Commonwealth Bank of Australia
Annual Report 2004

Plain-text annual report

2004 Commonwealth Bank of Australia ACN 123 123 124 Annual Report 2004 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 A I A N N U A L R E P O R T 2 0 0 4 u a . m o c . m m a . w w w – 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 2004 Table of Contents Chairman's Statement.....................................................................................................................................................................3 Highlights ........................................................................................................................................................................................5 Banking Analysis.............................................................................................................................................................................9 Funds Management Analysis........................................................................................................................................................17 Insurance Analysis........................................................................................................................................................................21 Shareholder Investment Returns ..................................................................................................................................................24 Life Company Valuations ..............................................................................................................................................................25 Presentation of Financial Information ...........................................................................................................................................26 Integrated Risk Management........................................................................................................................................................27 Description of Business Environment ...........................................................................................................................................30 Corporate Governance .................................................................................................................................................................34 Directors' Report ...........................................................................................................................................................................41 Five Year Financial Summary.......................................................................................................................................................49 Financial Statements ....................................................................................................................................................................52 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……………………………………………………………………………………..………………………………169 Independent Audit Report………………………………………………………………………………………...……………………...170 Shareholding Information…………………………………………………………………………………………………………………171 International Representation……………………………………………………………………………………………………………..175 Chairman’s Statement The Bank experienced another strong year with the Australian economy continuing to perform well. Housing lending remained buoyant for most of the year with early signs of some slowing towards the end of the year. Very low levels of corporate and personal defaults were favourable credit environment. experienced in a to an recovered which Investment markets funds the performance of improvement management and insurance businesses as well as contributing to an increase in the assessed value of the funds management business. the led in The Bank embarked on the three year Which new Bank program during the year, the successful execution of which is critical to the long term success of the Bank. So it is pleasing to be able to report that very good progress was made in the first year of the program in the achievement against the milestones set for the program. Results The Bank’s statutory net profit after tax for the year ended 30 June 2004 was $2,572 million, an increase of 28% over that earned in the prior financial year. Net profit from ordinary activities (“cash basis”) was $2,695 million, an increase of 5% over that earned in the prior year. This increase was achieved after expensing $749 million ($535 million after tax) on the Which new Bank program. Strong operating performances were recorded by all businesses, with the underlying profit after tax increasing by 15% to $3,078 million for the year. Underlying profit excludes the after tax impact of shareholder investment returns and the cost of initiatives, including Which new Bank. The banking result was driven by the continued good performance of the Australian and New Zealand lending operations, partly offset by an anticipated contraction funds management, recovery in funds flows was underpinned by strong international flows and the continued growth of business, FirstChoice, while performance improved across all regions. interest margin. insurance the net the for In in Loan asset quality strengthened during the year, reflecting the Bank’s ongoing, disciplined approach to risk management. Productivity improvement was evident across all businesses, particularly insurance and funds management. For more information on the company’s financial performance, please refer to the Highlights on page 5. Dividends and Capital Position At last year’s Annual General Meeting I informed shareholders that, although we would be charging the costs of the Which new Bank program against profit, we regarded that expenditure as being in the nature of an investment in the future of the Bank. I said that, for this reason, we would add back the after-tax cost of the program to the profit in determining the dividends for the year. This we did, and determined the total dividend out of the year’s profit would be $1.83 per share which represented 73.9% of the adjusted result and a 19% increase on the dividend for the prior year. The dividend of $1.83 per share continues the uninterrupted growth in the dividend rate since the Bank was privatised and listed as a public company twelve years ago. The final dividend of $1.04 per share, fully franked, will be paid on 24 September 2004 The Bank’s capital position remained strong throughout the year, sitting comfortably above the Bank’s target ranges and in conformance with the requirements of regulators. During the year, the Bank undertook a number of capital management initiatives that were well received by shareholders and which provide capital flexibility for the future. These included the issuance of hybrid capital and PERLS II, a $532 million share buyback, a $467 million share purchase plan, and a share sale facility for small shareholdings. These initiatives were in addition to the issue of new shares to the value of $389 million under the Dividend Reinvestment Plan during the year. Which new Bank As foreshadowed in last year’s annual report, the Which new Bank program was announced to the market in September 2003. Which new Bank is a three-year strategic program aimed at supporting the Bank’s vision to excel in customer service. The aim of the program is to provide better service to customers by engaged people using improved systems and simpler processes. The focus is very much on the training and motivating of people within the Bank and giving them the authority and accountability to be able to deliver excellence in service. They can only do this if they have the systems and processes that allow them to do it. Customers are beginning to notice differences and these differences will become more pronounced as the Which new Bank program is implemented. During the year, the Board has actively participated in activities that facilitate a better understanding of the prerequisites for strategic transformation. In September 2003, the Bank’s Directors spent five days touring the Bank’s branches, processing centres and call centres in Australia and New Zealand, gaining first hand experience of the Bank’s systems and processes. In May 2004, the Board was pleased to conduct its monthly Board meeting in Townsville, the Bank’s first regional branch in Australia. The Board will continue to be active in gaining first-hand knowledge of the operations of the Bank and its service standards throughout the duration of the program and beyond. Outlook The Global economy has improved noticeably, with an expectation of monetary tightening across the major economies in the near term. The Australian economy continues to perform well although growth in domestic spending has slowed as the construction sector loses some momentum. Consumer confidence is high while job security concerns are low and personal incomes are rising. Businesses should continue to benefit from sustained capital spending. High levels of spending on infrastructure are underway. the housing slowdown remain a key domestic issue, although the effects so far have been muted. The consequences of Subject to market conditions being maintained, the (cid:131) (cid:131) Bank is targeting: (cid:131) Growth (“EPS”) in cash Earnings Per Share exceeding 10% compound annual growth rate (“CAGR”) over the three year period to 30 June 2006, which is expected to be ahead of industry growth; Improvement in productivity between 4-6% CAGR over this period; and Growth in profitable market share across major product lines. Having in the determining the dividend as set out on page 113, and subject to no significant change in the Bank’s strategy and operating environment, the ratio of dividends per share to “cash” earnings is expected to be maintained at around the current level (that is, the ratio with Which new Bank costs added back). The Bank expects that the impact of expenses related to Which new Bank will be significantly lower going to increase. Accordingly, cash earnings should be significantly higher and we expect to increase the dividend per share each year. forward, and benefits will continue factors considered regard to Board Changes This coming Annual General Meeting will mark my retirement as Chairman and as a Director of the Bank. Mr Ross Adler has also signalled his intention to retire from the Board at that meeting. Mr Adler has been a committed and consistent valuable contributor to the deliberations of 3 Chairman’s Statement continued the Board since his appointment in 1990. He has served on the Audit, Remuneration and Risk Committees of the Board at various times and has always been a diligent member of those committees. There have been many changes in the Bank and in the financial services industry since I joined the Board in 1985 and since I became chairman in 1999. Early during my term on the Board the Bank was privatised and became a publicly listed company. There were other significant structural changes along the way, including the merger with the State Bank of Victoria and the acquisition of ASB Bank and Colonial Limited, all of which contributed to the strengthening of the competitive positioning of the Bank. During this time there has been considerable innovation as the Bank has diversified into new lines of wealth management businesses and led the introduction of banking technologies, such as telephone and internet internet broking, with CommSec now banking and servicing the greatest number of broking transactions in the market. in Currently, the Bank is engaged the most important change since its privatisation, with the Which new Bank program. The execution of this program is vital for the long term success of the Bank and it is pleasing, therefore, that such good progress has been made to date. It is an important underpinning of the Board’s commitment to achieving strong growth in all of the Bank’s businesses and in growing sustainable and reliable returns for shareholders. I have been privileged to serve on your Board and as Chairman for the last five years. I am confident that the Board is well positioned for the future under the capable chairmanship of John Schubert who will be succeeding me. I would like to take the opportunity to thank shareholders, customers and staff their continued support of the Bank. for John Ralph, AC Chairman 11 August 2004 3 Dividends The total dividend for the year is another record at 183 cents per share, an increase of 29 cents or 18.8% on the prior year. The dividend was determined after adding back the expenses related to the Which new Bank program which, although charged against profit, is regarded as an investment in determining the dividend to shareholders. As a result, the dividend payout ratio (“cash basis”) for the year is 89.1% (73.9% with Which new Bank costs added back). The dividend payment for the second half of the year is 104 cents per share (85 cents per share in the previous year). This dividend payment is fully franked and will be paid on 24 September 2004 to owners of ordinary shares at the close of business on 20 August 2004 (record date). Shares will be quoted ex-dividend on 16 August 2004. During the year, the Bank issued $201 million of shares to satisfy shareholder participation in the Dividend Reinvestment Plan (“DRP”) in respect of the final dividend for 2002/03 and $188 million in respect of the interim dividend for 2003/04. The Bank expects to issue around $250 million of shares in respect of the DRP for the final dividend for 2003/04. Highlights Financial Performance and Business Review The Bank’s net profit after tax (“statutory basis”) for the year ended 30 June 2004 was $2,572 million, an increase of 28% on the prior year’s result of $2,012 million. The current year’s result included an appraisal value uplift of $201 million, compared with a reduction in the appraisal value of controlled entities of $245 million for the previous year. The Bank posted a strong operating result for the year, with net profit after tax (“underlying basis”) up 15% to $3,078 million from $2,674 million for the year to 30 June 2003. Factors contributing to the growth in operating performance included: (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) life Insurance Continued strong home lending growth domestically and in New Zealand were the major contributors to the growth in lending asset balances, which increased 18% to $206 billion; Improved performance in Funds Management following positive investor sentiment in the market and higher assets under administration; Significantly stronger general and results; Cost control across the business, with operating expenses increasing only 3.5% during the year; A favourable credit environment, with very low levels of corporate and personal defaults; Initial benefits arising from the Which new Bank program, offset by Some margin compression, in line with the industry, with net interest margin down 14 basis points to 2.53%. The net profit after tax (“cash basis”) for the year was $2,695 million, an increase of 5% over the prior year. This result was achieved after absorbing $535 million (after tax) of incremental expenses in relation to the Which new Bank program. (cid:131) (cid:131) In addition, buoyant domestic and global equity markets led to investment returns on shareholders’ funds in Funds Management and Insurance increasing to $152 million (after tax) against $73 million in the prior year. Which new Bank Program The Bank has made excellent progress in the Which new Bank program announced to the market in September 2003, meeting all critical project milestones set for the year. Net benefits realised in 2004 of $237 million exceeded the market commitment of $200 million. Investment spend of $634 million for the twelve months was below the target of $660 million, however, total impact on 2004 profitability was slightly higher due mainly to lower levels of capitalisation. transformation of Focus during the 2005 financial year will be on the execution of several major IT projects, as well as a significant cultural the domestic operations. Following the successful pilot of the Bank’s new integrated customer service system, CommSee, in Tasmania, the roll out will commence progressively across the network as further development of the system is completed. Overall, the program remains on track to deliver a total annual net benefit of $900 million by 2006 and beyond, with a total investment of $1,480 million over the three years. More detail is included on page 7. 5 Highlights (continued) Contributions to Profit (after income tax) Banking Funds Management Insurance Net Profit after Income Tax ("underlying basis") Shareholder Investment Returns (after tax) Initiatives including Which new Bank (after tax) (1) Net Profit after Income Tax ("cash basis") Appraisal value uplift/(reduction) Goodwill amortisation Net Profit after Income Tax ("statutory basis") Shareholder Summary Dividends per share - fully franked (cents) Dividend cover - cash (times) Dividend cover - underlying (times) Earnings per share (cents) Statutory - basic Statutory - fully diluted Cash basis - basic Cash basis - fully diluted Underlying basis - basic Underlying basis - fully diluted Dividend payout ratio (%) Statutory Cash basis Underlying basis Weighted average number of shares - basic (number) Weighted average number of shares - fully diluted (number) Return on equity - cash (%) Return on equity - underlying (%) Full Year Ended 30/06/04 $M 30/06/03 $M Increase/ (Decrease) % 2,675 274 129 3,078 152 (535) 2,695 201 (324) 2,572 2,376 233 65 2,674 73 (168) 2,579 (245) (322) 2,012 13 18 98 15 108 large 5 large 1 28 Full Year Ended 30/06/04 30/06/03 Increase/ (Decrease) % 183 1.1 1.3 196.9 196.8 206.6 206.5 237.1 237.0 93.5 89.1 77.6 1,256 1,257 13.2 15.1 154 1.3 1.4 157.4 157.3 202.6 202.5 210.2 210.0 97.7 75.9 73.3 1,253 1,254 13.3 13.8 19 25 25 2 2 13 13 (0.1) 1.3 Underlying growth of 15% on prior year 299 64 2,674 41 3,078 152 (535) 2,695 $ m 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Underlying NPAT June 03 Banking Insurance Funds Management Underlying NPAT June 04 S'holder Invest Returns Which new Bank initiative (after tax) Cash NPAT June 04 (1) June 2004 results reflect the Which new Bank program, while the prior year includes strategic initiatives undertaken and the cost of the June 2002 Employee Share Acquisition Plan (ESAP) paid in October 2002. Important Dates for Shareholders 24 September 2004 5 November 2004 9 February 2005 Full Year Dividend Payment Annual General Meeting 2005 Interim Results Announcement 6 Highlights (continued) Net Profit after Income Tax ("statutory basis") Net Profit after Income Tax ("cash basis") Net Profit after Income Tax ("underlying basis") (1) Net Interest Income Other banking income Funds management income Insurance income Total Operating Income Shareholder investment returns Policyholder tax benefit/(expense) Total Income Operating expenses Initiatives including Which new Bank (2) Total Operating Expenses Charge for bad and doubtful debts Net Profit Before Income Tax Policyholder tax expense/(benefits) Corporate tax expense Outside equity interests Net Profit after Income Tax ("cash basis") Appraisal value uplift/(reduction) Goodwill amortisation Net Profit after Income Tax ("statutory basis") Full Year Ended 30/06/04 $M 30/06/03 $M Increase/ (Decrease) % 2,572 2,695 3,078 5,410 2,846 1,158 678 10,092 196 203 10,491 5,500 749 6,249 276 3,966 203 1,059 9 2,695 201 (324) 2,572 2,012 2,579 2,674 5,026 2,627 1,115 598 9,366 91 (58) 9,399 5,312 239 5,551 305 3,543 (58) 1,016 6 2,579 (245) (322) 2,012 28 5 15 8 8 4 13 8 large large 12 4 large 13 (10) 12 large 4 50 4 large 1 28 (1) (2) Underlying basis excludes Which new Bank program and Shareholder investment returns. June 2004 results reflect the Which new Bank program, while prior year includes strategic initiatives undertaken and the cost of the June 2002 ESAP paid in October 2002. Key Performance Indicators Banking Net interest margin (%) Average interest earning assets Average interest bearing liabilities Funds Management Funds under administration Insurance Inforce premiums Capital Adequacy Tier 1 (%) Total (%) Adjusted common equity Full Year Ended 30/06/04 $M 30/06/03 $M Increase/ (Decrease) % 2.53 214,187 197,532 2.67 188,270 174,737 109,883 98,566 1,167 1,076 7.43 10.25 4.75 6.96 9.73 - (0.1) 14 13 11 8 0.5 0.5 - Capital Management The Bank maintains a strong capital position. This is recognised in its credit ratings which again remained unchanged during the year. Credit Ratings Fitch Ratings Moody's Investor Services Standards & Poor's Long Term Short Term Affirmed AA Aa3 AA- F1+ P-1 A-1+ Feb 04 Dec 03 Apr 04 Additional information regarding the Bank’s capital management initiatives are disclosed in Note 31 to the Financial Statements. 7 Highlights (continued) Balance Sheet Summary Total assets Total liabilities Shareholders' equity Assets held and Funds under administration On Balance Sheet Banking assets Insurance Funds under administration Other insurance and internal funds management assets Off Balance Sheet Funds under administration Productivity and Efficiency(1) Banking Expense to income (%) Underlying expense to income (%) Funds Management Expense to average funds under administration (%) Underlying expense to average funds under administration (%) Insurance Expense to average inforce premiums (%) Underlying expense to average inforce premiums (%) Underlying staff expense/total operating income (%) Total operating income per FTE ($) Full time staff equivalent (FTE's) - Australia Full time staff equivalent (FTE's) - International Full time staff equivalent (FTE's) - Which new Bank Full time staff equivalent (FTE's) (1) Productivity changes shown as an annualised percentage change. Which new Bank Program Program expenses incurred Provision for future costs Investment capitalised Gross Which new Bank expense Normal project spend Expensing of previously capitalised software Incremental Which new Bank expense - before tax Incremental Which new Bank expense - after tax Which new Bank Benefits Gross benefits Additional operating expenses Net benefits 30/06/04 $M 305,995 281,110 24,885 30/06/03 $M 265,110 242,958 22,152 265,062 22,952 17,981 305,995 86,931 392,926 229,289 22,144 13,677 265,110 76,422 341,532 Increase % 15 16 12 16 4 31 15 14 15 Full Year Ended 30/06/04 30/06/03 Increase/ (Decrease) % 59.2 50.8 54.7 52.0 0.80 0.76 0.87 0.83 47.3 46.1 50.4 50.4 25.3 278,047 26.5 261,292 28,814 7,060 35,874 422 36,296 29,608 6,237 35,845 - 35,845 (8.2) 2.3 8.0 8.4 6.2 8.5 (4.5) 6.4 (2.7) 13.2 - n/a 1.3 Full Year 30/06/04 $M Market Commitment $M 634 208 (112) 730 (200) 219 749 535 Full Year Ended 30 June 2004 Revenue $M 152 (60) 92 Costs $M 145 - 145 660 210 (180) 690 (200) 215 705 500 Total $M 297 (60) 237 The impact on current year expenses is the net of $145 million cost benefits, less the impact of additional operating expenses of $60 million, totalling $85 million. 