 24.05 22.1 34.8 1.1 1.7 7.49 4.75 (2.49) 9.75 2.88 20.5 20.5 1.1 1.1 7.05 3.12 (0.79) 9.38 3.09 37,245 1,020 3,936 3,049 126,613 730 37,460 1,066 3,928 2,931 122,074 659 39,631 1,441 4,020 3,092 116,064 603 30,914 1,162 3,934 2,602 90,152 n/a Productivity Total Operating Income per full-time (equivalent) employee($)(6) Staff Expense/Total Operating Income (%) Total Operating Expenses (3) /Total Operating Income (%) 262,212 26.1 59.1 243,469 26.4 57.4 235,558 26.7 58.6 198,479 27.8 57.2 178,689 29.0 55.6 (1) (2) (3) (4) (5) (6) 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. 2003 shareholders’ equity includes retained earnings before provision for final dividend of $1,066 million. Prior periods’ return on average shareholders’ equity – cash basis have been restated to exclude the provision for final dividend. Staff numbers include all permanent full time staff, part time staff equivalents and external contractors employed by 3rd party agencies. Prior period staff numbers have to restated to reflect this. 51 Financial Statements Statements of Financial Performance ............................................................................................................................... 53 Statements of Financial Position ....................................................................................................................................... 54 Statements of Changes in Shareholders’ Equity.............................................................................................................. 55 Statements of Cash Flows.................................................................................................................................................. 56 Notes to the Financial Statements..................................................................................................................................... 57 1. Summary of Significant Accounting Policies .................................................................................................................. 57 2. Operating Profit ............................................................................................................................................................. 66 3. Revenue from Ordinary Activities .................................................................................................................................. 68 4. Average Balances and Related Interest ........................................................................................................................ 69 5. Income Tax Expense..................................................................................................................................................... 73 6. Dividends....................................................................................................................................................................... 75 7. Earnings Per Share ....................................................................................................................................................... 76 8. Cash and Liquid Assets ................................................................................................................................................. 76 9. Receivables from Other Financial Institutions................................................................................................................ 76 10. Trading Securities.......................................................................................................................................................... 77 11. Investment Securities .................................................................................................................................................... 78 12. Loans, Advances and Other Receivables ...................................................................................................................... 81 13. Provisions for Impairment .............................................................................................................................................. 84 14. Credit Risk Management ............................................................................................................................................... 88 15. Asset Quality ................................................................................................................................................................. 95 16. Life Insurance Investment Assets ................................................................................................................................ 100 17. Deposits with Regulatory Authorities ........................................................................................................................... 100 18. Shares in and Loans to Controlled Entities .................................................................................................................. 100 19. Property, Plant and Equipment .................................................................................................................................... 101 20. Intangible Assets ......................................................................................................................................................... 102 21. Other Assets................................................................................................................................................................ 103 22. Deposits and Other Public Borrowings ........................................................................................................................ 104 23. Payables to Other Financial Institutions....................................................................................................................... 105 24. Income Tax Liability..................................................................................................................................................... 105 25. Other Provisions .......................................................................................................................................................... 106 26. Debt Issues ................................................................................................................................................................. 107 27. Bills Payable and Other Liabilities................................................................................................................................ 109 28. Loan Capital ................................................................................................................................................................ 110 29. Share Capital............................................................................................................................................................... 112 30. Outside Equity Interests .............................................................................................................................................. 120 31. Capital Adequacy ........................................................................................................................................................ 121 32. Maturity Analysis of Monetary Assets and Liabilities.................................................................................................... 125 33. Financial Reporting by Segments ................................................................................................................................ 127 34. Life Insurance Business .............................................................................................................................................. 131 35. Remuneration of Auditors ............................................................................................................................................ 137 36. Commitments for Capital Expenditures Not Provided for in the Accounts.................................................................... 138 37. Lease Commitments - Property, Plant and Equipment ................................................................................................ 138 38. Contingent Liabilities ................................................................................................................................................... 139 39. Market Risk ................................................................................................................................................................. 141 40. Superannuation Commitments .................................................................................................................................... 151 41. Controlled Entities ....................................................................................................................................................... 153 42. Investments in Associated Entities and Joint Ventures................................................................................................ 155 43. Standby Arrangements and Unused Credit Facilities................................................................................................... 155 44. Related Party Disclosures ........................................................................................................................................... 156 45. Remuneration of Directors........................................................................................................................................... 158 46. Remuneration of Executives........................................................................................................................................ 160 47. Statement of Cash Flow .............................................................................................................................................. 164 48. Disclosures about Fair Value of Financial Instruments ................................................................................................ 166 Directors’ Declaration....................................................................................................................................................... 168 Independent Audit Report ................................................................................................................................................ 169 Shareholding Information ................................................................................................................................................ 170 International Representation............................................................................................................................................ 173 52 Statements of Financial Performance For the year ended 30 June 2003 Interest income Interest expense Net interest income Other income: Revenue from sale of assets Written down value of assets sold Other Net banking operating income Funds management income including premiums Investment revenue Claims and policyholder liability expense Net funds management operating income Premiums and related revenue Investment revenue Claims and policyholder liability expense Life insurance margin on services operating income Net funds management and life insurance operating income before appraisal value (reduction)/uplift Total net operating income before appraisal value (reduction)/uplift Charge for bad and doubtful debts Operating expenses: Comparable business First time Appraisal value (reduction)/uplift Goodwill amortisation Profit from ordinary activities before income tax Income tax expense Profit from ordinary activities after income tax Outside equity interests in net profit Net profit attributable to members of the Bank Foreign currency translation adjustment Revaluation of properties Total valuation adjustments Total changes in equity other than those resulting from transactions with owners as owners Earnings per share based on net profit distributable to members of the Bank: Basic Fully Diluted Dividends per share attributable to shareholders of the Bank: Ordinary shares Preference shares (issued 6 April 2001) Net Profit after Income Tax comprises Net Profit after Income Tax ("cash basis") Less Appraisal value (reduction)/uplift Less Goodwill amortisation Net Profit after Income Tax ("statutory basis") 53 Note 2 2 2003 $M 11,528 6,502 5,026 2002 $M 10,455 5,745 4,710 GROUP 2001 $M 11,900 7,426 4,474 BANK 2002 $M 2003 $M 9,477 8,670 5,336 4,707 4,141 3,963 3 128 (106) 2,675 7,723 1,125 8 (91) 1,042 1,011 620 (997) 634 718 (628) 2,462 7,262 1,083 (393) 457 1,147 866 293 (500) 659 185 (104) 2,300 6,855 67 (52) 914 (608) 3,339 3,634 7,495 7,903 1,079 - 1,145 - - 1,204 - (1,020) 695 - 553 - - 765 - (483) - - - - - - - - 1,676 9,399 1,806 9,068 1,969 - 8,824 - 7,495 7,903 2,13 305 449 385 266 405 2 2 34 5 7 5,292 5,201 259 - 5,201 5,551 (245) (322) 2,976 958 2,018 (6) 2,012 (129) 3 (126) 477 (323) 3,572 916 2,656 (1) 2,655 (146) (1) (147) 5,170 - 5,170 3,977 3,982 259 - 4,236 3,982 - 474 - (186) (186) 2,807 3,330 665 2,099 2,665 - (338) 3,405 993 2,412 (14) - 708 2,398 98 5 103 2,099 2,665 (16) (7) (7) (16) 1,886 2,508 2,501 2,092 2,649 Cents per share 157.4 157.3 154 1,019 $M 2,579 (245) (322) 2,012 209.6 209.3 189.6 189.3 150 970 $M 2,501 477 (323) 2,655 136 261 $M 2,262 474 (338) 2,398 Statements of Financial Position As at 30 June 2003 Note 2003 $M GROUP 2002 $M 2003 $M BANK 2002 $M 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 and other funds Total outside equity interests Total Shareholders' Equity 5,575 7,066 10,435 11,036 160,347 13,197 27,835 23 - 821 287 5,029 23,459 265,110 140,974 7,538 13,197 - 12 876 819 23,861 30,629 19,027 236,933 6,025 242,958 22,152 6,044 7,728 8,389 10,766 147,074 12,517 30,109 89 - 862 313 5,391 20,366 249,648 132,800 7,864 12,517 - 1,040 1,276 834 25,917 23,575 17,342 223,165 5,427 228,592 21,056 5,356 5,436 8,072 6,831 131,537 13,521 - 2 23,559 608 252 2,708 16,748 214,630 122,946 7,504 13,521 11,308 12 527 684 - 16,684 17,456 190,642 5,937 196,579 18,051 5,673 5,694 6,703 7,560 120,781 13,162 - 54 21,869 641 252 2,965 13,408 198,762 116,898 7,884 13,162 8,591 1,040 654 691 - 11,753 15,905 176,578 5,337 181,915 16,847 12,678 687 3,850 2,809 12,665 687 4,226 1,452 12,678 687 2,095 2,591 12,665 687 2,093 1,402 20,024 19,030 18,051 16,847 304 1,824 2,128 22,152 - 9 - 2,017 2,026 - 18,051 21,056 - - - 16,847 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 54 Statements of Changes in Shareholders’ Equity For the year ended 30 June 2003 Ordinary Share Capital Opening balance Buy back Buy back for dividend reinvestment plan Dividend reinvestment plan Employee share ownership schemes Issue costs Closing balance Preference Share Capital Opening balance Issue of shares Issue costs Closing balance Retained profits Opening balance Reversal of provision for final dividend at 30 June 2002 (on adoption of AASB 1044) Buy back Transfers from reserves Operating profit attributable to members of the Bank Total available for appropriation Transfers to reserves Interim dividend - cash component Interim dividend - dividend reinvestment plan Interim dividend - appropriated to dividend reinvestment plan reserve Provision for final dividend - cash component Final dividend - appropriated to dividend reinvestment plan reserve Payment of final dividend (2002) - cash component Payment of final dividend (2002) - dividend reinvestment plan Other dividends Closing balance Reserves General Reserve Opening balance Appropriation from profits Transfer to retained profits Closing balance Capital Reserve Opening balance Closing balance Asset Revaluation Reserve Opening balance Revaluation of investments and properties 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 Note 29 29 2003 $M 2002 $M GROUP 2001 $M 2003 $M 12,665 - (361) 361 13 - 12,678 12,455 - (158) 329 39 - 12,665 12,521 12,665 - (361) 361 13 - 12,455 12,678 (275) (140) 313 40 (4) 687 - - 687 687 - - 687 - 700 (13) 687 687 - - 687 BANK 2002 $M 12,455 - (158) 329 39 - 12,665 687 - - 687 1,452 1,160 1,686 1,402 650 1,027 - 250 2,012 4,741 - (699) (166) - - - (832) (195) (40) 2,809 3,998 - (247) 3,751 289 289 4 3 7 - - - - - - 250 2,655 4,065 (700) (693) (159) - (1,027) - - - (34) 1,452 3,548 700 (250) 3,998 289 289 5 (1) 4 168 (168) - - (65) (129) 81 (146) (3) - (65) (197) - (449) 125 2,398 3,760 (880) (642) - (131) (765) (168) - - (14) 1,160 2,793 880 (125) 3,548 1,027 - - 2,099 4,528 (9) (699) (166) - - - (832) (195) (36) 2,591 570 - - 570 - - - 2,665 3,315 - (852) - - (1,027) - - - (34) 1,402 570 - - 570 289 289 1,531 1,531 1,531 1,531 - 5 5 200 (331) 299 168 (17) 98 - 81 - - - - - - - - - - 168 (168) - - (8) (7) 9 (17) 9 - (8) (6) Total Reserves Shareholders' Equity Attributable to Members of the Bank 3,850 20,024 4,226 19,030 4,091 2,095 18,393 18,051 2,093 16,847 55 Statements of Cash Flows For the year ended 30 June 2003 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 / (used in) operating activities Note 2003 $M 2002 $M 11,452 10,683 5 (5,805) 3,706 (5,366) (926) (1,159) 4 (6,455) 3,135 (5,438) (1,258) (2,484) GROUP 2001 $M 12,059 14 (7,704) 2,800 (5,583) (1,252) (262) 2003 $M 9,204 579 (5,248) 2,668 (4,233) (838) (1,814) BANK 2002 $M 8,839 972 (4,812) 3,087 (4,113) (376) (1,353) 644 4,130 (5,855) (2,125) 870 5,689 (5,704) 1,993 900 - - 6,286 - - - - 2,244 318 (5,423) 1,835 47 (c) Cash Flows from Investing Activities Payments for acquisition of entities and management rights Proceeds from disposal of entities and businesses 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 Cash Flows from Financing Activities Buy back of shares Proceeds from issue of shares (net of costs) Proceeds from issue of preference shares to outside equity interests Net increase (decrease) in deposits and other borrowings Net movement in debt issues Dividends paid (including DRP buyback of shares) 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 47(a) (173) 33 (414) - (57) 314 - - (50) 242 66 23 (18,055) (23,488) 295 17,719 22,192 (28) (13,577) (11,702) - 72 (143) 109 (164) 15 28 31 (19,676) (15,761) (20,593) 594 19,654 16,449 19,590 (50) (8,790) 1,027 (5,026) 78 (106) 52 (4,181) (11,022) 64 (103) - - 157 (132) 513 (855) (184) 731 (691) 50 (1,376) (241) 301 (891) 1,504 (298) 125 (1,377) (312) (13,091) (13,926) 14,628 14,618 (11,634) (14,309) (21,229) - - 20,556 - - (8,705) (16,491) (4,793) 13 - - 39 182 - 5,129 15,135 (967) 7,054 (1,661) (1,933) 1,809 (926) 723 (724) - 13 - 39 - - - 3,004 13,112 1,022 4,931 (1,661) (1,929) 2,110 (1,024) 5,246 (2,099) (1,368) (1,010) (796) 211 1,396 (869) 645 19 3,046 310 901 - (100) 12,689 14,776 2,460 (1,070) 38 2,498 2,498 1,428 (485) - (69) 1,610 (1,348) 1,386 38 3,045 311 600 - (3) (15) 7,755 15,575 1,328 (631) (420) 908 908 277 It should be noted that the Group does not use this accounting Statement of Cash Flows in the internal management of its liquidity positions. 56 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 the requirements of the Banking Act, Corporations Act 2001, applicable Accounting Standards and other mandatory reporting requirements so far as the requirements are considered appropriate to a banking corporation. report which complies with financial 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. Change in accounting policies The consolidated entity has adopted the new Accounting Standard AASB 1044: Provisions, Contingent Liabilities and Contingent Assets, which has resulted in a change in the accounting for the dividend provisions. Previously, the consolidated entity recognised a provision for dividend based on the amount that was proposed or declared after the reporting date. In accordance with the requirements of the new standard, a provision for dividend will only be recognised at the reporting date where the dividends are declared, determined or publicly recommended prior to the reporting date. The effect of the revised policy has been to increase consolidated retained profits and decrease provisions at the beginning of the year by $1,027 million. In accordance with the new Standard, no provision for dividend has been recognised for the year ended 30 June 2003. The change in accounting policy has had no effect on basic and fully diluted earnings per share. The Group adopted the revised accounting standard AASB 1012: Foreign Currency Translation from 1 July 2002. There were no material changes to the related calculations. The Group adopted the revised accounting standard AASB 1028: Employee Benefits from 1 July 2002. All employee benefit liabilities expected to be settled more than 12 months after the reporting date were previously subject to actuarial review. As a result there were no material changes to the related liabilities on the adoption of the revised standard. Share Based Compensation In August 2002 the Bank announced that it will purchase shares to cover the Employee Share Acquisition Plan (ESAP) and include the full cost as an expense against profits. ESAP shares earned in respect of the 2002 financial year had not been awarded at the time of the announcement, and as such the cost of $25 million is a one off expense in the current year. In addition, current year ESAP expense accrued for the 2003 financial year is $20 million and this has also been charged against the current year’s profit. Similarly, the Executive Reward Plan has been restructured effective from 1 July 2002, whereby incentives allocated will be in the form of Reward shares and not options. This resulted in an increased expense for the year of $5 million. Other share based compensation expense for the year was $69 million. This was incurred and charged against profit on a consistent basis with prior periods. (b) Historical cost The financial statements of the Bank and the consolidated financial statements have been prepared in accordance with the historical cost convention and, except for AASB 1038: Life 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 other receivables and held by the Company and securities and derivatives held for trading purposes have been marked to market. The carrying amounts of all non current assets are reviewed to determine whether they are in excess of their recoverable amount at balance date. If the carrying amount of a non current asset exceeds the recoverable amount, the asset is written down to the lower amount. In assessing recoverable amounts for particular classes 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 was 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 to the Financial Statements. 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 spot 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 foreign exchange dealings are from losses arising included in the results. 57 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued The foreign currency assets and liabilities of overseas branches and overseas controlled entities are converted to Australian currency at 30 June 2003 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 spot exchange rate at the date of the transaction. 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. (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 that 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 gross value of the outstanding balance where 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 that 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 fair value and 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 58 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. (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, 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. interest reserved and unearned Non Accrual Facilities Non accrual facilities (primarily loans) are recorded on a cash basis income. Upon for recognition of classification as non accrual, all interest charged in the from profit and current financial period is reversed reserved if it has not been received in cash. If necessary, a specific provision for impairment is recognised so that the carrying amount of the facility does not exceed the expected future cash flows. In subsequent periods, interest in arrears/due on non accrual facilities is taken to profit and loss when a cash payment is received/realised and the amount is not designated as a principal payment. Non accrual facilities are restored to an accrual basis when all principal and interest payments are current and full collection is probable. 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 interest and/or principal is no longer probable, the account will be returned to the non accrual classification. Facilities are generally kept as non accrual until they are returned to performing basis. Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued Assets Acquired Through Securities Enforcement (AATSE) Assets acquired in satisfaction of facilities in default (primarily loans) are recorded at net market value at the date of acquisition. Any difference between the carrying amount of the facility and the net market value of the assets acquired is represented as a specific provision for diminution of value or written off. AATSE are further classified as Other Real Estate Owned (OREO) or Other Assets Acquired Through Security Enforcement (OAATSE). Such assets are classified in the appropriate asset classifications in the balance sheet. Bad Debts Bad debts are written off in the period in which they are recognised. Bad debts previously specifically provided for are written off against the related specific provisions, while bad debts not provided for are written off 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 that 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, contingent liabilities, financial instruments and investments and assets acquired through security enforcement. 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 in 59 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. 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 charged 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 that 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 this 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. The potential effect of any capital gains tax on disposal has not been taken into account in the determination of the revalued carrying amount. 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 less depreciation is shown at cost calculated principally on a category basis at rates applicable to each category’s useful life. Depreciation is Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued Such costs are amortised over the assessed useful life of the projects, up to a maximum of 10 years. The usual period of amortisation is 2½ years, except for a small number of term projects. Software maintenance costs continue to be expensed as incurred. longer (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 charged 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 charged to profit when incurred. (x) 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 is not carried forward as an asset unless the benefit is virtually certain of being utilised (Notes 5 and 21). At the date of this report, the Directors of the Bank have not made a decision whether or not to be treated as a single entity for Australian income tax purposes, under the tax consolidation system. For further details, refer to Note 5. (y) 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. leave represents The provision for annual The provision liabilities the outstanding liability as at balance date. Actual payments made during the year are included in Salaries and Wages. for other employee entitlements represents loan benefits, for staff housing a subsidy to a registered health fund with respect to retired employees and current employees, and employee incentives under employee share plans and bonus schemes. The level of these provisions has been determined in requirements of AASB 1028: accordance with Accounting for Employee Entitlements. the 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 2. Profit or loss on sale of property is treated as operating income or expense. Realised amounts in Asset Revaluation Reserve are transferred to Capital Reserve. 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 Equipment - Security surveillance systems Furniture - - 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 The Bank has outsourced its information processing and does not own any material amounts of computer or communications equipment. the majority of (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 is set out in Note 20. 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. The periods of goodwill amortisation are subject to review annually by the Directors. (u) Other assets Other assets include 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. Capitalisation of Computer Software Costs In accordance with the American 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 $248 million as at 30 June 2003 (2002: $209 million). for 60 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (z) Provisions for restructuring (ee) Shareholders’ equity Provisions for restructuring are brought to account where there is a detailed formal plan for restructure and a demonstrated commitment to that plan. Provision for Restructuring (2000) In June 2000 the Group acquired a 100% interest in the Colonial Limited Group of companies. This resulted in consequent within 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 were in the area of redundancy, property and systems. Refer Note 20 for further details on the Colonial acquisition. requirements restructuring Restructuring Costs (2000) The integration of Colonial into 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. (aa) 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. (bb) 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 charged against 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 debt issues are shown in Note 26. (cc) 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. (dd) 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. and discounts associated Premiums, issue 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. 61 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 $2,905 million, including the appraisal value uplift (2002:$3,150 million and 2001:$2,699 million). Capital reserve is derived from capital profits and is available for dividend. 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. (ff) Derivative financial instruments financial The Group enters into a significant volume of derivative foreign instruments 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. include that 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. Derivative financial instruments held or issued for purposes other than trading The principal objective issuing derivative financial instruments for purposes other than trading interest rate, 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 the underlying hedged item or class of items and generally rate or credit modify 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. identified and allocated against to manage balance sheet rate, exchange in holding or interest the is Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued 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 that 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. 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. (gg) 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 (hh) 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. loan 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 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 to specific transactions or events, they are recognised as income in the period 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. fees relate Other income Trading income is brought to account when earned based on changes in net fair value of financial instruments and recorded from trade date. Further information is included in Notes 1(e) Foreign currency translations, 1(j) Trading securities and 1 financial instruments. Life insurance business income recognition is explained in Note 1(ii) below. (ff) Derivative (ii) 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 report in irrespective of whether they are designated as relating to policyholders or to shareholders. included financial the (ii) All assets are measured at net market values. 62 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (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 1.03: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board. Other Liabilities are measured at net present value at reporting date. (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 the net assets of those subsidiaries as an item in the financial report of the life insurer economic entity. 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. (v) (vi) Returns on all investments controlled by a life insurer entity in the Group are recognised as revenues. (vii) Participating benefits vested the financial year, other than transfers from unvested policyholder benefits liabilities, are recognised as expenses. in relation to (viii) Reinsurance contracts entered into are recognised Insurance Holdings Limited on a gross basis. The Group conducts life insurance business through (CIHL), Commonwealth Commonwealth Life Limited (CLL) and The Colonial Mutual Life Assurance Society Limited 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 value their interests at market in their controlled entities at each reporting date. Refer Note 1(pp) for details of corporate restructure after 30 June 2003. (CMLA) Accounting policies and disclosures specific to life insurance business are required under AASB 1038. These are provided in this note and Notes 16, 21 and 34. (i) Premiums and Claims Investment linked business Premiums received, which are in the nature of investment deposits, have the fee portion of the premium recognised as revenue and the deposit portion recognised as an increase in policy liabilities. Premiums with no due date are recognised on a cash the received basis. Fees earned by Shareholder for managing the funds invested are recognised as revenue. Claims under investment represent withdrawals of linked businesses investment deposits and are recognised as a reduction in policy liabilities. (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 present value of the period are immediately recognised in profit. liabilities during (cid:1) 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: (cid:1) 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 the values so margins. This method allows 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. future about sales (cid:1) On consolidation the investment in controlled entities is eliminated and the excess of market value of controlled entities over their underlying net assets is separately recognised in Other Assets (Note 21) 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. 63 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued 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 1.03: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board. Policy liabilities are calculated in a way that allows for the systematic release of planned profit margins as services are provided to policyowners and the revenues relating to those services are received. Selected profit carriers including premiums and anticipated annuity payments are used to determine profit recognition. Profit Life insurance business operating under this profit recognition methodology can be analysed as follows: (i) life insurer has performed Emergence of planned profit margins: In setting premium rates, life insurers will include planned margins of revenues over expenses. When the the services necessary to establish a valid claim to those margins and has received the revenues relating to those services, the planned margins are recognised in profit. Where actual experience replicates planned margin assumptions, the planned profit margin will be released over the life of the policy. (ii) Difference between actual and planned experience: (iii) investment immediately. is recognised Experience profits/(losses) are realised where actual experience differs from the expected performance used to determine planned margins. Circumstances giving rise to experience profits/(losses) include experience variations in claims, expenses, mortality, discontinuance and 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: 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: Investment assets are held in excess of those required Investment 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 for future supportable bonuses. The value of supportable bonuses and planned shareholder profit margins account for all profit on participating policies based on best estimate assumptions. 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. Under Margin on Services profit to meet policy liabilities. (iv) Policy Acquisition Costs Policy acquisition costs the include 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. (jj) 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. 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. (kk) 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. (ll) Superannuation plans The Group sponsors a range of superannuation plans for its employees. The assets and liabilities of these plans are not included in the consolidated financial statements. 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. 64 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (mm) Comparative figures Where necessary, comparative figures have been adjusted to conform with changes in presentation in these financial statements. Statement of Financial Performance and Segment Reporting A part of the business previously reported under the Life Insurance segment namely Commonwealth and Colonial Products and part of the ASB business, is now funds management segment. reported under Management believes this classification more that appropriately represents the industry segments in which the Commonwealth Bank operates. Prior period numbers have been reclassified accordingly. the Share Based Compensation Share based compensation has been included as a new line item of expense within the Statement of Financial Performance and Note 2 Operating Profit which has resulted in the reclassification of part of the salaries and wages expense in prior periods. Refer Note 1(a) for further details. (nn) 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 outside equity interest before goodwill amortisation and funds management and life insurance appraisal value (reduction)/uplift. (oo) Policy Changes (2001) The Group adopted the requirements at AASB 1038: Life Insurance Business for the first time from 1 July 1999, refer note 1 (ii). 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 increased by $1,458 million at 30 June 2001 ($588 million at 30 June 2000). This change had no impact on operating profit after tax attributable to the Bank. Comparative figures were restated. The Group elected to apply revised accounting standard AASB 1005: Segment Reporting from 1 July 2000, prior to its operative date in accordance with Section 334(5) of the Corporations Act 2001, refer Note 33. The Group elected to apply revised accounting standard AASB 1041: Revaluation of Non-Current Assets from 1 July 2000, prior to its operative date in accordance with Section 334(5) of the Corporations Act 2001, refer Note 19. (pp) Subsequent events Corporate Restructure The Group (cid:1) (cid:1) is in the the Life the process of a corporate restructure of the legal entities involved in the Funds Management and Life Insurance operations within Australia. The corporate restructure involves: (cid:1) Transferring Insurance business of Commonwealth Life Limited to The Colonial Mutual Life Assurance Society Limited (on 1 July 2003); Transferring former Commonwealth Life Insurance and Funds Management companies into the Colonial sub-group of companies (during July and August 2003); and the Simplifying Colonial sub-group of companies (ongoing, to be substantially completed by December 2003). The restructure will: Align the corporate structure and the management structure; and Simplify the transparency for investors, regulators and creditors. There is no material effect on the regulatory capital position of the Bank, or of any of the life insurance companies, the general insurance company or the funds management companies arising directly the restructure. the corporate structure within increasing corporate structure, from (cid:1) (cid:1) Issue of Trust Preferred Securities On 6 August 2003 the Bank, via a wholly owned entity of the Bank, issued USD550m (AUD824m) of trust preferred securities into the US capital markets. The securities will qualify as Tier 1 capital of the Bank. Refer to Note 29 for further details. 65 Notes to the financial statements NOTE 2 Operating Profit Profit from ordinary activities before income tax has been determined as follows: 2003 $M 2002 $M GROUP 2001 $M 2003 $M BANK 2002 $M Interest Income Loans Other financial institutions Cash and liquid assets Trading securities Investment securities Dividends on redeemable preference shares Controlled entities Total Interest Income 10,084 233 137 454 579 41 - 11,528 9,231 165 142 359 517 41 - 10,455 10,253 280 110 548 655 8,077 70 135 362 256 54 - 577 9,477 - 11,900 Interest Expense Deposits Other financial institutions Debt issues Controlled entities Loan capital 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 investments and loans Net profit on sale of property, plant and equipment Funds management income Life insurance income General insurance premium income Less general insurance claims paid Other Total Other Operating Income Total Net Operating Income before appraisal value (reduction)/uplift Charge for Bad and Doubtful Debts (Note 13) General provisions Total Charge for Bad and Doubtful Debts 7,533 95 137 276 255 (6) 380 8,670 3,409 205 601 265 227 4,707 3,963 580 1,309 4,732 198 1,352 - 220 6,502 5,026 4,256 193 1,064 - 232 5,745 4,710 5,063 328 1,661 - 374 7,426 4,474 652 1,423 618 1,242 602 1,173 3,795 197 889 243 212 5,336 4,141 599 1,157 200 190 112 - 4 (9) 22 1,042 634 116 (75) 62 4,373 9,399 243 113 133 - 5 78 12 1,147 659 119 (66) 55 4,358 9,068 222 140 64 - 14 56 25 175 162 112 577 2 (9) 13 1,204 - 765 - 107 - - (57) 566 35 3,354 4,350 7,495 8,824 216 92 133 969 3 295 11 - - - - 332 3,940 7,903 305 305 449 449 385 385 266 266 405 405 66 Notes to the financial statements NOTE 2 Operating Profit continued Staff Expenses Salaries and wages Superannuation contributions Provisions for employee entitlements Payroll tax Fringe benefits tax Other staff expenses Recurrent expenses Restructuring Total Staff Expenses 2003 $M 2002 $M GROUP 2001 $M 2003 $M BANK 2002 $M 2,106 13 11 107 26 120 2,016 2,043 11 12 44 39 92 99 32 48 132 116 2,383 2,327 2,357 - 2,538 2,327 2,357 155 - 1,694 (3) 5 95 24 78 1,893 1,697 2 42 83 30 43 1,897 155 - 2,048 1,897 Share Based Compensation 119 63 3 118 62 Occupancy and Equipment Expenses Operating lease rentals Depreciation Buildings Leasehold improvements Equipment Repairs and maintenance Other Recurrent expenses Restructuring Total Occupancy and Equipment Expenses Information Technology Services Projects and development Data processing Desktop Communications Software amortisation Recurrent expenses Restructuring Total Information Technology Services 354 324 329 289 295 24 26 51 47 53 55 58 56 69 70 29 45 76 60 65 609 578 604 - 612 578 604 3 - 20 41 22 49 52 473 23 37 26 51 26 458 3 - 476 458 191 256 145 171 195 189 255 275 161 155 171 175 167 256 154 148 78 44 25 71 38 763 30 - 797 763 788 - 890 838 788 860 838 30 - 166 227 159 144 767 Other Expenses Postage Stationery Fees and commissions Advertising, marketing and loyalty Other Recurrent expenses Restructuring Total Other Expenses Total Operating Expenses before goodwill amortisation 109 111 108 118 104 104 551 609 524 276 256 252 312 315 430 1,366 1,395 1,418 26 - - 1,392 1,395 1,418 5,551 5,201 5,170 96 90 210 221 154 771 95 86 279 203 139 802 26 - 797 802 4,236 3,982 Appraisal value (reduction)/uplift Goodwill amortisation Profit from ordinary activities before income tax (245) (322) 2,976 - 477 474 - (186) (323) (186) (338) 2,807 3,330 3,572 3,405 First time expenses comprise: Restructuring expenses – as above 214 - - 214 - Employee compensation (ESAP) – Note 1(a) 45 - - 45 - 259 67 259 GROUP 2001 $M 11,900 1,775 426 14 157 28 85 14,385 2003 $M 9,477 1,756 449 579 65 2 566 12,894 BANK 2002 $M 8,670 1,889 441 972 78 836 334 13,220 1079 - - 695 - - 1,698 - - 3,472 - - 10,455 1,860 489 5 109 609 108 13,635 1,083 866 (100) 1,849 330 147 - 477 15,961 474 - - - - 474 - - 13,220 12,894 18,331 Notes to the financial statements NOTE 3 Revenue from Ordinary Activities 2003 $M 2002 $M Banking Interest income Fees and commissions Trading income Dividends Proceeds from sale of property, plant and equipment Proceeds from sale of investments and loans Other income Funds Management and Life Insurance Funds management income including premiums Life insurance premiums and related income Investment income Appraisal value uplift (1) - recurrent basis - corporate restructure of funds management business Total revenue from ordinary activities 11,528 2,075 502 4 72 56 94 14,331 1,125 1,011 628 2,764 - - - 17,095 There were no sources of revenue from non-operating activities. (1) Appraisal value reduction of $ 245 million for year ended 30 June 2003. 68 Notes to the financial statements NOTE 4 Average Balances 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 2001, 2002 and 2003. Averages used are predominantly daily averages. The overseas component comprises overseas branches of the Bank and overseas domiciled controlled entities. Overseas intragroup borrowings have been adjusted in the interest spread and margin calculations to more appropriately funds. Non-accrual loans are included in Interest Earning Assets receivables. under the overseas cost of advances reflect loans, other and Full Year Ended 2003 2002 2001 $M Average Interest Earning Assets and Interest Income Average Interest Average Average Interest Average Average Interest Average Rate Balance % $M Rate Balance $M Rate Balance $M $M $M % % 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 3,293 813 2,446 3,734 - 56 7,360 3,395 4,240 8,062 131,746 23,125 - - 3,604 191,874 (3,604) 188,270 133 4 79 154 - - 326 128 261 318 8,496 1,629 - - 31 4.0 0.5 3.2 4.1 4,290 285 1,822 2,663 138 4 69 96 3.2 1.4 3.8 3.6 2,428 273 2,658 1,595 107 3 159 121 n/a - 174 n/a - - n/a - n/a - 29 - 4.4 3.8 6.2 3.9 5,138 2,698 3,774 7,339 248 111 211 306 4.8 4.1 5.6 4.2 5,616 2,587 3,244 6,268 387 161 242 413 6.4 123,006 7.0 19,445 n/a - 7,984 1,288 - 6.5 118,917 6.6 16,992 n/a - 8,983 1,317 7 n/a - 3,232 0.9 - 65 n/a - 3,198 2.0 - 191 11,559 (31) 6.0 173,866 (3,232) 0.9 10,520 (65) 6.1 163,805 (3,198) 2.0 12,091 (191) 11,528 6.1 170,634 10,455 6.1 160,607 11,900 4.4 1.1 6.0 7.6 n/a n/a 6.9 6.2 7.5 6.6 7.6 7.8 n/a n/a 6.0 7.4 6.0 7.4 Average Non-Interest Earning Assets Bank acceptances Australia Overseas 13,144 53 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 26,333 4,070 627 197 24,046 3,303 (1,497) (150) 70,126 258,396 19.5% 11,965 66 26,853 4,129 681 203 23,617 3,411 (1,546) (143) 69,236 239,870 18.1% 69 12,074 109 26,580 3,062 1,024 240 21,676 1,835 (1,493) (84) 65,023 225,630 16.0% Notes to the financial statements NOTE 4 Average Balances and Related Interest continued Average Liabilities and Interest Expense Full Year Ended Average Balance $M 2003 Interest Average Average Interest Average Average Interest Average Rate % Rate Balance $M Rate Balance $M 2002 2001 $M $M $M % % Average Interest Bearing Liabilities and Loan Capital and Interest Expense 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 bearing liabilities Total average liabilities and loan capital Shareholders' equity Total average liabilities, loan capital and shareholders' equity Percentage of total average liabilities applicable to overseas operations 45,674 14,255 32,780 2,788 34,043 2,906 1,752 6,712 17,651 10,738 5,234 204 - 3,604 - 1,956 876 492 100 1,230 78 34 164 1,047 305 212 8 - 31 - 4.3 6.1 1.5 3.6 3.6 2.7 1.9 2.4 5.9 2.8 4.1 3.9 n/a 0.9 n/a 41,283 12,479 1,901 761 32,078 2,444 412 82 29,517 2,386 1,037 63 2,043 5,320 14,578 9,398 65 128 800 264 5,491 88 - 227 5 - 3,232 - 65 - 4.6 6.1 1.3 3.4 3.5 2.6 3.2 2.4 5.5 2.8 4.1 5.7 n/a 2.0 n/a 42,226 9,882 2,519 711 27,835 2,027 603 83 23,813 1,911 1,064 62 1,271 4,238 65 263 17,130 9,965 1,099 562 5,564 116 - 367 7 21 3,198 - 191 - 178,341 (3,604) 6,533 (31) 3.7 0.9 160,337 (3,232) 5,810 (65) 3.6 2.0 149,176 (3,198) 7,617 (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 5.1 6.0 174,737 6,502 3.7 157,105 5,745 3.7 145,978 7,426 5.1 4,784 871 13,146 53 20,828 3,596 16,034 2,739 62,051 236,788 21,608 258,396 18.9% 5,424 705 11,965 66 23,092 3,457 14,628 3,026 62,363 219,468 20,402 239,870 17.9% 70 6,034 608 12,077 109 23,584 2,617 13,536 2,890 61,455 207,433 18,197 225,630 16.6% Notes to the financial statements NOTE 4 Average Balances and Related Interest continued Changes in Net Interest Income: Volume and Rate Analysis Interest Earning Assets Cash and liquid assets Australia Overseas Receivables due from other financial institutions Australia Overseas 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 30/06/03 vs 30/06/02 Changes due to Rate $M Volume $M 30/06/02 vs 30/06/01 Changes due to Total $M Volume $M Rate $M Total $M 71 - - (41) 60 - (28) 6 - 35 58 - 287 176 - - - 1 656 (1) 679 (50) 171 73 16 228 14 32 47 (152) (24) (4) (2) - 1 - 503 (1) 486 278 (40) 1 - (49) (85) - (111) (56) - (66) (165) - (1,286) (205) (7) - - (127) (2,227) 127 (2,124) (568) (136) (264) (17) (255) (13) (32) (182) (147) (274) (136) - (6) 31 1 - (90) (25) - (139) (50) - (31) (107) - (999) (29) (7) - - (126) (1,571) 126 (1,445) (618) 35 (191) (1) (27) 1 - (135) (299) (298) (140) (2) (6) (127) - (2,310) 127 (2,167) (42) (126) - (1,807) 126 (1,681) 236 31 (5) (5) - (12) 17 (25) (10) 23 (17) (53) 90 - - (39) (17) 39 (7) (140) 7 70 6 32 1 (24) 2 72 3 (4) (3) - (39) - 57 39 107 (163) 10 58 78 17 50 12 512 341 - - (34) 1,039 34 1,073 55 115 80 18 193 15 (31) 36 247 41 (15) 3 - (34) - 723 34 757 316 (36) 5 22 41 103 27 27 29 565 251 - - 5 1,056 (5) 1,080 195 108 10 12 161 14 (7) 34 175 38 (11) 6 - 5 - 666 (5) 650 479 71 Notes to the financial statements NOTE 4 Average Balances and Related Interest continued Changes in Net Interest Income: Volume and Rate Analysis The preceding table shows the movement 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 change Net interest income Average interest earning assets Interest Margins and Spreads 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). 2003 $M 2002 $M 5,026 4,710 188,270 170,634 GROUP 2001 $M 4,474 160,607 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 (1) Benefit of net free liabilities, provisions and equity (2) Australia Interest Margin (3) Overseas Interest Spread (1) Benefit of net free liabilities, provisions and equity (2) Overseas Interest Margin (3) Group Interest Spread (1) Benefit of net free liabilities, provisions and equity (2) Group Interest Margin (3) 2003 % 2.68 0.20 2.88 1.22 0.50 1.72 2.40 0.27 2.67 2002 % 2.75 0.25 3.00 1.16 0.43 1.59 2.47 0.29 2.76 2001 % 2.56 0.43 2.99 1.06 0.55 1.61 2.32 0.46 2.78 (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 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. 72 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. Operating profit from ordinary activities before income tax Banking Funds Management Life insurance Appraisal value (reduction)/uplift Goodwill amortisation Prima facie income tax at 30% (30 June 2001: 34%) Banking Funds Management Life insurance Appraisal value (reduction)/uplift Goodwill amortisation 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 policyholder income Non assessable income - life insurance surplus Change in excess of net market value over net assets of life insurance controlled entities 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 Funds management Life insurance Corporate tax Policyholder tax Total Income Tax Expense Income tax expense comprises: Current taxation provision Deferred income (benefit)/tax provision Future income tax benefit Notional tax expense - leveraged leases Other Total Income Tax Expense The components of income tax expense consist of the following: Current Australia Overseas Deferred Australia Overseas 73 BANK 2002 $M 3,516 - - - (186) 3,330 1,055 - - - (56) 999 - (7) (308) - - - 56 (68) (35) (8) 36 (334) 2003 $M 3,187 206 150 (245) (322) 2,976 956 62 45 (73) (97) 893 2002 $M 2,884 399 135 477 (323) 3,572 866 120 40 143 (97) 1,072 GROUP 2001 $M 2003 $M 2,512 2,993 478 - 279 - 474 - (186) 2,807 (338) 3,405 898 853 163 - 95 - 161 - (56) 842 (114) 1,158 - 13 (36) (66) (18) 73 97 - (18) - 20 65 - 958 938 54 24 1,016 (58) 958 917 (24) 45 22 (2) 958 853 112 965 (1) (6) (7) - (3) (24) (25) (25) (143) 97 - (35) (8) 17 (149) 3 - 8 8 (146) (35) 62 - - (43) (161) 115 (38) (65) (8) 26 (136) - 56 - - - (52) (134) (7) 916 816 96 40 952 (36) 916 1,385 (408) (86) 12 13 916 1,239 146 1,385 (403) (66) (469) (29) 993 - 708 - 665 705 708 104 - 90 - 708 94 - 708 899 993 820 193 (35) 11 625 42 35 6 4 - 708 993 665 - - 665 - 665 814 (129) (28) 5 3 665 765 55 820 168 5 173 610 15 625 83 - 83 811 3 814 (149) - (149) 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 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) 2003 $M 2002 $M GROUP 2001 $M BANK 2002 $M 2003 $M 353 172 525 302 96 16 414 337 288 625 240 100 240 580 488 206 694 328 149 625 1,102 242 70 312 116 2 44 162 257 52 309 34 23 95 152 36 124 - - - 168 (34) (18) 26 142 146 (8) (27) 57 168 173 (2) (65) 40 146 132 (71) (17) 18 62 121 (10) (27) 48 132 Tax Consolidation Legislation has been enacted to allow Australian resident entities to elect to consolidate and be treated as a single entity for Australian tax purposes. At the date of this report, the directors of Commonwealth Bank of Australia have not made a decision whether or not to elect to be taxed as a single entity. In the event that the tax consolidation system is implemented, Commonwealth Bank of Australia has agreed to reimburse their wholly- owned subsidiaries which form part of the consolidated tax group for the net deferred tax assets that remain at implementation date. Alternatively where there exists a net tax liability, wholly-owned subsidiaries will compensate Commonwealth Bank of Australia. In future years, should the Bank enter the tax consolidation regime, tax balances will no longer be recorded by subsidiaries if they form part of a consolidated tax group. Tax balances for the consolidated tax group will be recorded in the financial statements of the Commonwealth Bank of Australia. 74 Notes to the financial statements NOTE 6 Dividends Ordinary Shares Interim ordinary dividend (fully franked) (2003: 69 cents, 2002: 68 cents, 2001: 61 cents) Provision for interim ordinary dividend - cash component only Provision for interim ordinary dividend - dividend reinvestment plan Declared final ordinary dividend (fully franked) (2003: nil provided, 2002: 82 cents, 2001: 75 cents) Provision for final ordinary dividend - cash component only Provision for final ordinary dividend - dividend reinvestment plan Other provision Preference Shares Preference dividends paid (fully franked) (2003: 1,019 cents, 2002: 970 cents, 2001: 261 cents) Provision for preference dividend Dividends provided for 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 Other provision carried Dividends proposed and not recognised as a liability (fully franked) (2003: 85 cents, 2002: nil) 2003 $M 2002 $M GROUP 2001 $M BANK 2002 $M 2003 $M 699 166 693 159 642 699 166 852 - - 832 195 - 765 - - 5 - 1,027 - 28 8 901 26 - 9 1,421 8 1,913 28 8 901 26 8 1,913 - - - 901 - - - 1,913 131 - 168 - 299 - 901 1,720 - - - 1,913 4 5 - 4 5 1,066 - - 1,066 - Dividend Franking Account After fully franking the final dividend to be paid for the year ended 30 June 2003 the amount of credits available as at 30 June 2003 to frank dividends for subsequent financial years is $417 million. This figure is based on the combined franking accounts of the Bank at 30 June 2003, which have been adjusted for franking credits that will arise from the payment of income tax payable on profits for the year ended 30 June 2003, franking debits that will arise from the payment of from distributing dividends proposed for the year and franking credits that the Bank may be prevented in subsequent financial periods. 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 2003 will be franked at the 30% tax rate. These calculations have been based on the taxation law as at 30 June 2003. Dividend History Half Year Ended 31 December 2000 30 June 2001 31 December 2001 30 June 2002 31 December 2002 30 June 2003 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) $ 61 75 68 82 69 85 68.2% 74.0% 71.8% 71.6% 143.2% 77.7% - 71.2% - 71.7% - 75.5% - 76.2% - - 30.82 28.79 31.96 31.92 24.75 18.6% 18.4% 18.7% 19.0% 19.2% 97.7% 75.9% - - (1) (2) (3) Dividend Payout Ratio: dividends 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. 