8 Banking Analysis Financial Performance and Business Review Asia Pacific Banking operations posted a strong result for the year with underlying net profit after tax up 13% to $2,675 million. The underlying result was driven by strong growth in home loan and other personal lending, an improved credit environment and increased volumes. Asia Pacific Banking incorporates the Bank’s retail and commercial banking operations in New Zealand, Fiji, and Indonesia. ASB Bank in New Zealand represents the majority of the Asia Pacific Banking business. During the year ASB Bank achieved strong growth Expenses in relation to the Which new Bank program across the loan portfolio, particularly in housing credit. totalled $499 million (after tax) for the year. Australian Retail (cid:131) (cid:131) the in other personal The strong performance of retail banking operations was driven by continued growth in the residential housing market, improved growth in other personal lending and solid deposit growth. Performance highlights for the year to June included: (cid:131) Home lending growth of 20%, underpinned by record in both proprietary and broker sales volumes channels. Strong performance lending, assisted by enhancements to the Personal Loan product and the launch of a new “Platinum” credit card in March 2004. Improved arrears levels across the retail lending portfolios, notwithstanding strong volume growth. Strong gains levels, supported by efficiency improvements in operations processing areas and branch operations. Continued growth in online channels, with the Bank’s NetBank service recognised during the year as the number one Internet Banking site in Australia (source: Australian NetGuide magazine May 2004). Significant progress has been made in the Which new Bank service transformation program designed to ensure a better service outcome for our customers. The major initiatives undertaken across the retail bank during the year included: (cid:131) in underlying productivity (cid:131) (cid:131) Changes to our home loan process, which make applying for a new loan or changing details on an existing loan much simpler and easier. Through system and process improvements, the great majority of home loan applications through retail proprietary channels are now either conditionally approved on the spot or within one business day. Around 70% of maintenance transactions (such as amending loan repayments on existing loans) can now be completed immediately in the branch or over the telephone, compared with up to 10 days previously. The commencement of our “Breakaway” Service and Sales program across our 1,000-strong retail branch network, encompassing a number of changes to improve frontline customer service, including new for all service-focused performance measures frontline staff, dedicated service and sales coaching and changes to staff roles designed to ensure a greater proportion of time is spent on servicing customers. Early signs of significant improvements in service and sales outcomes are being experienced as this has been rolled out. The refurbishment of 125 branches to a modern layout more conducive to effective customer service. A further 200 to 250 branches are targeted for refurbishment over the next two years. A continued emphasis on reducing customer waiting times, with some branches showing up to a 50% improvement. implementation of world class processing The techniques in our back-office processing areas, delivering both significant efficiency benefits and improved turnaround times for our customers. (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) Performance highlights were: Lending growth at well above market rates in the rural sectors continued retail, commercial and loan market share the year. Home throughout increased to 22.2% from 20.6% in June 2003. Leading customer service in the Banking sector. For the sixth 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 fifth consecutive year, ASB was rated the top business bank on the same criteria. A focus on technology innovation has led to the ASB website being judged the best Finance website for the second consecutive year by NetGuide Web Awards. The continued focus on process efficiencies has delivered an end-to-end credit card approval process which is faster, at a lower cost, and with improved service delivery. The banking operations Indonesia and Fiji survey. For the in continued to achieve strong balance sheet growth. Premium, Business, Corporate & Institutional (cid:131) (cid:131) in The strong domestic economy and strict credit discipline have led to continued good credit quality. The market has been characterised by a drive to gain market share via aggressive pricing and competitive terms and conditions. Within this competitive environment we have increased market share in some segments whilst maintaining share for the others. Major achievements during the year have been: (cid:131) Growing market share in the business lending market (source: RBA) with strong performance the institutional and corporate segments. Gained traction in the Transaction Banking segments through some major client wins. Market share in both the top 500 and commercial segments continued to increase (source: East & Partners). Strong growth in Asset Finance market share (source: AELA). Ranked second in Asia Pacific for project finance deals (source: Thompson). Maintained number one position in capital markets (source: Bloomberg, IFR, INSTO). Participated in the acquisition of the Loy Yang A power station as joint advisor. This was a landmark transaction in the energy sector and is the largest secondary market the Australian trade sale infrastructure sector. The Premium Financial Services and Institutional & Business Services business units merged on 18 May to more effectively meet the many common needs of premium and business customers. This newly formed business unit, Premium Business Services, enhances our ability to deepen relationships and in doing so, better identify high quality and relevant ideas for our customers. in (cid:131) (cid:131) (cid:131) Other initiatives undertaken during the year to strengthen the business have been: (cid:131) Completion of the redesign program to deliver better customer alignment and simplified processes. Development of the CommSee application to further enhance customer service capabilities. Continued focus on Customer Service Centres for day to day servicing to support the relationships with our clients. (cid:131) (cid:131) 9 Banking Analysis (continued) Key Performance Indicators Net interest income Other operating income Total Operating Income Operating expenses Initiatives including Which new Bank (1) 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 Profit after Income Tax ("underlying basis") (2) 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 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 (%) Full Year Ended 30/06/04 $M 30/06/03 $M Increase/ (Decrease) % 5,410 2,846 8,256 4,191 698 4,889 276 3,091 914 1 2,176 2,675 5,026 2,627 7,653 3,982 201 4,183 305 3,165 931 - 2,234 2,376 59.2 50.8 29.6 54.7 52.0 29.4 205,945 214,187 197,532 169,321 197 0.82 175,074 188,270 174,737 146,808 434 0.90 451.8 0.16 239.4 0.21 8 8 8 5 large 17 (10) (2) (2) - (3) 13 (8.2) 2.3 20bpts 18 14 13 15 (55) (8)bpts large (5)bpts Underlying growth of 13% on prior year 219 29 (209) 384 (124) 2,675 (499) 2,176 $ m 3,500 3,000 2,500 2,376 2,000 1,500 1,000 500 0 Underlying NPAT June 03 Net Interest Income Other Banking Income Bad Debts Expenses Tax Underlying NPAT June 04 Which new Bank Initiative (after tax) Cash NPAT June 04 (1) (2) June 2004 results reflect the Which new Bank program, while prior year results include strategic initiatives undertaken and the cost of the June 2002 ESAP paid in October 2002. Underlying basis excludes Which new Bank program. 10 Banking Analysis (continued) Net Interest Income Other Banking Operating Income Average Interest Earning Assets and NIM Trends 2.76% 29,592 2.67% 33,399 141,042 154,871 2.53% 38,093 176,094 220,000 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2.8% 2.6% 2.4% 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% ) m $ ( s t e s s A g n n r a E i t s e r e t n I e g a r e v A Jun-02 Jun-03 Jun-04 Lending Assets (excl Bank Accept) Non-Lending Interest Earning Assets Total NIM Net interest income increased by 8% to $5,410 million for the year. This increase was achieved through an increase of 14% in average interest earning assets to $214 billion, offset by a 14 basis point reduction in the net interest margin to 2.53%. Volume The increase in average interest earning assets represents an increase of $21 billion in lending assets and $5 billion in non-lending interest earning assets. The increase in average interest earning assets contributed $673 million to growth in net interest income. The largest contributor to the increase in average the strong interest earning assets continued residential lending market in Australia and New Zealand, with average loan balances increasing by 20% since 30 June 2003 (net of securitisation), accounting for over 85% of the total increase in average lending assets. to $111.4 billion to be Margin 2.7% 2.6% 2.5% 2.4% 2.3% 2.2% 2.1% 2.0% NIM Compression Since June 2003 2.67% (0.06)% (0.04)% (0.03)% (0.01)% 2.53% NIM 2003 Grow th in liquid assets Funding Mix Asset mix Competition ef fect NIM 2004 The reduction of 14 basis points in the Net Interest Margin (NIM) from 2.67% for the year to 30 June 2003 to 2.53% reduced net interest income by $289 million. Factors impacting the margin reduction include: (cid:131) Non lending interest earning assets: Non lending interest earning assets increased by $4.7 billion during the year largely as a result of increased liquidity requirements due to balance sheet growth and increased market making activities in Global Markets. This reduced the NIM by six basis points. Funding Mix: The strong growth in home loans outpaced growth in retail deposits, resulting in a higher reliance on wholesale funding. The impact was to reduce NIM by four basis points. Asset Mix: The continued strong growth in home loan balances compared with other lending reduced margins by three basis points. Competition: Represents the net impact of pricing changes on asset and liability products. Spreads on housing loans have tightened, offset by improved spreads on deposit products. The net impact of competition is a one basis point reduction in the NIM. (cid:131) (cid:131) (cid:131) 3,000 s n o 2,500 i l l i m $ ) I B O ( 2,000 e m o c n I 1,500 g n i k n a B r e h t O 1,000 500 0 34.7% 2,499 150 489 618 1,242 2,627 79 34.3% 502 652 2,846 120 34.5% 499 724 1,394 1,503 Jun-02 Jun-03 Jun-04 % e m o c n I g n i k n a B l a t o T / I B O 35% 34% 33% 32% 31% 30% Commissions Lending fees Trading Income Other Other banking operating income increased by 8% to $2,846 million for the year compared with $2,627 million for the previous year. This includes non-interest income earned on transaction accounts for the Bank’s personal, business and corporate customers. Factors impacting other banking operating income were: (cid:131) (cid:131) (cid:131) (cid:131) to this Fees and commissions increased by 8% to $1,503 million driven by increased volumes. CommSec experienced record trading levels during the year resulting in an increase in commissions of 72%. The acquisition and integration of TD Waterhouse effective increase. 1 May 2003 also contributed Spending on credit cards by customers increased by 17% during the year though this was partially offset by the impact of RBA interchange regulations. Personal transaction fees are less than 5% of the Bank’s total income. Lending fees increased by 11% to $724 million. Growth in retail lending fees was the result of the increased activity in home lending, margin lending and overdraft fees, which was partly offset by increased mortgage broker volumes and valuation fees. Institutional and Business fees increased, reflecting an improvement in market conditions. Trading income was in line with last year at $499 million. Other banking income increased by $41 million to $120 million. The current year includes the profit on sale of the Fleet Lease business of $43 million and Bank of Queensland shares of $28 million partially offset by equity accounted losses of an associate entity principally related to a change in its accounting policy ($32 million). income The for General line Insurance (previously reported in Other Banking Income) has been reallocated to the Insurance segment and prior year numbers and ratios have been restated. This reduced other banking operating income by $47 million for the year ended 30 June 2003 and $59 million for the year ended 30 June 2004, with a similar increase in the Insurance total operating income. The income from the Bank’s financial planners was reallocated to Funds Management, reducing other banking operating income by $24 million for the year ended 30 June 2003 and $15 million for the year ended 30 June 2004. 11 Banking Analysis (continued) Operating Expenses Bad and Doubtful Debts Total operating expenses on a comparable basis increased by 5% to $4,191 million for the current year. The increase was due to: (cid:131) increases of 4% awarded under the Salary Enterprise Bargaining Agreement (EBA). The full year effect of establishing the Premium Financial Services business which supported the strong growth in other banking operating income. Increases in volume related expenses including credit card loyalty. Operational (non-lending) losses incurred in retail banking and institutional banking. These increases were partly offset by initial Which (cid:131) (cid:131) (cid:131) new Bank savings. Productivity Efficiency Underlying Banking Expense to Income Ratio 54.1% 55% 54% 53% 52% 51% 50% 49% 52.0% 50.8% Jun-02 Jun-03 Jun-04 The underlying Banking expense to income ratio continued to improve from 52.0% for the year ended 30 June 2003 to 50.8% for the current year, a productivity improvement of 2.3%. It is expected that productivity gains will accelerate over the remaining two years of the Which new Bank program as further cost initiatives are implemented, and the full year benefits realised. Which new Bank Program The key strategic activities carried out in the current year included service process improvements and branch refurbishments in Retail Banking Services, as well as the continued implementation of the IBS redesign program and process improvements. Net benefits realised within the Banking operations during the year ended 30 June 2004 totalled $214 million pre tax. These benefits are split between ongoing cost savings of $124 million and revenue benefits of $90 million, and were realised across the following areas: (cid:131) Redesign of business and corporate banking and associated supporting functions. Several initiatives in the retail banking and premium financial segments. General procurement and IT&T savings. (cid:131) (cid:131) The total charge for bad and doubtful debts of $276 million was low compared with the prior two years ($305 million for the year ended 30 June 2003 and $449 million for the year ended 30 June 2002). The low interest rates continued to contribute to a good credit environment, with personal and corporate arrears and default levels at low levels. total The Bank remains well provisioned, with provisions for impairment as a percentage of gross impaired assets net of interest reserved of 451.8% (June 2003 : 239.4%) and a general provision as a percentage of risk weighted assets of 0.82%, compared with 0.90% at 30 June 2003. Taxation Expense The corporate tax charge of $914 million is in line with the prior year and reflects the effect of the incremental Which new Bank program expenses. The effective tax rate increased by 20 basis points to 29.6%. 12 Banking Analysis (continued) Assets & Liabilities Retail Major Balance Sheet Items (gross of impairment) Lending assets - Home Lending Lending assets - Personal Lending Deposits Market Share Home Loans(3) Retail deposits(4) Credit cards(4) (1) (2) (3) (4) As reported in the Dec-2003 Profit Announcement as at May 2004 Source: APRA / ABS Source: Reserve Bank of Australia Increase/ (Decrease) % 20 10 5 30/06/04 $M 104,883 13,160 72,360 30/06/04 19.3%(2) 23.6%(2) 22.7%(2) 30/06/03 $M 87,592 11,989 68,702 30/06/03(1) 19.5% 24.2% 22.8% Lending Assets Personal Lending Australian retail banking lending assets increased by 19% to $118 billion. Lending assets comprise Australian Home Lending and Personal Lending. Home Lending Home loan balances net of securitisation increased by 20% since 30 June 2003 to $105 billion. The increase in home loans was the major factor contributing to the increase in total lending assets during the year. This reflects continued strong demand in both owner occupied and investment loans. Market share as at 31 May 2004 was 19.3%, compared with 19.5% as reported at June 2003, relating to March 2003 (source: APRA). The Bank’s market share as at June 2003 was 19.3%. The Bank maintained its position as Australia’s leading home loan provider and has increased its share of broker originated loans which now account for 16% of the total Australian book compared with 11% at June 2003, while 26% of new home loans funded were originated by third party brokers. Personal lending includes Personal Loans, Credit Cards and Margin Loans. Balances increased by 10% over the year to $13.2 billion reflecting growth in Credit Card balances and margin lending. Retail Deposits total Retail deposits showed good growth, with balances increasing by over $3 billion to $72.4 billion. Competition has intensified within the market as the improved investment market performance has started to attract customers back to equity based products. The sale of Commonwealth Custodial Services Limited during the year impacted the Bank’s deposit market share by an estimated 24 basis points. Asia Pacific Major Balance Sheet Items (gross of impairment) Lending assets - Home Lending Lending assets - Other Trading & investment securities Debt issues Deposits Market Share NZ Lending for housing (2) NZ Retail Deposits(2) (1) (2) As reported in the December 2003 Profit Announcement Source: Reserve Bank of NZ 30/06/04 $M 16,967 10,018 2,459 5,500 19,176 30/06/03 $M Increase/ (Decrease) % 12,611 7,269 2,953 2,281 35 38 (17) large 17,168 12 30/06/04 30/06/03(1) 22.2% 17.5% 20.6% 16.4% 13 Banking Analysis (continued) Lending Assets The New Zealand lending volumes were very strong during the year across all sectors, particularly in housing and business lending. Credit demand was strong and housing activity remained buoyant. ASB Bank achieved Personal lending growth of 27%, Rural lending growth of 22% and Business/Commercial lending growth of 23%. Total operations advances growth was 26.5%. This compared with the annual market growth of 11.7% as measured by Private Sector Credit (Residents only). Institutional and Business and Group Treasury Major Balance Sheet Items (gross of impairment) Lending assets Trading & investment securities Debt issues Deposits Market Share Transaction Services (Commercial)(3) Transaction Services (Corporate)(4) Business Lending(5) Asset Finance(6) ASB Bank’s share of the home lending market continued to grow, with market share increasing to 22.2% from 20.6% (source: Reserve Bank of New Zealand). Focused marketing activity and ASB Bank’s award winning service and sales performance underpinned this result. Deposits Retail funding within ASB Bank increased 15% to $14.2 billion. Increase/ (Decrease) % 11 29 36 30 30/06/04 $M 60,918 23,884 38,542 71,641 30/06/04 24.4%(2) 20.9%(2) 14.2%(2) 16.0% 30/06/03 $M 55,060 18,518 28,347 55,104 30/06/03(1) 22.7% 18.1% 14.0% 15.1% (1) (2) (3) As reported in the Dec-2003 Profit Announcement as at May 2004 Source: East & Partners. Survey respondents included companies with $20 million to $340 million turnover. (4) (5) (6) Source: East & Partners. Survey respondents are companies with turnover greater than $340 million Source: APRA / RBA Source: AELA (Aust Equip Lessors Assoc) Lending Assets Debt Issues Institutional and Business Lending has increased $5.8 billion or 11% over the year to $60.9 billion. This growth reflected good transaction activity in Institutional Banking, a stronger performance in Corporate Banking and steady growth in Business Banking. Market share as at May 2004 has increased to 14.2% compared with 30 June 2003 of 14.0% (source: APRA). Trading and Investment Securities Trading and investment securities increased by $5.4 billion to $23.9 billion at 30 June 2004. This increase is primarily due to increased liquidity requirements arising from liability growth. Debt issues were $38.5 billion at 30 June 2004, an increase of $10 billion. The increase reflects offshore funding raised on favourable terms to fund the growth in the Bank’s assets. Deposits Deposits were $71.6 billion, an increase of $16.5 billion. This primarily reflects an increase in business deposit market share as well as increased use of wholesale funding to fund the growth in the Bank’s assets. 14 Banking Analysis (continued) Total Banking Major Balance Sheet Items (gross of impairment) - by Product Gross housing Securitisation Housing (net of securitisation) Personal Institutional and Business Bank acceptances Total Lending Assets Trading & Investment Securities Deposits and Other Public Borrowings Debt Issues 30/06/04 $M 129,455 (7,605) 121,850 13,208 55,869 15,019 205,946 30/06/03 $M 106,683 (6,480) 100,203 12,369 49,305 13,197 175,074 26,343 21,471 163,177 140,974 44,042 30,629 Increase/ (Decrease) % 21 17 22 7 13 14 18 23 16 44 Australian Home Loan Balances by Product Type at 30 June 2004 Owner Occupied 57% Investment 35% Line of Credit 8% Australian Home Loan balances by Loan Type at 30 June 2004 Variable Rate 62% Fixed Rate 21% Honeymoon 17% Lending Assets s n o i l l i m $ 220,000 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 175,074 13,197 49,305 12,369 100,203 205,946 15,019 55,869 13,208 121,850 Jun-03 Jun-04 Housing Personal Institutional and Business Bank Acceptances Origination of Home Loans funded for the year (Australia only) Third Party 26% Proprietary 74% 15 Banking Analysis (continued) Provisions for Impairment General provisions Specific provisions Total Provisions Total provisions for impairment as a % of gross impaired assets net of interest reserved Specific provisions for impairment as a % of gross impaired assets net of interest reserved General provisions as a % of risk weighted assets Bad debt expense as a % of risk weighted assets Total provisions for impairment for the Bank at 30 June 2004 were $1,536 million. 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 by 30% to $143 million at 30 June 2004, primarily as a result of significant reductions in the level of impaired assets (Gross Impaired Assets net of interest reserved have reduced by $299 million since June 2003, a reduction of 47%). 