75 Notes to the financial statements NOTE 7 Earnings Per Share Earnings Per Ordinary Share - Basic - Fully diluted Reconciliation of earnings used in the calculation of earnings per share Profit from ordinary activities after income tax Less: Preference share dividends Less: Outside equity interests Earnings used in calculation of earnings per share Weighted average number of ordinary shares used in the calculation of basic earnings per share Effect of dilutive securities - share options Weighted average number of ordinary shares used in the calculation of fully diluted earnings per share Cash Basis Earnings Per Ordinary Share - Basic - Fully diluted 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 NOTE 9 Receivables from Other Financial Institutions Australia Overseas Total Receivables from Other Financial Institutions 76 2003 c 157.4 157.3 2002 c 209.6 209.3 GROUP 2001 c 189.6 189.3 $M $M $M 2,018 (40) (6) 1,972 2,656 (34) (1) 2,621 2,412 (9) (14) 2,389 Number of Shares 2003 M 2002 M 2001 M 1,253 1,250 1,260 1 2 2 1,254 1,252 1,262 c 202.6 202.5 c 197.3 197.0 c 178.8 178.6 GROUP 2002 $M 2003 $M BANK 2002 $M 1,888 1,330 74 - 2,900 218 4,448 3,194 270 5,426 1,873 - 3,194 296 5,363 168 100 14 50 - 892 908 5,356 300 618 6,044 2 - 10 - 300 310 5,673 2003 $M 1,426 14 2,900 217 4,557 65 377 33 543 1,018 5,575 2003 $M 3,324 3,742 7,066 GROUP 2002 $M 4,333 3,395 7,728 2003 $M 3,287 2,149 5,436 BANK 2002 $M 4,504 1,190 5,694 Notes to the financial statements NOTE 10 Trading Securities Australia Listed: Australian public securities Commonwealth and states Local and semi-government Treasury notes Bills of exchange Other securities Unlisted: Local and semi-government Commercial paper Certificates of deposit Medium term notes Other securities Total Australia Overseas Listed: Government securities Eurobonds Bills of exchange Other securities Unlisted: Government securities Commercial paper Certificates of deposit Other securities Total Overseas Total Trading Securities 2003 $M GROUP 2002 $M 2003 $M BANK 2002 $M 551 755 - 947 679 - 397 2,141 851 13 6,334 698 938 1,136 603 - 726 - - 4,101 10,435 72 182 6 1,535 67 10 163 1,883 1,644 2 5,564 150 780 1,122 348 18 401 5 1 2,825 8,389 551 755 - 947 675 - 505 2,142 851 13 6,439 87 938 - 608 - - - 1,633 8,072 72 182 6 1,595 987 10 163 1,883 609 2 5,509 20 780 - 361 10 18 5 - 1,194 6,703 77 Notes to the financial statements NOTE 11 Investment Securities Australia Listed: Australian public securities Commonwealth and states Other securities and equity investments Unlisted: Australian public securities Local and semi-government Bills of exchange Medium term notes Other securities and equity investments Total Australia Overseas Listed: Government securities Treasury notes Certificates of deposit Eurobonds Medium term notes Floating rate notes 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 2003 $M 2002 $M GROUP 2001 $M 2003 $M BANK 2002 $M 1,915 439 1,969 456 1,919 354 1,915 433 1,969 448 - - 115 57 2,589 804 - 1,045 44 191 5 - 1,379 212 114 - 798 379 4,971 7,560 80 - 942 965 4,341 80 - 18 968 578 4,069 976 2 3,336 - 85 - 57 58 2,463 484 5 14 993 239 324 1,392 804 252 - 1,045 1,118 377 - 666 787 463 - - 796 239 111 631 1,417 212 174 116 - 6 - 1,343 230 117 29 - 438 957 - 4,368 6,831 6,369 9,705 1,422 98 - 1,343 230 583 - 900 90 6,695 11,036 113 - 1,379 212 114 - 784 1,082 6,697 10,766 78 Notes to the financial statements NOTE 11 Investment Securities continued 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) 2003 $M 2,118 - 935 1,400 4,453 593 5 1,357 1,260 816 1,215 1,488 6,734 11,187 151 GROUP Market Value at 30 June 2001 2002 $M $M 2,109 18 973 1,042 4,142 928 - 1,379 1,263 114 1,158 1,867 6,709 10,851 85 1,926 85 982 463 3,456 379 6 1,416 1,343 172 1,422 1,627 6,365 9,821 116 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 2003 Amortised Cost $M Gross Unrealised Losses Gains $M $M Fair Amortised Cost $M Value $M Gross Unrealised Losses Gains $M $M At 30 June 2002 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 1,995 - 942 123 - - - 11 4 2,118 - 935 2,049 71 18 - 5 968 1,404 - 4,341 127 4 15 1,400 4,453 1,034 4,069 582 5 - 1,357 - 56 1,223 12 822 1,224 - 11 - - - 19 18 9 593 917 5 - 1,379 1,257 114 1,161 1,357 1,260 816 1,215 1,482 6,695 11,036 6 - 46 61 85 212 1,488 6,734 11,187 1,869 6,697 10,766 12 88 13 - - 30 - - 9 52 140 11 - - 4 15 2,109 18 973 1,042 4,142 2 - - 24 - 3 928 - 1,379 1,263 114 1,158 11 40 55 1,867 6,709 10,851 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 Group. (1) Equity derivatives are in place to hedge equity market risk in respect of structured equity products for customers. There are $4 million of net deferred gains on these contracts (2002: $12 million net deferred losses) which offset the above unrealised losses and these are disclosed within Note 39. At the end of the financial year $1 million of net deferred losses (2002: $98 million of deferred losses) are included in the amortised cost value. 79 Notes to the financial statements NOTE 11 Investment Securities continued Maturity Distribution and Average Yield The following table analyses the maturities and weighted average yields of the Group’s holdings of investment securities. 1 to 12 months % $M 1 to 5 years % $M GROUP Maturity Period at 30 June 2003 Total $M 10 years or more % $M 5 to 10 years % $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 206 6.07 - - - 1,332 6.01 - - 447 6.48 - 457 5.29 - - - - - 495 7.00 397 4.73 988 5.22 1,098 2,767 19 5.66 - - 476 - - - - - 287 5.61 - 1,343 1.99 84 6.62 37 7.28 103 1.33 64 1.27 - - - 231 3.10 5 3.10 - 14 1.99 - 995 6.43 785 5.08 - 665 1.17 - - 77 5.56 - 439 4.83 - - - 67 2.65 - 17 2.66 - 421 2.92 945 4.19 37 6.32 79 5.04 2,275 3,373 3,379 3,640 6,407 6,516 617 1,093 1,135 163 163 157 1,995 942 1,404 4,341 582 5 1,357 1,223 822 1,224 1,482 6,695 11,036 11,187 Additional Disclosure Proceeds at or close to maturity of investment securities were $17,719 million (2002: $22,192 million; 2001: $19,697 million). Proceeds from sale of investment securities were $23 million (2002: $295 million; 2001: $28 million). Realised capital gains were $7 million and realised capital losses were $5 million (2002: realised capital gains $86 million and realised capital losses $14 million; 2001: realised capital gains $3 million and realised capital losses $1 million). 80 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 Equity participation in leveraged leases Other lending Total Australia Overseas Overdrafts Housing loans Credit card outstandings Lease financing Term loans Redeemable preference share financing Other Lending Total Overseas Gross Loans, Advances and Other Receivables Less: Provisions for impairment (Note 13) General provision Specific provision against loans and advances Unearned income Term loans Lease financing Leveraged leases Interest reserved Unearned tax remissions on leveraged leases Net Loans Advances and Other Receivables Lease Receivables, Net of Unearned Income (included above) Current Non current 2003 $M 2,452 87,592 5,227 3,988 2,303 36,742 1,276 604 140,184 2,005 12,611 296 197 7,444 511 13 23,077 163,261 (1,325) (205) (618) (549) (143) (26) (48) (2,914) 160,347 GROUP 2002 $M 2,513 75,394 4,552 4,094 1,753 38,544 1,331 968 129,149 1,691 10,444 274 256 7,494 695 43 20,897 150,046 (1,356) (270) (631) (426) (162) (59) (68) (2,972) 147,074 2003 $M 2,452 87,149 5,227 1,543 2,303 31,115 446 618 130,853 BANK 2002 $M 2,513 75,123 4,552 2,044 1,753 32,556 409 900 119,850 - 51 - 80 2,098 - - 2,229 133,082 - 49 - 110 2,525 - - 2,684 122,534 (1,152) (157) (12) (157) (39) (25) (3) (1,545) 131,537 (1,190) (231) (29) (210) (28) (55) (10) (1,753) 120,781 1,402 2,234 3,636 1,408 2,516 3,924 743 724 1,467 711 1,233 1,944 Leasing Arrangements Retail Financial Services provides vehicle and equipment lease finance to a broad range of industries including transport, service, earthmoving, construction, manufacturing and mining. Most finance arrangements are for terms of between 3 and 5 years and lease rentals are generally payable monthly in advance. 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. 81 Notes to the financial statements NOTE 12 Loans, Advances and Other Receivables continued 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 Leases 2003 $M 1,385 2,082 718 4,185 304 575 397 1,276 GROUP 2002 $M 1,598 2,530 222 4,350 225 483 623 1,331 2003 $M 826 686 111 1,623 59 203 184 446 BANK 2002 $M 790 1,213 151 2,154 87 169 153 409 82 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 2003. GROUP Maturity Period at 30 June 2003 Maturing Maturing Between One Year One & Five Years $M or Less $M Maturing After Five Years $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 Interest Rate Sensitivity of Lending Australia Overseas Total Variable Interest Rates Australia Overseas Total Fixed Interest Rates Gross Loans, Advances and Other Receivables 517 1,105 1,230 3,447 703 5,388 1,467 17,493 31,350 75 500 1,162 2,947 36 555 116 2,364 7,755 39,105 21,771 5,862 27,633 9,579 1,893 11,472 39,105 348 1,346 533 14,163 732 6,303 2,620 5,860 31,905 79 897 1,175 640 1,226 261 69,982 266 281 1,177 3,096 76,929 68 881 873 3,249 89 305 6,415 84 531 81 - 139 8,991 85,920 456 6,331 38,236 23,941 1,611 25,552 7,984 4,700 12,684 38,236 74,296 2,450 76,746 2,633 6,541 9,174 85,920 Total $M 1,505 3,677 2,024 87,592 1,701 11,972 5,264 26,449 140,184 222 2,278 3,210 12,611 209 1,391 197 2,959 23,077 163,261 120,008 9,923 129,931 20,196 13,134 33,330 163,261 (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. 83 Notes to the financial statements NOTE 13 Provisions For Impairment 2003 $M 2002 $M 2001 $M 2000 $M GROUP 1999 $M BANK 2002 $M 2003 $M General Provisions Opening balance 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 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 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 Charges to profit and loss for bad and doubtful debts comprise: 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 1,356 305 1,399 449 - - (495) 56 1 (350) 74 (9) 1,376 (51) 1,325 1,410 (54) 1,356 1,358 385 51 (411) 88 (29) 1,442 (43) 1,399 1,076 1,081 196 247 214 - (239) 1,190 266 1,240 405 - - (457) 44 (3) - (322) 51 - (7) (140) 54 (3) 1,402 (44) 1,358 1,128 (47) 1,081 1,194 (42) 1,152 1,232 (42) 1,190 270 234 432 275 279 231 190 - - 6 219 - - - 416 (66) 350 546 (51) 495 495 (84) 411 236 (96) 140 (11) (11) (17) 5 609 (404) 205 1,530 718 (448) 270 1,626 832 (598) 234 1,633 639 (207) 432 1,790 284 (45) 239 (8) 510 (235) 275 1,356 382 (60) 322 496 (39) 457 (17) (12) 536 (379) 157 1,309 635 (404) 231 1,421 205 270 - - 270 205 233 1 234 431 275 1 - 275 432 157 231 - - 231 157 % % % % % % % 32.08 30.54 36.06 43.03 46.69 24.84 30.72 239.44 0.90 183.94 251.62 178.29 1.06 0.96 1.01 230.22 1.09 207.25 188.96 0.91 0.84 $M $M $M $M $M $M $M 305 449 405 196 - - - - - - - 405 196 266 247 449 305 385 266 247 385 0.19% 0.31% 0.28% 0.16% 0.25% 0.21% 0.34% 84 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 2003 $M 305 GROUP 2002 $M 449 2003 $M 266 BANK 2002 $M 405 416 (66) 350 (350) - 546 (51) 495 (495) - 382 (60) 322 (322) - 496 (39) 457 (457) - 51 (74) (22) 350 305 305 51 (56) (41) 495 449 449 42 (63) (35) 322 266 266 42 (44) (50) 457 405 405 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 1999, 2000, 2001, 2002 and 2003. 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 2003 $M 2002 $M 2001 $M 2000 $M GROUP At 30 June 1999 $M - 3 2 - 10 26 - 8 24 - 35 23 - 15 23 6 - 36 4 112 163 6 4 35 6 134 221 4 6 28 7 77 154 8 6 17 6 110 205 4 35 15 4 82 178 10 11 1 - 12 - 15 - 4 - 13 - - 1 - 7 - 4 - 20 42 205 3 - 3 - 20 49 270 7 - 3 - 51 80 234 3 - 69 - 141 227 432 3 - 2 - 92 97 275 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 85 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 ended 30 June 1999, 2000, 2001, 2002 and 2003. 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 2003 $M - 4 26 8 - 209 11 171 429 - - 16 2 - 7 - 1 26 455 57 17 74 381 2002 $M - 6 6 11 4 177 18 178 400 1 - 58 2 - 6 - 35 102 502 49 7 56 446 2001 $M - 10 1 10 14 142 16 301 494 - - 6 1 - 38 - 102 147 641 59 29 88 553 GROUP Year Ended 30 June 1999 2000 $M $M - 6 2 - 7 4 8 24 104 11 90 245 - - - 1 - 4 - 1 6 251 46 8 54 197 9 7 94 11 71 203 - - - 1 14 - 3 61 79 282 48 3 51 231 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 86 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 ended 30 June 1999, 2000, 2001, 2002 and 2003. 2003 $M 2002 $M 2001 $M GROUP Year Ended 30 June 1999 $M 2000 $M - - - 2 1 1 - 9 - 1 - 30 - 17 49 - - 1 1 1 30 1 17 59 - - - 1 2 28 2 10 46 - - 2 - 1 3 - - 1 3 - 3 - - - 2 8 54 3 7 56 25 29 88 - 2 2 - 1 27 2 14 48 - - - - - 3 - - 3 51 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 Bad Debts Recovered - 1 4 - - 38 2 12 57 - - 1 - - 4 - 12 17 74 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 87 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 where cases of non-compliance are observed. Facilities in the credit risk rated segment become classified for remedial management by centralised units based on assessment in the risk rating system. These facilities are generally 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 facilities where 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 Group’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, including a centralised portfolio model that assesses risk and return on an overall portfolio and segmented basis, to assist in diversifying the credit portfolio. The Group 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 Management The Group has clearly defined credit policies for the risk. Credit approval and management of credit incorporate underwriting income/repayment capacity, acceptable terms and security and loan documentation tests exist for all major lending areas. standards, which The Group relies, in the first instance, on the assessed integrity and ability of 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 risk portfolio is divided into two segments, statistically managed and credit risk rated. Statistically managed exposures generally comprise facilities of less than $250,000 for housing loan, credit card, personal loan and some leasing products. These exposures are generally not individually reviewed unless arrears occur. The portfolios are reviewed by the business Credit Support and Monitoring unit with an overview by the Risk Asset Review unit. in for Facilities the statistically managed segment remedial management by become classified centralised units based on arrears status. Impaired assets in this segment are those ‘classified’ facilities that 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 exposures generally comprise business and corporate exposures, including bank and government exposures. Each exposure is assigned an internal risk rating that is based on an assessment of the risk of default and the risk of loss in the event of default. Credit risk rated exposures are generally required to be reviewed at they are small transactions that are managed on a behavioural basis after their initial rating at origination. 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. least annually, unless 88 Notes to the financial statements NOTE 14 Credit Risk Management 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 1999, 2000, 2001, 2002 and 2003. The industry profile of the loans, advances and other receivables content for the five financial years to 30 June 2003 is shown on page 95. 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 (2) Construction (3) 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) 2003 $M 5,810 5,100 19,867 91,956 2,722 12,327 5,264 51,469 194,515 1,709 2,278 14,828 13,428 210 1,391 197 9,080 43,121 237,636 (1,310) 236,326 305 0.13% 2002 $M 5,955 5,480 20,926 85,032 3,837 11,718 5,425 43,531 181,904 1,390 1,863 14,192 10,735 185 343 256 10,173 39,137 221,041 (1,219) 219,822 449 0.20% 2001 $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% GROUP At 30 June 1999 $M 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% 2000 $M 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% (1) (2) (3) The loss rate is the charge as a percentage of the credit risk. Principally owner occupied housing. Primarily financing real estate and land development projects. The Group has a good quality and well diversified credit portfolio in Australia, with 47.3% of the exposure in mortgage loans and a further 10.2% in finance, investment and insurance (primarily banks). 18.1% of exposure is overseas, of which 31.1% is in mortgage loans. Overall over 63% of individually rated exposures in the commercial portfolio (including government and finance) are of investment grade or equivalent quality. 89 Notes to the financial statements NOTE 14 Credit Risk Management continued The following table sets out the Group’s credit risk by industry and asset class at 30 June 2003. Trading Investment Loans Advances and Other Acceptances Contingent Bank Industry 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 Balances Other Risk Concentrations Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk Securities Securities Receivables of Customers Liabilities Derivatives $M $M $M $M $M $M Total $M 1,703 1,995 - - 3,089 - 1,505 3,677 2,024 2 1,281 699 494 74 1,766 111 68 5,810 5,100 8,964 16,542 - - - - - - - - 2,346 1,542 4,341 6,334 1,701 11,972 87,592 - 387 263 4,364 (3) 420 90 5,264 - - 4,499 10,490 11,707 13,122 26,449 140,184 698 582 - - 3,143 1,135 222 - 148 2,278 - - 1,773 3,210 62 - - - - - - - - 2,970 6,695 11,036 2,268 4,101 10,435 12,611 - 209 - 817 - 1,391 - - 197 - - 662 3,400 15,107 13 75 13,197 2,959 23,077 163,261 - 214 91,956 2,722 2 12,327 5,264 - 6,143 51,469 15,502 191,190 36 - 1,686 2,278 1,764 11,087 - 1 - - 208 13,428 210 1,391 197 9,080 2,009 39,357 17,511 230,547 7,066 23 237,636 (1) (2) (3) Principally owner occupied housing. Primarily financing real estate and land development projects. A review of policy occurred in the year ended 30 June 2003. Amounts available for redraw now attract a credit equivalent factor of 0% (100% in 2002). Under this policy the 2002 credit equivalent balance would be reduced by $4,542 million. 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. 90 Notes to the financial statements NOTE 14 Credit Risk Management continued The following table sets out the Group’s credit risk by industry and asset class as at 30 June 2002. Trading Investment Loans Advances and Other Acceptances Contingent Bank 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 (1) Construction (2) 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 Securities $M Securities Receivables of Customers $M $M $M Liabilities Derivatives $M $M Total $M 270 - 3,418 2,049 - 474 2,466 3,893 1,435 359 1,346 2,875 353 76 2,622 458 165 5,955 5,480 5,769 16,593 - - - - 1,876 5,564 - - - - 1,546 4,069 75,394 2,182 11,488 131 1,203 162 5,425 - 6,373 12,449 26,866 129,149 9,507 193 41 - 2,869 15,661 259 - 85,032 3,837 27 11,718 5,425 4,001 43,531 10,679 177,571 - 168 - 1,127 917 - 2,540 204 - 1,863 - 68 3,035 11 - 1,364 1 - 1,301 1,863 2,663 10,797 - - - - 1,530 2,825 8,389 - - - - 3,240 6,697 10,766 10,444 - 185 - 337 - 256 - 4,573 - 68 12,517 20,897 150,046 291 - 6 - 655 2,327 17,988 - 10,735 185 - 343 - 256 - 175 10,173 2,839 35,653 13,518 213,224 7,728 89 221,041 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 91 Notes to the financial statements NOTE 14 Credit Risk Management continued Impaired Assets by Industry and Status The following table sets out the Group’s impaired asset position by industry and status as at 30 June 2003. Industry 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 Balances Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk Total Risk $M Impaired Provisions for Assets $M Impairment Write-offs Recoveries $M $M $M Net Write-offs $M 5,810 - 19 5,100 6 16,542 - 3 2 - 4 26 - (1) (4) - 3 22 91,956 - 2,722 12,327 5,264 51,469 191,190 6 5 - 36 4 112 163 11 12 492 545 - 209 11 171 429 8 - - (38) (2) (12) (57) 8 - 171 9 159 372 1,686 46 2,278 - 11,087 5 - 10 - 1 - 16 - - (1) - - 15 1,391 13,428 - 210 - 1 197 - 68 120 665 9,080 39,357 230,547 7 - 4 - 20 42 205 - 7 - 1 26 455 2 - - (4) - (12) (17) (74) 2 - 3 - (11) 9 381 7,066 23 237,636 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 92 Notes to the financial statements NOTE 14 Credit Risk Management continued The following table sets out the Group’s impaired asset position by industry and status as at 30 June 2002. Industry 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 Balances Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk Total Risk $M Impaired Assets $M Provisions for Impairment $M Write-offs $M Net Recoveries Write-offs $M $M 5,955 - 40 5,480 53 16,593 - 10 26 - - 6 (1) 6 - 85,032 - 16 21 19 583 732 3,837 11,718 5,425 43,531 177,571 6 4 35 6 134 221 177 11 (1) 4 - (30) 18 - (17) (49) 178 400 1,301 55 1,863 - 43 10,797 11 - 12 - 58 1 - - (1) 10,735 - 185 - 1 343 256 - 112 211 943 10,173 35,653 213,224 3 - 3 - 20 49 270 7,728 89 221,041 - - 35 102 502 2 - (3) 6 - - (3) (7) (56) - 5 6 10 4 147 18 161 351 1 - 57 2 (3) 6 - 32 95 446 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. Large Exposures Concentration of exposure to any debtor or counterparty group is controlled by a large credit exposure policy. All exposures outside the policy are approved by the Board Risk Committee. The following table shows the aggregate number of the Group’s counterparty group exposures (including direct and contingent exposure) which individually were greater than 5% of the Group’s capital resources (Tier 1 and Tier 2 capital): 10% to less than 15% of Group's capital resources 5% to less than 10% of Group's capital resources 2003 Number - - 2002 Number - 1 2001 Number - 2 2000 Number - 1 1999 Number 1 7 93 Notes to the financial statements NOTE 14 Credit Risk Management continued Credit Portfolio Receivables by Industry The following table sets out the distribution of the Group’s loans, advances and other receivables (excluding bank acceptances) by industry at 30 June 1999, 2000, 2001, 2002 and 2003. Industry 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 2003 $M 1,505 3,677 2,024 87,592 1,701 11,972 5,264 26,449 140,184 222 2,278 3,210 12,611 209 1,391 197 2,959 23,077 2002 $M 2,466 3,893 1,435 75,394 2,182 11,488 5,425 26,866 129,149 204 1,863 3,035 10,444 185 337 256 4,573 20,897 2001 $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 2000 $M 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 At 30 June 1999 $M 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 13,491 163,261 150,046 139,195 135,768 104,566 (2,914) (2,972) (3,136) (3,504) (2,729) 160,347 147,074 136,059 132,264 101,837 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 94 Notes to the financial statements NOTE 15 Asset Quality Impaired Assets The Group adopted for the Australian disclosure requirements in AASB 1032: Specific Disclosures by Financial Institutions with Effect from Financial Year 1997. contained impaired assets 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. 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, comprising: (cid:1) Credit risk facilities on which the original contractual terms have been modified due to financial difficulties of the borrower. Interest on these facilities is taken to profit and loss. Failure to comply fully with the modified immediate reclassification to non accrual. terms will result in (c) Assets Acquired Through Security Enforcement (cid:1) (cid:1) (AATSE), comprising: Other Real Estate Owned (OREO), comprising real estate where the Group has assumed ownership or foreclosed in settlement of a debt; and Other Security Enforcement (OAATSE), comprising assets other than real estate where the Group has assumed ownership or foreclosed in settlement of a debt. Acquired Through Assets Impaired Asset Ratios Gross impaired assets net of interest reserved as % of risk weighted assets 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 2003 % 0.44 0.30 1.96 2003 $M 651 530 159 121 786 30 2002 % 0.63 0.44 2.92 GROUP 2001 % 0.47 0.30 2.09 GROUP Year Ended 30 June 2001 $M 2002 $M 920 673 225 247 810 30 699 514 203 185 911 51 95 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 1999, 2000, 2001, 2002 and 2003. 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 (AATSE) Gross balances Less provisions for impairment Net AATSE Net overseas impaired assets Total Net Impaired Assets 2003 $M 545 (25) 520 (163) 357 2002 $M 732 (54) 678 (221) 457 2001 $M 518 (63) 455 (154) 301 GROUP At 30 June 1999 $M 495 (66) 429 (178) 251 2000 $M 722 (128) 594 (205) 389 - - 1 - - - - - 1 - - - - - - - 1 - - 1 1 1 1 1 1 - - - 1 - - - - - - 1 - - - - 252 302 391 357 457 120 (1) 119 (42) 77 211 (5) 206 (49) 157 197 (5) 192 (79) 113 410 (3) 407 (226) 181 147 (2) 145 (97) 48 - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 1 14 - - - - - - 181 572 (1) - 14 62 314 77 434 157 614 113 415 (1) 96 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 1999, 2000, 2001, 2002 and 2003. Gross Impaired Assets 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 2003 $M 943 617 (456) (439) 2002 $M 717 1,069 (481) (362) 2001 $M 1,135 707 (666) (459) 665 - 665 943 - 943 717 - 717 Loans Accruing But Past Due 90 Days or More Housing loans Other loans Total Interest income Forgone on Impaired Assets Australia non accrual facilities Overseas non accrual facilities Total 2003 $M 157 91 248 2003 $M 15 3 18 2002 $M 176 73 249 2002 $M 21 7 28 2001 $M 218 90 308 2001 $M 8 8 16 Interest Taken to Profit on Impaired Assets 2003 $M 2002 $M 2001 $M GROUP Year Ended 30 June 1999 $M 2000 $M 657 414 (226) (194) 651 484 1,135 926 415 (280) (404) 657 - 657 GROUP At 30 June 1999 $M 182 23 205 2000 $M 211 64 275 GROUP Year Ended 30 June 1999 $M 17 10 27 2000(1) $M 4 5 9 GROUP Year Ended 30 June 1999 $M 2000 (1) $M 33 - - - 45 37 14 6 - - - - 33 51 51 Australia Non accrual facilities Restructured facilities Overseas Non accrual facilities Other real estate owned Total (1) Excluding Colonial 26 - 27 - 4 - 30 3 - 30 97 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 (1) Australia Overseas 2003 $M 2003 $M 431 114 545 (25) 520 (163) 357 113 7 120 (1) 119 (42) 77 GROUP Total 2003 $M 544 121 665 (26) 639 (205) 434 Australia Overseas 2002 $M 2002 $M 572 160 732 (54) 678 (221) 457 124 87 211 (5) 206 (49) 157 GROUP Total 2002 $M 696 247 943 (59) 884 (270) 614 - - - - - - - - - - - 545 (25) 520 (163) 357 158 138 249 545 227 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 120 (1) 119 (42) 77 1 6 113 120 21 665 (26) 639 (205) 434 159 144 362 665 248 732 (54) 678 (221) 457 170 193 369 732 235 211 (5) 206 (49) 157 2 16 193 211 14 943 (59) 884 (270) 614 172 209 562 943 249 (1) These are loans that 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. 98 Notes to the financial statements NOTE 15 Asset Quality continued Colonial State Bank 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 loan losses (including interest) arising are 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) were 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. The sale agreement also allows for loans to be withdrawn from the indemnity provided the withdrawal is approved by Colonial State Bank and the NSW Government and the due processes are followed. Pursuant to the sale agreement, the costs of funding and managing non-performing loans that are covered by the NSW indemnities are reimbursed by the Government on a quarterly basis. loan Selected Regional Exposures Asia Over 61% of total exposures relate to financial institutions. Exposures to Indonesia, Thailand and Korea represent approximately 17% of the Group’s Asian credit risk. The Group’s credit risk exposure to Asian countries as at 30 June 2003 is set out below. The exposures exclude Group equity investments. Asian Exposures Country Finance CUSTOMER TYPE Corporate/ Government Project Finance(2) Multinational $M $M $M 36 - - 314 - - 350 - - 572 16 321 132 20 87 22 - 50 - 74 - 52 - - - 1 - - 176 - 240 7 41 71 119 709 46 64 316 - 18 - 64 64 380 556 $M 129 1,364 1,493 1 932 7 120 2 129 2,554 APL/NZPL $M - 200 200 5 1 38 - - 44 13 - - 13 257 China Hong Kong Japan Malaysia Singapore Taiwan Other Indonesia South Korea Thailand Total Other Regional Exposures Region Finance Corporate/ Government CUSTOMER TYPE Eastern Europe Latin America Middle East $M - - 50 Multinational $M $M Project Finance(2) $M APL/NZPL $M 2003 Total Exposure(1) $M - - - - 6 - - - - - - - - - 56 (1) (2) Total Exposure - The maximum of the limit or balance utilised for committed facilities, whichever is highest, and the balance utilised for uncommitted facilities. For derivative facilities, balances are reported on a ‘mark to market plus potential exposure basis. 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. 99 2003 Total Exposure(1) $M 165 1,878 2,043 GROUP 2002 Total Exposure $M 162 1,558 1,720 759 111 498 22 2 1,392 137 477 91 705 4,140 785 150 612 4 4 1,555 230 534 110 874 4,149 GROUP 2002 Total Exposure $M 1 - 116 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 Other Assets Total Life Insurance Investment Assets the the issuer of investment. Direct investments refer to investments that are directly with Indirect investments refer to investments that are held through unit investment vehicles. Prior year trusts or similar classifications between direct and indirect have been restated to conform with the basis of current year disclosure. Disclosure on Asset Restriction Investments held in the statutory funds can only be used within the restrictions imposed under the Life Insurance Act 1995. 2003 $M 3,559 8,476 12,035 3,574 8,529 12,103 80 2,151 2,231 1,466 27,835 GROUP 2002 $M 3,913 8,542 12,455 4,042 10,204 14,246 283 2,141 2,424 984 30,109 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 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 2003 $M 23 23 GROUP 2002 $M 89 89 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 2003 $M - - - GROUP 2002 $M - - - 2003 $M 2 2 2003 $M 11,772 11,787 23,559 BANK 2002 $M 54 54 BANK 2002 $M 10,545 11,324 21,869 100 Notes to the financial statements NOTE 19 Property, Plant and Equipment (a) Land and Buildings Land At 30 June 2003 valuation At 30 June 2002 valuation Closing Balance Buildings At 30 June 2003 valuation At 30 June 2002 valuation Closing Balance Total Land and Buildings 2003 $M GROUP 2002 $M 2003 $M BANK 2002 $M 141 - 302 - 129 160 - 129 160 233 358 - 233 358 362 518 - 149 149 - 276 276 425 - 141 - 302 443 These valuations were established by the Directors and are lower than valuations prepared by independent valuers. This valuation process is conducted on an annual basis. (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 579 (351) 228 557 (407) 150 821 2003 $M 531 (326) 205 580 (441) 139 862 GROUP 2002 $M 458 (283) 175 279 (208) 71 608 2003 $M 436 (278) 158 318 (260) 58 641 BANK 2002 $M Reconciliation of the carrying amount of property, plant and equipment at the beginning and end of the 2003 and 2002 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 Depreciation Closing balance Equipment Opening balance Acquisitions Disposals Depreciation Closing balance 160 (19) - 141 191 (30) (1) 160 149 (20) - 129 179 (30) - 149 358 1 (33) (24) 302 389 29 (34) (26) 358 276 1 (24) (20) 233 312 19 (32) (23) 276 205 78 (4) - (51) 228 139 64 - (53) 150 101 169 84 (6) 158 62 (4) 5 - (41) 175 (47) 205 137 62 (4) - (37) 158 170 51 (27) (55) 139 58 35 - (22) 71 60 25 (1) (26) 58 Notes to the financial statements NOTE 20 Intangible Assets Purchased goodwill - Colonial Purchased goodwill - other Realisation of life insurance synergy benefits Accumulated amortisation Total Intangibles 2003 $M 5,591 1,155 (332) (1,385) 5,029 GROUP 2002 $M 5,662 1,125 (332) (1,064) 5,391 2003 $M 2,671 835 - (798) 2,708 BANK 2002 $M 2,742 835 - (612) 2,965 Acquisition of TD Waterhouse Segment Allocation of Goodwill On 1 May 2003, the Group acquired a 100% interest in TD Waterhouse Australian stockbroking operations. Consideration of $27 million cash was paid for net liabilities of $3 million resulting in goodwill recognised on acquisition of $30 million. The goodwill will be amortised over a period of 10 years, representing the assessed life of the ongoing business. Commonwealth Bank Foundation On 31 December 2002, under the trust deed of the Colonial Foundation Trust, the Group became entitled to half of the assets of the Transitional Fund of the Colonial Foundation Trust. A net amount of $71 million has been recognised as an investment in the Commonwealth Bank Foundation, with goodwill paid on the Colonial merger being reduced also by $71 million. There is no effect on profit for the year. The Commonwealth Bank Foundation has been established to encourage developments in education. In recognition of the disclosure requirements of US SFAS 141: Business Combinations and the proposals of Australian ED 109 Intangible Assets, the Group’s carrying amount of goodwill at 30 June 2003 is disclosed for each segment of business. Segment Banking(1) Funds Management(2) Life Insurance(2) Total $M 4,681 270 78 5,029 (1) (2) The allocation to banking includes goodwill related to the acquisitions of Colonial, State Bank of Victoria and 25% of ASB Bank. The allocation to funds management and life insurance principally relates to the goodwill on acquisition of Colonial. Additional to the Colonial goodwill acquired, $2,548 million in excess of net market value over net assets of life insurance controlled entities was booked at acquisition of the Colonial insurance funds management and businesses in June 2000. life 102 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 Excess of net market value over net assets of life insurance controlled entities Excess related to outside equity interests (1) Unrealised gains on trading derivatives (Note 39) Other Total Other Assets 2003 $M 1,023 145 492 727 525 GROUP 2002 $M 945 69 398 1,138 625 2003 $M 1,239 50 268 500 312 BANK 2002 $M 966 40 411 961 309 5,540 111 13,907 989 23,459 5,656 - 10,336 1,199 20,366 - - 13,908 471 16,748 - - 10,196 525 13,408 (1) This is an outside equity interest in a funds management business acquired during the year, and is not included in the revaluation in Note 34 Life Insurance Business. Excess of net market value over net assets of controlled entities of the life insurance businesses: GROUP At 30 June 2003 Excess of Market Value Over Net Assets $M 5,071 469 5,540 GROUP At 30 June 2002 Excess of Market Value Over Net Assets $M 5,210 446 5,656 Net Assets $M 2,626 380 3,006 Net Assets $M 2,623 301 2,924 Market Value $M 7,697 849 8,546 Market Value $M 7,833 747 8,580 Potential future income tax benefits of the Company arising from tax losses and timing differences in offshore centres have not been recognised as assets because recovery is not virtually certain. These benefits, which could amount to $142 million (2002: $168 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; The Company continues the conditions for deductibility imposed by tax legislation; and to comply with (cid:1) No changes in tax legislation adversely affect the Company in realising the benefit from the deductions for the losses. (cid:1) Commonwealth and Colonial entities ASB entities Commonwealth and Colonial entities ASB entities 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 life and 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 funds management amortised. The CFS Property business was transferred under CMLA in June 2002. 103 Notes to the financial statements 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 and short sales Total Australia Overseas Certificates of deposit Term deposits On demand and short term deposits Deposits not bearing interest Securities sold under agreements to repurchase and short sales Total Overseas Total Deposits and Other Public Borrowings 2003 $M 11,228 32,398 68,507 5,001 3,231 120,365 2,900 10,326 5,871 921 591 20,609 140,974 GROUP 2002 $M 15,832 28,991 63,844 6,072 757 115,496 2,258 9,035 5,185 806 20 17,304 132,800 2003 $M 11,228 30,448 68,932 5,031 3,232 118,871 1,130 2,295 59 7 584 4,075 122,946 BANK 2002 $M 15,832 26,708 64,038 6,169 753 113,500 904 2,455 16 5 18 3,398 116,898 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 2003. GROUP At 30 June 2003 Maturing Between Six & Twelve Months $M Maturing After Twelve Months $M 723 3,570 4,293 123 627 750 5,043 2,729 2,353 5,082 2 519 521 5,603 Total $M 11,228 32,398 43,626 2,900 10,326 13,226 56,852 Maturing Three Maturing Between Months or Three & Six Months $M Less $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 5,907 20,447 26,354 1,957 7,807 9,764 36,118 1,869 6,028 7,897 818 1,373 2,191 10,088 (1) All certificates of deposit issued by the Bank are for amounts greater than $100,000. 104 Notes to the financial statements 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 2003 $M 2,527 5,011 7,538 2003 $M 433 414 847 GROUP 2002 $M 3,153 4,711 7,864 GROUP 2002 $M 695 540 1,235 2003 $M 2,527 4,977 7,504 2003 $M 355 162 517 BANK 2002 $M 3,255 4,629 7,884 BANK 2002 $M 490 152 642 29 - 29 876 1 10 40 - 10 41 527 1,276 12 - 12 654 105 Notes to the financial statements NOTE 25 Other Provisions Long service leave Annual leave Other employee entitlements Restructuring costs General insurance claims Self insurance/non lending losses Other Total Other Provisions Restructuring costs: Opening balance Additional provision Amounts utilised during the year Closing Balance General insurance claims: Opening balance Additional provision Amounts utilised during the year Closing Balance Self insurance/non lending losses: Opening balance Additional provision Amounts utilised during the year Closing Balance Other: Opening balance Additional provision Amounts utilised during the year Foreign exchange translation adjustment Closing Balance GROUP 2003 2002 $M $M 294 302 127 163 116 139 35 29 63 - 55 55 63 77 684 834 BANK 2002 $M 299 149 139 21 - 53 30 691 BANK 2003 $M 21 20 (12) 29 - - - - 53 12 (10) 55 30 39 (6) - 63 2003 $M 300 143 117 30 66 56 107 819 GROUP 2003 $M 35 20 (25) 30 63 75 (72) 66 55 11 (10) 56 77 51 (18) (3) 107 106 Notes to the financial statements NOTE 26 Debt Issues Short term debt issues Long term debt issues Total Debt Issues 2003 $M 17,255 13,374 30,629 GROUP 2002 $M 14,718 8,857 23,575 2003 $M 6,577 10,107 16,684 BANK 2002 $M 4,127 7,626 11,753 Short Term Debt Issues AUD bill reliquification AUD promissory notes AUD bank bills US commercial paper Euro commercial paper Long term debt issues with less than one year to maturity Total short term debt issues - 1,643 777 6,163 5,738 2,934 17,255 72 - 1,533 - 1,217 - 6,082 - 3,842 2,651 2,735 3,163 6,577 14,718 72 - - - 1,041 3,014 4,127 Long Term Debt Issues USD medium term notes AUD medium term notes JPY medium term notes GBP medium term notes Other currencies medium term notes Offshore loans (all JPY) Eurobonds 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 The Bank has a Euro Medium Term Note programme under which it may issue notes (Euro MTN’s) up to an aggregate amount of USD10 billion. Notes issued under the programme are both fixed and variable rate. Interest rate risk associated with the notes is incorporated within the Bank’s interest rate risk framework. (cid:1) (cid:1) (cid:1) Subsequent to 30 June 2003, the Bank has issued: USD medium term notes: 3 months to 12 months – USD5 million (AUD8 million); between 1 and 5 years USD45 million (AUD67 million); greater than 5 years – USD990 million (AUD1,483 million) HKD medium term notes: between 1 and 5 years – HKD650 million (AUD125 million) JPY medium term notes: greater than 5 years – JPY4.3 billion (AUD54 million) 4,517 3,510 414 1,799 2,752 187 195 13,374 13,348 3,907 10,426 2,948 30,629 3,659 4,517 1,601 2,307 900 414 14 - 1,389 2,682 187 680 614 - 10,107 8,857 10,340 4,378 8,149 708 23,575 3,994 2,696 7,958 2,036 16,684 3,426 1,168 529 14 1,389 680 420 7,626 1,453 2,674 7,112 514 11,753 Where any debt issue is booked in an offshore branch or subsidiary, first been converted into the base currency of the branch at a branch defined exchange rate, before being converted into the AUD equivalent. the amounts have Where proceeds have been employed in currencies other than that of the ultimate repayment liability, swap or other hedge arrangements have been entered into. 107 Notes to the financial statements NOTE 26 Debt Issues continued Short Term Borrowings The following table analyses the Group’s short term borrowings for the financial years ended 30 June 2001, 2002 and 2003. 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 GROUP Year Ended 30 June 2001 2002 2003 (AUD millions, except where indicated) 6,111 6,082 6,163 7,850 7,158 8,973 6,571 6,173 5,890 1.4% 1.2% 5,738 5,990 3,132 1.3% 1.1% - 250 23 4.9% - 2,420 3,066 2,476 3.7% 3.9% 2.3% 1.8% 2,651 3,805 2,883 1.2% 0.9% 72 564 268 4.8% 5.0% 2,750 3,455 2,912 4.5% 5.3% 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% (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. Exchange Rates Utilised As at AUD1.00 = USD GBP JPY NZD HKD DEM CHF IDR THB FJD PHP EUR 30 June 2003 0.6677 0.4043 80.036 1.145 5.207 1.143 0.9037 5,528 28.051 1.250 35.737 0.5842 30 June 2002 0.5639 0.3694 67.450 1.155 4.399 1.116 0.840 4,919 23.437 1.188 28.456 0.5706 108 Notes to the financial statements NOTE 26 Debt Issues continued Guarantee Arrangements Commonwealth Bank of Australia The due payment of all monies payable by the Bank was guaranteed by the Commonwealth of Australia under section 117 of the Commonwealth Bank’s Act 1959 (as amended) at 30 June 1996. This guarantee has been progressively phased out the Commonwealth of Australia’s shareholding in the Bank on 19 July 1996. the sale of following 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. Accordingly, demand deposits are no longer 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: (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; (cid:1) (cid:1) 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) incurred or issued prior to 31 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 the liabilities and products as described above continues unchanged by the succession. 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) Other liabilities Total Bills Payable and Other Liabilities 2003 $M 993 991 740 699 13,528 2,076 19,027 GROUP 2002 $M 892 944 734 1,548 10,226 2,998 17,342 2003 $M 874 842 567 479 13,502 1,192 17,456 BANK 2002 $M 857 754 640 1,385 10,062 2,207 15,905 109 Notes to the financial statements NOTE 28 Loan Capital Currency Amount (M) 2003 $M 2002 $M GROUP 2001 $M 2003 $M 2002 $M BANK 2001 $M Tier 1 Capital Exchangeable Exchangeable Undated Tier 2 Capital Extendible Extendible Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated FRNs FRNs FRNs USD300 USD400 USD100 FRNs FRNs MTNs FRNs FRNs MTNs FRNs Notes FRNs EMTNs EMTNs EMTNs EMTNs EMTNs EMTNs EMTNs Loan FRNs FRNs Notes Other Notes EMTN AUD25 AUD275 AUD185 AUD115 AUD25 AUD200 AUD50 USD300 USD450 JPY20,000 USD200 USD75 USD100 USD400 GBP200 JPY30,000 NZD100 AUD210 AUD38 AUD130 AUD35 USD350 GBP150 (1) (2) (3) (4) (4) (5) (5) (6) (7) (7) (8) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) 59 142 150 351 25 275 185 115 25 199 50 549 672 248 313 115 152 501 408 444 88 210 38 130 35 524 373 70 168 177 415 25 275 186 115 25 199 50 532 795 293 313 115 152 501 408 525 90 210 38 130 35 - - 78 187 197 462 25 275 185 115 25 200 50 591 882 326 314 115 152 501 408 582 79 210 38 130 39 - - 59 142 150 351 25 275 185 115 25 199 50 549 672 248 313 115 152 501 408 444 - 210 38 130 35 524 373 70 168 177 415 25 275 186 115 25 199 50 532 795 293 313 115 152 501 408 525 - 210 38 130 35 - - 78 187 197 462 25 275 185 115 25 200 50 591 882 325 314 115 152 501 408 582 - 210 38 130 39 - - Total Loan Capital 5,674 6,025 5,012 5,427 5,242 5,704 5,586 5,937 4,922 5,337 5,162 5,624 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) USD 300 million undated Floating Rate Notes (FRNs) issued 11 July 1988 exchangeable into dated FRNs. (2) Outstanding notes at 30 June 2003 were: USD1.5 million Due July 2003 USD0.5 million Due July 2004 USD32.5 million Due July 2006 USD5 million undated : : : : USD 400 million undated FRNs issued 22 February 1989 exchangeable into dated FRNs. Outstanding notes at 30 June 2003 were: USD64 million Due February 2005 USD24 million Due February 2006 USD7 million Due February 2008 : : : 110 (3) USD 100 million undated capital notes issued on 15 fully paid 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. The agreements provide that, upon the occurrence of certain events listed below, the Bank may issue either 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. ordinary shares to Notes to the financial statements NOTE 28 Loan Capital continued to date, the Bank and Any one or more of the following events may trigger the issue of shares to the Commonwealth of Australia or a rights issue: A relevant event of default (discussed below) occurs in respect of a note issue and the Trustee of the relevant notes gives notice to the Bank that the notes are immediately due and payable; The most recent audited annual financial statements of the Group show a loss (as defined in the Agreements); The Bank does not declare a dividend in respect of its ordinary shares; The Bank, if required by the Commonwealth 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 to Dated FRNs, 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 the have matured Commonwealth agreed 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. AUD300 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: 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. to amend the (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (4) (cid:1) (cid:1) the trigger issue of shares Any payment made by the Commonwealth of Australia pursuant to its guarantee in respect of the issue will to the Commonwealth of Australia to the value of such payment. 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. AUD250 million issued November 1999, due November 2009; split into $200 million fixed rate notes and $50 million floating rate notes. USD750 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. subordinated FRN, (5) (6) (7) (8) (9) (10) USD200 million subordinated EMTN, November 1999, due November 2009. issued (11) USD75 million subordinated EMTN, issued January 2000, due January 2010. (12) USD100 million subordinated EMTN, 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 (15) March 1996; due December 2006. JPY30 billion subordinated Euro MTN October 1995; due October 2015. issued (16) NZD100 million subordinated matures 15 December 2009. With a coupon rate of 8.30% until 15 December 2004, after which the rate will be reset against the three month bank bill benchmark rate. The subordinated debt is callable on 15 December 2004. 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: AUD 10 million fixed rate notes issued 12 December 1995, maturing 12 December 2005. AUD 110 million floating rate notes issued 12 December 1995, maturing 12 December 2005. AUD 5 million fixed rate notes issued 17 December 1996, maturing 12 December 2005. AUD 5 million floating rate notes issued 17 December 1996, maturing 12 December 2005. (17) (18) (19) (20) Comprises 12 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 2003 to October 2009. (21) USD350 million subordinated fixed rate note, issued June 2003, due June 2018. (22) GBP150 million subordinated EMTN, issued June 2003, due December 2023. 111 Notes to the financial statements NOTE 29 Share Capital Issued and Paid Up Ordinary Capital Ordinary Share Capital Opening balance Dividend reinvestment plan (DRP): 2000/2001 final dividend Buy back for DRP: 2001/2002 interim dividend DRP: 2001/2002 interim dividend Buy back for DRP: 2001/02 final dividend DRP 2001/2002 final dividend Buy back for DRP: 2002/2003 interim dividend DRP 2002/2003 interim dividend Exercise of executive options Closing Balance Shares on Issue Opening balance DRP issues: 2001 final dividend fully paid ordinary shares at $28.79 Buy back for 2001/2002 interim dividend 2001/2002 interim dividend fully paid ordinary shares at $31.96 Buy back for DRP: 2001/2002 final dividend 2001/2002 final dividend paid shares at $31.92 Buy back for 2002/2003 interim dividend 2002/2003 interim dividend fully paid ordinary shares at $24.75 Exercise under executive option plan Employee share acquisition plan issues Closing Balance 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 Preference Share Capital Issued and paid up PERLS capital PERLS on issue 2003 $M BANK 2002 $M 12,665 - - - (195) 12,455 171 (158) 158 - 195 - - 166 - 39 12,665 (166) 13 12,678 Number 1,252,921,363 Number 1,244,015,455 - - - (6,111,510) 5,954,040 (4,951,275) 4,951,275 - 6,111,510 - - 6,753,320 - 2,052,500 899,368 1,252,921,363 (6,753,320) 660,000 - 1,253,581,363 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 2003 $M 687 BANK 2002 $M 687 Number 3,500,000 Number 3,500,000 Commonwealth Bank PERLS (‘PERLS’) are perpetual preference shares that offer a quarterly, floating rate dividend. PERLS represent a less expensive form of equity funding than ordinary shares and increase the diversity and flexibility of the Bank’s capital base. 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. If a dividend is not paid the Bank will not be permitted to pay dividends on any of its ordinary shares until four consecutive dividends are paid on the PERLS. 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. PERLS are listed and traded on the Australian Stock Exchange. Holders of PERLS are entitled to vote at a general meeting of the issuer in limited circumstances. 112 Notes to the financial statements NOTE 29 Share Capital continued Subsequent Event these On 6 August 2003 the Bank, via a wholly owned entity of the Bank, issued USD550 million (AUD824 million) of trust preferred securities, subject to a limited guarantee by the Bank, in the US capital markets. These securities are perpetual in nature and offer a non- cumulative fixed rate distribution of 5.805%p.a., payable semi annually. Distributions will be paid if determined by Directors, or a committee of the Board, to be payable. If a distribution is not paid the Bank will not be permitted to pay dividends on any of its ordinary shares or shares ranking equally with including Commonwealth Bank PERLS, until two consecutive semi annual dividends are paid. The securities may be redeemed by the Bank, subject to the approval of APRA, on 30 June 2015 and qualify as Tier 1 capital for the Bank. If the securities are not redeemed on 30 June 2015, the holders of the securities may request their securities be exchanged for an equivalent value of ordinary shares of the Bank. In certain circumstances, and at any time at the Bank’s discretion, the trust preferred securities may be redeemed (ADSs) representing preference shares of the Bank. Where there has been no earlier redemption, the trust preferred securities will be mandatorily redeemed for ADS’s on 30 June 2053. for American Depositary Shares securities, The issue of trust preferred securities provided a cost effective opportunity to supplement the Bank's Tier 1 capital and broaden its investor base. 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). 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. Shareholders were also informed at the AGM on 26 October 2000 that the Executive Option Plan (EOP) would be discontinued. Employee Share Acquisition Plan (ESAP) The ESAP provides employees of the Group 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. Under ESAP, shares granted are restricted for sale for three years or until such time as the participating employee ceases employment with the Group, whichever is earlier. Shares granted under the plan receive full dividend entitlements and voting rights. There are no forfeiture or vesting conditions attached to shares granted under ESAP. Effective from 1 July 2002, shares granted under ESAP offers have been expensed against the Profit and Loss account. In the current year, 832,458 shares were granted to eligible employees and $25 million was expensed against the Profit and Loss account to reflect the cost of the 2002 grant. The Bank has determined to allocate each eligible employee shares up to a value of $800 in respect of the 2003 grant. As a result, an amount of $20 million has been accrued in respect of the year ended 30 June 2003. The shares will be purchased on-market at the then market price. 113 Notes to the financial statements Details of issues under ESAP are: Offer Issue Date 1996 1997 1999 2000 2001 2 Jan 1997 18 Mar 1997 11 Dec 1997 3 Feb 1998 24 Sep 1999 13 Oct 2000 20 Dec 2000 31 Oct 2001 3 Dec 2001 31 Jan 2002 Ordinary Shares Issued(1) 27,755 13 3,025 - - - - - - - Bonus Ordinary Shares Issued(2) No. of Participants Shares issued to Each Participant 2,275,910 1,066 1,637,273 232 1,053,199 872,620 805 893,554 3,876 1,938 27,755 13 28,281 4 24,493 24,932 23 26,281 114 57 83 83 58 58 43 35 35 34 34 34 Issue Price(3) $12.04 $12.04 $17.16 $17.16 $23.12 $27.78 $27.78 $28.95 $28.95 $28.95 Details of shares purchased under ESAP are: Offer Purchase Date 2002 31 Oct 2002 22 Jan 2003 Ordinary Shares Purchased 830,874 1,584 No. of Participants Shares Allocated to Each Participant Allocation Price(4) 25,178 48 33 33 $29.71 $29.71 (1) (2) (3) (4) 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 Offers in 1999, 2000 and 2001 both new and existing shareholders were granted Bonus Ordinary Shares. For the 1996 & 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 were issued from the Share Capital Account. The Issue Price x Shares issued to each Participant effectively represents about $1,000 of free shares. The Allocation Price for the offer is equal to the market value which is determined by calculating the weighted average of the prices at which the shares were traded on the ASX during the 5 trading day period up to and including the grant date. The Allocation Price x Shares issued to each participant effectively represents about $1,000 of free shares. 114 Notes to the financial statements NOTE 29 Share Capital continued Equity Participation Plan (EPP) The EPP facilitates the voluntary sacrifice of both fixed remuneration and annual bonus to be applied in the acquisition of shares. The Plan also facilitates the mandatory sacrifice of annual performance bonuses. All shares acquired by employees under this Plan are purchased on-market at the current market price. Details of share purchases for the EPP so far are as follows: Purchase Date 1 Oct 2001 31 Oct 2001 31 Oct 2001 31 Oct 2001 2 Jan 2002 3 Apr 2002 28 Jun 2002 2 Oct 2002 8 Oct 2002 31 Oct 2002 30 Dec 2002 31 Mar 2003 31 Mar 2003 30 Jun 2003 Number of Participants 19 5 1,640 47 65 67 107 63 5 2,164 68 2 95 76 Number of Shares Purchased 2,073 187 1,564,314 31,752 8,504 7,963 14,384 6,751 2,726 1,955,758 11,421 463 12,187 10,854 Average Purchase Price $27.40 $29.35 $30.00 $30.13 $30.05 $31.43 $33.15 $30.51 $29.44 $28.22 $27.21 $25.91 $25.90 $29.92 Under the voluntary component of the EPP, shares purchased are restricted for sale for two years or when a participating employee ceases employment with the Bank, whichever is earlier. Shares granted under the voluntary component of the plan receive full dividend entitlements and voting rights. There are no forfeiture or vesting conditions attached to shares granted under the voluntary component of the EPP. Under the mandatory component of the EPP, fully paid ordinary shares are purchased and held in Trust until such time as the vesting conditions have been met. Vesting of shares is subject to participants remaining employees of the Group until the vesting date (generally a period of one and two years after the bonus award period). From 1 July 2001 to 30 June 2002 Details of Movements Shares held under the plan at the beginning of year Shares Allocated during year Shares Vested during year Shares Forfeited during year Shares Held Under the Plan at End of Year From 1 July 2002 to 30 June 2003 Details of Movements Shares held under the plan at the beginning of year Shares Allocated during year Shares Vested during year Shares Forfeited during year Shares Held Under the Plan at End of Year 115 Each participant on behalf of whom shares are held by the Trustee have a right to receive dividends. Once the shares vest, dividends are paid in relation to those accrued during the vesting period. The participant may also direct the Trustee on how the voting rights attached to the shares are to be exercised during the vesting period. Where participating employees do not satisfy the vesting conditions, shares and dividend rights are forfeited. The movement in shares granted under the mandatory component of the EPP has been as follows: Number of Shares - 1,578,469 57,645 42,401 1,478,423 Number of Shares 1,478,423 1,968,197 836,437 112,999 2,497,184 Notes to the financial statements NOTE 29 Share Capital continued Shares granted under both the voluntary and mandatory components of the EPP have been expensed against the profit and loss account. In the current year, $66 million was expensed against the profit and loss account to reflect the cost of allocations under the Plan. Equity Reward Plan (ERP) The Board has envisaged that up to a maximum of 500 employees would participate each year in the ERP. Previous grants under the ERP were in two parts, comprising grants of options and grants of shares. Since 2001/02, no options have been issued under the ERP. In 2002/03 reward shares only were issued under this plan. The exercise of previously granted options and the vesting of employee legal title to the shares is conditional on the Bank achieving a prescribed performance hurdle. The ERP performance hurdle is based on relative Total Shareholder Return the Bank’s TSR performance being measured against a comparator group of companies. (TSR) with The prescribed performance hurdle for options and reward shares issued prior to 2002/03 was: (cid:1) The Bank’s TSR (broadly, growth in share price plus dividends reinvested) over a minimum three year period, must equal or exceed the index of TSR achieved by the comparator group of companies. The comparator group (previously companies represented in the ASX’s ‘Banks and Finance Accumulation the Bank) was widened in 2001/02 to better reflect the Bank’s business since the acquisition of Colonial. If the performance hurdle is not reached within that three years the options may nevertheless be exercisable or the shares vest, only where the hurdle is subsequently reached within 5 years from the grant date. Index’ excluding (cid:1) A further change was introduced in relation to reward shares granted from 2002/03 onwards. A tiered vesting scale was introduced so that 50% of the allocated shares vest if the Bank’s TSR is equal to the median return, 75% vest at the 67th percentile and 100% when the Bank’s return is in the top quartile. Where the rating is at least at the 50th percentile on the third anniversary of the grant, the shares will vest at a time nominated by the executive, within the trading windows, over the next two years. The vesting percentage will be at least that achieved on the third anniversary of the grant and the executive will be able to delay vesting until a subsequent half yearly window prior to the fifth anniversary of the grant. The vesting percentage will be calculated by reference to the rating at that time. Where the rating is below the 50th percentile on the third anniversary of grant, the shares can still vest if the rating reaches the 50th percentile prior to the fifth anniversary, but the maximum vesting will be 50%. Shares acquired under the share component of the ERP are purchased on-market at the current market price. The cost of shares acquired is expensed against the Profit and Loss Account over a three year period, reflecting the minimum vesting period. In the current year, $8 million has been expensed to the profit and loss account reflecting the cost of reward shares purchased and allocated under the plan. Executive options issued up to September 2001 are not currently recorded as an expense by the Group. If the options issued in 2001/02 were expensed to the profit and loss account, the amount recorded by the Group would have been $6.0 million, based on 2,994,500 options being issued with a fair value of $2.01 and 12,500 options with a fair value of $1.53. (The fair value is determined using the Black-Scholes option pricing model and includes a 50% discount for probability of options not being exercised). Details of options issued and shares acquired under ERP as well as movements in the options and shares are as follows - Options Year of Grant Commencement Date Issue Date Options Issued Options Outstanding (1) Participants Exercise Price Exercise Period 2000 13 Sep 2000 7 Feb 2001 577,500 427,500 13 Sep 2000 31 Oct 2001 12,500 - 2001 3 Sep 2001 31 Oct 2001 2,882,000 2,223,900 3 Sep 2001 31 Jan 2002 12,500 12,500 3 Sep 2001 15 Apr 2002 100,000 100,000 23 1 79 1 1 $26.97(2) $26.97(2) $30.12(2) $30.12(2) $30.12(2) 14 Sep 2003 to 13 Sep 2010(3) 14 Sep 2003 to 13 Sep 2010(3) 4 Sep 2004 to 3 Sep 2011(4) 4 Sep 2004 to 3 Sep 2011(4) 4 Sep 2004 to 3 Sep 2011(4) (1) Options outstanding as at the date of the report. (2) Will be adjusted by the premium formula (based on the actual difference between the dividend and bond yields at the date of the vesting). (3) Performance hurdle must be satisfied between 14 September 2003 and 13 September 2005, otherwise options will lapse. Performance hurdle must be satisfied between 4 September 2004 and 3 September 2006, otherwise options will lapse. (4) 116 Notes to the financial statements NOTE 29 Share Capital continued Details of Movements From 1 July 2001 to 30 June 2002 Total options held by participants at the start of year Total options granted during year Total options exercised during year Total options lapsed during year Total options outstanding at the end of year Details of Movements From 1 July 2002 to 30 June 2003 Total options held by participants at the start of year Total options granted during year Total options exercised during year Total options lapsed during year Total options outstanding at the end of year Total options granted from 30 June 2003 to date of this report Total options exercised from 30 June 2003 to