30/06/04 $M 1,393 143 1,536 30/06/03 $M 1,325 205 1,530 451.8 239.4 42.1 0.82 0.16 32.1 0.90 0.21 The general provision for impairment has increased to $1,393 million at 30 June 2004, an increase of 5% since June 2003. The general provision as a percentage of Risk Weighted Assets reduced to 0.82% from 0.90% in the year. This level is generally consistent with that of other major Australian banks. The general provision as a percentage of risk weighted assets has declined over the last three years reflecting: (cid:131) Major growth in credit has been in home loans which have a lower credit risk than other portfolios; Continuing strong asset quality in the business book; and The reduction in gross impaired assets to the lowest level in the past decade. (cid:131) (cid:131) Growth in Assets of $36bn drives growth in RWA of $20bn $ m 300,000 250,000 200,000 150,000 100,000 50,000 0 Gross Assets (+17%) $36bn 250,856 214,718 74,472 83,256 +$9bn 103,987 +$21bn +$2bn +$4bn 12,427 23,832 Jun-03 125,026 15,020 27,554 Jun-04 Risk weighted on balance sheet assets (+15%) $20bn 148,773 128,950 74,472 +$9bn 51,993 Jun-03 +$11bn 83,256 62,513 Jun-04 Risk Weighting 0% Risk Weighting 20% Risk Weighting 50% Risk Weighting 100% 16 Operating Income Operating income increased by 4% to $1,172 million for the year. This was achieved despite the negative impact from the appreciation of the Australian Dollar and the reduction of income following the sale of the Bank’s custody business. The revenue increase was supported by an 11% increase in FUA balances from $99 billion in 2003 to $110 billion. Average funds under administration for the year were $105.5 billion, which is 6% higher than in the prior year. FUA margins were very resilient with the income to average FUA ratio decreasing by three basis points to 1.11% over the year. Shareholder Investment Returns Shareholder investment returns attributable to the Funds Management business of $26 million were double the prior year figure of $13 million reflecting the strong investment markets during the year. Operating Expenses (cid:131) (cid:131) Operating expenses consist of two components: Ongoing operating costs; and Volume related costs which vary in relation to the level of business and revenue. Operating costs were $26 million lower than in the prior year, reducing from $666 million to $640 million. The reduction was due to: (cid:131) (cid:131) (cid:131) (cid:131) The exit from non-core products in the UK business; Rationalisation of back office processes; Rationalisation of legacy systems; and Favourable exchange rate movements. Volume related expenses were $8 million higher than in the prior year, an increase of 5% which was in line with revenue growth. Productivity Efficiency Underlying operating expenses as a percentage of average funds under administration of 0.76% were down seven basis points compared with June 2003, a productivity improvement of 8%. Which new Bank Program Costs of $37 million relating to Which new Bank initiatives include the expenses of continued rationalisation of systems, development of FirstChoice mastertrust platform, with a new version launched in May 2004 and redundancies resulting from the strategic review of the UK operations. The prior year also includes the one-off cost relating to the sale of the custody business. Taxation The corporate tax charge for the year was $79 million, an effective tax rate of 22% compared with 20% last year. The low effective tax rate in this business is largely due to transitional tax relief on investment style funds management products within life insurance legal entities. The benefits derived from this relief are being phased out over a five year period ending in 2005. Funds Management Analysis Financial Performance and Business Review Performance Highlights Underlying net profit after tax increased by 18% to $274 million for the year. This result was achieved on increased in a competitive environment the business focused on tight cost control which resulted in a 4% reduction in non-volume related expenses. revenues of 4% while Funds under administration (FUA) ended the year at $110 billion, which is up 11% on 30 June 2003 levels, assisted by stronger domestic and international investment markets together with good inflows to the FirstChoice product in Australia and wholesale mandates in the United Kingdom. Business Review During the year there was a recovery of investment markets and an associated investor confidence. These conditions resulted in a recovery in flows into the retail funds sector after two years of relatively poor market returns. improvement in investors The emerging preference of retail for platform products resulted in the more traditional retail products being in net outflow for the year. In the platform sector, the Bank was well positioned with the FirstChoice product increasing its FUA to over $7 billion. This resulted in the FirstChoice product being the industry leader in platform net flows during the year (Source: Plan for Life: March 2004). International net flows were very strong, particularly in the United Kingdom, with FUA increasing by 32.5% over the year. There was a focus on costs during the year which resulted in a $26 million reduction in non volume related expenses. This was achieved despite the business continuing to incur significant additional costs in respect of regulatory and compliance matters. Which new Bank Program The Funds Management business is a key contributor to the Bank’s Which new Bank transformation program. The majority of the Funds Management initiatives undertaken during the year centred on developing the platform offerings and investing in our adviser network. There was also a continuation of the system simplification program within the legacy product business which has and will result in significant cost savings. These initiatives will substantially improve our capacity to serve our customers and position the business to meet the changing preferences of investors. Key highlights of the initiatives during the year were: (cid:131) the A continuation of the product migration strategy away from older style closed products. The number of product systems supporting legacy products has already been reduced from 17 to 11, and is targeted to reach five by December 2005. Launch of improved FirstChoice mastertrust platform, with additional services and reporting for financial planners. A restructure of back office services to reduce costs and provide simpler processes. A strategic review of our UK operations which resulted in a more targeted product range and a reduction in the cost base of this business. (cid:131) (cid:131) (cid:131) Investment Performance The absolute returns of most of the funds were strong reflecting the recovery of investment markets. On a relative basis 70% of funds out-performed their benchmark during the year. The flagship Australian Equity and Global Equity funds, however, were below benchmark on a one year comparative performance which negatively impacted fund flows. 17 Funds Management Analysis (continued) Profit Summary Key Performance Indicators Funds Management Operating income - external Operating income - internal Total Operating Income Shareholder investment returns Policyholder tax expense/(benefits) Funds Management Income Volume based expenses Other operating expenses Operating expenses Initiatives including Which new Bank (1) Total Operating Expenses Net Profit before Income Tax Policyholder tax expense/(benefits) Corporate tax expense Outside equity interests Net Profit after Income Tax ("cash basis") Net Profit after Income Tax ("underlying basis") (2) Full Year Ended 30/06/04 $M 30/06/03 $M Increase/ (Decrease) % 1,158 14 1,172 26 149 1,347 166 640 806 37 843 504 149 79 8 268 274 1,115 13 1,128 13 (62) 1,079 158 666 824 38 862 217 (62) 57 6 216 233 4 8 4 large large 25 5 (4) (2) (3) (2) large large 39 33 24 18 (1) (2) June 2004 results reflect the Which new Bank program, while prior year results include strategic initiatives undertaken including the one off cost relating to the sale of the custody business. Underlying basis excludes shareholder investment returns and Which new Bank program. Funds Under Administration Funds under administration - average Net flows Productivity and Other Measures Operating income to average funds under administration (%) Expenses to average funds under administration - actual (%) Expenses to average funds under administration - underlying (%) Effective corporate tax rate (%) 105,458 846 99,280 (686) 6 large 1.11 0.80 0.76 22.3 1.14 0.87 0.83 20.4 (3)bpts 8.0 8.4 190bpts Underlying growth of 18% on prior year 44 233 26 (8) (21) 20 (26) 274 268 $ m 350 300 250 200 150 100 50 0 Underlying NPAT June 03 Operating income Other operating expenses Volume based expenses Tax - Corporate Underlying NPAT Jun 04 S'holder Invest Returns Which new Bank initiative (after tax) Cash NPAT June 04 18 Funds Management Analysis (continued) Funds under Administration Wholesale Funds under administration increased by 11% to $110 billion at 30 June 2004. The primary drivers of FUA growth were the strong investment markets which added $10 billion; the positive net flows in the FirstChoice product, and the international business. Offsetting this was the net outflow of the other retail products due to: (cid:131) (cid:131) (cid:131) Run-off of legacy products; Reduced support for the Australian equity funds; and Industry trend towards platform products. Average funds under administration of $105.5 billion for the year ended 30 June 2004 was 6% higher than the prior year. FirstChoice and Avanteos FirstChoice achieved $7 billion funds under administration during the year, an increase of 119% over the prior year. Net flows of $3 billion during the year placed the product at the top of the industry for platform flows (source: Plan for Life March 04). The relaunch of FirstChoice in May 2004 resulted in record net flows into the product in June. The Avanteos business acquired during 2003 and provider of wholesale wrap products, experienced strong inflows during the year with FUA approaching $2 billion at the end of the year. Other Retail (including Legacy Products) Other Retail has two major components, being the closed legacy products and the traditional CFS retail products. Other CFS retail funds under administration have continued to struggle to attract and retain customers as investors move away from traditional single entity managers to flexible mastertrust and wrap platforms, like FirstChoice. The net outflow position of the legacy products results from the business decision to close most of these products to new clients. There remains a substantial inforce business in the legacy products and retention measures to minimise outflows from these products have been implemented. Wholesale funds under administration have risen 6% to $27 billion during the year. Investment returns were $2.7 billion for the year partly offset by $1.1 billion in net outflows. The net outflows on the wholesale business was largely attributable to Australian equity funds. Other asset classes showed good inflows. Property Property funds under administration comprise both listed and unlisted (wholesale) funds. Total property funds under administration grew by $0.8 billion or 7%, benefiting from both asset revaluations and acquisitions of new properties. Internationally Sourced International funds net inflows were $2.4 billion for the year due to some large mandate wins into the Global Emerging Markets product. Combined with good investment returns, this resulted in a 32.5% increase in international FUA over the year. Definition Funds under administration include all funds sourced by platforms such as FirstChoice and Avanteos, including the assets which are externally managed. This represents a change from the funds under management disclosed in previous years. The change has been made as platform sales represent the largest growth area in the retail funds industry and to exclude these funds would present an incomplete view of the business performance. The Bank monitors the leading market share position under both definitions. Comparative numbers have been restated. Funds under administration for FirstChoice and Avanteos have been represented together for the first time. Comparative numbers inflows, outflows and including investment income have been restated. retail Other reflecting investment returns for the year of positive $3.9 billion, offset by net outflows. remained steady funds 19 Closing Balance 30/06/04 $M 9,010 4,414 37,738 27,020 12,624 90,806 19,077 Closing Balance 30/06/03 $M 4,192 4,963 37,749 25,485 11,790 84,179 14,387 Funds Management Analysis (continued) Year Ended 30 June 2004 Funds Under Administration Opening Balance 30/06/03 $M Inflows Outflows $M $M Income $M Investment Acquisitions & Fx Disposals Movements (1) $M $M FirstChoice & Avanteos Cash Management Other Retail Wholesale Property Domestically Sourced Internationally Sourced Total - Funds Under Administration 4,192 4,963 37,749 25,485 11,790 84,179 14,387 5,431 3,178 4,893 12,322 2,023 27,847 7,769 (1,370) (3,930) (8,820) (13,453) (2,079) (29,652) (5,118) 757 203 3,916 2,666 890 8,432 1,592 - - - - - - (255) - - - - - - 702 98,566 35,616 (34,770) 10,024 (255) 702 109,883 Year Ended 30 June 2003 Funds Under Administration Opening Balance 30/06/02 $M Inflows Outflows $M $M Income $M Investment Acquisitions & Fx Disposals Movements(1) $M $M FirstChoice & Avanteos Cash Management Other Retail Wholesale Property Domestically Sourced Internationally Sourced Total - Funds Under Administration 568 5,634 41,953 29,240 8,895 86,290 19,522 4,221 1,121 11,356 10,126 963 27,787 4,603 (614) (1,970) (13,867) (13,329) (183) (29,963) (3,113) 17 178 (1,693) (552) (43) (2,093) (424) - - - - 2,158 2,158 (5,000) - - - - - - (1,201) 105,812 32,390 (33,076) (2,517) (2,842) (1,201) 98,566 (1) Includes foreign exchange gains and losses from translation of internationally sourced business. Market Share Australian Retail – administrator view(2) New Zealand(3) Australian Property(4) (1) (2) as at March 2004 Source: Plan for Life. The administrator view considers market share from the perspective of the company, which administers the product, and also includes badged products distributed by separate entities. 30/06/04 14.4%(1) 14.4%(1) 5.5% 30/06/03 14.5% 14.5% n/a (3) (4) Source: Fund Source Research Source: UBS Warburg 20 (cid:131) (cid:131) Significant reductions in expense levels for the Hong Kong operations; and Development of new distribution capabilities. The Asian business produced $3 million in operating margins compared with a loss of $9 million for the prior year. The favourable result for the current year was driven by: (cid:131) (cid:131) (cid:131) (cid:131) Improved investment markets; Increased sales across all markets; Expense containment; and Improved persistency. The result was impacted by a $16 million write off of capitalised pre-licence start-up costs in China which was reflected in Australian shareholder investment returns. Operating Income Operating income of $678 million was 13% higher than in the prior year. Operating income in the prior year included a write-down of an asset in the Australian annuity fund of $30 million. Taking this item into account, operating income was up 8% on the prior year. This was mainly attributable inforce premiums, positive experience on claims and an increase in general insurance income. to growth in Shareholder Investment Returns Shareholder investment returns attributable to the insurance business of $170 million for the year represent an increase of $92 million on the prior year, reflecting the rebound in domestic and overseas equity markets. Operating Expenses Underlying Expenses to average inforce premiums 58.5% 50.4% 46.1% 70% 60% 50% 40% 30% 20% 10% 0% Jun-02 Jun-03 Jun-04 Operating expenses of $517 million decreased by $2 million compared with the prior year, due to a drop in volume related costs in the Asian business. Non volume related costs were in line with the prior year, with EBA related increases in staff costs, and increased compliance and regulatory related costs being offset by savings from process tight cost control and achieved by reengineering in the back-office. The underlying expense to average inforce premium ratio of 46.1% represents a 9% productivity improvement over the year. Corporate Taxation The corporate tax charge for the year was $66 million an effective tax rate of 20.8% compared with 17.8% last year. The low effective tax rate in this business is largely due to transitional tax relief on certain products within life insurance legal entities. The benefits derived from this relief are being phased out over a five year period ending in 2005. Insurance Analysis Financial Performance and Business Review Performance Highlights The underlying profit after tax for the Insurance business for the year was $129 million, an increase of 98% over the prior year. This result was achieved with a 13% increase in operating income due to improved underwriting and favourable claims experience. Non volume related expenses were maintained at last year’s levels driven by improved efficiency. Business and Financial Review Australia The profit growth in the Australian business was achieved from strong underwriting performance in both the general and life risk insurance categories. This was driven largely by robust claims management, favourable claims experience and improved profitability in the annuities market. Non volume related management expenses were maintained at last year’s levels at the same time as providing enhanced customer service levels. This was achieved re- engineering delivering enhanced productivity and efficiency in the business. through significant business process (cid:131) (cid:131) (cid:131) (cid:131) to more Key drivers of the current year’s result were: Premium growth with Life Risk Premiums up 8%. Strong investment returns. Improved margins in the annuity market as a result of a rational competitive pricing return behaviour. Robust claims management activity driving enhanced claims expense outcomes despite some large weather related claims in the general insurance segment early in the year. The group maintained its number one market share of risk premiums with a 14.8% share of the market. New Zealand The life insurance operations in New Zealand operate predominantly under the Sovereign brand. The market for risk products was subdued during the year. However, Sovereign increased market share in new business from 27% to 28% and maintained its market leadership position with 28.2% of the inforce premium market (source: ISI). The business continued to expand sales through aligned channels such as ASB Bank while maintaining traditional levels of support the independent financial advisers. from During the year the business fundamentals were further tighter through product underwriting standards and continued rationalisation of products and systems. improved repricing, The New Zealand business generated $55 million profit after tax. This represents a 20% increase on last year’s result of $46 million. Asia Asia includes pension administration operations in Hong Kong, together with life businesses in China, Vietnam, Indonesia and Fiji. Hong Kong represents our largest operation in the region. insurance and life The Asian business continued to improve. Key initiatives during the year included: (cid:131) Improved risk profile of Hong Kong business following amendments to investment mix, product repricing and product mix; 21 Insurance Analysis (continued) Profit Summary Summary Financial Performance (excluding appraisal value (reduction)/uplift) Insurance Life Insurance Operating Income General Insurance Operating Income Total Operating Income Shareholder investment returns Policyholder tax Total Insurance Income Volume based expenses Other operating expenses - external Other operating expenses - internal Operating expenses Initiatives including Which new Bank (1) Total operating expenses Net Profit before Income Tax Income tax expense attributable to: Policyholder Corporate Net Profit after Income Tax ("cash basis") Net Profit after Income Tax ("underlying basis") (2) Productivity and Other Measures Expenses to average inforce premiums (actual %) Expenses to average inforce premiums (underlying %) Effective corporate tax rate (%) Full Year Ended 30/06/04 $M 30/06/03 $M Increase/ (Decrease) % 618 60 678 170 54 902 224 279 14 517 14 531 371 54 66 251 129 551 47 598 78 4 680 228 278 13 519 - 519 161 4 28 129 65 12 28 13 large large 33 (2) 0 8 (0) - 2 large large large 95 98 47.3 46.1 20.8 50.4 50.4 17.8 6.2 8.5 300bpts Full Year Ended 30/06/04 Sources of Profit from Insurance Activities $M The Margin on Services profit from ordinary activities after income tax is represented by: Planned profit margins Experience variations Other General insurance operating margin Operating margins After tax shareholder investment returns Net profit after Income Tax ("cash basis") 107 - (8) 19 118 133 251 30/06/03 $M Increase/ (Decrease) % 104 (42) (8) 11 65 64 129 3 - - 73 82 large 95 Geographical Analysis of Business Performance Australia New Zealand Asia Total Full Year Ended Net Profit after Income Tax (“cash basis”) 30/06/04 30/06/03 30/06/04 30/06/03 $M $M $M $M 30/06/04 30/06/03 30/06/04 30/06/03 $M $M $M $M Operating margins Investment earnings on assets in excess of policyholder liabilities Net Profit after Income Tax 78 101 179 43 35 78 37 18 55 31 15 46 3 14 17 (9) 14 5 118 133 251 65 64 129 (1) (2) June 2004 result reflects the Which new Bank program. Underlying basis excludes shareholder investment returns and Which new Bank program. 22 Insurance Analysis (continued) Inforce Premiums Annual Inforce Premiums General Insurance Personal Life Group Life Total Australia New Zealand Asia Total Opening Balance 30/06/03 $M 196 626 254 1,076 771 221 84 1,076 Full Year Ended 30 June 2004 Sales/New Business $M Lapses $M Other Movements(1) $M 46 156 53 255 177 42 36 255 (50) (85) (34) (169) (133) (16) (20) (169) - 6 (1) 5 - 11 (6) 5 Closing Balance 30/06/04 $M 192 703 272 1,167 815 258 94 1,167 (1) Consists mainly of foreign exchange movements. Annual Inforce Premiums General Insurance Personal Life Group Life Total Australia New Zealand Asia Total Full Year Ended 30 June 2003 Opening Balance 30/06/02 $M Sales/New Business $M 172 580 229 981 698 187 96 981 51 129 58 238 180 43 15 238 Lapses $M (27) (78) (30) (135) (107) (16) (12) (135) Other Movements(2) $M - (5) (3) (8) - 7 (15) (8) Closing Balance 30/06/03 $M 196 626 254 1,076 771 221 84 1,076 (1) (2) Life Insurance results for both New Zealand and Asia include savings products. Savings products are disclosed within Funds Management for the Australian business. Inforce premium relates to risk business only. Consists mainly of foreign exchange movements. Annual inforce premiums increased by $91 million or 8% to $1,167 million for the year ended 30 June 2004. General Insurance lapses include $19 million of rebadged premiums which ceased to be attributable to the CBA business due to a FSRA related business restructuring. The Australian business maintained its leading market share of inforce premiums despite a reduction from 15.3% at 30 June 2003 to 14.8% at 31 March 2004. Sovereign maintained its leading position in New Zealand with a market share of 28.2%, slightly down from 28.3% at 30 June 2003. Market Share – Annual Inforce Premiums New Zealand(4) Australia (Total Risk)(5) Australia (Individual Risk)(5) Hong Kong(6) 30/06/04 28.2%(2) 14.8%(3) 12.8%(3) 2.5%(3) 30/06/03 (1) 28.3% 15.3% 13.0% 2.8% (1) (2) (3) As reported in the December 2003 Profit Announcement as at May 2004 as at March 2004 (4) (5) (6) Source: ISI Statistics Source: Plan for Life Source: HK Insurance Assoc 23 Shareholder Investment Returns Shareholder Investment Returns Funds Management Business Insurance Business Shareholder Investment Returns before Tax Taxation Shareholder Investment Returns after Tax Full Year Ended 30/06/04 $M 30/06/03 $M 26 170 196 44 152 13 78 91 18 73 Increase/ (Decrease) % large large large large large At 30 June 2004 Shareholder Investments Asset Mix (%) Australia % New Zealand % Local equities International equities Property Other (1) Sub-total Fixed interest Cash Other Sub-total Total 10 4 22 - 36 39 25 - 64 100 1 6 4 3 14 38 35 13 86 100 At 30 June 2004 Shareholder Investments Asset Mix ($M) Australia $M New Zealand $M Local equities International equities Property Other (1) Sub-total Fixed interest Cash Other Sub-total Total 166 64 357 - 587 644 415 - 1,059 1,646 3 26 17 14 60 156 147 52 355 415 (1) Other assets include the excess of carrying value over net tangible assets. Domestic and investment markets international rebounded strongly over the year, with the benchmark S&P/ASX200 price index increasing by 16.7% and the MSCI World index by 21.8%. All other asset classes (fixed interest, property and cash) posted positive returns. Asia % 4 6 - 4 14 61 7 18 86 100 Asia $M 25 38 - 21 84 364 42 110 516 600 Total % 7 5 14 1 27 44 23 6 73 100 Total $M 194 128 374 35 731 1,164 604 162 1,930 2,661 24 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 are 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 certain market based factors which result in the adoption of a more conservative valuation that is $450 million lower at 30 June 2004 ($450 million lower at 30 June 2003) than that determined by Trowbridge Deloitte. The key consideration by Directors in determining their value is the continued uncertainty of investment markets and industry funds flows. Carrying Value at 30 June 2004 Shareholders net tangible assets Value of inforce business Embedded Value Value of future new business Carrying Value Increase/(Decrease) in Carrying Value since 30 June 2003 Analysis of Movement Since 30 June 2003 Profits Capital movements (2) Dividends paid FX Movements Change in Shareholders NTA Appraisal value uplift/(reduction) Increase/(Decrease) to 30 June 2004 Funds Management $M 515 1,850 2,365 2,774 5,139 (334) Funds Management $M 268 (27) (470) (10) (239) (95) (334) Life Insurance Australia New Zealand Asia(1) Total $M 1,131 295 1,426 235 1,661 73 $M 415 286 701 277 978 129 $M $M 600 - 600 24 624 2,661 2,431 5,092 3,310 8,402 (12) (144) Life Insurance Australia New Zealand Asia(1) Total $M 180 108 (421) - (133) 206 73 $M 54 (29) (9) 19 35 94 129 $M 17 - - (25) (8) (4) (12) $M 519 52 (900) (16) (345) 201 (144) (1) (2) The Asian life businesses are not held in a 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 subject to impairment. Includes capital injections, transfers and movements in intergroup loans. Change in Valuations The valuations adopted have resulted in a total negative change in value of $144 million since 30 June 2003. The main components comprised: (cid:131) A $345 million decrease in net tangible assets partially reflecting improved capital efficiency. (cid:131) An appraisal value uplift of $201 million, reflecting projected sales levels, higher retention rates and improved equity markets and their effect on industry flows. Movem ent in Directors Valuation 519 (864) 8,546 201 8,402 $ m 9,500 9,000 8,500 8,000 7,500 7,000 Directors Valuation June 2003 Profit Capital Movements Including Dividends Uplift in Value Directors Valuation June 2004 25 "Operating Expenses – Initiatives including Which new Bank” refers to incremental expenses associated with these initiatives. Prior period numbers refer to the strategic initiatives as outlined in the Bank’s annual report for the year ended 30 June 2002 and June 2002 Employee Share Acquisition Plan costs paid in October 2002 following changes to the Bank’s remuneration structures and policy. These incremental costs principally relate to restructuring expenses. “Operating expenses – Initiatives including Which new Bank” plus “operating expenses — comparable business” is equal to the Australian GAAP measure "operating expenses". Management believes is meaningful to highlight these items in an analysis of our results. it "Underlying profit" refers to profit after tax, “cash basis”, before operating expenses - initiatives including Which new Bank and shareholder investment returns. "Underlying profit" is referred to across all our businesses. The underlying profit is the 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. (cid:131) (cid:131) (cid:131) "Underlying" productivity ratios: Exclude expenses of “Initiatives including Which new Bank”; Exclude shareholder investment returns from funds management and life insurance income; and Exclude policyholder tax from the funds management income and life insurance income lines. In productivity providing ratios, "underlying" 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 ratios. Management presentation of our productivity 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. . Presentation of Financial Information Definitions 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 interests, before goodwill amortisation and funds management and life insurance appraisal value uplift/(reduction). "Cash basis" net profit after 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 uplift/(reduction). 