date of this report Total options lapsed from 30 June 2003 to date of this report Total options outstanding as at the date of this report Shares 2000 Grant 560,000 12,500 - - 572,500 2000 Grant 572,500 - - 145,000 427,500 - - - 427,500 Year of Grant Purchase Date Shares Purchased Shares Allocated Participants Vesting Period 2000 2001 2002 20 Feb 2001 31 Oct 2001 31 Oct 2001 22 Nov 2002 361,100 2,000 652,100 357,500 361,100 2,000 661,500(1) 545,500(2) 61 1 241 195 14 Sept 2003 to 13 Sept 2005(3) 14 Sept 2003 to 13 Sept 2005(3) 4 Sept 2004 to 3 Sept 2006(3) 2 Sept 2005 to 1 Sept 2007(3) 2001 Grant - 2,994,500 - 131,400 2,863,100 2001 Grant 2,863,100 - - 526,700 2,336,400 - - - 2,336,400 Average Purchase Price $29.72 $29.25 $29.25 $28.26 (1) (2) (3) In October 2001, 11,400 reward shares were re-allocated to participants receiving the 2001 grant as a result of reward shares forfeited from previous ERP grant. In November 2002, 188,000 reward shares were re-allocated to participants receiving the 2002 grant as a result of reward shares forfeited from previous grants. The total number of reward shares allocated in 2002 represents fifty percent of the maximum entitlement that participants may receive. It is intended that reward shares required to meet obligations under ERP will be acquired by the trust on-market during the three years prior to the first measurement point of the performance hurdle. Performance hurdle must be satisfied within the vesting period, otherwise shares will be forfeited. Details of Movements From 1 July 2001 to 30 June 2002 Total reward shares held by participants at the start of year Total reward shares granted during year Total reward shares vested during year Total reward shares lapsed during year Total reward shares outstanding at the end of year Details of Movements From 1 July 2002 to 30 June 2003 Total reward shares held by participants at the start of year Total reward shares granted during year Total reward shares vested during year Total reward shares lapsed during year Total reward shares outstanding at the end of year 2000 Grant 337,300 - - 120,200 217,100 117 2000 Grant 361,100 2,000 - 25,800 337,300 2001 Grant 638,800 - - 120,300 518,500 2001 Grant - 676,500 - 37,700 638,800 2002 Grant - 552,000 - 36,700 515,300 Notes to the financial statements NOTE 29 Share Capital continued During the vesting period, reward shares are held in Trust. Each participant on behalf of whom Reward Shares are held by the Trustee, have a right to receive dividends. Once the shares vest dividends are paid in relation to those accrued during the vesting period. The participant may also direct the trustee on how the voting rights attached to the shares are to be exercised during the vesting period. Executive Option Plan (EOP) As previously notified to shareholders, this plan was discontinued in 2000/01. Under the EOP, the Bank granted options to purchase ordinary shares to those key executives who, being 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. The performance hurdle the same TSR comparator hurdle as outlined above for the Equity Reward Plan (ERP) grants prior to 2002/03. is If the performance hurdle is not reached within that 3 years (4 years for the second tranche of options granted to the chief executive officer on 24 August 1999), the options may nevertheless be exercisable only where the hurdle is subsequently reached within 5 years (6 years for the second tranche of options granted to the chief executive officer on 24 August 1999) from the grant date. The option plan did not grant rights to the option holders to participate in a share issue of any other body corporate. Details of issues made under EOP as well as movements for 2001/02 and 2002/03 are as follows: Commencement Date Issue Date Options Issued Options Outstanding Participants 12 Nov 1996 16 Dec 1996 2,100,000 3 Nov 1997 11 Dec 1997 2,875,000 - - 25 Aug 1998 30 Sep 1998 3,275,000 387,500 24 Aug 1999 24 Sep 1999 3,855,000 3,221,000 13 Sep 2000 13 Oct 2000 2,002,500 1,336,200 25 27 32 38 50 Exercise Price(1) $11.85 $15.53(2) $19.58(2) $23.84(3) $26.97(3) Exercise Period 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) 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. (2) (3) Will be adjusted by the premium formula (based on the actual difference between the dividend and bond yields at the date of the vesting). Details of Movements From 1 July 2001 to 30 June 2002 Total options held by participants at the start of year Total options granted during year Total options exercised during year Total options lapsed during year 1996 Grant 50,000 - 50,000 - 1997 Grant 125,000 - 75,000 - 1998 Grant 2,975,000 - 1,927,500 - 1999 Grant 3,700,000 - - 175,000 2000 Grant 1,952,500 - - 260,800 Total options outstanding at the end of year - 50,000 1,047,500 3,525,000 1,691,700 Details of Movements From 1 July 2002 to 30 June 2003 Total options held by participants at the start of year Total options granted during year Total options exercised during year Total options lapsed during year Total options outstanding at the end of year Total options granted from 30 June 2003 to date of this report Total options exercised from 30 June 2003 to date of this Total options lapsed from 30 June 2003 to date of this report t 1997 Grant 50,000 - - 50,000 - - - - 1998 Grant 1,047,500 - 660,000 - 387,500 - 150,000 75,000 1999 Grant 3,525,000 - - 304,000 3,221,000 - - - 2000 Grant 1,691,700 - - 355,500 1,336,200 - - - Total options outstanding as at the date of this report - 162,500 3,221,000 1,336,200 118 Notes to the financial statements NOTE 29 Share Capital continued Summary of shares issued during the period 1 July 2002 to the date of the report as a result of options being exercised are: Option Issue Date 30 Sep 1998 Shares Issued 810,000 Price paid per Share $19.58 Total Consideration Paid $15,859,800 No amount is unpaid in respect of the shares issued upon exercise of the options during the above period. Under the Bank’s EOP and ERP an option holder generally has no right to participate in any new issue of securities of the Bank or of a related body corporate as a result of holding the option except that if there is a pro rata issue of shares to the Bank’s shareholders by way of bonus issue involving capitalisation (other than in place of dividends or by way of dividend reinvestment) an option holder is entitled to receive additional shares upon exercise of the options being the number of bonus shares that the option holder would have received if the options had been exercised and shares issued prior to the bonus issue. Non-Executive Directors Share Plan (NEDSP) The NEDSP provides for the acquisition of shares by non-executive directors through 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 Director leaves the Board, whichever is earlier. Shares acquired under the plan receive full dividend entitlements and voting rights. There are no forfeiture or vesting conditions attached to shares granted under the NEDSP. Shares are purchased on-market at the current market price and details of shares purchased under NEDSP so far are: Quarter Ending 31/12/2000 31/03/2001 30/06/2001 30/09/2001 31/12/2001 31/03/2002 30/06/2002 30/09/2002 31/12/2002 31/03/2003 30/06/2003 Total Fees Sacrificed $63,518 $65,918 $61,331 $62,005 $62,005 $62,005 $61,332 $66,959 $68,307 $68,671 $73,797 Participants 11 11 10 10 10 10 10 10 10 11 11 Shares Purchased 1,989 2,359 1,820 2,454 2,091 1,950 1,848 2,196 2,510 2,653 2,464 Average Purchase Price $31.93 $27.94 $33.45 $25.44 $29.65 $31.83 $33.15 $30.51 $27.21 $25.90 $29.92 No trading restrictions were lifted on shares during the period 1 July 2002 to the date of this report. For the current year, $339,924 was expensed to Profit and Loss account reflecting shares purchased and allocated under the NEDSP. 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 the accordance with an agreement reached with the Australian Taxation Office $10 per share of consideration for each share bought back was charged to paid up capital ($251 million). The balance of $17.84 per share was 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. 119 Notes to the financial statements NOTE 30 Outside Equity Interests Controlled Entities: Share capital (1) Reserves Retained profits Life insurance statutory funds and other funds Total Outside Equity Interests (1) ASB Perpetual Preference Shares $182 million 2003 $M GROUP 2002 $M 300 - 4 1,824 2,128 7 - 2 2,017 2,026 On 10 December 2002, ASB Capital Limited, a New Zealand subsidiary, issued NZD200 million (AUD182 million) of perpetual preference shares. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly and are non-cumulative. Gandel Listed Property Trusts - $111 millon In July 2002 Colonial First State Property Retail Pty Ltd was incorporated and in August 2002, the Colonial First State Property Retail Trust (CFSPRT) was established. Both of these entities are owned 60% by the CBA Group and 40% by outside equity interests. On 30 September 2002, unitholders of the Colonial First State Property Trust Group (CFT), the Commonwealth Property Office Fund (CPA) and the Gandel Retail Trust (GAN) the approved a proposal which saw CPA acquire industrial/office assets of CFT and GAN acquire the retail assets of CFT. GAN changed its name to the CFS Gandel Retail Trust and CFSPRT became the delegated manager of this trust along with the retail component of a wholesale property trust. 120 Notes to the financial statements NOTE 31 Capital Adequacy to regulation by requirements define what Commonwealth Bank of Australia (“the Bank”) is subject the Australian Prudential Regulation Authority (APRA) under the authority of the Banking Act 1959. APRA has set minimum regulatory capital requirements for banks that are consistent with the is Basel Accord. These acceptable as capital and provide for standard methods of measuring the risks incurred by the Bank. APRA has set minimum ratios that compare the regulatory capital with on and off balance sheet assets, weighted risk. Regulatory capital requirements are measured for the Bank (known from 1 July 2003 as “Level 1”) and for the Bank and its banking subsidiaries (known from 1 July 2003 as “Level 2”). The funds management businesses are not consolidated for capital adequacy purposes. insurance and life for Regulatory capital is divided into Tier 1 capital and Tier 2 capital. Certain deductions are made from the sum of Tier 1 and Tier 2 capital to arrive at the capital base. Tier 1 capital consists of shareholders equity plus other capital instruments acceptable to APRA, less goodwill and less the intangible element of the investment in life insurance and funds management businesses. Tier 2 capital consists of the general provision for credit losses and other hybrid and debt instruments acceptable to APRA. The tangible element of the investment in life insurance and funds management businesses and any holdings of capital instruments issued by other banks are deducted from the sum of Tier 1 and Tier 2 capital to arrive at the capital base. The standard method of measuring risk requires one of a number of risk weights to be applied to each category of assets on the balance sheet and to categories of off- balance sheet obligations. The standard risk weights are 100%, 50%, 20% and 0%. It should be noted that the risk weights are not consistent with loss experience of the Bank and its subsidiaries. In addition, there is an agreed method for measuring market risk for traded assets. The regulatory capital ratios of the Group are shown on page 11 together with an analysis of the movement in the capital ratios. New Capital Accord The Basel Committee on Banking Supervision (“the Basel Committee”) issued its latest draft proposals for changes to the calculation of capital adequacy for banks, (“the New Capital Accord”) in April 2003. The goal of the Basel Committee is to finalise the New Capital Accord by 31 December 2003 and to implement it by 31 December 2006. There is a number of aspects of the New Capital Accord that are yet to be resolved. The objective of the New Capital Accord is to develop capital adequacy guidelines that are more accurately aligned with the individual risk profile of banks. The New Capital Accord is based on three “pillars”. Pillar 1 covers the capital requirements for banks, pillar 2 covers the supervisory review process and pillar 3 relates to market disclosure.There are three approaches to credit risk under the New Capital Accord, being standardised and internal risk-based (IRB) approaches. The Standardised Approach is a modified version of the current approach but with risk weights aligned with the credit ratings of borrowers and counterparties. Under the IRB approaches, banks such as Commonwealth Bank that two use internal models to calculate and allocate the amount of capital required for credit risk, may be able to use components of their own calculations to determine the amount of regulatory capital required for credit risk. Under the Foundation IRB Approach, the regulator will in most cases, provide the parameters. Under the Advanced IRB Approach, substantially all of the parameters will be those used by the bank in its internal models. Commonwealth Bank is targeting the Advanced IRB approach. The New Capital Accord will introduce a capital requirement for operational risk. As with credit risk, there will be three approaches. The Basic Indicator Approach, the Advanced the Standardised Approach and Measurement Approach. The Bank the targeting Advanced Measurement Approach . is The current capital requirements for market risk are not expected to change significantly under the New Capital Accord. The Basel Committee has initiated a number of quantitative impact studies (QIS) to gauge the effect of the proposed changes. These studies show that Australian banks adopting the Advanced IRB Approach will see an overall reduction in the amount of regulatory capital required, even allowing for the new capital requirement for operational risk. However, under Pillar 2, there is scope for the regulator to require capital to be held for other risks such as interest rate risk in the banking book, business and strategic risk and credit concentration risk. funds management companies The rules for deduction of the investment in life insurance and from regulatory capital will change under the New Capital Accord. The portion of the investment represented by what APRA regards as intangible assets, such as self- generated value of business in force and value of future new business will continue to be deducted from Tier 1 capital. The portion of the investment represented by net tangible assets will be deducted 50% from Tier 1 and 50% from Tier 2 capital (instead of 100% from total regulatory capital as at present). Overall, too many uncertainties regarding the New Capital Accord to provide reliable information on the regulatory position of the Group under the new rules. there are still Conglomerate Groups is an ADI and APRA has advised that a third level of capital adequacy will apply from 1 July 2003 for conglomerate groups (“Level 3”). APRA defines a conglomerate group as a group of companies containing one or more incorporated Authorised Deposit-taking Australian Institutions (“ADIs”). The Bank the Commonwealth Bank Group falls within APRA’s definition of a conglomerate group. Each conglomerate group will be required to hold capital that corresponds to the corporate structure of that conglomerate and the calculation will have regard to all group members and the capacity to move surplus capital from one group entity to another. The regulatory capital requirements for each conglomerate group will be specific to that group. Therefore, it may not be possible to compare the regulatory position of the Commonwealth Bank Group with that of other conglomerate groups. The proposals indicate that the use of internal capital estimation and allocation models may be permitted. 121 Notes to the financial statements NOTE 31 Capital Adequacy continued their is not yet able However, APRA requirements for internal models, nor when they will complete their review of the Bank’s models. Whilst the Bank considers that it is strongly capitalised (as evidenced by its credit ratings), no assurance can be given that our models will meet APRA’s requirements or that the Group meets the Level 3 capital requirements. to specify Dividends Banks may not pay dividends if immediately after payment, they are unable to meet the minimum capital requirements. Banks cannot pay dividends from retained earnings without APRA’s prior approval. The Group has adopted the new accounting standard AASB 1044, which has resulted in a change in the accounting for dividend provisions. Under APRA guidelines, the expected dividend must be deducted from Tier 1 capital. Regulatory Capital Requirements for Other ADIs In The Group ASB Bank Limited is subject to regulation by the Reserve Bank of New Zealand (RBNZ). RBNZ applies a similar methodology to APRA in calculating regulatory capital requirements. At 30 June 2003 ASB Bank Limited Group had a Tier 1 ratio of 8.12% and a Total Capital ratio of 10.26%. Regulatory Capital Requirements for Life Insurance and Funds Management Business for for the fund in each framework life The Group’s life insurance businesses in Australia are also regulated by APRA. The Life Insurance Act has regulatory capital established a requirements insurance companies. These requirements are based on tests aimed at ensuring each statutory insurance company has life 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 2003, all statutory funds of the Group’s life insurance companies in Australia met the capital adequacy test. At 30 June 2003, for Australian life insurance companies, the excess over capital adequacy within statutory in aggregate. funds amounted to $266 million life the Group owned During 2002/03, insurance companies in Australia: Commonwealth Insurance Holdings Limited (“CIHL”), Commonwealth Life Limited (“CLL”) and The Colonial Mutual Life Assurance Society Limited (“CMLA”). The life insurance business of CLL was amalgamated into CMLA on 1 July 2003 using the provisions of part 9 of the Life Insurance Act. three 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 is regulated by the Insurance Authority of Hong Kong. The minimum regulatory requirement comprises a solvency test defined in local regulations and ordinances. in Hong Kong Funds managers in Australia are subject to regulation by The Australian Securities and Investment Commission (ASIC) through their role in supervising responsible entities. The regulatory capital requirements vary for responsible entities depending on the type of Australian Financial Services or Dealers’ Licence held but a maximum requirement of $5 million of net tangible assets applies. APRA approved supervises tangible assets of at of superannuation funds and requires them to also maintain net least $5 million. These requirements are not cumulative where an entity is both an approved trustee for superannuation purposes and responsible entity. trustees Across the total Group, life and funds management companies held $766 million in excess of regulatory capital requirements at 30 June 2003 in aggregate. 122 Notes to the financial statements NOTE 31 Capital Adequacy continued Risk Weighted Capital Ratios Tier One Tier Two Less Deductions Total Regulatory Capital Tier One Capital Shareholders' equity Eligible loan capital Total Shareholders' Equity and Loan Capital Add back foreign currency translation reserve related to non-consolidated subsidiaries Less asset revaluation reserve Less goodwill Less expected dividend Less intangible component of investment in non-consolidated subsidiaries Less outside equity interest in entities controlled by non-consolidated subsidiaries Less outside equity interest in life insurance statutory funds Total Tier One Capital Tier Two Capital Asset revaluation reserve General provision for bad and doubtful debts (1) FITB related to general provision Upper Tier two note and bond issues Lower Tier two note and bond issues Less lower Tier two adjustment to 50% of tier one capital Total Tier Two Capital Tier One and Tier Two Capital Less Investment in non-consolidated subsidiaries (net of intangible component deducted from Tier one) Less other deductions Capital Base (1) Excludes general provision for bad and doubtful debts in non-consolidated subsidiaries. 2003 Actual % 6.96 4.21 (1.44) 9.73 2003 $M 22,152 351 22,503 147 (7) (5,029) (1,066) (4,388) (123) (1,824) 10,213 7 1,321 (391) 250 4,990 - 6,177 16,390 (2,072) (42) 14,276 GROUP 2002 Actual % 6.78 4.28 (1.26) 9.80 GROUP 2002 $M 21,056 415 21,471 90 (4) (5,391) - (4,588) - (2,017) 9,561 4 1,351 (392) 297 4,934 (154) 6,040 15,601 (1,741) (40) 13,820 123 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 Total On Balance Sheet Assets - Credit Risk(2)(3) Off-balance Sheet Exposures (4) Direct credit substitutes Trade and performance related items Commitments (5) Foreign exchange, interest rate and other market related transactions Total Off Balance Sheet Exposures - Credit Risk (6) Total risk-weighted assets - credit risk Risk-weighted assets - market risk Total Risk-Weighted Assets Face Value 2003 $M 2002 $M Risk Weights % GROUP Risk-Weighted Balance 2002 $M 2003 $M 23,832 12,427 103,987 74,472 214,718 22,315 13,401 86,378 77,474 199,568 0% 20% 50% 100% - 2,485 51,993 74,472 128,950 - 2,680 43,189 77,474 123,343 Face Value 2003 $M 2002 $M 2003 $M Credit Equivalent 2002 $M GROUP Risk-Weighted Balance 2002 $M 2003 $M 3,746 992 58,674 4,042 1,157 3,746 463 48,040 10,882 603,726 667,138 583,752 17,475 636,991 32,566 4,042 538 13,400 12,993 30,973 3,238 435 7,832 5,028 16,533 145,483 1,325 146,808 3,597 507 8,491 3,921 16,516 139,859 1,190 141,049 (1) (2) (3) (4) (5) (6) For loans secured by residential property approved after 5 September 1994, a risk weight of 100% applied where the loan to valuation ratio is in excess of 80%. Effective from 28 August 1998, a risk weight of 50% applies to these loans if they are totally insured by an acceptable lender’s mortgage insurer. Loans that are risk weighted at 100% are reported under ‘All other assets’. 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 provision for bad and doubtful debts, and investments in life insurance and fund management business. Total on balance sheet assets exclude debt and equity securities in the trading book and all on balance sheet positions in commodities, as they are included in the calculation of notional market risk weighted assets. Off-balance sheet exposures for 2002 have been restated to be consistent with 2003, in accordance with APRA’s classification of certain items for capital adequacy reporting purposes. The reduction in the risk weighting of commitments was achieved by improved classification of assets by risk weight, principally through the identification of additional eligible security and by more accurate classification of counterparties. Off balance sheet exposures secured by the residential property account for $10.4 billion of off balance sheet credit equivalent assets ($5.2 billion of off balance sheet risk weighted assets). 124 Notes to the financial statements 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 upon by the Bank in the management of its interest rate risk in Note 31. GROUP Maturity Period At 30 June 2003 Assets Cash and liquid assets Receiviables 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 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 1,033 - 4,542 - - - - 5,575 1,256 - - - - - 5,054 756 10,435 - 2,034 1,339 4,457 14,128 1,515 - - 4,109 - 582 - 13,197 - 473 7 1,857 15,616 4,457 66,168 8,495 - - 6,407 18,094 37,167 - 3,142 21,364 46,721 86,311 - 2,950 5 - 90,517 7,066 10,435 11,036 (1,325) 160,347 13,197 15,304 27,835 631 16,841 14,610 252,332 - - - - - 1,256 - 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 81,385 - 1,438 - - - - - - - 1 - 82,824 - 38,334 5,724 15,138 376 13,197 - - 4,962 - - - 3,911 12,005 - 19,449 16,967 24 - 13,352 17,043 87,650 1,155 - 140,974 - 7,538 13,197 - 23,861 23,861 416 36,654 284 17,352 24,561 239,576 - - - 6,970 - 8,125 (1) (2) (3) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months. $87 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 that 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. 125 Notes to the financial statements NOTE 32 Maturity Analysis of Monetary Assets and Liabilities continued 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 0 to 3 At Call Overdrafts months $M $M $M GROUP Maturity Period At 30 June 2002 3 to 12 Months $M 1 to 5 Over years 5 years $M $M Not specified $M Total $M 2,266 - 3,778 - - - - 6,044 2,182 - - - - - 1,730 - - 4,490 - 2 - 319 5,216 11 - 8,389 - - - 2,883 2,354 4,204 14,918 40,031 73,072 1,316 - - 11,201 3,413 4,332 1,601 25 - - 11,976 49,798 78,839 4,204 59,962 105 14,475 17,012 5,424 772 10,670 16,959 405 32,778 5,671 11,201 1,451 75,368 - 50 1,726 - - - 1,316 - - - - - - - - 10,340 - - 4,020 16,594 - - - 4 - 5,521 76,584 77,098 - 6,231 12 16,011 23,058 9,768 4,378 - - - (1,356) - 15,501 598 7,728 8,389 10,766 147,074 12,517 30,109 12,601 14,743 235,228 - - 25,917 496 256 13 132,800 7,864 12,517 25,917 29,002 16,854 26,682 224,954 (1) (2) (3) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within three months. $75 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 that 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. 126 Notes to the financial statements NOTE 33 Financial Reporting by Segments Primary Segment Business Segments Financial Performance Interest income Premium and related revenue Other income Total Revenue GROUP Year Ended 30 June 2003 Funds Banking Management $M $M Life Insurance $M Total $M 11,528 - 2,803 14,331 - - - 1,011 1,133 620 1,133 1,631 11,528 1,011 4,556 17,095 Interest expense 6,502 - - 6,502 Segment result before tax, goodwill amortisation and appraisal value (reduction)/uplift Income tax expense Segment result after tax and before goodwill amortisation and appraisal value (reduction)/uplift Outside equity interest Segment result after tax and outside equity interest before goodwill amortisation and appraisal value (reduction)/uplift Goodwill amortisation (1) Appraisal value (reduction)/uplift (1) Net Profit Attributable to Shareholders of the Bank Non-Cash Expenses Goodwill amortisation Charge for bad and doubtful debts Depreciation Appraisal value reduction Other Financial Position Total assets Acquisition of property, plant and equipment, Intangibles and other non-current assets Associate investments Total liabilities 3,187 (938) 206 8 150 (28) 3,543 (958) 2,249 - 214 122 - (6) 2,585 (6) 2,249 208 122 2,249 208 122 305 109 - - 8 11 112 1 - 2,579 (322) (245) 2,012 322 305 128 245 113 229,289 19,622 16,199 265,110 98 214 216,939 16 12 17,044 6 61 8,975 120 287 242,958 (1) These are Group items and accordingly are not allocated to the business segments, which is consistent with management reporting. 127 Notes to the financial statements NOTE 33 Financial Reporting by Segments continued Financial Performance Interest income Premium and related revenue Other income Appraisal value uplift Total Revenue Interest Expense Segment result before tax, and appraisal value uplift, goodwill amortisation Income tax expense Segment result after income tax and before goodwill amortisation and appraisal value uplift Outside equity interest Segment result after tax and outside equity interest before goodwill amortisation and appraisal value uplift Goodwill amortisation Appraisal value uplift Net Profit Attributable to Shareholders of the Bank Non-Cash Expenses Goodwill amortisation Charge for bad and doubtful debts Depreciation Other Financial Position Total assets Acquisition of property, plant and equipment, intangibles and other non-current assets Associate investments Total liabilities GROUP Year Ended 30 June 2002 Funds Banking Management $M $M Life Insurance $M 10,455 - 3,180 - - 866 - 293 690 13,635 690 1,159 Total $M 10,455 866 4,163 477 15,961 5,745 - - 5,745 2,884 (816) 399 (31) 135 (69) 2,068 (1) 66 - - 368 2,067 2,067 368 368 66 66 449 109 87 - - 12 7 1 2 3,418 (916) 2,502 (1) 2,501 (323) 477 2,655 323 449 128 90 211,130 20,531 17,987 249,648 147 235 200,885 17 - 48 30 9,584 18,123 164 313 228,592 128 Notes to the financial statements NOTE 33 Financial Reporting by Segments continued Financial Performance Interest income Premium and related revenue Other income Appraisal value uplift Total Revenue $M Funds Banking Management $M 11,900 - - 2,224 - 2,224 - 2,485 - 14,385 GROUP Year Ended 30 June 2001 Life Insurance $M - 695 553 - 1,248 Total $M 11,900 695 5,262 474 18,331 Interest Expense 7,426 - - 7,426 Segment result before tax, goodwill amortisation and appraisal value uplift Income tax expense Segment result after income tax and before goodwill amortisation and appraisal value uplift Outside equity interest Segment result after tax and outside equity interest before goodwill amortisation and appraisal value uplift Goodwill amortisation Appraisal value uplift Net profit attributable to shareholders of the Bank Non Cash Expenses Goodwill amortisation Charge for bad and doubtful debts Depreciation Other Financial Position Total assets Acquisition of property, plant and equipment, intangibles and other non-current assets Associate investments Total liabilities 2,512 (705) 478 (155) 279 (133) 1,807 (14) 323 - 146 - 1,793 1,793 323 323 146 146 385 - 5 108 4 28 - 37 5 3,269 (993) 2,276 (14) 2,262 (338) 474 2,398 338 385 150 37 191,333 20,830 18,248 230,411 129 249 179,733 3 - 94 10,665 57 20,165 391(1) 400 210,563 (1) Includes intangible assets of $259 million on acquisition of 25 % interest in ASB Group. 