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. Also for the year ended 30 June 2004, the Bank has added back the non-recurring ‘Which new Bank’ costs in considering the amount to be distributed as dividends to shareholders. 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 insurance funds management and businesses which in part is driven by external economic factors and markets, such as world equity markets and interest rates. the life 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 value uplift/(reduction), divided by the weighted 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. insurance appraisal life 26 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 Bank’s risk profile is measured by the difference between capital available to absorb loss and risk as assessed by target equity required. “Target equity” is defined as the potential risk of loss of one year’s earnings, measured at a standard consistent with an AA credit rating. Target equity is derived from underlying exposures to credit, market, operational and life insurance risks in the banking, insurance and funds management businesses of the Group. In the banking business, economic equity is a measure of the potential risk of loss of cash earnings. In the insurance and funds management businesses, target equity is a measure of the potential risk of loss of the fair value of the business. The composition of economic equity of the Group during the financial year ended 30 June 2004 was 54% credit risk, 11% market risk, 34% operational risk and 1% insurance risk. The component measures of economic equity for the banking, insurance and funds management businesses were as follows: (cid:131) Banking: 73% credit risk, 4% market risk and 23% operational risk; Insurance: 40% market risk, 50% operational risk, 6% credit risk and 4% insurance risk; and Funds Management:; 11% market risk and 89% operational risk. The following sections describe the integrated risk (cid:131) (cid:131) management framework components. Credit Risk Credit risk is the potential of 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, financial markets transactions and other associated activities. In the 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 Bank uses a diversified portfolio approach for the management of credit risk (refer to Note 14) comprised of the following: (cid:131) 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. These policies assist in the diversification of the (cid:131) (cid:131) (cid:131) credit portfolio. The credit portfolio is managed in two distinct segments: (cid:131) 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. 27 (cid:131) 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. Provision 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 Bank. 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. Off Balance Sheet Arrangements The Bank 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 substance rather than form, and accordingly, determination of the existence of control involves management judgment. The Bank has no off balance sheet financing entities that it is considered to control. As detailed in Note 1 (jj), the Bank 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 Bank in accordance with the Australian Prudential Regulation Authority (“APRA”) Prudential Guidelines. These liquidity facilities are disclosed within Contingent Liabilities as commitments to provide credit. 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. in both the banking and Market risk arises from the mismatch between assets insurance liabilities and businesses and from controlled trading undertaken in pursuit of profit. The Bank is exposed to diverse financial instruments including interest rates, foreign currencies, equities and commodities and transacts in both physical and derivative instruments. in Note 39 A discussion and analysis of the Bank’s market risk is contained financial statements. the to Information on trading securities is further contained in Note 10 to the financial statements. Note 2 to the financial statements contains financial markets trading income contribution to the Bank. 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. 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 Bank. Refer to Note 39 to the financial statements for further details. VaR Expressed based on 97.5% confidence Group Interest rate risk Exchange rate risk Implied volatility risk Equities risk Commodities risk Prepayment risk ASB Bank Diversification benefit Credit Spread(1) Total VaR Expressed based on 99.0% confidence Group Interest rate risk Exchange rate risk Implied volatility risk Equities risk Commodities risk Prepayment risk ASB Bank Diversification benefit Credit Spread(1) Total Average VaR During June 2004 Half Year $M Average VaR During December 2003 Half Year $M Average VaR During June 2003 Half Year $M Average VaR During December 2002 Half Year $M 2.88 1.09 0.84 0.70 0.37 0.58 0.14 (2.49) 4.11 4.92 9.03 3.02 1.24 0.92 0.56 0.33 0.36 0.20 (2.51) 4.12 - 4.12 3.43 1.31 0.62 0.73 0.32 0.38 0.15 (2.32) 4.62 - 4.62 3.37 1.47 0.59 0.32 0.35 0.30 0.19 (2.14) 4.45 - 4.45 Average VaR During June 2004 Half Year $M Average VaR During December 2003 Half Year $M Average VaR During June 2003 Half Year $M Average VaR During December 2002 Half Year $M 3.69 1.28 1.04 0.98 0.45 0.58 0.19 (3.21) 5.00 5.84 10.84 3.99 1.50 1.26 0.70 0.40 0.36 0.25 (3.26) 5.20 - 5.20 4.31 1.64 0.79 0.93 0.41 0.38 0.20 (3.02) 5.64 - 5.64 4.45 1.75 0.71 0.39 0.42 0.30 0.24 (2.70) 5.57 - 5.57 (1) At 30 June 2004 the value at risk of the movement of credit spreads has been added to the VaR model. This had previously been captured in the “Specific Risk” allocation capital charge. Inclusion of a separate risk class reflects growth in this particular market segment and increasing availability of data on which to model. 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. possible, Wherever segregates policyholder’s funds from shareholder’s funds and sets investment mandates that are appropriate for each. The investment mandates for assets in policyholder’s funds Bank the 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 policyholder’s 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 for lower investment linked policies is at the discretion of the policyholder. fees should markets fall. Asset allocation A smaller proportion of policyholder’s 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 inforce 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 28 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: - - - - Economic; Competitive; Social trends; or Regulatory. In each of the businesses, management is responsible identification, assessment and treatment of these risks. These business managers are supported by the Bank’s framework consisting of a governance structure, a suite of risk mitigating policies, a measurement methodology and skilled operational risk employed throughout the Group. the for The Bank’s risk measurement operational methodology provides the basis for the expert assessment of the calculation of operational risk economic equity. individual risk exposures and Target equity for the banking business is calculated by aggregating individual risk measures which are based on expert assessment. For the insurance and funds management businesses target equity is calculated using worst-case scenarios that impact upon business risk factors such as pricing, margins and business volumes. risk transfer program The Bank continues to benchmark and monitor its insurance for efficiency and 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. Business Continuity Management Business Continuity Management (“BCM”) within the Bank 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 Bank’s risk management process by providing a controlled response to potential operational risks that could have a significant impact on the Bank’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. A comprehensive BCM program including plan development, testing and education has been rolled out across all business units to embed BCM methodologies and capability throughout the Bank. 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. Integrated Risk Management (continued) 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. The current investment mandate for shareholders’ funds reflects a decision taken during this year to reduce the overall exposure of shareholders’ fund to growth assets. As at 30 June 2004, shareholders’ funds in the life insurance business are invested 73% in income assets (cash and fixed interest) and 27% in growth assets (shares and property), although the asset mix varies from company to company. Policyholder funds are invested to meet policyholder reasonable expectations without putting the policyholder at undue risk. 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. Liquidity risk is not a significant issue in 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 income. Furthermore, processing time for claims and redemptions enables each company to forecast and manage its liquidity needs with a high degree of accuracy. receive substantial premium to 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 is integral 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 Over the Counter (“OTC”) derivatives markets. the Bank’s to 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. OTC traded derivatives The Bank buys and sells financial instruments that are traded ‘over-the-counter’, rather than on recognised exchanges. The terms and conditions of these transactions are negotiated between the parties, although the majority conform Industry to accepted market conventions. standard documentation is used, most commonly in the form of a master agreement supported by individual transaction confirmations. The documentation protects the Bank’s interests should the counterparty default, and provides in jurisdictions where the relevant law allows. to net outstanding balances the ability The Bank’s exposure to derivatives is disclosed in Note 39 Market Risk. Operational and Strategic Business Risk The Bank’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 gain or loss resulting from: Inadequate or - methodologies; People; Systems; or External events. - - - failed internal processes and 29 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 51 banking groups operating in Australia at 30 June 2004. 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 14) 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 years regional banking sector has undergone substantial consolidation with several of these institutions amalgamating with other regional banks or being acquired by major banks. the locally through a There are 13 foreign owned banks operating in incorporated subsidiary. Australia An additional 24 banks conduct operations through a foreign bank branch. While many foreign banks operating in Australia initially focused their activities on the provision of banking services to the Australian clients of their overseas parent bank, most have now diversified their operations, offering local clients a broad range of financial products and services. Foreign bank branches in Australia are not able to offer retail deposit and transaction accounts to customers. Five foreign banks are represented in Australia by both a locally incorporated subsidiary and a branch. 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. in the Changes financial needs of consumers, deregulation, and technology developments have also changed the mode of competition. In particular, the development of electronic delivery channels and the reduced reliance on a physical network facilitate the entry of new players from related industries, such as retailers, telecommunication companies and utilities. Technological change 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 management, especially within the superannuation industry. Future growth will be (pension 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 the capital markets, originator of corporate debt 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. in 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 four financial services groups, all owned by Australian-based banks operating through nationwide branch networks. The Group’s major competitors in New Zealand are ANZ and the National Bank of New Zealand (both wholly- owned subsidiaries of the ANZ Group), Bank of New Zealand (a wholly-owned subsidiary of NAB), and Westpac. In addition, there are several financial institutions operating largely in the wholesale banking sector including Deutsche Bank and ABN Amro. Through its wholly owned subsidiaries, Sovereign Group and ASB Group Investments, ASB Group also competes in the New Zealand insurance and investment market, where Asteron (part of the Promina Group) and AXA are major competitors. Following the acquisition of Colonial Ltd in June 2000, the Group’s retail operations were extended into the United Kingdom, several 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. 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 to the 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. 30 Description of Business Environment (continued) The prudential framework applied by APRA embodied in a series of prudential standards including: (i) Capital Adequacy is required Under APRA capital adequacy guidelines, Australian banks are ratio of capital to maintain a (comprising Tier One and Tier Two capital components) to risk weighted assets of at least 8%, of which at least half must be Tier One capital. Regulatory capital requirements are measured for the Bank (“Level 1”) and for the Bank together with its banking subsidiaries (“Level 2”). APRA capital requirements are generally consistent with those agreed upon by the Basel Committee on Banking Supervision. APRA has advised that a third level of capital adequacy (“Level 3”) for conglomerate groups will be implemented to coincide with Basel 2. For information on the capital position of the Bank, see Note 31 Capital Adequacy. (ii) 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 Certificates of Deposits/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. (iii) 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 July 2003 the limit was 30%). Exposure to authorised deposit taking institutions (“ADIs”) is not to exceed 50% of the capital base. Prior consultation must be held with APRA if a bank intends to exceed set thresholds. For information on the Bank’s large exposures refer to Note 14 to the Financial Statements. (iv) Ownership and Control that financial regulated In pursuit of transparency and risk minimisation, the Financial Sector (Shareholding) Act 1998 embodies the institutions should principle 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 industry, in established participants 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. the Australian Securities and Since July 1998, the new regulatory arrangements have comprised four separate agencies: The Reserve Bank of Australia, the Australian Prudential Regulation Authority, Investments Commission and the Australian Competition and Consumer Commission. Each of these agencies has system wide responsibilities for the different objectives of government oversight of the financial system. A description of these agencies and their general responsibilities and functions is set out below. Reserve Bank of Australia (“RBA”) – is responsible financial system stability and for monetary policy, 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 these products. the providers of 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 for disclosure and a single authorisation procedure financial exchanges and clearing and settlement facilities. The Financial Services Reform Act 2001 enacting these proposals came into force in March 2004. It is intended to facilitate innovation and promote business while at the levels of consumer same protection and market integrity. time ensuring adequate The Government passed into law in June 2004 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. 31 Description of Business Environment (continued) (v) Banks’ Association With Non-Banks There are formal guidelines (including maximum exposure limits applicable from 1 July 2003) that control investments and dealings with subsidiaries and associates. A bank’s equity associations with other institutions should normally be in the field of finance. APRA has expressed an unwillingness to allow subsidiaries of a bank to exceed a size which would endanger the stability of the parent. No bank can enter into any agreements or arrangements for its business, or effect a reconstruction or carry on business in partnership with another bank, without the consent of the Commonwealth Treasurer. (vi) Supervision of Non-Bank Group Entities the sale or disposal of The Australian 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 audited accounts and supervisory inspections. Compliance with APRA regulation for general insurance companies is monitored through regular returns, lodgment of an audited annual return, and auditor certification covering prudential matters. 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 instruments such as bank acceptances, other credit 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 specific segments the credit risk rated managed portfolio. These provisions are derived primarily by reference to historical ratios of write-offs to balances in default. in Specific provisions are provided for from the general provision. All facilities subject for impairment are classified as non-accrual, as set out in Note 15. to a specific provision 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 policyholder 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:131) Business assumptions including: - amount, timing and duration of claims/policy payments; - policy lapse rates; and - acquisition and long term maintenance expense levels; (cid:131) (cid:131) 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: Recent results may be a statistical aberration; or - There may be a commencement of a new paradigm - requiring a change in long term assumptions. The Group’s actuaries arrive at conclusions regarding their experience and the statistical analysis using judgement. Additional information on the accounting policy is set out in Note 1(ii) Life Insurance Business, and Note 34 Life Insurance Business details the key actuarial assumptions. Market Valuation of Life Insurance Controlled Entities life in controlled entities held by Interests insurance companies are subject to revaluation each period, such that the investment in the controlled entity is recorded at market value. the 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 32 systems and process additional expenditure in the key areas of staff training and skilling, simplification, and technology. In the period to 30 June 2004 such expenses have totaled $749 million and principally comprise redundancies, expensing of previously capitalised software of $219 million, process improvements and branch refurbishment. The Group is required to book a provision for restructuring costs to the extent that it has announced a plan or started implementing a plan, and has no realistic alternative but to proceed with the restructuring. There is a level of management judgement involved in estimating the planned costs involved and the level of commitment to the plan, such that it is judged that the plan will proceed to completion. On this basis a provision for ‘Which new Bank’ costs of $208 million was outstanding at 30 June 2004, which is included in the expenses referred to above. The cost estimates for the provision were determined by the businesses concerned taking into account the details of the planned initiatives and their timing. Other provisions for restructuring established in the past have proved to be appropriately estimated at the time. The provision established in June 2000 when the Group acquired the Colonial Limited Group of companies to cover the integration of the Colonial operations into the existing Group is described in Note 1(z) of the financial statements for the year ended 30 June 2003. This provision for restructuring was estimated at $400 million at 30 June 2000. This initial estimate was subsequently revised up to $545 million in the year ended 30 June 2001. The revision to costs of restructure principally related to additional staff redundancy payments and information technology contract termination costs. The current transformation initiative is a three year program that is estimated to cost $1,480 million over the 2004 to 2006 period. It is expected that additional provisions for ‘Which new Bank’ costs will be established over the this period as accounting standard are met. the provisioning criteria in Description of Business Environment (continued) as ‘Excess of Net Market Value over Net Tangible Assets of Life Insurance Controlled