129 Notes to the financial statements NOTE 33 Financial Reporting by Segments continued Secondary Segment GEOGRAPHICAL SEGMENTS Revenue Australia New Zealand Other Countries* Net profit attributable to shareholders of the Bank Australia New Zealand Other Countries* Assets Australia New Zealand Other Countries* Acquisition of Property, Plant & Equipment, Intangibles and other Non-current Assets Australia New Zealand Other Countries* 2003 $M % 2002 $M % 2001 $M % 13,934 2,025 1,136 17,095 1,385 539 88 2,012 221,248 27,567 16,295 265,110 81.6 11.8 6.6 100.0 68.8 26.8 4.4 100.0 12,651 1,591 1,719 15,961 2,569 178 (92) 2,655 79.3 10.0 10.7 100.0 96.8 6.7 (3.5) 100.0 15,265 1,499 1,567 18,331 2,228 159 11 2,398 83.5 10.4 6.1 208,673 24,579 16,396 83.6 9.8 6.6 196,918 20,208 13,285 83.3 8.2 8.5 100.0 92.9 6.6 0.5 100.0 85.5 8.8 5.7 100.0 249,648 100.0 230,411 100.0 98 6 16 120 81.7 5.0 13.3 100.0 134 26 4 164 81.7 15.9 2.4 100.0 360 29 2 391 92.1 7.4 0.5 100.0 * Other Countries are: United Kingdom, United States of America, Japan, Singapore, Hong Kong, Grand Cayman, Philippines, Fiji, Indonesia, China and Vietnam. The geographical segments represent the location in which the transaction was booked. 130 Notes to the financial statements NOTE 34 Life Insurance Business The following information, in accordance with AASB 1038, is provided to disclose the statutory life insurance business transactions contained in the Group financial statements and the underlying methods and assumptions used in their calculation. Also refer Notes 1 (ii) and 21. The life insurance segment result is prepared on a business segment basis, refer Note 33. Summarised Statement of Financial Performance 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 (loss) profit after income tax Sources of life insurance operating profit The Margin on Services operating (loss) 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 (loss) profit after income tax Life insurance premiums received and receivable Life insurance claims paid and payable 2003 $M 1,326 (200) (471) 132 (680) 894 374 46 (546) 875 (245) 630 (697) (67) 45 (22) 228 (67) (245) (11) 73 - (22) 4,158 5,843 GROUP 2002 $M 1,332 (192) (447) 89 (1,057) 878 184 (105) 315 997 477 1,474 (757) 717 (22) 695 234 (37) 477 (9) 33 (3) 695 5,734 5,755 131 Notes to the financial statements NOTE 34 Life 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 Bank’s life insurance and funds management businesses, together with the key actuarial assumptions that have been used. These are Directors’ valuations based on appraisal values using a range of economic and business assumptions determined by management which are reviewed by independent actuaries Trowbridge Deloitte. Analysis of Movement since 30 June 2002 Profits Net Capital Movements (2) Dividends paid Disposals/acquisitions of Business (3) Foreign Exchange Movements Change in Shareholders’ net tangible assets Acquired excess (4) Underlying Appraisal Value (Reduction)/ Uplift (Decrease)/Increase to 30 June 2003 Shareholders’ Net Tangible Assets 30 June 2002 balance Profits Net capital movements Disposals/acquisitions of Business(3) Foreign Exchange Movements 30 June 2003 balance Value in Force Business 30 June 2002 balance Acquisitions of business (4) (Reduction)/Uplift 30 June 2003 balance Value Future New Business 30 June 2002 balance Acquisitions of business (4) (Reduction)/Uplift 30 June 2003 balance Carrying Value at 30 June 2003 Shareholders’ net tangible assets Value in force business Embedded value Value future new business Carrying Value Funds Life Insurance $M 71 98 Asia (1) Management (5) Australia (6) New Zealand $M $M $M 5 46 208 36 1 154 - (196) (111) - (20) (110) - - (92) (1) (71) 46 - - (3) 55 129 - (4) 52 (291) (110) 123 178 15 61 (92) (163) 702 208 (42) (110) (4) 754 1,209 71 (13) - (3) 1,264 334 46 1 - (1) 380 679 5 36 (20) (92) 608 Total $M 330 289 (307) (130) (100) 82 129 (245) (34) 2,924 330 (18) (130) (100) 3,006 1,221 178 179 40 1,618 84 - - - 84 (139) 1,123 245 191 4 1,563 (182) (36) 67 12 3,660 275 23 45 - - 3 56 278 79 (109) 3,596 80 - (56) 24 4,038 45 (106) 3,977 754 1,264 380 608 3,006 1,123 245 191 4 1,563 1,877 1,509 571 612 4,569 3,596 79 278 24 3,977 5,473 1,588 849 636 8,546 (1) (2) (3) (4) (5) (6) The Asian life businesses are not held in the market value environment and are carried at net assets plus any 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. Includes capital injections and movements in intergroup loans. Represents the purchase of management rights in CFS Retail Property Trust, the acquisition of Avanteos, investment in a Chinese funds management joint venture, disposal of some Colonial First State UK business and disposal of the Philippines life insurance business. Represents the value of acquired management rights of CFS Retail Property Trust, the acquisition of Avanteos and investment in a Chinese funds management joint venture. "Managed Products" business was reported at 30 June 2002 as "Funds Management" and "Life Insurance - Australia - Investment" business. These businesses have been combined. "Life Insurance - Australia" business was reported at 30 June 2002 as "Life Insurance - Australia - Risk" business. This business includes risk, traditional, investment account and annuity business. 132 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 in Note 31. 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 Investment in non-consolidated subsidiaries deducted from Total Capital comprises: Shareholders’ net tangible assets in life and funds management businesses Capital in other non-consolidated subsidiaries Value of acquired in force business (1) Less non-recourse debt 2003 $M 3,977 411 4,388 3,006 286 1,152 (2,372) 2,072 2002 $M 4,038 550 4,588 2,924 122 1,068 (2,373) 1,741 (1) The increase in the value of acquired in force business principally relates to the acquisition of management rights of CFS Retail Property Trust. Key Assumptions Used in Appraisal Values The following key assumptions have been used by in determining the appraisal values. Other actuarial assumptions used in the valuation are described in the section Actuarial Methods and Assumptions. As at 30 June 2003 Life insurance entities Australia New Zealand Asia - Hong Kong - Other Funds management entities Australia As at 30 June 2002 Life insurance entities Australia New Zealand Asia - Hong Kong - Other Funds management entities Australia New Business Multiplier 8 8 8 various Risk Discount Rate % 10.8 10.9 11.5 various Value of Franking Credits % 70 - - - n/a 11.9 70 New Business Multiplier 9 8 10 various n/a Risk Discount Rate % 11.5 12.0 HKD13.0 USD12.0 various 13.0 Value of Franking Credits % 70 - - - 70 The movement in the risk discount rate is based on the change in the underlying risk free rate using a capital asset pricing model framework. This framework utilises the local 10-year government bond yield as the proxy for the risk free rate. The movement in risk discount rates have been accompanied by broadly equivalent movements in assumed future investment returns. 133 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 (Life 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. Taxation 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. 2003 $M 27,426 1,188 1,637 1,420 (916) (6,956) 62 23,861 2002 $M 29,164 1,493 2,259 1,343 (1,085) (7,330) 73 25,917 Actuarial Methods and Assumptions Policy liabilities have been calculated in accordance with the Margin on Services (MoS) methodology as set out in Actuarial Standard 1.03 – Valuation Standard (‘AS1.03’) issued by the Life Insurance Actuarial Standards Board (‘LIASB’). The principal methods and profit carriers used for particular product groups, are as follows: 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 Accumulation Projection Projection Projection Projection Accumulation Projection Accumulation Projection Bonuses / dividends or expected claim payments Bonuses or asset charges Not applicable Premiums/claims Expected claim payments Bonuses or annuity payment Bonuses or asset charges Not applicable Claims Premiums (implied) Expected claim payments 134 Notes to the financial statements NOTE 34 Life Insurance Business continued Actuarial Assumptions 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, to the benefits currently payable under Participating Business. Under the Life Act, bonuses are a distribution to policyholders of profits and may take a number of reversionary bonuses, including interest credits and capital growth bonuses (payable on the termination of the policy). forms 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) Bonuses 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 Maintenance expenses The maintenance expenses are based on an internal analysis of experience and are assumed to increase in line with inflation each year and are assumed to be sufficient to cover the cost of servicing the business in the coming year after adjusting for one off expenses. For participating business, expenses continue on the previous charging basis. 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 135 Set out below the material assumptions used in the calculation of policy liabilities. These assumptions are also used in the determination of appraisal values. is a summary of 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 2003 Rate Range % 5.44 – 6.19 6.65 – 7.58 5.46 – 6.67 3.16 – 3.85 3.16 – 3.85 5.50 4.88 – 5.68 6.33 – 6.84 7.20 – 8.27 3.67 4.46 June 2002 Rate Range % 6.21-6.96 7.58-8.52 6.49-7.86 3.89-4.55 3.89-4.55 6.50 5.89-6.45 7.51-7.96 8.52-9.13 4.41 5.36 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 in force. There have been no significant changes to these assumptions. Surrender values Current surrender value bases are assumed to apply in the future. There have been no significant changes to these assumptions. Unit price growth 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. 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. 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 Bank. Disaggregated Information the Australian Life Insurance Act 1995, Life insurance business is conducted through a number of life insurance entities in Australia and overseas. Under life insurance business is conducted within one or more separate statutory funds, which are distinguished from each other and from the shareholders’ funds. The financial statements of Australian in accordance with AASB 1038, (and which are lodged with regulators) show all major the components of the financial statements disaggregated between the various life insurance statutory funds and their shareholder funds. relevant Australian insurers prepared life Notes to the financial statements NOTE 34 Life Insurance Business continued Solvency Australian Life Insurers Australian life required 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 adverse experience. Actuarial Standard AS2.03 ‘Solvency Standard’ (‘AS2.03’) prescribes a minimum capital requirement and the minimum level of assets required to fund. All controlled be held Australian the solvency requirements of AS2.03. Further information is available from the individual statutory returns of subsidiary life insurers. Overseas life insurers insurance entities complied with insurance in each life life 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. 136 Notes to the financial statements NOTE 35 Remuneration of Auditors Amounts paid or due and payable for audit services to: Ernst & Young Other Auditors Amounts paid or due and payable for non-audit services to Ernst & Young: Audit related services Taxation services All other services Corporate finance services Staff assistance services Other services 2003 $'000 6,634 137 6,771 752 325 628 1,263 321 3,289 GROUP 2002 $'000 2003 $'000 BANK 2002 $'000 5,197 2,555 100 - 2,555 5,297 1,909 - 1,909 666 435 578 1,551 921 4,151 571 170 528 827 122 2,218 660 103 155 1,551 685 3,154 Total Remuneration of Auditors 10,060 9,448 4,773 5,063 Effective 27 May 2002, the majority of partners of the former Australian accounting practice Andersen became partners of Ernst & Young. A small number of these partners had loans with the Group on normal commercial terms. By virtue of Australian Securities and Investments Commission (ASIC) Class Order 02/0606 dated 24 May 2002 as amended, Ernst & Young were relieved from compliance with sections 324(1) and 324(2) of the Corporations Act 2001 until 13 December 2002. During its currency this Class Order required: (cid:1) The Bank to notify ASIC within 30 days of any event of default or enforcement action taken in respect of these loans; The Bank to notify ASIC within 7 days of the signing of the Auditors’ Report whether, in the opinion of the the Class Order has been Audit Committee, complied with; Ernst & Young not assign any of these partners to the audit of the Bank or any controlled entity; and Ernst & Young to notify ASIC within 7 days of the signing of the Auditors’ Report whether the audit has been influenced by these loans. Ernst & Young were fully compliant with sections 324(1) and 324(2) of the Corporations Act 2001 prior to expiry of the Class Order on 13 December 2002. (cid:1) (cid:1) The Audit Committee has considered the non-audit services provided by Ernst & Young and is satisfied that the services and level of fees are compatible with maintaining auditors' independence. in Audit relation to statutory and Fees for audit services includes fees associated with statutory audit services, review of the Group's half year financial statements, audit of the Group's US Form 20-F, services regulatory requirements, and other services that only the external auditor can provide such as comfort letters on debt issues. include accounting and regulatory consultations, due diligence in connection with acquisitions and disposals and investigations and verification of internal control systems, and financial or regulatory information. fees tax and GST compliance and related advice, and tax technology and related training. related services fees principally Taxation income include All other fees principally include transaction support services related to potential and actual acquisition and disposition transactions, research and investigation of potential suppliers and provision of personnel to assist alleviate short term non-management resource or skill needs in areas not subject to audit. 137 Notes to the financial statements 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 needs. 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 using either internal or external professional property resources acting for the Group. Rental payments are determined in terms of relevant lease requirements – usually reflecting market rentals. 2003 $M 48 - - - GROUP 2002 $M 42 - - - 2003 $M 23 - - - BANK 2002 $M 26 - - - 48 42 23 26 2003 $M GROUP 2002 $M 264 587 160 1,011 274 642 200 1,116 2003 $M 228 503 104 835 BANK 2002 $M 220 508 124 852 27 51 1 79 11 26 2 39 The Group as lessee has no purchase options over premises occupied. 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. 138 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 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 that would have a material adverse 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 Face Value 2002 $M GROUP Credit Equivalent 2002 $M 2003 $M 1,806 464 1,073 134 1,023 47,652 1,168 53,320 2,075 380 589 22 441 10,519 1,081 15,107 1,806 464 1,073 27 511 13,012 1,095 17,988 2003 $M 2,075 380 589 110 882 58,310 2,720 65,066 Guarantees represent unconditional undertakings by the Group to support the obligations of its customers to third parties. Standby letters of credit are undertakings by the Group to pay, against production of documents, an obligation in the event of a default by a customer. Bill endorsements relate to bills of exchange that have been endorsed by the Group and represent liabilities in the event of default by the acceptor and the drawer of the bill. 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. Documentary letters of credit represent an undertaking to pay or accept drafts drawn by an overseas supplier of goods against production of documents in the event of payment default by a customer. Performance involve undertakings by if a customer fails to fulfil a contractual non-monetary obligation. related the Group third parties contingents to pay Where the potential loss depends on the performance of a counterparty, the Group utilises the same credit policies and assessment criteria for off balance sheet business as it does for on balance sheet business and if it is deemed necessary, collateral is obtained based on management’s credit evaluation of the counterparty. If a probable loss is identified, suitable provisions are raised. Commitments to provide credit include all obligations on the part of the Group to provide credit facilities. Other commitments include the Group’s obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities. Contingent Assets The credit risk related contingent liabilities of $65,066 million (2002: $53,320 million) detailed above also represent contingent assets of the Group. Such commitments to provide credit may in the normal course convert to loans and other assets of the Group. 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 the event of non performance by counterparty. in 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. 139 Notes to 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 prior period mis-selling activities in the UK for pension and mortgage endowment products. Under the sales agreement liabilities are shared between Winterthur and the Group on a pre-determined basis. the Funds under management Australia United Kingdom New Zealand Asia Funds under trusteeship Australia The Group and its associated entities conduct investment management and other fiduciary activities as responsible entity, trustee, custodian or manager for including numerous superannuation and approved deposit funds, wholesale and retail trusts. The amounts of funds concerned that are not reported in the Group’s balance sheet are as follows: funds and investment trusts, 2003 $M 59,318 6,908 3,812 1,369 71,407 28,223 2002 $M 60,234 12,088 3,402 1,759 77,483 21,785 Funds under custody and investment administration Australia (1) 57,777 79,162 (1) The Group has agreed to novate a significant portion of this business after year end. 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). Certain entities within the Group act as responsible entity or trustee of various managed schemes (‘schemes’), wholesale and retail trusts (‘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 2003. Where entities within the Group act as manager of unit trusts, 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. 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, telecommunications services agreement with TCNZ Australia Pty Ltd for five years. The exact amounts of these contracts are unable to be reliably determined as they are dependent upon business volumes over the period of the contracts. into a 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 Chief Executive Officer and other executives of the Company and its controlled entities at 30 June 2003 was $10.6 million (2002: $11.4 million). 140 Notes to the financial statements NOTE 39 Market Risk The Bank in its daily operations is exposed to a number of market risks. A market risk is the risk of an event in the financial markets that results in a loss of earnings to or a loss of value of the Group, e.g. an adverse interest rate movement. Under the authority of the Board of Directors, the Risk Committee of the Board ensures that all the market risk exposure is consistent with the business strategy and within risk tolerance of the Group. Regular market risk reports are tabled before the Risk Committee of the Board. Within the Group, market risk is greatest in the balance sheets of the banking and insurance businesses. Market risk also arises in the course of its intermediation activities in financial services and in financial markets trading. Market risk in the balance sheets 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 Group Asset and Liability Committee, with operational management delegated to the Group Executives of the associated business units. For bank balance sheets, market risk includes liquidity risk, funding risk, interest rate risk and foreign exchange risk. On life and general insurance balance sheets, market risk is part of the principal means by which long term liabilities are managed. In this sense and in contrast to banking, market risk is structural for these businesses. Liquidity risk Balance sheet liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Group manages liquidity requirements by currency and by geographical location of its operations. Subsidiaries are also included in the Group’s liquidity policy framework. Liquidity policies are in place to manage liquidity in a day- to-day sense, and also under crisis assumptions. 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 raising funding funds. The Group has a policy of diversification. The funding policy augments the Group’s liquidity policy with its aim to assure the Group has a stable diversified funding base without over-reliance on any one market sector. Domestically, the Group continues to obtain the majority of its AUD funding from a stable retail deposit base which has a lower interest cost than wholesale funds. The retail funding percentage has risen from 66% in June 2002 to 67% in June 2003 due to the growth of “at call” savings. The relative size of the Group’s retail base has enabled it to source funds at a lower than average rate of interest than the other major Australian banks. However, some of this benefit is offset by the cost of the Group’s extensive retail network and the Group’s large share (approximately 49%) of pensioner deeming accounts. The cost of funds for Financial Year 2003, calculated as a percentage of interest exposure to average interest bearing liabilities, was 3.6% on a group basis consistent with the 3.6% on a group basis for Financial Year 2002. The Group obtains a significant proportion of its funding for the domestic balance sheet from wholesale sources – approximately 22.7%, excluding Bank Acceptances. The cost of funds raised in the wholesale markets is affected by independently assessed credit ratings. Under current APRA Prudential Standards, each bank is required to develop a liquidity management strategy that is appropriate for itself, based on its size and nature of operations. The objectives of the Group’s funding and liquidity policies are to: (cid:1) (cid:1) Ensure all financial obligations are met when due; Provide adequate protection, even under crisis scenarios, at lowest cost; and Achieve sustainable, lowest-cost funding within the limitations of funding diversification requirements. (cid:1) 141 Notes to the financial statements NOTE 39 Market Risk continued A funding diversification policy is particularly important in offshore markets where the absence of any ‘natural’ offshore funding base means the Group is principally reliant on money market and capital market sources for funding. The Group has imposed internal prudential limits on the relative mix of offshore sources of funds. Market Risk 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 Loan capital Bank acceptances and other Total Overseas Total Funding Sources Provisions and other liabilities Total Liabilities 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. 2003 $M 22,341 32,411 32,398 18,756 19,577 13,122 11,228 20,443 5,937 3,231 2,527 181,971 25,621 258 3,418 10,794 88 75 40,254 222,225 20,734 242,959 GROUP 2002 $M 22,921 32,935 28,991 14,330 14,880 12,449 15,832 22,662 5,336 753 2,888 173,977 22,014 5,682 3,255 3,013 91 68 34,123 208,100 20,492 228,592 142 of risk to the next 12 months earnings. To measure this longer-term sensitivity, the Bank utilises an economic value-at-risk (VaR) analysis. This analysis measures the potential change in the net present value of cash flows of assets and liabilities. Cash flows for fixed rate products are included on a contractual basis, after adjustment for forecast prepayment activities. Cash flows for products repriced at the discretion of the Bank are based on the expected repricing characteristics of those products. interest rate scenarios using The total cash flows are revalued under a range of the VaR possible 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 for $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 then trading. Exposure as at 30 June Average monthly exposure High month exposure Low month exposure 2003 $M 34 24 64 4 2002 $M 16 29 59 9 framework A stress-test rate risk augments the two risk management perspectives outlined above. The results of the stress tests are used to refine policy and limits where appropriate and are reported to the Group Asset and Liability Committee. interest for for The table rate following interest represents sensitivity the Bank’s repricing contractual mismatches as at 30 June 2003 and 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. All assets and liabilities are shown according to contractual repricing dates. Options are shown in the mismatch report using the delta equivalents of the option face values. Notes to the financial statements NOTE 39 Market Risk continued Interest rate risk (Banking) Interest rate risk in the bank balance sheet arises from the potential for a change in interest rates to have an adverse affect on the net interest earnings, in the current reporting period and in future years. Interest rate risk arises from the structure and characteristics of the Bank’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 Bank 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 for 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 whole yield curve as well as other interest rate scenarios with variations in size and timing of interest rate movements. Potential variations in net interest earnings are measured using a simulation model that 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 the other assets and liabilities (those priced at the discretion of the Bank) 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. The figures in the table represent the potential change to net interest earnings during the year (expressed as a percentage of expected net interest earnings in the next 12 months) based on a 1% parallel rate shock and the expected change in price of assets and liabilities held for the purposes other than trading. (expressed as a % of expected next 12 months' earnings) 2003 % 2002 % Average monthly exposure High month exposure Low month exposure 1.3 2.1 0.4 1.3 1.8 0.7 (b) Economic value Some of the Bank’s assets and liabilities have interest rate risk that is not fully captured within a measure 143 Notes to the financial statements NOTE 39 Market Risk continued Interest Rate Risk Sensitivity Balance Sheet Total $M 1 to 3 0 to 1 6 to 12 month months months months $M 3 to 6 $M $M $M Repricing Period at 30 June 2003 Not Weighted Interest Average Rate % over 5 years Bearing $M 1 to 5 years $M $M 4,557 3,667 - - - - - 890 3.55 3,325 6,334 4,341 137,424 1,266 753 1,070 6,334 - - 36 8,482 521 7,167 82 80,485 36 - - 200 - - - 16 (1,188) 2,720 25,336 467 2,370 - 499 14,772 1.41 4.64 5.38 6.32 13,122 - - - - - - 13,122 - 24,185 5,344 444 71 305 2,178 2,240 13,603 4.04 - - - - - - - - - 4,552 - - 628 - - - - - - 9,342 21,966 - 97,178 9,202 220,434 - - - 15,612 - - - - - - 5,077 30,234 628 4,552 21,966 53,789 - - - 4.79 120,365 82,397 15,572 7,910 4,286 4,246 861 5,093 2.97 892 2,527 1,486 132 13,122 - - - 12 - - - - - 850 - - - 777 - - - 20,443 - 19,576 1,458 4,452 16,867 - - - 6,378 17 - - - - - - - - - - - - - 13,122 12 850 777 20,443 (3) 4,949 - - 1,187 - 16,867 - - - - - 1,152 - 5,937 200,476 734 89,069 2,050 24,892 15 - 5,455 9,515 1,320 10,515 1,818 - 57,164 3,866 19,910 - - 1,936 - - - 21,846 - - - - 8,186 (21,935) 623 - - - - - - (2) (2) (2) (2) (2) - - - - - - - - - 19,910 1,936 21,846 39 - - 7,673 5,414 - - - - - - - (13,826) (13,826) (7,504) (21,330) 450 (20,880) 10,196 (10,684) 27,392 16,708 6,625 (25,221) (1,888) 23,333 1.54 - - - - - 5.50 - 3.31 2.44 (1) (1) (1) (1) (1) Australia Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers 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 Share capital Outside equity interests Total Shareholders' Equity Off Balance Sheet Items Swaps FRAs Futures Net Mismatch Cumulative Mismatch (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. 144 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 2003 Not Weighted over 5 Interest Average Rate years Bearing % $M 1 to 5 years $M $M 1,018 868 53 1 - - - 96 1.75 3,741 4,101 6,695 22,923 448 1,252 2,390 1,064 2,146 5,273 1,424 495 626 9,155 2,145 1,519 1,816 1,972 79 - 237 458 3,687 9 4.32 84 - 308 30 4.31 397 - 6.26 (37) 7.36 483 75 - 75 - - - - - - 1,717 2.54 710 24 15 2.06 8 - - - - - 193 - 193 - - - - - - 477 - - 477 - - - 1,780 - - 5.72 4,355 1,898 - - 1,780 - - - - - 9,533 3,650 23 44,676 12,693 4,455 4,194 7,548 966 117 73 43 20,609 11,472 4,299 2,193 749 861 149 886 4.53 - 763 4,021 5,011 68 - - - 26 - - - - 42 - 159 75 - - - - - - 3.12 75 - - - - - - - - - 26 - 42 - 3,418 - 2.01 2,160 - 8.13 3.11 - - - - - - - 3,418 - - - - - - 331 2,160 - - - - - - 88 - - - 2,331 - - 6,607 16,543 13,137 139 - 88 - 2,683 1,050 7,987 1,470 893 288 76 42,482 11,053 114 - - - - - - 192 - - - - - - 306 - - - - - - 114 192 306 (2) (2) (2) (2) (2) (2) 579 368 514 (1,827) (4,216) (4,216) 4,065 (562) 101 (3,260) (5,245) (9,461) 405 (2,495) (445) 392 (550) (109) (1,016) (305) (2,349) (205) - 247 - - 44 - - 1,417 - 4,991 1,453 (8,008) (503) (8,511) 10,135 1,624 2,822 (2,558) 1,888 4,446 (1) (1) (1) (1) (1) (1) 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 Share capital Outside equity interests Total Shareholders' Equity Off Balance Sheet Items Swaps Options FRAs Futures Net Mismatch Cumulative Mismatch (1) (2) No rate applicable. No balance sheet amount applicable. 