Entities’. This amount is the valuation of assessed periodically as part 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, involves actuarial judgement. the selection of which Economic assumptions are the long term view on key economic drivers and comprise investment earnings rates, risk discount inflation. The economic assumptions are reviewed as a suite to take account of the correlation between the movements in each factor. rates and 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 life The major business assumptions liabilities. businesses are: - - - - Sales/new business; Claims; Persistency; and Expenses. The major business assumptions for funds for management businesses are: - - - - Sales/new business; Margins/business mix; Redemptions; and Cost to income ratio. Details of the key assumptions used in the valuations are set out in Note 34 Life Insurance Business. Provision for Which new Bank costs On 19 September 2003, the Group launched its Which new Bank customer service vision. This is a three year transformation program and involves the Bank in 33 Corporate Governance Board of Directors Charter The role and responsibilities of the Board of Directors are set out in the Board Charter. The responsibilities include: - 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 - - 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 and financial objectives; − approving major corporate initiatives; systems − establishing appropriate of risk management; and − monitoring the performance of management; Communicating with the community, results of, and developments in, the operations of the Bank; shareholders and 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 - - Nominations Remuneration Audit Risk Chairman Chairman Chairman Chairman Deputy Chairman Member Chairman Member Chief Executive Officer J T Ralph, AC J M Schubert D V Murray N R Adler, AO R J Clairs, AO Non-executive, Independent Non-executive, Independent Executive Non-executive, Independent Non-executive, Independent A B Daniels, OAM Non-executive, Independent C R Galbraith, AM Non-executive, S C Kay W G Kent, AO F D Ryan F J Swan B K Ward Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent - - 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 has determined that upon the retirement of Mr Ralph and Mr Adler at the 2004 Annual General Meeting, the number of directors shall be 10; and 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 has 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, the Chairman will be expected to be available for that position for five years). Directors do not stand for re-election after attaining the age of 70. - 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. Member Member Member Member Member Member Member Member Member Member Member Member Member Member Member Member 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 the related party dealings are set out Company's accounts as required by law. in notes to independent Directors. All the current non-executive Directors of the Bank have been assessed as In reaching that determination, the Board has taken into account (in addition to the matters set out above): - The specific disclosures made by each Director as referred to above; Where applicable, related party dealings referrable to each Director, noting that those dealings are not material under accounting standards; the - 34 - - Corporate Governance (continued) 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 has established a policy limiting Directors' that skill sets remain appropriate in a dynamic industry. to ensure tenures - Education Directors participate in an induction programme upon appointment and in a refresher program on a regular basis. The Board has established a program 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 has 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 information made available to Directors. Every two 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 at least annually with members of the senior executive team to discuss with them the Board’s performance and level of involvement from their perspective. Selection of Directors The Nominations Committee has developed a set of criteria for director appointments which have been adopted by the Board. The criteria set the objective of the Board as being as effective, and preferably more effective than the best boards in the comparable peer group. These criteria, which are reviewed annually, ensure that any new appointee is able to contribute to the ongoing effectiveness of the Board, have the ability to exercise sound business judgment, to think strategically and have demonstrated leadership experience, high levels of professional skill and appropriate personal qualities. 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. The Bank has adopted a policy whereby, 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: - 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. 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 in involvement in discussions and decisions on strategy. Matters having strategic implications are given priority on the agenda for regular Board meetings. In addition, ongoing strategy is the major focus of at least two of the Board meetings annually; The Board has an agreed policy on the basis on which Directors are entitled to obtain access to company documents and information and to meet with management; and The Bank has 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 generally made available to all Directors. - - - - Ethical Standards Conflicts of Interest In accordance with interest. the Constitution and In compliance with section 195 of the Corporations Act 2001, Directors are required to disclose to the Board any material contract in which they may have the an 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. In addition, any director who has a conflict of interest in connection with any matter being considered by the Board or a Committee does not receive a copy of any paper dealing with the matter. in the securities of Share Trading The restrictions imposed by law on dealings by the Bank have been Directors the Board of Directors adopting supplemented by guidelines which limit any such dealings by Directors, their spouses, any dependent child, family company or family trust. further The guidelines provide, that in addition to the requirement that Directors not deal in the securities of the Bank or any related company when they have or may be perceived as having relevant unpublished price-sensitive information, Directors are only permitted to deal within certain periods. These periods include between three and 30 days after the announcement of half yearly and final results and from three days after release of the annual report until 30 days after the Annual General Meeting. Further, the guidelines require that Directors not deal on the basis of considerations of a short term nature or to the extent of trading in those securities. Similar restrictions apply to executives of the Bank. - In addition, Bank policy prohibits: For Directors and executives who report to the Chief Executive Officer, any hedging of publicly disclosed shareholding positions; and 35 Corporate Governance (continued) For executives, any trading (including hedging) in - positions prior to vesting of shares or options. Remuneration Arrangements Remuneration Committee The Board has established a Remuneration - - - Committee to: - - - - 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 industrial compliance 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 has an established work plan which allows it to review all major human resource policies, strategies and outcomes. Non-Executive Directors’ Remuneration The Constitution and the Australian Stock Exchange (“ASX”) Listing Rules specify that the aggregate fees of non-executive Directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined, is divided among 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 fees 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 44. 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 for the 2000 Annual General Meeting. The Non-Executive Directors’ Retirement Allowance Scheme which provides for retirement benefits to be paid to non-executive Directors was approved by shareholders at the 1997 Annual General Meeting. The terms of this scheme allowed for a benefit on a pro-rata basis to a maximum of four years total emoluments after 12 years service. In July 2002, the Board closed the scheme to any newly appointed directors. The entitlement of the non- executive Directors at the time were not affected and continued to accrue further benefits. 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, and are consistent with those applying to other executives of the Bank. Executive Remuneration The Bank’s remuneration systems complement and reinforce its leadership and succession planning systems. The Bank’s remuneration framework aims to reward executives with a mix of remuneration appropriate to their level in the organisation and incorporates a significant weighting to towards variable (“at risk”) pay performance, both short term and long term. This focus aims to: - reward executives for bankwide, business unit and individual performance against targets set by reference to appropriate benchmarks; linked align the interests of executives with those of shareholders; link executive reward with the strategic goals and performance of the Bank; and ensure total remuneration is competitive by market standards. Remuneration and terms and conditions of employment are specified in an individual contract of employment with each executive which is signed by the executive and the Bank. Remuneration of the Bank’s executives consists of three key elements” - - - Fixed Remuneration; Short Term Incentive (“STI”); and Long Term Incentive (“LTI”). The relationship of fixed remuneration and variable pay (potential short term and long term incentives) is established for each level of executive management by the Remuneration Committee. Fixed remuneration is reviewed annually by the Remuneration Committee through a process that considers bankwide, business unit and individual performance, relevant comparative remuneration in the market and internal and, where appropriate, external advice on policies and practices. The Committee has access to external advice independent of management. Actual STI payments for executives depend on the extent to which operating targets set at the beginning of the financial year are met. These targets consist of a number of Key Result Areas (“KRAs”) covering both financial and non-financial measures of performance. Included are measures such as contribution to net profit after tax (“NPAT”), customer service, risk management, product management, and leadership/team contribution. STI Payments to executives are usually delivered in two components - - Fifty percent made as an immediate cash payment; and Fifty percent deferred in the form of shares in the Bank. The shares acquired vest in two equal instalments after one and two years respectively. Dividends on the shares are not paid to the executive unless and until the shares vest. Generally, the executive will need to be an employee of the Bank at the relevant vesting date to receive the shares. LTI grants to executives are delivered in the form of Reward Shares under the Bank’s Equity Reward Plan (“ERP”). No value accrues to the executive unless the Bank’s Total Shareholder Return (“TSR”) at least meets the median of a peer comparator group of companies. To receive the full value of the LTI grant, the Bank’s performance must be in the top quartile of the peer group. The percentage of shares vesting in the executive will be based on a sliding scale where 50% of allocated shares vest if the Bank’s TSR is equal to the median return, 75% vest at the 67th percentile and 100% when the return exceeds the 75th percentile, ie. when the Bank’s return is in the top quartile. Where the rating is below the median return on the third anniversary of grant, the shares can still vest if the rating reaches the median prior to the fifth anniversary, but the maximum vesting will be 50%. Purchase of Shares on the Market Currently, Reward Shares purchased on market to satisfy incentives earned by executives under the ERP are charged against profit and loss as are incentives paid in cash and in deferred shares under the Equity Participation Plan (“EPP”). As from the beginning of the 2003 financial year, total remuneration, which includes the full cost of the ERP and EPP and also the distribution of shares to employees under the ESAP, have been expensed against profits. 36 Corporate Governance (continued) Further Information Further detail of remuneration arrangements for Directors and executives of the Bank is outlined in the Directors’ Report. Individual remuneration details of Directors and Specified Executives are set out in Note 44 to the Financial Statements. - - - - the chief 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: - The Audit Committee consists entirely of 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 permitted to be the Chairman of the Audit 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; and 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 Securities and Exchange Commission (“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 regulations and laws, current with 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. 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: - The financial statements and their conformity with accounting standards, other mandatory reporting 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. relevant - - - - - - The Board has determined that Fergus Ryan is an “audit committee financial expert” within the meaning of that term as described in the SEC rules. Although the Board has determined that this individual has the requisite the SEC, his attributes defined under responsibilities are the same as those of the other Audit Committee members. He is not an auditor, does not the rules of 37 perform “field work” and is not a full time employee. The SEC has determined that an audit committee member who is designated as an audit committee financial expert will not be deemed to be an “expert” for any purpose as a result of being identified as an audit committee financial expert. The Audit Committee is responsible for oversight of management in the preparation of the Bank’s financial statements and financial disclosures. The Audit Committee relies on the information provided by management and the external auditor. The Audit Committee does not have the duty to plan or conduct audits to determine whether the Bank’s financial statements and disclosures are complete and accurate. Non-Audit Services The Board has in place an External Auditor Services Policy which only permits the Independent Auditor to carry out audit services and audit related services which are an extension of the audit services and certain other services pre-approved by the Audit Committee. All other non-audit services are prohibited. The objective of this policy is to avoid prejudicing the independence of the Auditors. - - - - - - - The policy also ensures that the Auditors do not: Assume the role of management or act as an employee; Become an advocate for the Bank; Audit their own work; Create a mutual or conflicting interest between the Auditor and the Bank; Require an indemnification from the Bank to the Auditor; Seek contingency fees; nor Have a direct financial or business interest or a material indirect financial or business interest in the Bank or any of its affiliates, or an employment relationship with the Bank or any of its affiliates. Under the policy, the Auditor shall not provide the following services: (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) and design (cid:131) (cid:131) (cid:131) (cid:131) systems functions, investment information to accounting investment adviser or including acting as an Bookkeeping or services relating records or financial statements of the Bank; Financial implementation; Appraisal or valuation services and fairness opinions; Actuarial services; Internal audit outsourcing services; Management employee; Human resources; Broker-dealer, banking services; Legal services; or Expert services unrelated to the audit. In general terms, the permitted services are: Audit services to the Bank or an affiliate, covered by an engagement the Audit Committee, financial and statutory audits of affiliates and services connected with lodgement of statements or documents with ASX, ASIC, APRA, SEC or other regulatory or supervisory bodies; Services reasonably related to the performance of the audit services; Agreed upon procedures or comfort letters provided by the Auditor to third parties in connection with the Bank’s financing or related activities; and Other services pre-approved by the Audit Committee. The SEC has requested that the Bank produce documents and information relating to all services provided by the Bank’s external auditors, Ernst & Young, since 1 July 2000, in the context of the US auditor independence rules. The Bank understands that the SEC has made similar requests to certain other Australian companies registered with the SEC and accounting firms. letter approved by the (cid:131) (cid:131) (cid:131) The Bank is producing the documents and information requested. Although the Bank cannot predict the nature of any future action if the SEC determines that any services Corporate Governance (continued) provided by Ernst & Young did not comply with the SEC’s rules and while the SEC could seek sanctions of a type or in amounts not currently known, based on information currently available to the Bank, it does not believe the outcome of the SEC’s ongoing inquiry will have a material adverse financial effect on the Commonwealth Bank Group. Auditor Ernst & Young was appointed as the Auditor of the Bank at the 1996 Annual General Meeting and continues in that office. The audit partner from Ernst & Young attends the Annual General Meetings of the Bank and is available to respond to shareholder audit related questions. The Bank currently the partner managing the audit for the external Auditor be changed within a period of five years. requires that The Chief Executive Officer is authorised to appoint and remove the chief internal audit executive only after consultation with the Audit Committee. Risk Management Risk Committee The Risk Committee oversees credit, market, and operational 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 to achieve portfolio underwriting standards designed 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 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. 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 independent non executive directors. The Chief Executive Officer attends the meeting by invitation. In addition to its role in proposing candidates for director appointment for consideration by the Board, the Committee reviews fees payable to non-executive directors and reviews, and advises the Board in relation to Chief Executive Officer succession planning. Continuous Disclosure The Corporations Act 2001 and the ASX Listing Rules require that a company discloses to the market matters which could be expected to have a material effect on the price or value of the company’s securities. The 38 Bank’s “Guidelines for Communication between the Bank and Shareholders” sets out the processes to ensure that shareholders and the market are provided with full and timely information about the Bank’s activities in compliance with continuous disclosure requirements. Management procedures 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 established reporting lines, or as a part of the deliberations of the Bank’s Executive Committee. Matters reported are assessed and, where required by the Listing Rules, advised to the market. The Company Secretary is responsible for communications with the ASX and for ensuring that such information is not released to any person until the ASX has confirmed its release to the market. Ethical Policies 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. - - Statement of Professional Practice The Bank has adopted a code of ethics, known as a Statement of Professional Practice, which sets standards of behaviour required of all employees and directors including: - To act properly and efficiently in pursuing the objectives of the Bank; To avoid situations which may give rise to a conflict of interest; To know and adhere Employment Opportunity policy and programs; To maintain confidentiality in the affairs of the Bank and its customers; and To be absolutely honest in all professional activities. These standards are regularly communicated to staff. In addition, the Bank has established insider trading guidelines for staff to ensure that unpublished price sensitive information about the Bank or any other company is not used in an illegal manner. the Bank’s Equal to - - Our People The Bank is committed to providing fair, safe, challenging and the rewarding work, importance of attracting and retaining high quality 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 : - - - - - - - - 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 to the Chief Compliance Officer by the Chief Security Officer, who administers the reporting and investigation system. The Chief Security Officer reports any such matters to the Audit Committee, noting the status of resolution and actions to be taken. Corporate Governance (continued) Governance Philosophy The Board has consistently placed great importance on the governance of the Bank, which it believes is vital to the well-being of the corporation. The Bank has adopted a framework of Corporate Governance comprehensive 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. The Guidelines and the practices of the Bank comply with all the current best practice recommendations set by the ASX Corporate Governance Council. US Sarbanes-Oxley Act On 30 July 2002, a broad US financial reporting and corporate governance reform law, called the Sarbanes- Oxley Act of 2002 (“SOX Act”), was enacted. By its terms, this Act applies to the Group because it has certain securities registered with the SEC under the Securities Exchange Act of 1934 (“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 has 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: - - - - 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 they have disclosed to 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 to providing that these certifications make the following disclosures in its annual report on Form 20-F: - The Group’s Chief Executive Officer and Chief the assistance of other Financial Officer, with members of the Group’s management, have evaluated the effectiveness of 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 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 an exception 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. Ordinary course lending that is considered “consumer credit” is in certain circumstances also exempt. Furthermore, in April 2004, the SEC adopted a rule exempting from the prohibition loans made by foreign banks meeting certain requirements. 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 financial officer, principal executive officer, principal 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: - - their knowledge, 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; for establishing and That 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: such disclosure − they are responsible the designed 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 report is reasonably the Group’s internal control over financial reporting; and that has materially affected, or to materially affect, likely − − 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: − all significant deficiencies (if any) in the design or operation of internal controls over financial reporting which are to adversely affect the Group’s ability to record, reasonably likely - - - 39 Company Secretaries The details of the Bank’s company secretaries, including their experience and qualifications are set out below. John Hatton has been Company Secretary of the Commonwealth Bank since 1994. From 1985-1994, he was a solicitor with the Bank’s Legal Department. He has a law degree from Sydney University and was admitted as a solicitor in New South Wales. He is a Fellow of the Chartered Secretaries Australia and a Member of the Australian Institute of Company Directors. Henry Broekhuijse was appointed a Company Secretary to the Bank in August 2001. He joined the Commonwealth Bank Legal Department in January 1979 and has approximately 25 years experience as an in-house lawyer. He has a BA from Sydney University and an LLB from the University of New South Wales. He is a Member of the Law Society of NSW; Australian Corporate Lawyers Association; City of Sydney Law Society; and the Risk Management Association – Australia. Corporate Governance (continued) − process, summarise and report financial data; and any fraud, whether or not material, that 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 2004. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that the Group’s disclosure controls and procedures are effective. Changes in internal control over financial reporting No changes in our internal controls over financial reporting occurred during the year ended 30 June 2004 that have materially affected, or are reasonably likely to materially affect, our financial reporting. Material changes in our internal controls over financial reporting will occur from 1 July 2005 with the transition to International Financial Reporting Standards, refer to Note 1 (pp) to the Financial Statements. internal controls over 40 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 2004. 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 for Science Management), Australian Foundation (Chairman), (Chairman), Australian Farm Australian (Fellow), Institute of Company Directors Australian Institute of Management (Fellow), Australian Academy of Science (Fellow), Australian Academy of Technological Science and Engineering (Fellow), Scouts Australia Victorian Branch (President) and St Vincent’s Institute Foundation (Patron). Institute Mr Ralph is a resident of Victoria. Age 71. 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 Risk and Nominations Committees. He holds a Bachelor’s 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 former Chairman and International Limited and Managing Director of Esso Australia Ltd. the Chairman: Worley Group Limited and G2 Therapies Limited. Director: BHP Billiton Limited, BHP Billiton plc, and Qantas Airways Limited. Other Interests: Academy of Technological Science (Fellow), Great Barrier Reef Research Foundation (Deputy Chairman), AGSM Advisory Board (Member), and Business Council of Australia (Member). Dr Schubert is a resident of New South Wales. Age 61. 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. (Member), and the Financial Sector Advisory Council (Member). Mr Murray is a resident of New South Wales. Age 55. N R (Ross) Adler, AO Mr Adler has been a member of the Board since 1990 and is a member of the Audit and Risk Committees. 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. He is the former Managing Director and Chief Executive Officer of Santos Limited. Chairman: Austrade and Amtrade International Pty Ltd. Director: Australian Institute of Commercialisation Ltd and AWL Enterprises Pty Ltd. Other Interests: Adelaide Festival (Chairman), University of Adelaide (Council Member and Chairman of the Finance Committee) and Executive Member of the Australian Japan Business Co-operation Committee. Mr Adler is a resident of South Australia. Age 59. Reg J Clairs, AO Mr Clairs has been a member of the Board since March 1999 and is a member of the Remuneration and Risk Committees. As the former Chief Executive Officer of Woolworths Limited, he had thirty-three years’ experience in retailing, branding and customer service. Director: David Jones Ltd and The Cellnet Group. Deputy Chairman: National Australia Day Council. Other Interests: Institute of Company Directors (Member). Mr Clairs is a resident of Queensland. Age 66. A B (Tony) Daniels, OAM Mr Daniels has been a member of the Board since March 2000 and is a member of the Remuneration and Risk Committees. He 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. experience extensive has Director: Australian Gas Light Company and O'Connell St Associates. Other Interests: Australian Institute of Company Directors (Fellow) and Australian Institute of Management (Fellow). Mr Daniels is a resident of New South Wales. Age 69. Colin R Galbraith, AM Mr Galbraith has been a member of the Board since June 2000 and is a member of the Risk Committee. He was previously a Director of Colonial Limited, appointed 1996. He is a partner of Allens Arthur Robinson, Lawyers. Director: Tara Anglican School Limited. for Girls Foundation Chairman: BHP Billiton Community Trust. Interests: International Monetary Conference Other (Member), Asian Bankers’ Association (Member), Australian Bankers’ Association (Member), Asia Pacific Bankers' Club (Member), Business Council of Australia 41 Director: GasNet Australia (Group) and OneSteel Limited. 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 63. Barbara K Ward Ms Ward has been a member of the Board since 1994 and is a member of the Audit and Risk Committees. 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 experience in the transport and aviation industries, most recently as Chief Executive of Ansett Worldwide Aviation Services. Chairperson: Country Energy. Director: Lion Nathan Limited, Allens Arthur Robinson, Multiplex Limited and Multiplex Funds Management Limited. Other Interests: Sydney Opera House Trust (Trustee), Australia Day Council of New South Wales (Member) and Australian Institute of Company Directors (Member). Ms Ward is a resident of New South Wales. Age 50. Directors’ Report (continued) Other Interests: Council of Legal Education in Victoria (Honorary Secretary), CARE Australia (Director) and Royal Melbourne Hospital Neuroscience Foundation (Trustee). Mr Galbraith is a resident of Victoria. Age 56. S Carolyn H Kay Ms Kay has been a member of the Board since March 2003 and is also 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. She was a senior executive at Morgan Stanley in London and Melbourne for 10 years and 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 Limited and Deputy Chair Victorian Funds Management Corporation. Other Interests: Australian Institute of Company Directors (Fellow). Ms Kay is resident in Victoria. Age 42. 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. Chairman: Coventry Group Limited and West Australian Newspapers Holdings Limited. Director: Perpetual Trustees Australia Limited Group. Other Interests: Walter and Eliza Hall Trust (Trustee), Australian (Fellow), Institute of Company Directors Australian Society of CPAs (Fellow), Australian Institute of Bankers (Fellow) and the Chartered Institute of Company Secretaries (Fellow). Mr Kent is a resident of Western Australia. Age 68. Fergus D Ryan Mr Ryan has been a member of the Board since March 2000 and is a member of the Audit and Risk Committees. 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. Until November 2002, he was Strategic Investment Co-ordinator and Major Projects Facilitator for the Commonwealth Government. Member: Prime Minister's Community Business Partnership and Council of the National Library of Australia. Director: Australian Foundation Limited and Clayton UTZ. Investment Company Other Interests: Committee for Melbourne (Patron), Pacific Institute (Counsellor) and Special Committee for Mature Age Workers (Chairman). Mr Ryan is a resident of Victoria. Age 61. Frank J Swan Mr Swan has been a member of the Board since July 1997 and is a member of the Risk and Nominations Committees. 42 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: No. of Meetings Held(1) DIRECTORS’ MEETINGS No. of Meetings Attended 11 11 11 11 11 11 11 11 11 10 9 9 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 DIRECTOR J T Ralph J M Schubert(2) D V Murray N R Adler(2) R J Clairs(2) A B Daniels(2) C R Galbraith S C Kay W G Kent F D Ryan(2) F J Swan B K Ward(2) DIRECTOR J T Ralph J M Schubert D V Murray F J Swan 11 11 11 11 11 11 11 11 11 11 11 11 2 2 2 2 (1) 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(1) No. of Meetings Attended No. of Meetings Held(1) No. of Meetings Attended No. of Meetings Held(1) No. of Meetings Attended 8 4 8 4 4 4 8 8 8 4 8 4 8 4 8 3 4 4 8 8 8 4 7 3 7 7 7 7 7 7 7 7 8 8 8 8 8 8 No. of Meetings Held(1) NOMINATIONS COMMITTEE No. of Meetings Attended 2 2 2 2 (1) The number of meetings held during the time the Director was a member of the relevant committee. (2) Directors appointed to Risk Committee in April 2004. Principal Activities The Commonwealth Bank Group is one of Australia’s leading providers of integrated financial services including retail, business and institutional banking, superannuation, life insurance, general insurance, funds management, broking services and finance company activities. The principal activities of the Commonwealth Bank Group during the financial year were: (i) 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. For our corporate and institutional clients, we offer a broad range of structured finance, equities and advisory solutions, financial markets and equity markets solutions, transactions banking, and merchant acquiring. including business 43 The Group also has full service banking operations in New Zealand and Fiji. The Group has wholesale banking operations in London, New York, Hong Kong, Singapore and Tokyo. (ii) Funds Management administration. The Group’s The Group is Australia’s largest funds manager and largest retail funds manager in terms of its total value of funds funds under the management business Investment and Insurance Services division. This business manages a wide range of wholesale and retail investment, superannuation and retirement funds. Investments are across all major asset classes including Australian and International shares, property, fixed interest and cash. is managed as part of The Group also has funds management businesses in New Zealand, UK and Asia. (iii) Insurance The Group provides insurance, disability insurance, annuities, master trusts, investment products and household general insurance. term Directors’ Report (continued) 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 2004 was $2,572 million (2003: $2,012 million). The net operating profit for the year ended 30 June 2004 after tax, and before goodwill amortisation, appraisal value uplift, shareholder investment returns and costs related to initiatives including Which new Bank was $3,078 million. This is an increase of $404 million or 15% over the year ended 30 June 2003. systems and process On 19 September 2003, the Group launched its Which new Bank customer service vision. This is a three year transformation program and involves the Bank in additional expenditure in the key areas of staff training and skilling, simplification, and technology. In the period to 30 June 2004 such expenses and provisions have totalled $749 million and principally previously comprise capitalised software of $219 million, process improvements and branch refurbishment. The outstanding provision for Which new Bank costs at 30 June 2004 is $208 million. redundancies, expensing of to factors The principal contributing this profit increase were a growth in net interest income reflecting continued strong housing loan growth together with growth in commissions, and a decrease in charge for bad and doubtful debts. Underlying operating expenses have increased by 4% over the year, primarily due to salary increases and increases in volume related expenses. Funds management and insurance income rose which reflects the effect of rising equity markets for most of the year and improved underwriting and claims management. Dividends The Directors have declared a fully franked (at 30%) final dividend of 104 cents per share amounting to $1,315 million. The dividend will be payable on 24 September 2004 to shareholders on the register at 5pm on 20 August 2004. Dividends paid since the end of the previous financial year: (cid:131) As declared in last year’s report, a fully franked final dividend of 85 cents per share amounting to $1,066 million was paid on 8 October 2003. The payment comprised cash disbursements of $865 million with $201 million being reinvested by participants through the Dividend Reinvestment Plan; and In respect of the current year, a fully franked interim dividend of 79 cents per share amounting to $996 million was paid on 30 March 2004. The payment of $808 million with $188 million being reinvested by participants through the Dividend Reinvestment Plan. Additionally, quarterly dividends totalling $37 million for the year were paid on the PERLS preference shares; $15 million on the PERLS II (for distributions in March 2004 and June 2004); $40 million on the Trust Preferred Securities; and $9 million on the ASB Capital preference shares. disbursements comprised cash (cid:131) (cid:131) Review of Operations An analysis of operations for the financial year is set out in the Highlights on pages 5 to 8 and business analysis on pages 9 to 25. Changes in State of Affairs During the year, the Bank made significant progress in implementing a number of strategic initiatives under the Which new Bank program launched in September 2003. The program is designed to ensure a better service outcome for the Bank’s customers. The major initiatives undertaken during the year included: (cid:131) (cid:131) (cid:131) Changes to the home loan process, which make applying for a new loan much simpler and easier; The refurbishment of 125 branches to a modern layout conducive to effective customer service; A continued emphasis on reducing customer waiting times and changes to frontline customer service roles designed to ensure a greater proportion of staff time is spent serving customers; and A restructure of funds management back office to reduce costs and provide simpler services processes. In May 2004 the Bank announced the merger of its Premium Financial Services and Institutional and Business Services divisions to form Premium Business Services. This merger did not result in any significant change in the nature of the business activities. (cid:131) There were no other significant changes in the state of affairs of the Group during the financial year. Events Subsequent to Balance Date The Directors are not aware of any matter or circumstance that has occurred since the end of the financial year that has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Future Developments and Results Major developments, which may affect the operations of the Group in subsequent financial years, are referred to in the Chairman’s Statement on page 3. In the opinion of the Directors, disclosure of any further information on likely developments in operations would be unreasonably prejudicial to the interests of the Group. Environmental Regulation The Bank and its controlled entities are not subject to any particular or significant environmental regulation under a law of the Commonwealth or of a State or Territory, but can incur environmental liabilities as a lender. The Bank has developed credit policies to ensure this is managed appropriately. 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 its continuation was An Executive Option Plan (“EOP”) was approved by shareholders at the Annual General Meeting on 8 October 1996 and further approved by shareholders at the Annual General Meeting on 29 October 1998. At the 2000 Annual General Meeting, the EOP was discontinued and shareholders approved the establishment of the Equity Reward Plan (“ERP”). The last grant of options to be made under the ERP was the 2001 grant, with options being granted 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 in the 2001 grant. During the financial year, the performance hurdles for the August 1999 and September 2000 EOP grants were met. During the financial year and for the period to the date of this report 1,837,600 shares were allotted by the Bank consequent to the exercise of options granted under the Executive Option Plan and Equity Reward Plan. Full details of the Plan are disclosed in Note 44 Directors’ Report (continued) 29 to the financial statements. No options have been allocated since the beginning of the 2001/02 financial year. 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 previously granted to the Chief Executive Officer, being a director, refer to Note 44 to the Financial Statements. 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”. 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 41 to 42 of this report, and the Secretaries of the Commonwealth Bank, being J D Hatton and H J Broekhuijse 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 insurance premium The Commonwealth Bank has, during the financial year, paid an 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 the 2001. 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, Remuneration This report outlines the remuneration arrangements for Directors and executives of the Bank. In compiling this report, the Bank has taken into account the requirements of the Government’s Corporate Law and Economic Reform Program (“CLERP 9”) which is to take effect for reporting periods commencing from 1 July 2004. Whilst the Bank is not required to report under the new CLERP 9 framework for the year ended 30 June 2004, the Bank believes that this report will assist in meeting the intent of these reforms and will ensure that these requirements are met for future reporting periods. Remuneration Committee The Bank’s remuneration arrangements are overseen by the Remuneration Committee of the Board. The Committee considers changes in remuneration policy likely to have a material impact on the Bank and is informed of leadership performance, in employment issues, industrial agreements and incentive plans operating across the Bank. compliance legislative The Committee also considers senior appointments and remuneration arrangements for senior management. The remuneration arrangements for the CEO and his direct reports are approved by the full Board. 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. The Committee engages an external consultant to advise it directly in relation to the remuneration of executives. Non-Executive Director Remuneration The Constitution and the ASX Listing Rules specify remuneration of Non-Executive the aggregate that 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. 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. Under the Directors’ Retirement Allowance Scheme, which was approved by shareholders at the 1997 Annual General Meeting, Directors accumulate a retirement benefit on a pro-rata basis to a maximum of four years’ total emoluments after twelve years’ service. No benefit accrues until the Director has served three years on the Board. In 2002 the Board decided to discontinue the Directors’ Retirement Allowance Scheme without affecting the entitlements of then existing Non-Executive Directors. After that time new Directors are not entitled to participate in the scheme. As part of a proposed arrangement relating to remuneration, the Board will be seeking shareholder approval at the 2004 Annual General Meeting to terminate accrual of further benefits under the Scheme and freeze the entitlements of current members until their respective retirements. This approach will result in remuneration arrangements being expressed in a more transparent manner which does not include retirement benefits (other than compulsory superannuation). Remuneration Principles and Structure The Bank’s remuneration systems complement and reinforce its leadership and succession planning systems. The Bank’s remuneration framework aims to reward executives with a mix of remuneration appropriate to their level in the organisation and incorporates a significant weighting to towards variable (‘at risk’) pay performance, both short term and long term. This focus aims to: (cid:131) Reward executives for bankwide, business unit and individual performance against targets set by reference to appropriate benchmarks; Align the interests of executives with those of shareholders; linked (cid:131) 45 These targets consist of a number of Key Result Areas (“KRAs”) covering both financial and non-financial measures of performance. Included are measures such as contribution to net profit after tax, customer service, risk management, product management, and leadership/team contribution. Depending on the executive’s the organisation, any actual STI payments received are based on a combination of bankwide, business unit and individual performance. level within On an annual basis, after consideration of performance against KRAs, an overall performance rating for the Bank and each individual business unit is approved by the Remuneration Committee. Individual performance is assessed by the executive’s manager based on the Bank’s performance management system. Executives who are not meeting the expectations of their role will generally not receive a payment. The aggregate of annual STI payments available for executives across the Bank is subject to the approval of the Remuneration Committee. In the case of the Chief Executive Officer and his senior direct reports, individual payments are subject to the approval of the Board. STI payments to executives are usually delivered in two components: (cid:131) (cid:131) Fifty percent made as an immediate cash payment; and Fifty percent deferred in the form of shares in the Bank. Shares are acquired under the mandatory component of the Bank’s Equity Participation Plan, more details of which may be the Financial Statements. The shares acquired vest in two equal instalments of one and two years respectively. Dividends on the shares are not paid to the executive unless and until the shares vest. Generally, the executive will need to be an employee of the Bank at the relevant vesting date to receive the shares. in Note 29 found to Variable Pay – Long Term Incentive (“LTI”) LTI grants to executives are delivered in the form of Reward Shares under the Bank’s Equity Reward Plan (“ERP”). LTI grants are only made to executives who are able to influence the generation of shareholder wealth and thus have a direct impact on the Bank’s performance against the relevant hurdle. Participation is thus restricted to executives who, in a reporting sense, are no more than three levels removed from the Chief Executive Officer. The quantum of grants made to each executive depends on their level within the organisation and has regard to the desired mix between fixed remuneration, short term and long term incentive as well as the performance and potential of the individual executive. No value will accrue to the executive unless the Bank’s Total Shareholder Return (“TSR”) at least meets the median of a peer comparator group of companies. To receive the full value of the LTI grant, the Bank’s performance must be in the top quartile of the peer group. The table over the page provides a summary of the ERP grants that were in operation during the 2003/04 year (cid:131) Directors’ Report (continued) (cid:131) Link executive reward with the strategic goals and performance of the Bank; and Ensure total remuneration is competitive by market standards. In determining appropriate levels of executive remuneration, the Remuneration Committee engaged an external consultant to provide independent advice both in the form of a written report detailing market levels of remuneration for comparable executive roles as well as the participation of the independent consultant in the meeting from which the Committee makes its recommendations to the Board. Remuneration and terms and conditions of employment are specified in an individual contract of employment with each executive which is signed by the executive and the Bank. Remuneration of the Bank’s executives consists of three key elements: (cid:131) (cid:131) (cid:131) Fixed Remuneration; Short Term Incentive (“STI”); and Long Term Incentive (“LTI”). The relationship of fixed remuneration and variable pay (potential short term and long term incentives) is established for each level of executive management by the Remuneration Committee. Currently, the variable component of remuneration is in the general range of around 35% to 80% of an executive’s total potential remuneration depending on their level in the organisation. As a result of the review with the external consultant of developments in the market, and benchmarking against peer organisations, the distribution of total potential remuneration for executives is being modified in the current year so as to increase the percentage for the STI component and decrease the percentage for the LTI component. For senior executives, including the CEO, the maximum STI potential available will generally be an amount equal to fixed remuneration. The structure for some specialists differs from that which applies generally to executive management. With specialists, a greater proportion of the variable component of remuneration may be in short term rather than long term incentives but the overall mix of remuneration is still heavily weighted towards ‘at risk’ pay. Fixed Remuneration Fixed remuneration is competitively set so that the Bank can attract, motivate and retain high calibre local and international executive staff. Fixed remuneration is reviewed annually by the Remuneration Committee through a process that considers individual performance, bankwide, business unit and relevant comparative remuneration in the market and internal and, where appropriate, external advice on policies and practices. As noted above, the Committee has access to external advice independent of management. Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles) as well as employer to superannuation. contributions Variable Pay – Short Term Incentive (“STI”) Actual STI payments for executives depend on the extent to which operating targets set at the beginning of the financial year are met. 46 Directors’ Report (continued) Commencement Date First Possible Vesting Date Final Possible Vesting Date Performance Hurdle 2000 Grant 13 Sep 2000 14 Sep 2003 13 Sep 2005 2001 Grant 3 Sep 2001 4 Sep 2004 3 Sep 2006 TSR vs Peer Group. If the performance hurdle is not reached after three years the options may nevertheless be exercisable or the shares vest, only where the hurdle is subsequently reached within five years from the commencement date. Vesting Scale < Weighted Average of Peers = 0% > Weighted Average of Peers = 100% Status as at 30 June 2004 Peer Group (GIO and BankWest were included prior to 19/01/00 and 26/08/03 respectively) Adelaide Bank Australia & New Zealand Banking Group AMP AXA Bank of Queensland Bendigo Bank IAG Vested on 31 Mar 04 Not yet vested (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) Macquarie Bank (cid:131) National Australia Bank (cid:131) (cid:131) (cid:131) QBE Insurance (cid:131) Westpac Banking Corporation St George Suncorp-Metway 2002 Grant 2 Sep 2002 3 Sep 2005 2 Sep 2007 2003 Grant 1 Sep 2003 2 Sep 2006 1 Sep 2008 TSR vs Peer Group. 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%. < 50th percentile = NIL 50th – 67th percentile = 50% - 75% 68th – 75th percentile = 76% - 100% Not yet vested Not yet vested The use of a relative TSR based hurdle is currently market best practice as it ensures an alignment between comparative for executives. return and shareholder reward the Bank In assessing whether the performance hurdles for receives each grant have been met, independent data from Standard & Poors which provides both the Bank’s TSR growth from the commencement of each grant and that of the peer group (excluding the Bank). The Bank’s performance against the hurdle is then determined as follows: (cid:131) the peer group For grants prior to 2002, the TSR of each company in is weighted by market capitalisation to form an index against which the Bank’s TSR is compared; and For grants in 2002 and 2003, each company in the peer group and the Bank is ranked in order of TSR growth from the commencement of each grant. The Bank’s percentile is determined by ranking aggregating the weighting within the peer group (based on market capitalisation) of each company ranked below the Bank. The peer group chosen for comparison reflects the (cid:131) Bank’s current business mix. Further details of the ERP may be found in Note 29 to the Financial Statements. Severance Arrangements The Bank’s executive contracts generally provide for severance payments of up to six months in the case of retrenchment. The contracts generally provide for a four week notice period. On exit from the Bank, executives are entitled to receive their statutory entitlements of accrued annual and long service leave as well as accrued superannuation benefits. Executives who leave the Bank during a given performance year (i.e. 1 July to 30 June) will generally not receive an STI payment for that year except in the circumstances of retrenchment, retirement or death. In those circumstances a pro-rated payment may be made based on the length of service during the performance year. forfeited where Deferred shares from previous STI grants are usually is dismissed. In circumstances of retrenchment, retirement and death any unvested shares will generally vest immediately. the executive resigns or forfeited where LTI grants are generally the executive resigns or is dismissed. In circumstances of retrenchment, retirement or death the executive or their estate may, at Board discretion, retain a pro-rated grant of long term incentives. Vesting of any long term incentives retained by the executive will still be subject to the performance hurdle relevant to that grant. 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. Mr Murray’s remuneration arrangements are in line with other executives except in relation to the need to seek shareholder approval of LTI grants. At the 2004 Annual General Meeting (“AGM”), the Board will be seeking the approval of shareholders for a 47 Directors’ Report (continued) maximum of 250,000 shares to be allocated to Mr Murray under the ERP in two tranches prior to the 2006 AGM. Mr Murray was granted 110,000 shares in 2002 and 90,000 shares in 2003 from the 200,000 shares approved at the 2001 AGM. At the 2001 AGM, shareholders also approved 1,000,000 options to be granted to Mr Murray. In line with the Bank’s decision to cease granting options to executives in 2002 none of the 1,000,000 options approved by shareholders were allocated and it is not intended to allocate these options. The severance arrangements in Mr Murray’s contract, other than for misconduct, provide for a notice period of six months and a pro-rata payment of the average of the previous three years short term incentive payment, payable in the event of termination by the Bank, after 1 May but before 30 June each year. In such circumstances, Mr Murray may exercise all vested options and obtain vested shares (including those that vest within two years from the Termination Date) within a period of three years from the Termination Date. Individual Remuneration details for Directors and Specified Executives The CLERP 9 reforms mentioned earlier in this report require that individual remuneration details of Directors and Specified Executives be included in this report. These requirements duplicate those of Accounting Standard AASB 1046 which requires these same details to be set out in the notes to the accounts. To avoid duplication, individual remuneration details of Directors and Specified Executives are set out in Note 44. 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 (as amended by ASIC Class Order 04/667). Signed in accordance with a resolution of the Directors. J T Ralph, AC Chairman 11 August 2004 D V Murray Managing Director and Chief Executive Officer 48 Five Year Financial Summary Financial Performance Net interest income Other operating income Total operating income Charge for bad and doubtful debts Operating expenses: Comparable business Initiatives including Which New Bank 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 uplift/(reduction) Goodwill amortisation Operating profit after income tax attributable to members of the Bank Contributions to profit (after tax) Banking Funds management Insurance Profit on operations ("underlying basis")(1) Shareholder investment returns Initiatives including Which New Bank Profit on operations (“cash basis”) Goodwill amortisation Appraisal value uplift/(reduction) Abnormal income/(expense) 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 Average interest earning assets Average interest bearing liabilities Assets (on balance sheet) Australia New Zealand Other Total Assets 2004 $M 2003 $M 2002 $M 5,410 5,081 10,491 276 5,500 749 6,249 3,966 (1,262) (9) 2,695 - - 201 (324) 5,026 4,373 9,399 305 5,312 239 5,551 3,543 (958) (6) 2,579 - - (245) (322) 4,710 4,358 9,068 449 5,201 - 5,201 3,418 (916) (1) 2,501 - - 477 (323) 2001 $M 4,474 4,350 8,824 385 5,170 - 5,170 3,269 (993) (14) 2,262 - - 474 (338) 2000 $M 3,719 2,420 6,139 196 3,407 - 3,407 2,536 (820) (38) 1,678 967 20 92 (57) 2,572 2,012 2,655 2,398 2,700 2,675 274 129 3,078 152 (535) 2,695 (324) 201 - 2,572 2,376 233 65 2,674 73 (168) 2,579 (322) (245) - 2,012 2,067 368 33 2,468 33 - 2,501 (323) 477 - 2,655 1,793 323 20 2,136 126 - 2,262 (338) 474 - 2,398 1,513 36 116 1,665 13 - 1,678 (57) 92 987 2,700 189,391 305,995 160,347 265,110 147,074 136,059 249,648 230,411 132,263 218,259 163,177 281,110 140,974 242,958 132,800 117,355 228,592 210,563 112,594 199,824 22,405 17,700 20,024 14,995 19,030 13,639 18,393 12,677 17,472 11,942 169,321 146,808 141,049 138,383 128,484 214,187 197,532 188,270 174,737 170,634 160,607 157,105 145,978 129,163 117,075 252,652 35,059 18,284 305,995 221,248 27,567 16,295 265,110 208,673 196,918 20,208 13,285 249,648 230,411 24,579 16,396 187,452 16,661 14,146 218,259 (1) “Underlying basis” excludes shareholder investment returns, initiatives including Which new Bank, goodwill amortisation, appraisal value uplift (reduction) and abnormal items. 49 Five Year Financial Summary (continued) Shareholder Summary Dividends per share (cents) - fully franked Dividend cover (times) - statutory Dividend cover (times) - cash Dividend cover (times) - underlying Earnings per share (cents) Basic before abnormal items after abnormal items cash basis(1) Underlying basis(2) Fully Diluted before abnormal items after abnormal items cash basis(1) underlying basis(2) Dividend payout ratio (%)(3) before abnormal items after abnormal items cash basis(1) underlying basis(2) Net tangible assets per share ($) Weighted average number of shares (basic) (m) Weighted average number of shares (fully diluted)(m) Number of shareholders Share prices for the year ($) Trading high Trading low End (closing price) Performance Ratios (%) Return on average shareholders' equity(4)(5) before abnormal items after abnormal items cash basis underlying basis Return on average total assets(4) before abnormal items after abnormal items cash basis underlying basis Capital adequacy - Tier 1 Capital adequacy - Tier 2 Deductions Capital adequacy – Total Net interest margin Other Information (numbers) Full time staff equivalent(6) Branches/service centres (Australia) Agencies (Australia) ATMs (Proprietary) EFTPOS terminals EzyBanking 2004 2003 2002 2001 2000. 183 1.1 1.1 1.3 196.9 196.9 206.6 237.1 196.8 196.8 206.5 237.0 93.5 93.5 89.1 77.6 12.2 1,256 1,257 714,901 33.54 27.00 32.58 13.0 13.0 13.2 15.1 0.9 0.9 0.9 1.1 7.43 3.93 (1.11) 10.25 2.53 154 0.9 1.3 1.4 157.4 157.4 202.6 210.2 157.3 157.3 202.5 210.0 97.7 97.7 75.9 73.3 11.4 1,253 1,254 746,073 32.75 23.05 29.55 10.7 10.7 13.3 13.8 0.8 0.8 1.0 1.0 6.96 4.21 (1.44) 9.73 2.67 150 1.4 1.3 1.3 209.6 209.6 197.3 194.6 209.3 209.3 197.0 194.3 136 1.4 1.3 1.2 189.6 189.6 178.8 168.8 189.3 189.3 178.6 168.5 130 1.2 1.6 1.2 184.8 291.2 181.0 179.6 184.4 290.7 180.6 179.2 71.7 71.7 76.2 77.2 10.3 1,250 1,252 722,612 71.2 71.2 75.5 80.2 9.6 1,260 1,262 83.5 53.0 85.3 85.9 9.2 927 929 709,647 788,791 34.94 24.75 32.93 34.15 26.18 34.15 27.95 22.54 27.69 14.7 14.7 13.1 12.9 1.1 1.1 1.0 1.0 6.78 4.28 (1.26) 9.80 2.76 13.5 13.5 12.0 11.4 1.1 1.1 1.0 1.0 6.51 4.18 (1.53) 9.16 2.78 22.1 34.8 19.1 18.9 1.1 1.7 0.9 0.9 7.49 4.75 (2.49) 9.75 2.88 36,296 1,012 3,866 3,109 126,049 815 35,845 1,014 3,893 3,116 129,959 760 37,245 1,020 3,936 3,049 126,613 730 37,460 1,066 3,928 2,931 39,631 1,441 4,020 3,092 122,074 116,064 603 659 Productivity Total Operating Income per full-time (equivalent) employee ($) Staff Expense/Total Operating Income (%) Total Operating Expenses(7)/Total Operating Income (%) 278,047 24.3 59.6 262,212 26.1 59.1 262,856 26.4 57.4 235,558 198,479 27.8 57.2 26.7 58.6 (1) (2) (3) (4) ‘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. ‘Underlying earnings’ for the purpose of these financial statements is defined as net profit after tax and before shareholder investment returns, initiatives including Which new Bank, abnormal items, goodwill amortisation and life insurance and funds management appraisal value uplift. Dividends paid divided by earnings. Calculations based on operating profit after tax and outside equity interests applied to average shareholders’ equity/average total assets. 50 Five Year Financial Summary (continued) (5) 2004 and 2003 shareholders’ equity includes retained earnings before provision for final dividend of $ 1,315 million and $1,066 million respectively. Prior periods’ return on average shareholders’ equity – cash basis and underlying 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 third party agencies. 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. (6) (7) 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 ..................................................................................................................................................................65 3. Revenue from Ordinary Activities ......................................................................................................................................67 4. Average Balances and Related Interest ............................................................................................................................68 5. Income Tax Expense .........................................................................................................................................................72 6. Dividends............................................................................................................................................................................74 7. Earnings Per Share............................................................................................................................................................75 8. Cash and Liquid Assets .....................................................................................................................................................75 9. Receivables from Other Financial Institutions ...................................................................................................................75 10. Trading Securities ..............................................................................................................................................................76 11. Investment Securities.........................................................................................................................................................77 12. Loans, Advances and Other Receivables..........................................................................................................................80 13. Provisions for Impairment ..................................................................................................................................................83 14. Credit Risk Management....................................................................................................................................................87 15. Asset Quality ......................................................................................................................................................................94 16. Insurance Investment Assets .............................................................................................................................................99 17. Deposits with Regulatory Authorities .................................................................................................................................99 18. Shares in and Loans to Controlled Entities........................................................................................................................99 19. Property, Plant and Equipment ........................................................................................................................................100 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 ...................................................................................................................................................118 31. Capital Adequacy .............................................................................................................................................................119 32. Maturity Analysis of Monetary Assets and Liabilities .......................................................................................................123 33. Financial Reporting by Segments ....................................................................................................................................125 34. Life Insurance Business ...................................................................................................................................................129 35. Remuneration of Auditors ................................................................................................................................................135 36. Commitments for Capital Expenditures Not Provided for in the Accounts ......................................................................135 37. Lease Commitments - Property, Plant and Equipment....................................................................................................135 38. Contingent Liabilities and Assets .....................................................................................................................................136 39. Market Risk ......................................................................................................................................................................138 40. Superannuation Commitments.........................................................................................................................................149 41. Controlled Entities ............................................................................................................................................................150 42. Investments in Associated Entities and Joint Ventures ...................................................................................................153 43. Standby Arrangements and Unused Credit Facilities ......................................................................................................153 44. Director and Executive Disclosures .................................................................................................................................154 45. Related Party Disclosures................................................................................................................................................164 46. Statement of Cash Flow...................................................................................................................................................165 47. Disclosures about Fair Value of Financial Instruments....................................................................................................167 Directors’ Declaration............................................................................................................................................................169 Independent Audit Report.....................................................................................................................................................170 Shareholding Information ....................................................................................................................................................171 International Representation ................................................................................................................................................175 52 Statements of Financial Performance for the year ended 30 June 2004 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 fee 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 Insurance margin on services operating income Total net operating income before appraisal value uplift/(reduction) Charge for bad and doubtful debts Operating expenses: Comparable business Initiatives including Which new Bank(1) Appraisal value uplift/(reduction) 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) Other equity instruments (issued 6 August 2003) Other equity instruments (issued 6 January 2004) Net Profit after Income Tax comprises: Net Profit after Income Tax ("underlying basis") Shareholder investment returns Initiatives including Which new Bank(1) Net Profit after Income Tax ("cash basis") Appraisal value uplift/(reduction) Goodwill amortisation Net Profit after Income Tax ("statutory basis") Note 2 2 3 3 3 3 2004 $M 13,287 7,877 5,410 943 (874) 2,777 8,256 1,175 1,967 (1,809) 1,333 2003 $M 11,528 6,502 5,026 GROUP 2002 $M 10,455 5,745 4,710 128 (106) 2,605 7,653 1,149 8 (91) 1,066 718 (628) 2,462 7,262 1,083 (393) 457 1,147 866 293 (500) 659 2004 $M 11,053 6,649 4,404 1,398 (1,823) 3,737 7,716 BANK 2003 $M 9,477 5,336 4,141 67 (52) 3,339 7,495 - - - - - - - - - - - - - - - - 1,012 840 (950) 902 1,131 620 (1,071) 680 10,491 9,399 9,068 7,716 7,495 2,13 276 305 449 263 266 2 2 2 34 5 7 7 6 6 5,500 749 6,249 201 (324) 3,843 1,262 2,581 (9) 2,572 (8) 54 46 5,312 239 5,551 (245) (322) 2,976 958 2,018 (6) 2,012 (129) 3 (126) 5,201 - 5,201 477 (323) 3,572 916 2,656 (1) 2,655 (146) (1) (147) 4,226 725 4,951 - (186) 2,316 669 1,647 - 1,647 10 43 53 3,997 239 4,236 - (186) 2,807 708 2,099 - 2,099 (7) - (7) 2,618 1,886 2,508 1,700 2,092 Cents per share 196.9 196.8 157.4 157.3 209.6 209.3 183 1,065 7,306 402 154 1,019 - - $M $M 3,078 152 (535) 2,695 201 (324) 2,572 2,674 73 (168) 2,579 (245) (322) 2,012 150 970 - - $M 2,468 33 - 2,501 477 (323) 2,655 (1) June 2004 results reflects the Which new Bank program, while prior year includes strategic initiatives undertaken and the cost of the June 2002 ESAP paid in October 2002. 