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. 145 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 $M 0 to 1 $M $M $M Repricing Period at 30 June 2002 Not Weighted Average Rate % over 5 Interest years Bearing $M 1 to 5 years $M $M 5,426 4,105 - - - - - 1,321 2.61 547 202 4,333 5,865 4,069 126,330 295 - - 3,491 5,865 - - - - 2,288 110 60 8,980 15,289 353 64,273 11,551 12,449 - - - - - 3,390 539 5,174 26,102 - - - - - - - - - - - - 18,577 - - - - - 31,044 656 - - 4,866 - - - - - - 14 1,042 25,366 2,175 (1,304) - 12,449 2,790 13,584 - - 656 - - 4,866 - 18,577 6,007 50,163 83,110 12,990 9,792 15,567 208,673 407 218 2.46 3.61 6.26 6.82 - 5.82 - - - - 6.38 115,497 77,414 10,110 9,114 3,880 7,458 1,495 6,026 2.61 1 20 3,153 1,105 1,965 12 12,449 - - - - - 1,040 - - - - - 1,235 - - - - - 787 - - - - - - - - 22,363 - - 14,820 6,469 2,404 2,920 2,134 14,508 - - - - - 927 14,866 1,872 81,740 16,007 10,222 543 - 6,285 5,337 191,189 545 227 2.40 50 - - - 12,449 - 1,040 - - 1,235 - - - 787 - 22,363 (3) - 4.67 - 4.18 2.89 348 - - 14,508 1,768 - 3,661 58,408 12,659 - - 2,009 - - 14,668 - - - - - - - - - - - - 12,659 - 2,009 - 14,668 3,877 (2) (13,383) (3,048) (2) - - (2) - - (2) (12,013) (6,065) (2) (12,013) (18,078) (14,631) 8,246 - - - - - - 24,424 21,495 25,729 1,888 - - - - - 4,234 (22,913) 2,816 3,447 11,702 (2,929) 2,420 (1) (1) (1) (1) (1) Australia Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers 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 Share capital Outside equity interests Total Shareholders' Equity Off Balance Sheet Items Swaps FRAs Futures Net Mismatch Cumulative Mismatch (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. 146 Notes to the financial statements NOTE 39 Market Risk continued 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. Balance Sheet 3 to 6 6 to 12 1 to 3 Total month months months months $M $M 0 to 1 $M $M $M Repricing Period at 30 June 2002 Not Weighted Average Rate % over 5 Interest years Bearing $M 1 to 5 years $M $M 618 506 - - - - - 112 3,395 2,524 6,697 20,744 2,033 489 851 8,481 107 1,372 1,562 2,095 310 185 1,057 1,548 58 80 142 3,461 520 153 2,370 4,748 64 303 168 77 715 - (52) 463 2.38 5.97 5.12 4.36 6.95 68 4,007 89 206 525 2,102 31 128 778 - - - - - - - 451 - - - - - - - - - - - - - - - - - - - - - - - - 2,100 8,248 3,131 3,869 5,136 457 68 2,162 89 206 525 2,102 5,353 - 2.76 - - - - 5.95 40,975 13,138 17,303 10,034 3,536 1,688 827 413 - 805 4.24 756 3,821 4,711 53 68 - - - - - - 81 - - - 68 - - - - - - - - 41 47 3,554 39 2,834 90 - - 7,388 344 41 - - - - - - 47 - - - - - - 3,554 - - - - - - 8,755 344 913 2,834 - - - - - - 90 - - - - 1,279 37,403 14,139 10,875 6,583 2,654 284 371 221 724 2.80 - - - - 3.70 - 7.87 3.87 6,371 - - - - - - 17 - - - - - - 6,388 - - - - - - 6,371 17 6,388 - - - (2) (2) (2) (2) (2) (2) 1,252 - (437) - (186) (186) 3,930 271 (653) 300 (1,891) (2,077) 1,325 (1,590) - 285 90 1,375 1,692 - 805 (213) 2,394 317 (4,390) (271) - (177) 2,686 4,378 (527) - - - - - - - 1,229 (8,423) 5,607 (2,816) (1) (1) (1) (1) (1) (1) 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 Share capital Outside equity interests Total Shareholders' Equity Off Balance Sheet Items Options Swaps FRAs Futures Net Mismatch Cumulative Mismatch (1) (2) No rate applicable. No balance sheet amount applicable. 147 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 2002 2003 $M $M Interest Rate Related Contracts 2002 2003 $M $M 2 (3) 1 189 (8) 181 (258) (25) (199) 94 123 (265) (11) 6 17 13 143 168 123 2 (38) (47) (157) (117) 2003 $M (9) 3 18 202 135 349 Total 2002 $M (135) (23) (237) 47 (34) (382) The objectives of the Group’s financial markets activities are to: (cid:1) (cid:1) (cid:1) Provide risk management products and services to customers; Manage the Group’s own market risks; and Conduct controlled in pursuit of profit, trading 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 concentrating trading activity in highly liquid markets. Market liquidity risk Note 2 of the financial statements details Financial Markets Trading Income contribution of $502 million (2002: $489 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 Bank provides operating leases to customers on equipment such as motor vehicles, computers and industrial equipment. Residual value risk is the risk that the amount recouped by selling the equipment at lease expiry will be less than the residual value of the lease. In managing this risk the Bank utilises industry experts to ensure that the residual value of equipment is prudently estimated at the start of the lease and the Bank realises the maximum value of the equipment at lease expiry. Foreign exchange risk Foreign exchange risk is the risk to earnings and value caused by a change in foreign exchange rates. The Bank hedges all balance sheet foreign exchange risks except for long term investments in offshore subsidiaries. Net deferred gains and losses Net deferred unrealised gains and losses arising from derivative hedging contracts entered into in order to manage risk arising from assets, liabilities, commitments of anticipated the expected term of deferral are shown below. together with transactions, future 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 rate 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 VaR measure outline above. Additionally, there is $4 million of net deferred gains on derivatives (2002: $12 million net deferred losses) used to hedge equity risk on investments disclosed within Note 11. Market risk in financial services 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 returns obtained from investing the shareholders capital held in each life company. Shareholders insurance funds business are on average invested 50% in income assets (cash and fixed interest) and 50% in growth assets (shares and property) with the asset mix varying from company to company. Policyholder funds are invested to meet policyholder reasonable expectations without putting the shareholder at undue risk. the life in Market risk in the fund 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 of fee income. Market Risk in Financial Markets Trading The Group’s policy is that exposure to market risk from trading activities is managed by Institutional and Business Services. The Group trades and distributes financial markets products and provides risk management services to clients on a global basis. 148 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 Options Trading Total equity risk related contracts Total derivatives exposures 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 for derivative financial instruments is set out in Note 1(ff). 2003 $M Face Value 2002 $M GROUP Credit Equivalent 2002 $M 2003 $M 147,998 5,329 153,327 47,821 19,737 67,558 132,200 5,146 137,346 44,084 14,612 58,696 4,201 291 4,492 3,787 1,569 5,356 4,435 124 4,559 3,061 953 4,014 - - - - 293 - - 293 - - - - 35,310 1,121 36,431 257,316 33,398 2,292 35,690 126,312 129,086 255,398 31,409 - 31,409 77,641 277 77,918 274,253 31,055 8,983 40,038 128,983 118,880 247,863 79,173 80,736 1,234 27 1,261 11,109 4 37 41 3,737 2,342 6,079 1,334 5 1,339 9,912 6 2 8 2,150 1,372 3,522 18 - - 18 - 1,563 - 14,028 18,241 5,602 - 18,241 386,878 19,630 342,127 355 - 278 - 247 - 278 602 661,409 600,045 149 152 76 28 - 76 3,606 180 6,318 - 29 - - 55 - 84 - 13,518 17,511 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 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 realised and unrealised gains and losses on trading securities are reported within trading income under foreign exchange earnings or other financial instruments (refer Note 2). In aggregate, derivatives trading was profitable for the Group during the year. Fair Value 2002 $M 2003 $M Average Fair Value 2002 $M 2003 $M 4,753 (4,922) (169) 3,599 (2,390) 1,209 3,590 (3,451) 139 2,765 (2,288) 477 3,198 (3,245) (47) 2,996 (2,078) 918 2,996 (2,197) 799 2,619 (2,408) 211 - 2 - - 2 - - - - - - - 832 (1,138) (306) 736 826 (903) (77) 539 783 (920) (137) 734 4 (4) - 9 (8) 1 7 (7) - 564 (517) 47 1,057 14 (13) 1 4,444 (4,911) (467) 3,049 (3,468) (419) 4,301 (4,799) (498) 3,408 (3,891) (483) 15 (18) (3) 24 (35) (11) 258 (145) 73 (73) 113 - (429) 110 (357) 379 33 (23) 10 223 (146) 77 (411) 323 28 (35) (7) 92 (75) 17 (473) 584 In accordance with the accounting policy set out in Note 1(ff) 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 13,907 13,528 379 10,336 10,226 110 150 Notes to the financial statements NOTE 40 Superannuation Commitments The Group sponsors a range of superannuation plans for its employees worldwide. Details of major defined benefit plans with assets in excess of $10 million are: Name of Plan Type Form of Benefit Officers’ Superannuation Fund (OSF) The Colonial Group Staff Superannuation Scheme (CGSSS) Commonwealth Bank of Australia (UK) Staff Benefits Scheme (CBA(UK)SBS) 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 Date of Last Actuarial Review of the Fund 30 June 2000 30 June 2001 1 May 2002 5 April 2002 1 September 2001 Financial Details of Defined Benefits Plans from Prior to the financial year ending 30 June 2003, the Bank prepared the following disclosures using values extracted financial statements and actuarial assessments of each plan which have been prepared in accordance with relevant accounting and actuarial standards and practices. To maintain consistency in values, the Bank updates these values after each actuarial assessment of the fund (when the present value of accrued benefits would be calculated). In view of market volatility, commencing with the financial year ending 30 June 2003, the Bank will update the following values annually using most recently available information (including values obtained from unaudited fund financial statements). Net Market Value of Assets(4) Present Value of Accrued Benefits(5) Difference between Net Market of Assets and Present Value of Accrued Benefits Difference as a percentage of plan assets Value of Vested Benefits(5) (1) OSF $M 4,748 3,650 1,098 23% 3,650 (1) (2) (2) (3) CGSSS CBA (UK) SBS $M $M 351 260 91 26% 252 81 63 18 22% 56 CUKSPS SI&CRBS $M 243 288 (45) (19%) 253 $M 23 40 (17) (74%) 29 Total $M 5,446 4,301 1,145 21% 4,240 (1) (2) (3) (4) (5) The values for the OSF and CGSSS were the fund actuary’s estimates as at 31 March 2003. The values for the CBA(UK)SBS and CUKSPS were the fund actuary’s estimates as at 31 May 2003. The values for the SI&CRBS were the fund actuary’s estimates as at 30 June 2003. These values have been extracted from the latest available fund financial statements (which are unaudited). The Present Value of Accrued Benefits and Value of Vested Benefits for the OSF and CGSSS have been calculated in accordance with the Australian Accounting Standards AAS 25. For CBA(UK)SBS, CUKSPS and SI&CRBS, the Present Value of Accrued Benefits and Value of Vested Benefits have been calculated in accordance with relevant UK actuarial standards and practices. Contributions For the plans listed in the above table, entities of the Group contribute to the respective plans in accordance with the Trust Deeds following the receipt of actuarial advice. With the exception of contributions corresponding 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, the Bank does not intend to make contributions to the OSF until after consideration of the next actuarial assessment of the OSF as at 30 June 2003. No employer contributions were made to 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 CGSSS relating to salary sacrifice benefits from 1 July 1999. 151 Notes to the financial statements NOTE 40 Superannuation Commitments continued The Bank has been making contributions to the CUKSPS and SI&CRBS following receipt of the actuarial assessments of these funds. Events Subsequent to Balance Date On 31 July 2003, the Colonial UK Staff Pension Scheme (CUKSPS) and Stewart Ivory & Company Limited Retirement Benefits Scheme (SI&CRBS) were terminated and each plan’s assets, liabilities, member contributions the and arrangements transferred benefit to Commonwealth Bank of Australia (UK) Staff Benefits Scheme (CBA(UK)SBS). Since 31 July 2003, the Bank has continued to make its contributions in respect of former members of CUKSPS and SI&CRBS. An actuarial review of the merged fund is currently in progress and the Bank will amend its contributions to the merged fund in accordance with the Trust Deed following consideration of the results of this actuarial review. 152 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 Retail Investor 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 TD Waterhouse Holdings (Aust) Pty 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 CMG Asia Pty Limited CMG First State Investment Managers (Asia) Limited Colonial AFS Services Pty Limited Colonial Financial Corporation Limited Colonial First State Group Limited Avanteos Pty Limited ** Colonial First State Property Limited Colonial First Statutory Funds Management Limited CFS Managed Property Limited Colonial Holding Company Pty Limited Colonial Holding Company (No.2) Pty Limited Colonial Financial Management 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 153 Extent of Beneficial Interest if not 100% Incorporated in 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 Australia Notes to the financial statements NOTE 41 Controlled Entities continued Entity Name (b) Life Insurance and Funds Management continued Colonial Mutual Superannuation Pty Limited Colonial PCA Holdings Pty Limited Colonial PCA Services Limited Colonial Portfolio Services Limited Colonial Services Pty Limited Jacques Martin Pty Limited NEW ZEALAND (a) Banking ASB Group Limited ASB Holdings 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 ASB Group (Life) Limited Kiwi Income Properties Limited Kiwi Property Management Limited Sovereign Life NZ Limited Sovereign Services Corporation New Zealand Limited OTHER OVERSEAS (a) Banking CBA Asia Limited CBA (Europe) Finance Limited CBA (Delaware) Finance Incorporated CTB Australia Limited Senator House Investments (UK) Limited (1) Commonwealth Securities (Japan) Pty Limited SBV Asia 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 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 Waterloo & Victoria Limited Extent of Beneficial Interest if not 100% Incorporated in 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 New Zealand New Zealand New Zealand Singapore United Kingdom USA Hong Kong United Kingdom Japan Hong Kong Fiji Indonesia Bermuda Bermuda Hong Kong Hong Kong Singapore Fiji United Kingdom Fiji United Kingdom Fiji Fiji United Kingdom Cayman Islands 51 Non-operating and minor operating controlled entities and investment vehicles holding policyholder assets are excluded from the above list. (1) Wholly owned subsidiary of CBA International Finance Pty Limited. Small proprietory companies not requiring audit. Companies purchased during the year. * ** 154 Notes to the financial statements NOTE 42 Investments in Associated Entities and Joint Ventures EDS (Australia) Pty Limited GROUP 2003 2002 $M $M 225 238 Computer Fleet Management - 1 Cyberlynx Procurement Services PT Astra CMG Life Allday Enterprises Ltd 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 (1) Colonial First State Private Ltd Total - 12 36 12 - - 10 1 - 36 7 - - 1 - - 1 20 - 287 - 313 Extent of Ownership Interest % Principal Activities Balance Date 35 50 30 50 30 49 50 50 50 50 100 50 Information Technology Services Desktop IT Lease Management Procurement Services Life insurance - Indonesia Financial Services Life insurance - China Life insurance - Vietnam Direct investment in China Investment Management Investment Management Technology and Development Investment Management 31 December 30 June 30 June 31 December 31 December 31 December 31 December 30 June 30 June 31 March 31 December 30 June (1) Ownership interest increased from 50% as at 30 June 2002 to 100% on 3 March 2003. The Group also holds investments in the Colonial First State Property Trust Group and Colonial Mastertrust Wholesale equity funds (including the Fixed Interest, Australian Share, International Share, Property 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 Share of associates' profits (losses) Closing Balance NOTE 43 Standby Arrangements and Unused Credit Facilities (of controlled entities that are borrowing corporations) 2003 $M GROUP 2002 $M 1 - 1 (2) 1 (1) 313 6 (21) (9) (3) 1 287 400 8 (85) (9) - (1) 313 2003 $M Unused Available Available GROUP 2002 $M Unused 72 - - 72 23 - - 23 51 - - 51 19 - - 19 Financing arrangements accessible Bank overdraft Revolving credit Other 155 Notes to the financial statements NOTE 44 Related Party Disclosures Australian banks, parent entities of Australian banks and controlled entities of Australian banks have been exempted, subject to certain conditions, under an ASIC Order No. 98/110 dated 10 July 1998, from making disclosures of any loan made, guaranteed or secured by a bank to related parties (other than directors) and financial instrument transactions (other than shares and share options) of a bank where a director of the relevant entity is not a party and where the loan or financial instrument transaction is lawfully made and occurs in the ordinary course of banking business and either on an arm’s length basis or with the approval of a general meeting of the relevant entity and its ultimate parent entity (if any). The exemption does not cover transactions that relate to the supply of goods and services to a bank, other than financial assets or services. The Class Order does not apply to a loan or financial instrument transaction which any director of the relevant entity should reasonably be aware that if not disclosed would have the potential to adversely affect the decisions made by users of the financial statements about the allocation of scarce resources. A condition of the Class Order is that the Bank must lodge a statutory declaration, signed by two directors, with the Australian Securities and Investments Commission accompanying the annual report. The declaration provides confirmation that the bank has systems of internal control and procedures to provide assurance that any financial instrument transactions of a bank which are not entered into on an arm’s length basis are drawn to the attention of the Directors so that they may be disclosed. Directors The name of each person holding the position of Director of the Commonwealth Bank during the financial year is: (Chairman) (Deputy Chairman) (Managing Director) 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, AM S C Kay W G Kent, AO F D Ryan F J Swan B K Ward 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 to their Directors; and Non bank controlled entities to Directors (and their related parties) of those entities. The aggregate amount of such loans outstanding at (cid:1) 30 June 2003 was: (cid:1) $50,000 to Directors of the Bank (Mr F D Ryan) (2002: $50,000); and $3,348,236 (2002: $2,735,036). to Directors of related entities (cid:1) The aggregate amount of such loans received and repayments made was: Directors of the CBA Normal terms and conditions Directors of related entities Normal terms and conditions (1) Loans Received 2003 $ 2002 $ Repayments Made 2002 2003 $ $ - - - - 1,691,375 1,055,843 431,123 601,331 (1) Directors: G J Judd, G H Burrett, J M R Syme, C Seddon, M Hunter, R G Wilkie, C B Millett, S Swanson, M D Widjaja, S Vuetaki, C Kamea, M Naiyaga, J Wong and A V Villamor. 156 Notes to the financial statements NOTE 44 Related Party Disclosures continued Shares of Directors The aggregate number of shares acquired by, disposed of and held by Directors and their director related entities in the Commonwealth Bank during the financial year ended 30 June 2003, were: Director J T Ralph J M Schubert D V Murray N R Adler R J Clairs A B Daniels C R Galbraith S C Kay W G Kent F D Ryan F J Swan B K Ward Shares Disposed Of Ordinary (350,000) Held 30 June 2002 Ordinary 14,789 12,602 66,638 7,825 11,153 13,718 5,462 - 8,822 5,160 3,051 3,175 Shares Acquired Ordinary 6,550 1,826 514,308 811 774 1,417 1,117 2,184 886 775 987 884 Held 30 June 2003 Ordinary 21,339 14,428 230,946 8,636 11,927 15,135 6,579 2,184 9,708 5,935 4,038 4,059 Under the Australian Securities and Investments Commission Class Order referred to above, disclosure of financial instrument transactions regularly made by a bank is limited to disclosure of such transactions with a Director of the entity concerned. All such financial instrument transactions that have occurred between the banks and their Directors have been trivial or domestic and were in the nature of normal personal banking and deposit transactions. Transactions other than Financial Instrument Transactions of Banks All other transactions with Directors, director related entities and other related parties are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally involve the provision of financial and investment services by non bank controlled entities. Mr Ralph’s and Mr Daniels’ interests in investment funds managed by Colonial First State are detailed above. Additionally, Mr C R Galbraith is a partner in the law firm, Allens Arthur Robinson, which acted for the Bank in the provision of legal services during the financial year. The fees for these services were $3,795,665. All other 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, unit funds and superannuation monies. through All shares were acquired by Directors on normal terms and conditions or the Non-Executive Directors’ Share Plan (or in the case of Mr D V Murray the Equity Reward Plan or the previous Executive Option Plan). Mr D V Murray exercised 500,000 options during the year, leaving his total holdings of options at 1,250,000 under the Equity Reward Plan and the previous Executive Option Plan. (No further options will be granted under the Equity Reward Plan. The Executive Option Plan was discontinued in 2000.) Mr D V Murray was also awarded rights to 55,000 shares under the Equity Reward Plan during the year. He has a total holding of 97,000 shares under the Equity Reward Plan. Shares awarded under the Equity Reward Plan are registered in the name of the Trustee. The transfer of legal title to Mr D V Murray is subject to vesting conditions and is conditional on the Bank achieving a prescribed performance hurdle over a minimum three year period. For further details on the Non- Executive Directors’ Share Plan, Equity Reward Plan and the previous Executive Option Plan refer Note 29. In addition, Mr Ralph holds 100,000 units in Commonwealth Property Trust and 495,294 units in Colonial First State Hedge Fund. Both holdings are held beneficially. Mr Daniels beneficially holds 73,588 units in Colonial First Global Health and Biotech fund. A related party of Mr Daniels holds 59,818 units in Colonial First State Future Leaders Fund and 84,994 units in Colonial First State Imputation Fund. 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 that are controlled entities occur in the ordinary course of business of the banks on an arm’s length basis. 157 Notes to the financial statements NOTE 44 Related Party Disclosures continued 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. 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 2. 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 2003 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 C R Galbraith, AM Ms S C Kay** Mr W G Kent, AO Mr F D Ryan Mr F J Swan Ms B K Ward Executive Director Mr D V Murray (refer Note 46) Base Fee/Pay Committee Fee Salary Sacrifice(2) Superannuation(1) $ 216,000 108,000 72,000 72,000 72,000 72,000 25,863 72,000 72,000 72,000 72,000 $ 32,000 20,000 16,000 12,000 12,000 20,000 6,465 20,000 16,000 20,000 16,000 $ 62,000 32,000 22,000 21,000 21,000 23,000 8,082 23,000 22,000 23,000 22,000 $ 5,626* 11,520 7,920 7,560 7,560 8,280 2,910 8,280 7,920 8,280 7,920 Total Remuneration $ 315,626 171,520 117,920 112,560 112,560 123,280 43,320 123,280 117,920 123,280 117,920 * Mr.J T Ralph turned 70 during the 2002/03 financial year. The Bank’s SG obligations generally cease after a person attains age 70. ** Ms.S C Kay was appointed a Director on 5 March 2003. (1) (2) 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 financial year. Also refer Note 29 for further details. 158 Notes to the financial statements NOTE 45 Remuneration of Directors continued Directors' Retirement Allowance Scheme The Board has discontinued the retirement scheme which provided for benefits to be paid to non-executive directors. The terms of this scheme, which were approved by shareholders at the 1997 Annual General Meeting, allowed for a benefit on a pro rata basis to a maximum of four years’ total emoluments after twelve years’ service. The entitlements of the non- executive directors in office at the time of discontinuance will not be affected and are shown below. No new members will be admitted to the scheme from that time. Increase in accrued benefit in year $ Entitlement as at 30 June 2003 $ 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 C R Galbraith, AM Mr W G Kent, AO Mr F D Ryan Mr F J Swan Ms B K Ward Ms S C Kay (2) 127,635 102,537 34,867 44,194 103,796 (1) 104,132 (1) 104,132 (1) 109,074 (1) 46,924 53,672 - (1) (2) First year of entitlement accumulated for three years service Appointed as a Director after closure of scheme 1,160,000 577,260 395,342 145,800 103,796 104,132 104,132 109,074 213,657 301,389 - Total amount received or due and receivable by executive and non executive Directors (includes accumulated benefits due to Directors who retired during the year) 3,998,811 8,308,940 The number of executive and non-executive Directors whose remuneration fell within these bands was: 2003 $ BANK 2002 $ Remuneration (Dollars) $40,001 - $49,000 $100,001 - $110,000 $110,001 - $120,000 $120,001 - $130,000 $150,001 - $160,000 $170,001 - $180,000 $290,001 - $300,000 $310,001 - $320,000 $2,510,001 - $2,520,000 $6,990,001 - $7,000,000 Number 1 - 5 3 - 1 - 1 1 - 12 2003 $ Number - 5 3 - 1 - 1 - - 1 11 GROUP 2002 $ Total amount received or due and receivable by executive and non executive Directors of the Bank and controlled entities 10,133,461 15,804,263 159 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 reporting directly to the Chief Executive Officer, who were officers of the Bank and the Group in the year ended 30 June 2003. The table does not include individuals who are not direct reports to the Chief Executive Officer, but whose incentive based remuneration in any given year is in excess of that received by a member of the senior executive team. Senior Executive Team Name & Position Base Pay (1) Bonus in respect of this year (2) Superannuation (3) Other Compensation (4) Total Remuneration Paid in Cash $ 1,625,000 $ 375,000 Vested in CBA Shares $ 375,000 $ 131,625 $ 13,000 $ 2,519,625 815,616 262,500 262,500 58,724 313,000 1,712,340 870,000 240,000 240,000 67,500 13,000 1,430,500 820,000 217,500 217,500 132,300 13,000 1,400,300 540,000 185,000 185,000 66,802 13,000 989,802 560,000 160,000 160,000 40,320 13,000 933,320 240,411 - - 63,519 1,204,795 1,508,725 D V Murray Chief Executive Officer S I Grimshaw Group Executive, Investment & Insurance Services M A Katz Group Executive, Premium Financial Services M J Ullmer Group Executive, Institutional & Business Services G L Mackrell Group Executive, International Financial Services A R Cosenza Group Executive, Office of CEO Retired Executive P L Polson Group Executive, Investment & Insurance Services(5) (1) (2) (3) (4) (5) Base pay reflects amounts paid in the year ending 30 June 2003 and is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles. Bonuses paid are for the year ending 30 June 2003. The Group has a vesting (deferral) arrangement for most executives. 50% of the bonus payment is paid in cash and the remaining 50% is deferred and vested in the Bank’s shares. Half of the shares will vest after one year (in 2004) and half will vest after two years (in 2005). Generally shares are only received if the executive is still in the employ of the Bank on the relevant dates. The Bank is currently not contributing to the Officers’ Superannuation Fund or to the Colonial Group Staff Superannuation Scheme – refer Note 40. However, the notional cost of superannuation has been determined on an individual basis for each executive. Other compensation includes, where applicable, car parking (including FBT), accommodation (including FBT), commencement payments, retirement allowances, contractual and other payments. Retired 26 October 2002. 160 Notes to the financial statements NOTE 46 Remuneration of Executives continued The following table shows the number of shares granted as well as the amortisation of unvested shares and options for the year ending 30 June 2003: Name & Position D V Murray Chief Executive Officer S I Grimshaw Group Executive, Investment & Insurance Services M A Katz Group Executive, Premium Financial Services M J Ullmer Group Executive, Institutional & Business Services G L Mackrell Group Executive, International Financial Services A R Cozenza Group Executive, Office of CEO Retired Executive P L Polson Group Executive, Investment & Insurance Services(2) Number of Shares granted during the year ended 30 June 2003(1) No. 110,000 Amortisation for the year ended 30 June 2003 of unvested shares and options allocated in fiscal years 2001, 2002 and 2003 Share Grants (1) $ 667,973 Option Grants (1) $ 412,347 39,000 48,000 48,000 29,500 29,500 65,189 174,527 168,324 89,830 85,792 232,565 383,601 383,601 220,910 220,161 - 59,526 78,698 (1) (2) Since 2002/03, shares only have been allocated under the Equity Reward Plan. Shares are purchased on-market at the current market price and the cost of the shares acquired is expensed against the Profit & Loss account over a 3 year period. No consideration is payable by the executive for the grant of shares and the vesting of the executive’s legal title to the executive is conditional on the Bank achieving the prescribed performance hurdle. Option Grants previously awarded under the Equity Reward Plan were a right to subscribe for ordinary shares at an exercise price which was 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). No options have been granted since 2001/02. The prescribed performance hurdle for Options and Shares issued prior to 2002/03 was – (cid:1) the Bank’s Total Shareholder Return (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 a comparator group of companies, 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 within this period the Options will lapse and entitlement to Shares will be forfeited. (cid:1) In relation to Reward Shares granted from 2002/03 onwards, a tiered vesting scale was introduced so that 50% of allocated shares vest if the Bank's Total Shareholder Return is equal to the median return of the comparator group, 75% vest at the 67th percentile and 100% when the Bank's return is in the top quartile with a linear relationship between the percentiles. Where the rating is at least at the 50th percentile on the third anniversary of the grant, the shares will vest at a time nominated by the executive, within the trading windows, over the next two years. The vesting percentage will be at least that achieved on the third anniversary of the grant and the executive will be able to delay vesting until a subsequent half yearly window prior to the fifth anniversary of the grant. The vesting percentage will be calculated by reference to the rating at that time. Where the rating is below the 50th percentile on the third anniversary of grant, the shares can still vest if the rating reaches the 50th percentile prior to the fifth anniversary, but the maximum vesting will be 50%. Options and Shares previously allocated under the Equity Reward Plan will continue until they vest upon the prescribed performance hurdles being met or they lapse. The amortisation of Options and Shares disclosed above is calculated as follows – Options – Calculated using the ‘fair value’ of all outstanding (i.e. currently unexercisable) Options granted in fiscal years 2001 and 2002 (plus second tranche of Options granted to the CEO in fiscal year 2000). The ‘fair value’ (as previously disclosed for US GAAP purposes) is derived using a Black-Scholes valuation discounted by 50% for the probability of not meeting the performance hurdle. The annualised equivalent of the ‘fair value’ in respect of each grant has been apportioned on a straight line basis over the period from the Commencement Date until the first possible vesting date – a period of 37 months (49 months in respect of the second tranche of Options granted to the CEO in fiscal year 2000). The first tranche of Options granted to the CEO in fiscal year 2000 as well as to other executives have not yet become exercisable but have passed the first possible vesting date and are not included in the values calculated. Shares – Calculated using the market value at the Commencement Date of all outstanding (i.e. currently unvested) entitlements to Shares granted in fiscal years 2001, 2002 & 2003 discounted by 50% for the probability of not meeting the performance hurdle. The annualised equivalent of the ‘fair value’ in respect of each grant has been apportioned on a straight line basis over the period from the Commencement Date until the first possible vesting date – a period of 37 months. For further details on the Equity Reward Plan, refer Note 29. Retired 26 October 2002. 161 Notes to the financial statements NOTE 46 Remuneration of Executives continued The following table shows the number of executives whose remuneration (excluding Long Term Incentive entitlements) fell within the stated bands: Remuneration (Dollars) $160,000 - $169,999 $250,000 - $259,999 $310,000 - $319,999 $330,000 - $339,999 $390,000 - $399,999 $400,000 - $409,999 $420,000 - $429,999 $430,000 - $439,999 $460,000 - $469,999 $470,000 - $479,999 $490,000 - $499,999 $530,000 - $539,999 $560,000 - $569,999 $570,000 - $579,999 $610,000 - $619,999 $650,000 - $659,999 $710,000 - $719,999 $740,000 - $749,999 $760,000 - $769,999 $780,000 - $789,999 $790,000 - $799,999 $810,000 - $819,999 $820,000 - $829,999 $870,000 - $879,999 $880,000 - $889,999 $930,000 - $939,999 $980,000 - $989,999 $1,100,000 - $1,109,999 $1,110,000 - $1,119,999 $1,200,000 - $1,209,999 $1,220,000 - $1,229,999 $1,260,000 - $1,269,999 $1,370,000 - $1,379,999 $1,380,000 - $1,389,999 $1,400,000 - $1,409,999 $1,430,000 - $1,439,999 $1,500,000 - $1,509,999 $1,640,000 - $1,649,999 $1,650,000 - $1,659,999 $1,710,000 - $1,719,999 $1,760,000 - $1,769,999 $1,960,000 - $1,969,999 $2,500,000 - $2,509,999 $3,590,000 - $3,599,999 $6,210,000 - $6,219,999(1) $6,990,000 - $ 6,999,999 Total number of executives BANK 2002 Number - - 1 1 1 - - 1 - 1 1 1 1 - 1 1 1 - 1 1 1 1 - 1 1 - - - 1 2 - 1 1 1 - - - - 1 - 1 1 - 1 - 1 28 2003 Number 1 * 2 * - 1 - 1 1 * - 1 1 * - - - 2 1 - - 1 - - - - 4 - - 2 1 1 1 - 1 - - - 1 1 1 * 1 - 1 - - 1 - 1 * - 29 GROUP 2002 Number - - 1 1 1 - - 1 - 1 1 1 1 - 1 1 1 - 1 1 1 1 - 1 1 - - - 1 2 - 1 1 1 - - - - 1 - 1 1 - 1 - 1 28 2003 Number 1 * 2 * - 1 - 1 1 * - 1 1 * - - - 2 1 - - 1 - - - - 4 - - 2 1 1 1 - 1 - - - 1 1 1 * 1 - 1 - - 1 - 1 * - 29 162 Notes to the financial statements NOTE 46 Remuneration of Executives continued 2003 $ GROUP 2002 $ 2003 $ BANK 2002 $ Total amount received or due and receivable by executives (includes accumulated benefits due to executives who retired, resigned or were retrenched during the year). 31,306,809 33,973,600 31,306,809 33,973,600 (1) * Includes a payment of $3.39m to a former Colonial First State Executive for an incentive payment in respect of the year ended 30 June 2002. This amount was not included in the equivalent table for the year ended 30 June 2002 as the payment was not finalised until after the signing of the June 2002 Financial Statement. This amount has now been included in the above bands for the current year. Additionally, the executive received a $26.54m payment from a provision raised at the acquisition of Colonial for liabilities relating to the conditions in the contract with that company. Includes termination payments to 7 retired, resigned, or retrenched executives during the 2002/2003 financial year. In addition to remuneration shown above, contractual payments have been made or accrued as a consequence of contracts acquired with the Colonial acquisition. An executive is a person who is directly accountable and responsible to the Chief Executive Officer, 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. The Group’s Policy in respect of remuneration of executives is outlined in Corporate Governance on page 39. 163 Notes to the financial statements NOTE 47 Statements of Cash Flow GROUP 2003 $M 2002 $M 2001 $M 2003 $M BANK 2002 $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 1,492 641 2,528 (3,233) 1,428 2,056 495 2,709 (2,762) 2,498 1,048 544 458 (2,012) 38 1,332 232 1,943 (3,230) 277 1,873 306 1,470 (2,741) 908 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 (cid:1) Accounts, borrowings and repayments on loans, advances and other receivables; Note (c) Reconciliation of Operating Profit After Income Tax to Net Cash Provided by Operating Activities Net profit after income tax Decrease/(increase) in interest receivable Increase/(decrease) in interest payable Net (increase)/decrease in trading securities Net (gain)/loss on sale of investment securities (Gain)/loss on sale of property plant and equipment Charge for bad and doubtful debts Depreciation and amortisation (Decrease)/increase in other provisions Increase/(decrease) in income taxes payable (Decrease)/increase in deferred income taxes payable (Increase)/decrease in future income tax benefits (Increase)/decrease in accrued fees/reimbursements receivable (Decrease)/increase in accrued fees and other items payable 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 Change in policy liabilities Other assets Other Net Cash Provided by / (used in) Operating Activities (cid:1) (cid:1) Sales and purchases of trading securities; and Proceeds from and repayment of short term debt issues. 2003 $M 2,018 (78) 62 (2,484) 9 (22) 305 450 (15) (234) (166) 100 (94) 6 6 (269) 2002 $M 2,656 210 (60) (1,159) (78) (12) 449 451 (120) 443 (522) 69 (17) (162) 18 723 GROUP 2001 $M 2,412 159 (278) (262) (56) (25) 385 488 (692) (371) (97) 209 (194) 136 24 (186) 2003 $M 2,099 (273) 103 (1,814) 9 (13) 266 269 (7) (137) 10 (3) 143 (73) 6 (246) BANK 2002 $M 2,665 152 (146) (1,353) (295) (11) 405 272 (146) 465 (225) 49 (11) (72) 17 723 245 (2,056) - 92 (2,125) (477) (1,112) - 693 1,993 (474) - - - 400 - (21) 257 318 1,835 - - - (245) 2,244 Note (d) Non Cash Financing and Investing Activities Shares issued under the Dividend Reinvestment Plan for 2001 were $313 million (2000: $253 million) and shares issued under the Employee Share Plans for 2002 were $39 million (2001: $40 million; 2000: $24 million). Acquisition of entity by means of an equity issue nil (2000: $9,274 million). 164 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 Pre-acquisition dividend received Fair value of net tangible assets acquired Cash & liquid assets Receivables from other financial institutions Trading securities Loans, advances and other receivables Life insurance investment assets Property, plant and equipment Other assets Deposits and public borrowings Payables due to other financial institutions Other provisions Life insurance policy liabilities Debt issues Bills payable and other liabilities 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 Note (f) Disposal of Controlled Entities Disposal proceeds Cash receipt on disposal Fair value of net tangible assets disposed Net book value of assets disposed Loss on sale Inflow of cash from disposal Cash proceeds Note (g) Financing Facilities Standby funding lines are immaterial. 165 2003 $M 2002 $M 2001 $M 71 - 2 73 29 - - - - - 29 - - (8) - - (33) - 17 26 30 73 71 - (29) 42 56 418 1 - - - 418 57 - - - - - - - - - - - - - - - 57 - 57 4 26 501 2,812 76 42 109 (2,108) (601) (3) (75) (599) (64) (12) 108 51 259 418 56 418 1 - (4) 414 - 57 2003 $M 2002 $M 2001 $M 33 33 - - - - 65 (32) 33 - - - - - - 33 33 - - - - 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 trading market as instruments 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 would 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. information with Because of the wide range of valuation techniques and the numerous estimates that must be made, it may be difficult to make reasonable comparisons of the Bank’s net fair value 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 value amount should in no way be construed as representative of the underlying value of the Commonwealth Bank of Australia. that of other 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 5,575 7,066 10,435 11,036 160,347 13,197 27,835 23 23,094 140,974 7,538 13,197 23,862 30,629 18,822 6,025 - 2003 Net Fair Value $M 5,575 7,066 10,435 11,187 160,441 13,197 27,835 23 23,094 Carrying Value $M 6,044 7,728 8,389 10,766 147,074 12,517 30,109 89 19,961 141,186 7,538 13,197 23,862 30,356 18,819 6,350 132,800 7,864 12,517 25,917 23,575 17,184 5,427 353 - 2002 Net Fair Value $M 6,044 7,728 8,389 10,851 148,378 12,517 30,109 89 19,751 132,879 7,864 12,517 25,917 24,462 17,203 5,632 (394) 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. 166 Notes to the financial statements NOTE 48 Disclosures about Fair Value of Financial Instruments continued For those debt issues where quoted market prices were not available, discounted cash flow and option pricing models were used, utilising a yield curve appropriate to the expected remaining maturity of the instrument. 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 that 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 The net trading and Other off-balance sheet financial instruments fair value of investment derivative contracts (foreign exchange contracts, currency swaps, exchange rate futures, currency options, forward rate agreements, interest rate swaps, interest rate futures, interest rate options), were obtained from quoted market prices, discounted cash flow models or option pricing models as appropriate. The fair value of these instruments is disclosed in Note 39. The net fair value of impaired loans was calculated by discounting expected cash flows using a rate that 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 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 Included in income, fees receivable, this category are in associates of investments unrealised $287 million (2002: $313 million), and excess of net market value over net assets of life insurance controlled entities of $5,540 million (2002: $5,656 million), where the carrying amount to be a reasonable estimate of net fair value. is considered 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. 167 Directors’ Declaration In accordance with a resolution of the directors of the Commonwealth Bank of Australia, the directors declare that: (a) (b) (c) the financial statements and notes thereto comply with Accounting Standards and in their opinion are in accordance with the Corporations Act 2001; the financial statements and notes thereto give a true and fair view of the Bank's and the Group's financial position as at 30 June 2003 and of their performance for the year ended on that date; and in the opinion of the directors, 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 20 August 2003 D V Murray Managing Director and Chief Executive Officer 168 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 (the Bank) for the year ended 30 June 2003 included on the Bank’s web site. The Bank’s directors are responsible for the integrity of the Bank’s web site. We have not been engaged to report on the integrity of the 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 The financial report and directors’ responsibility The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors’ declaration for Commonwealth Bank of Australia (the Bank) and the consolidated Group, for the year ended 30 June 2003. The consolidated Group comprises both the Bank and the entities it controlled during that year. The directors of the Bank are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of the Bank and the consolidated Group, and that complies with Accounting Standards in Australia, in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. Audit approach We conducted an independent audit of the financial report in order to express an opinion on it to the members of the Bank. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards in Australia, and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the Bank’s and the consolidated Group’s financial position, and of their performance as represented by the results of their operations and cash flows. We formed our audit opinion on the basis of these procedures, which included: § § examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report. These and our other procedures did not include consideration or judgment of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the Bank. Independence We are independent of the Bank, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. In addition to our audit of the financial report, we were engaged to undertake the services disclosed in the notes to the financial statements. The provision of these services has not impaired our independence. 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 financial position of the Bank’s and the consolidated Group’s at 30 June 2003 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory financial reporting requirements in Australia. Ernst & Young Sydney 20 August 2003 S J Ferguson Partner 169 Shareholding Information Top 20 Holders of Fully Paid Ordinary Shares as at 19 August 2003 Rank Name of Holder Number of Shares 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 JP Morgan Nominees Australia Ltd National Nominees Limited Westpac Custodian Nominees Ltd Citicorp Nominees Pty Limited RBC Global Services Australia Nominees Pty Limited Commonwealth Custodial Services Limited AMP Life Limited ANZ Nominees Limited Queensland Investment Corporation Cogent Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Westpac Financial Services Ltd Invia Custodian Pty Limited Bond Street Custodians Limited CSS Board & PSS Board Australian Foundation Investment Company Limited Government Superannuation Office Gladiator Custodian Pty Ltd UBS Warburg Private Clients Nominees Pty Ltd NRMA Nominees Pty Limited 125,476,803 83,086,262 79,115,602 55,570,707 38,330,704 20,041,919 17,871,153 16,032,155 13,308,399 11,837,661 7,390,996 5,932,044 4,832,697 4,523,108 4,470,337 4,195,245 3,624,656 3,582,953 3,410,467 3,176,111 % 10.01 6.63 6.31 4.43 3.06 1.60 1.43 1.28 1.06 0.94 0.59 0.47 0.39 0.36 0.36 0.33 0.29 0.29 0.27 0.25 The twenty largest shareholders hold 505,809,979 shares which is equal to 40.35% of the total shares on issue. Stock Exchange Listing The shares of the Commonwealth Bank of Australia are listed on the Australian Stock Exchange under the trade symbol CBA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers, generally under the abbreviation of CBA or C’wealth Bank. The Bank does not have a current on- market buyback of its shares. Directors Shareholdings as at 20 August 2003 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, AM S C Kay W G Kent, AO F D Ryan F J Swan B K Ward Options 1,250,000 Shares 21,339 14,428 230,946 8,636 11,927 15,135 6,579 2,184 9,708 5,935 4,038 4,059 Mr Murray has a total holding of 97,000 shares under the Equity Reward Plan, registered in the name of the Trustee. In addition, Mr Ralph beneficially holds 100,000 units in Commonwealth Property Trust and 495,294 units in Colonial First State Hedge Fund and Mr Daniels beneficially holds 73,588 units in Colonial First Global Health and Biotech fund. A related party of Mr Daniels holds 59,818 units in Colonial First State Future Leaders Fund and 84,994 units in Colonial First State Imputation Fund. 170 Shareholding Information Guidelines for Dealings by Directors in Shares The restrictions imposed by law on dealings by Directors in the securities of the Bank have been supplemented by the Board of Directors adopting guidelines which further limit any such dealings by Directors, their spouses, any dependent child, family company and family trust. The guidelines provide that, in addition to the requirement that Directors not deal in the securities of the Bank or any related company when they have or may be perceived as having relevant unpublished price sensitive information, Directors are only permitted to deal within certain periods. Further, the guidelines require that Directors not deal on the basis of considerations of a short term nature or to the extent of trading in those securities. Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 19 August 2003 Range Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001-Over Total Less than marketable parcel of $500 578,272 146,784 12,888 5,450 265 743,659 14,461 77.76% 192,877,335 19.74% 295,759,711 1.73% 89,215,343 0.73% 107,083,627 571,111,021 0.04% 100% 1,256,047,037 95,327 15.36% 23.55% 7.10% 8.53% 45.47% 100% Voting Rights Trust Preferred Securities 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. If a member is present in person, any proxy or attorney of that member is not entitled to vote. If more than one official representative or attorney is On 6 August 2003 the Bank, via a wholly owned entity of the Bank, issued USD550 million (AUD824 million) of Trust Preferred Securities, subject to a limited guarantee by the Bank, in the US capital markets. At 19 August 2003, there were 550,000,000 Trust Preferred Securities outstanding held by 32 investors. No investor held more than 20% of the issue. present for a member: (cid:1) (cid:1) none of them is entitled to vote on a show of hands; and on poll only one official representative may exercise the member’s voting rights and the vote of each attorney shall be of no effect unless each is appointed to represent a specified proportion of the member’s voting rights, not exceeding in aggregate 100%. If a member appoints two proxies and both are present at the meeting and the appointment does not specify the proportion or number of the member’s votes each proxy may exercise: (cid:1) neither proxy shall be entitled to vote on a show of hands; and on a poll each proxy may exercise one half of the member’s votes. (cid:1) 171 Shareholding Information Top 20 Holders of Preferred Exchangeable Resettable Listed Shares (PERLS) as at 19 August 2003 Rank Name of Holder Number of Shares 1 2 3 4. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Commonwealth Custodial Services Limited Westpac Custodian Nominees Ltd RBC Global Services Australia Nominees Pty Limited Invia Custodian Pty Limited ANZ Executors & Trustee Company Limited Tower Trust Limited UBS Warburg Private Clients Nominees Pty Ltd JP Morgan Nominees Australia Ltd Boxall Marine Pty Ltd Questor Financial Services Limited Bond Street Custodians Limited AMP Life Limited Brencorp No 11 Pty Limited Livingstone Investments (NSW) Pty Limited Ms Thelma Joan Martin-Weber Perpetual Trustee Co Ltd (Hunter) Albert Investments Pty Limited Felden Pty Ltd Mr Edward Furnival Griffin + Ms Deborah Ann Griffin Marbear Holdings Pty Limited Mrs Fay Cleo Martin-Weber Professional Indemnity Insurance Company of Australia Pty Ltd Swinburne University of Technology 286,180 104,460 61,036 57,275 44,187 32,763 29,530 25,344 25,000 24,319 24,169 23,316 15,756 15,000 12,500 12,014 10,000 10,000 10,000 10,000 10,000 10,000 10,000 % 8.18 2.98 1.74 1.64 1.26 0.94 0.84 0.72 0.71 0.69 0.69 0.67 0.45 0.43 0.36 0.34 0.29 0.29 0.29 0.29 0.29 0.29 0.29 The twenty three largest PERLS shareholders hold 862,849 shares which is equal to 24.66% of the total shares on issue. Twenty three PERLS shareholders are disclosed in the above table due to a number of shareholders having the same number of PERLS. 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): 19 August 2003 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 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 Commonwealth Bank PERLS; that affects rights attached to (cid:1) (cid:1) (cid:1) meeting of circumstances: (cid:1) Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 20,555 244 22 13 2 20,836 4 (cid:1) (cid:1) (cid:1) (cid:1) 98.65% 1.17% 0.11% 0.06% 0.01% 100% 2,119,134 487,683 174,329 328,214 390,640 3,500,000 5 60.55 13.93 4.98 9.38 11.16 100.00 On a proposal to wind up the Bank; 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) (cid:1) 172 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 PERLS. Vietnam CBA Representative Office Suite 202-203A The Central Building 31 Hai Ba Trung, Hanoi Telephone: (84 4) 826 9899 Facsimile: (84 4) 824 3961 Chief Representative SRJ Holden Bao Minh CMG Life Insurance Co Ltd Level 3, Saigon Riverside Office Center 2A-4A Ton Duc Thang District 1, Ho Chi Minh City Telephone: (84 4) 829 1919 Facsimile: (84 4) 829 3131 General Director R Carkeet Americas United States of America CBA Branch Office Level 17, 599 Lexington Avenue New York NY 10022 Telephone: (1 212) 848 9200 Facsimile: (1 212) 336 7725 Executive Vice President, Head of North America R Day Europe United Kingdom CBA Branch Office Senator House 85 Queen Victoria Street London EC4V 4HA Telephone: (44 20) 7710 3999 Facsimile: (44 20) 7710 3939 Regional General Manager Europe & North America A de Torguat First State Investments (UK) Limited 3rd Floor, 30 Cannon Street London EC4M 6YQ Telephone: (44 20) 7332 6500 Facsimile: (44 20) 7332 6501 Chief Executive Officer, First State International T Waring Edinburgh 23 St Andrew Square Edinburgh EH2 1BB Telephone: (44) 131 473 2200 Facsimile: (44) 131 473 2222 Chief Executive Officer, First State International T Waring International Representation Australia Head Office Commonwealth Bank of Australia 48 Martin Place, Sydney NSW 1155 Telephone: (612) 9378 2000 New Zealand ASB Bank Limited Level 28 ASB Bank Centre 135 Albert Street, Auckland Telephone: (649) 377 8930 Facsimile: (649) 358 3511 Managing Director H Burrett Sovereign Group Limited 33-45 Hurstmere Road Takapuna, Auckland Telephone: (649) 487 9000 Facsimile: (649) 486 1913 Managing Director S Swanson Asia Pacific Fiji Islands Colonial National Bank Colonial Life Limited 3 Central Street, Suva Telephone: (679) 3214 400 Facsimile: (679) 3303 448 Managing Director M Walsh China CBA Representative Office 2909 China World Towers 1 1 Jian Guo Men Wai Avenue Beijing 100004 Telephone: (86 10) 6505 5350 Facsimile: (86 10) 6505 5354 Chief Representative Y T Au CBA Representative Office Room 4007 Bund Center 222 Yan An Road East Shanghai 200002 China Telephone: (86 21) 6335 1686 Facsimile: (86 21) 6335 1766 Chief Representative Y T Au China Life – CMG Asia Life Assurance Co Ltd 21st Floor China Insurance Building 166 Lujiazui Dong Road Shanghai 200120 Telephone: (86 21) 5882 5245 Facsimile: (86 21) 6887 5720 General Manager C Lee Hong Kong 15th Floor, Chater House 8 Connaught Place, Central Hong Kong Telephone: (852) 2844 7500 Facsimile: (852) 2845 9194 Regional General Manager Asia SRJ Holden CMG Asia Regional Office 12th Floor CMG Asia Tower The Gateway, 15 Canton Road Kowloon Tsimshatsui Telephone: (852) 2861 4006 Facsimile: (852) 2520 1119 Regional Managing Director P Fancke First State Investments (Hong Kong) Limited Level 6 Three Exchange Square 8 Connaught Place, Central Hong Kong Telephone: (852) 2846 7555 Facsimile: (852) 2868 4742/4783 Chief Executive Officer, First State International T Waring Indonesia PT Bank Commonwealth Ground Flr, Wisma Metropolitan II Jl. Jendral Sudirman Kav. 29-31 Jakarta 12920 Telephone: (6221) 5296 1222 Facsimile: (6221) 5296 2293 President Director S Brewis-Weston PT Astra CMG Life 11/F Sentra Mulia Jl. H.R. Rasuna Said, Kav X-6 No 8 Jakarta 12940 Telephone: (6221) 250 0385 Facsimile: (6221) 250 0389 President Director G Coates Japan CBA Branch Office 8th Floor Toranomon Waiko Building 5-12-1 Toranomon Minato-ku, Tokyo 105-0001 Telephone: (813) 5400 7280 Facsimile: (813) 5400 7288 General Manager L Xia Singapore CBA Branch Office 3 Temasek Avenue #20-01 Centennial Tower Singapore 039190 Telephone: (65) 6349 7000 Facsimile: (65) 6224 5812 General Manager R Buchan First State Investments (Singapore) 3 Temasek Avenue #20-01 Centennial Tower Singapore 039190 Telephone: (65) 6538 0008 Facsimile: (65) 6538 0800 Chief Executive Officer, Singapore L Mann 173 This page has been left blank intentionally 174 This page has been left blank intentionally 175 This page has been left blank intentionally 176 Contact Us www.commbank.com.au 13 2221 General Enquiries For your everyday banking 13 1998 Business Line For a full range of business including paying bills using BPAY banking solutions. Available from our automated service is available 8 am to 8 pm, Monday to Friday 24 hours a day, 365 days a year. From overseas call +61 13 2221. Operator assistance is available between 8 am and 8 pm, Monday to Friday 13 2224 Home Loans & Investment Home Loans To apply for a new home 13 2015 Commonwealth Financial Services For enquires on retirement and superannuation products, or managed investments. Available from 8 am to 8 pm (Sydney time), Monday to Friday. Unit prices are available 24 hours a day, loan/investment home loan 365 days a year or to maintain an existing loan. Available from 8 am to 10 pm, 365 days a year 13 1519 CommSec (Commonwealth Securities) Available from 8 am to 7 pm (Sydney time), Monday to Friday. CommInsure – For all your general insurance needs call 13 2423 8 am to 8 pm (Sydney time), Monday to Friday – or visit www.comminsure.com.au – For general claims assistance call 13 2420, 24 hours a day, 365 days a year. CommSec provides the information – For all your life insurance needs and tools to make smart investment easy, accessible and affordable for all Australians. By phone or Internet at www.commsec.com.au 1800 240 889 Telephone Typewriter Service A special telephone banking service for our hearing and speech impaired call 13 1056 8 am to 8 pm (Sydney time), Monday to Friday – or visit www.comminsure.com.au Internet Banking You can apply for a home loan or credit card on the internet by visiting our website at www.commbank.com.au customers. The service covers all available 24 hours a day, the services available on 13 2221. 365 days a year Available from 8 am to 8 pm, Monday to Friday 1800 011 217 Lost or Stolen Cards To report a lost or stolen card 24 hours a day, 365 days a year Do your everyday banking on our internet banking service NETBANK at www.commbank.com.au/netbank available 24 hours a day, 365 days a year To apply for access to NETBANK, call 13 2828 between 8 am and 8 pm (Sydney time), Monday to Friday Corporate Directory Registered Office Level 7, 48 Martin Place Sydney NSW 1155 Telephone (02) 9378 2000 Facsimile (02) 9378 3317 Company Secretary JD Hatton Shareholder Information www.commbank.com.au Share Registrar ASX Perpetual Registrars Limited Locked Bag A14 Sydney South NSW 1232 Telephone (02) 8280 7199 Facsimile (02) 9261 8489 Freecall 1800 022 440 Internet www.asxperpetual.com.au Email registrars@asxperpetual.com.au Telephone numbers for overseas shareholders New Zealand 0800 442 845 United Kingdom 0845 769 7502 Fiji 008 002 054 Other International 612 8280 7199 Australian Stock Exchange Listing CBA Annual Report To request a copy of the annual report please call (02) 9378 3229 e d i a l e d A — e n r u o b l e M — y e n d y S , n e r a L c M + r e l l i M g n o r t s m r A y b d e c u d o r P Which bank? C O M M O N W E A L T H B A N K O F A U S T R A L I A A N N U A L R E P O R T 2 0 0 3 2003 Commonwealth Bank of Australia ACN 123 123 124 Annual Report 2003 

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