53 2004 $M 6,453 8,369 14,896 11,447 189,391 15,019 28,942 38 - 1,204 239 4,705 25,292 305,995 163,177 6,641 15,019 - 14 811 997 24,638 44,042 19,140 274,479 6,631 281,110 24,885 13,359 687 1,573 3,946 2,840 GROUP 2003 $M 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 2004 $M 6,485 7,068 12,877 6,626 154,139 15,160 - 4 23,677 722 220 2,522 18,849 248,349 142,469 6,611 15,160 14,176 13 690 819 - 24,449 17,888 222,275 7,338 229,613 18,736 12,678 687 - 3,850 2,809 13,359 687 737 2,148 1,805 BANK 2003 $M 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 12,678 687 - 2,095 2,591 22,405 20,024 18,736 18,051 304 2,176 2,480 24,885 304 1,824 2,128 22,152 - - - 18,736 - - - 18,051 Statements of Financial Position as at 30 June 2004 Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers 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 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 Other equity instruments Reserves Retained profits Shareholders' equity attributable to members of the Bank Outside equity interests: Controlled entities Insurance statutory funds and other funds Total outside equity interests Total Shareholders' Equity Note 8 9 10 11 12 16 17 18 19 42 20 21 22 23 6 24 25 34 26 27 28 29 29 29 30 30 54 Statements of Changes in Shareholders’ Equity for the year ended 30 June 2004 Ordinary Share Capital Opening balance Buy back Buy back for dividend reinvestment plan Dividend reinvestment plan Employee share ownership schemes Share purchase plan Closing balance Preference Share Capital Opening balance Closing balance Other Equity Instruments Opening balance Issue of instruments Closing balance Retained profits Opening balance Reversal of provision for final dividend at 30 June 2002 (on adoption of AASB 1044) Share buy back Transfers from reserves Operating profit attributable to members of Bank Total available for appropriation Transfers to reserves Interim dividend - cash component Interim dividend - dividend reinvestment plan Provision for final dividend - cash component Payment of final dividend - cash component Payment of final dividend - 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 Reversal of revaluation deficit on sale of property 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 Closing balance Foreign Currency Translation Reserve Opening balance Currency translation adjustments Transfer to retained profits Closing balance Total Reserves Shareholders' Equity Attributable to Members of the Bank Note 29 29 29 2004 $M 12,678 (213) - 389 38 467 13,359 687 687 - 1,573 1,573 GROUP 2002 $M 2003 $M 12,665 - (361) 361 13 - 12,678 687 687 - - - 12,455 - (158) 329 39 - 12,665 687 687 - - - 2004 $M 12,678 (213) - 389 38 467 13,359 687 687 - 737 737 BANK 2003 $M 12,665 - (361) 361 13 - 12,678 687 687 - - - 2,809 1,452 1,160 2,591 1,402 - (319) 142 2,572 5,204 (201) (808) (188) - (865) (201) (101) 2,840 3,751 201 (142) 3,810 289 (9) 280 7 54 61 - - - 1,027 - 250 2,012 4,741 - (699) (166) - (832) (195) (40) 2,809 3,998 - (247) 3,751 289 - 289 4 3 7 - - - (197) (8) - (205) (65) (129) (3) (197) - - 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) - 81 (146) - (65) - (319) - 1,647 3,919 - (808) (188) - (865) (201) (52) 1,805 570 - - 570 1,027 - - 2,099 4,528 (9) (699) (166) - (832) (195) (36) 2,591 570 - - 570 1,531 - 1,531 1,531 - 1,531 - 43 43 - - - (6) 10 - 4 - - - - - - (8) (7) 9 (6) . 2,095 3,946 3,850 4,226 2,148 22,405 20,024 19,030 18,736 18,051 55 Statements of Cash Flows for the year ended 30 June 2004 Cash Flows From Operating Activities Interest received Dividends received Interest paid Other operating income received Expenses paid Income taxes paid Net increase in trading securities Life insurance: Investment income Premiums received(1) Policy payments(1) Net Cash provided by/(used in) Operating Activities Cash Flows from Investing Activities Payments for acquisition of entities and management rights Proceeds from disposal of entities and businesses Disposal of shares in other companies 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 Proceeds from issue of other equity instruments (net of costs) Net increase in deposits and other borrowings Net movement in debt issues Dividends paid (including DRP) Net movements in other liabilities Net increase/(decrease) in payables due to other financial institutions not at call Net increase in securities sold under agreements to repurchase Issue of loan capital Redemptions 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 Note 2004 $M 2003 $M 13,101 6 (7,543) 3,410 (5,529) (1,366) (4,324) 841 3,562 (4,529) 11,452 4 (6,455) 3,135 (5,438) (1,258) (2,484) 644 4,130 (5,855) GROUP 2002 $M 10,683 5 (5,805) 3,706 (5,366) (926) (1,159) 870 5,689 (5,704) 2004 $M 11,045 798 (6,351) 2,375 (4,459) (886) (4,672) - - - BANK 2003 $M 9,204 579 (5,248) 2,668 (4,233) (838) (1,814) - - - 46(c) (2,371) (2,125) 1,993 (2,150) 318 46(f) - 63 114 (173) 33 - (57) 314 - - 885 114 - - - (25,587) 697 24,407 (18,055) 23 17,719 (23,488) 295 22,192 (15,157) 390 14,904 (15,761) 31 16,449 (15) 66 (28) (2) 52 (29,328) - 69 (536) 292 (1,023) (1,461) (13,577) - 72 (143) (11,702) - 109 (164) (22,873) 1,412 7 (175) (11,022) 1,027 64 (103) 513 50 301 (855) (344) 731 (1,376) (241) (1,039) (1,537) (298) 125 (20,286) 21,500 (31,094) (13,091) 14,628 (11,634) (13,926) 14,618 (14,309) - - (23,415) - - (8,705) (532) 505 - 1,573 21,997 13,413 (1,774) (242) - 13 182 - 5,129 7,054 (1,933) (926) - 39 - - 15,135 (967) (1,661) 1,809 (532) 505 - 737 19,254 7,765 (1,726) 113 - 13 - - 3,004 4,931 (1,929) (1,024) (929) (796) 211 (909) (869) 206 985 (317) (2) 34,883 1,418 1,428 2,846 3,046 901 - 19 12,689 (1,070) 2,498 1,428 310 - - (100) 14,776 2,460 38 2,498 269 1,784 (317) (16) 26,927 1,362 277 1,639 3,045 600 - (15) 7,756 (631) 908 277 46(a) (1) These were gross premiums and policy payments before splitting between policyholders and shareholders. 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 the purpose 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 accounting polices applied are consistent with those of the previous year, except that the criteria for capitalised information technology software was amended, refer below. 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 that such differences would be material. is not anticipated it Unless otherwise indicated, all amounts are shown in $ million and are expressed in Australian currency. Software Capitalisation The criteria for technology software information capitalisation has been amended, such that only computer software projects costing $10 million or more are being capitalised and capitalisation those investments that will deliver identifiable and sustainable customer value and an increase in returns, in a significant line of business. limited to is This change has been applied retrospectively and has resulted in the expensing of $219 million of previously capitalised software at 1 July 2003. (b) Historical cost The the Bank and financial statements of 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 their present value unless otherwise stated. to (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. (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 the Financial Statements. in Note 42 to Investments in associates are carried at cost plus the Group’s share of post-acquisition profit or loss. The 57 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 losses arising from foreign exchange dealings are included in the results. The liabilities of overseas branches and overseas controlled entities are converted to Australian currency at 30 June 2004 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. foreign currency assets and 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 foreign currencies and the level of net foreign currency exposure does not have a material effect on its financial condition. in assets and liabilities in (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 (as amended by ASIC Class Order 04/667). (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 and losses on disposal and unrealised fair value adjustments trading are reflected securities is reported in net interest earnings. Trading trade date basis. securities are recorded on a Interest on Income’. ‘Other in Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (k) Investment securities Investment securities are securities purchased with the intent of being held to maturity. Investment securities are short and long term public, bank and other securities and include bonds, bills of exchange, commercial paper, certificates of deposit and equities. These securities are recorded at cost or amortised cost. Premiums and discounts are amortised through profit and loss each year from the date of purchase so that securities attain their redemption values by maturity date. Interest is reflected in profit when earned. Dividends on equities are brought to account in profit on declaration date. Any profits or losses arising from disposal prior to maturity are taken to profit in the period in which they are realised. The cost of securities sold is calculated on a specific identification basis. Unrealised losses related to permanent diminution in the value of investment securities are recognised in profit and the recorded values of those securities adjusted accordingly. Investment securities are recorded on a trade date basis. The relationship between book and net fair values of investment securities is shown in Note 11. (l) Repurchase agreements Securities sold under agreements to repurchase are retained within the investment or trading portfolios and accounted for accordingly. Liability accounts are used to record the obligation to repurchase and are disclosed as deposits and other public borrowings. Securities held under reverse repurchase agreements are recorded as liquid assets. (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 current financial period is reversed from profit and reserved if it has not been received in cash. If necessary, a specific provision for impairment is recognised so that the carrying amount of the facility does not exceed the expected future cash flows. In subsequent periods, interest in arrears/due on non accrual facilities is taken 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. loss when a cash payment to profit and Restructured Facilities When facilities (primarily loans) have the original contractual terms modified, the accounts become classified as restructured. Such accounts will have interest accrued to profit as long as the facility is performing on the modified basis 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 a performing basis. in accordance with the restructured terms. 58 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 in the statistically managed segment to cover facilities which are not well secured and past due 180 days or more, against the credit risk rated managed segment for exposures aggregating to less than $250,000 and 90 days past due or more, and against emerging credit in specific segments in the credit risk rated managed portfolio. These provisions are funded primarily by reference to historical identified risks Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued The useful lives of major depreciable assets are as follows: Buildings - Shell - Integral plant and equipment - carpets - all other (air-conditioning, lifts) - Non integral plant and equipment - fixtures and fittings Leasehold improvements Maximum 30 years 10 years 20 years 10 years Lesser of unexpired lease term or lives as above Equipment - Security surveillance systems - Furniture - Office machinery - EFTPOS machines 10 years 8 years 5 years 3 years The Bank has outsourced 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, the merger with the State Bank of Victoria in 1991 and from the acquisition of the 25% minority interest in ASB Group in New Zealand in August 2000 is each 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 for the Costs of Computer Software Developed or Obtained for Internal Use’, the Group carries net unamortised capitalised computer software costs of $107 million as at 30 June 2004 (2003: $248 million). The criteria for capitalised computer software costs was amended, effective 1 July 2003, refer to Note 1 (a). Such costs are amortised over the assessed useful life of the projects. An amortisation period of 2½ years is for most software developments. Software adopted maintenance costs continue to be expensed as incurred. (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. 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. 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. rates applicable to each category’s useful Equipment and assets held for lease is shown at cost less depreciation calculated principally on a category basis at life. Depreciation is calculated using the straight line method. It is treated as an operating expense and charged to profit. The amounts charged for the year are shown in Note 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. Investment property carried at lower of cost and recoverable amount is not depreciated in accordance with the depreciation guidance in AASB1021: Depreciation. . 59 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (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. for (x) income 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 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). tax and accounting purposes The Commonwealth Bank of Australia has elected to be taxed as a single entity under the tax consolidation system with effect from 1 July 2002. The Bank has formally notified the Australian Taxation Office of its adoption of the tax consolidation regime. 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. The provision the outstanding liability as at balance date. Actual payments made during the year are included in Salaries and Wages. leave represents for annual The provision for other employee entitlements represents liabilities for staff housing loan benefits, 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 (z) Provisions for restructuring 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 ‘Which new Bank’ costs On 19 September 2003, the Group launched its Which new Bank customer service vision. This is a three year transformation programme and involves the Bank in additional expenditure in the key areas of staff training and skilling, simplification, and technology. In the period to 30 June 2004 such expenses have totalled $749 million and principally comprise redundancies, expensing of previously capitalised software of $219 million, process improvements and branch refurbishment. The outstanding provision for ‘Which new Bank’ costs at 30 June 2004 is $208 million. systems and process (aa) Provision for self insurance The provision for self insurance covers certain non lending insurance risks. Actuarial reviews are carried out at regular intervals with provisioning effected in accordance with actuarial advice. losses and non transferred (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 guidelines. Loan capital debt issues are recorded at cost or amortised cost. Premiums, discounts and associated 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. (ee) Shareholders’ equity Ordinary share capital is the amount of paid up capital from the issue of ordinary shares. Preference Share Capital and Other Equity Instruments is the amount of paid up capital from the issue of preference shares and other equity instruments respectively. 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 $3,106 million, including the appraisal value uplift (2003: $2,905 million and 2002: $3,150 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 foreign instruments derivative 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 60 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued 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 as they occur. Derivative financial instruments held or issued for purposes other than trading is in holding or The principal objective to manage balance sheet 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 modify rate or credit characteristics of the hedged asset or liability. Such derivative financial instruments are purchased with the intent of being held to maturity. Derivatives that are designated and effective as hedges are accounted for on the same basis as the instruments they are hedging. identified and allocated against rate, exchange interest the Swaps Interest rate swap receipts and payments are accrued to profit as interest of the hedged item or class of items being hedged over the term for which the swap is effective as a hedge of that designated item. Premiums or discounts to market interest rates 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 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. the previous paragraph. in 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. 61 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 on instruments is shown in Note 39. information derivative financial (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 the broader customer credit process and 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. Lending fees Material non refundable front end loan fees that are yield related and do not represent cost recovery, are taken to profit over the period of the loan. Associated costs incurred in these lending transactions are deferred and netted against yield related loan fees. Where non refundable front end loan fees are received that represent cost recovery or charges for services not directly related to the yield on a loan, they are taken to income in the period in which they are received. Where fees are received on an ongoing basis and the recoupment of the costs of maintaining and administering existing loans, these fees are taken to income on an accrual basis. represent Commission and other fees When commission charges and fees relate to specific transactions or events, they are recognised as income in the period in which they are received. However, when they are charged for services provided over a period, they are taken to income on an accrual basis. 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) financial securities and 1(ff) Derivative Trading instruments. Life insurance business income recognition is explained in Note 1(ii) below. (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 included in the financial report irrespective of whether to policyholders or to shareholders. they are designated as relating (ii) All assets are measured at net market values. 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. (v) Premiums and claims are separated on a product basis into their revenue, expense and change in liability components unless the separation is not practicable or the components cannot be reliably measured. - - - (vi) Returns on all investments controlled by a life insurer entity in the Group are recognised as revenues. to (vii) Participating benefits vested the financial year, other than transfers from unvested policyholder benefits liabilities, are recognised as expenses. in relation (viii) Reinsurance contracts entered into are recognised Insurance Holdings Limited on a gross basis. The Group conducts life insurance business through Commonwealth (CIHL), Colonial Mutual Life Assurance Society Limited (CMLA) in Australia, Sovereign Assurance Company Limited in New Zealand, and several subsidiaries and joint ventures throughout Asia. CIHL is the top tier life insurance company within the life insurance corporate structure and values its interests at market in its controlled entities at each reporting date. Accounting policies and disclosures specific to life insurance business are required under AASB 1038. These are provided in this note and Notes 16, 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 received basis. Fees earned by the Shareholder for managing the funds invested are recognised as revenue. Claims under investment linked businesses represent withdrawals of investment deposits and are recognised as a reduction in policy liabilities. (ii) Non-investment linked business received for providing services and Premiums 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 liabilities during immediately recognised in profit. 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: 62 from future business and 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 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 about future sales growth, redemptions, expenses, investment returns and fee margins. This method allows the values so calculated to be expressed in the form of appraisal values, consistent with those calculated for the life insurance controlled entities. Valuation of the investment in the non life insurance controlled entities is then based on these calculated appraisal values as at reporting date. Properties are valued annually by qualified independent valuers. Excess of Net Market Value over Net Assets of Controlled Entities Interests in controlled entities held by life insurance companies are subject to revaluation each period, such that the investment in the controlled entity is recorded at market value. the 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 the valuation of assessed periodically as part of investments with changes in value taken to profit. This excess does not require amortisation in the financial statements. Insurance Policy Liabilities and Margin on Life 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) Emergence of planned profit margins: In setting premium rates, life insurers will include planned margins of revenues over expenses. When the life insurer has performed the services necessary to establish a valid claim to those margins and has received the revenues relating to those services, the planned margins are recognised in profit. Where replicates planned margin actual experience assumptions, the planned profit margin will be released over the life of the policy. (ii) Difference between actual and planned experience: 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 investment returns. For example, an experience profit will emerge when the expenses of maintaining all in force business in a year are lower than those allowed for in the planned margin. Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (iii) Loss recognition on groups of related products or is (iv) recognised immediately. reversals of previously recognised losses: Where future expenses for a group of related products exceeds future revenues, the anticipated loss If unprofitable 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 to meet policy liabilities. 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 Policy Acquisition Costs Policy acquisition costs include the fixed and variable costs of acquiring new business. These costs are effectively deferred through the determination of policy liabilities at the balance date to the extent that they are deemed recoverable from premium or policy charges. Deferred acquisition costs are effectively amortised over the life of the policy. (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 liquidity facilities are provided at arms length to the program by the Group in accordance with APRA Prudential Guidelines. 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. the significant uncertainties to the underlying in Due estimating 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. inherent (kk) Fiduciary activities The Bank and designated controlled entities act as Responsible Entity, Trustee and/or Manager 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 superannuation contributions expense principally represents the annual funding, determined after having regard to actuarial advice, to provide for future obligations of all superannuation plans are made in accordance with the rules of the plans. plans. Contributions defined benefit to (mm) Comparative figures Where necessary, comparative figures have been adjusted to conform with changes in presentation in these financial statements. (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 uplift/(reduction). ‘Underlying Basis’ is defined as net profit after tax (“cash basis”) excluding Which new Bank initiatives, shareholder investment returns and the cost of the June 2002 Employee Share Acquisition Plan (“ESAP”) paid in October 2002. (oo) Policy changes (2003) The consolidated entity, adopted the new Accounting Standard AASB 1044: Provisions, Contingent Liabilities and Contingent Assets, from 1 July 2002 which 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 is only recognised at the reporting date where the dividends publicly recommended prior to the reporting date. The effect of the revised policy was to increase consolidated retained profits and decrease provisions at the beginning of the year ended 30 June 2003 by $1,027 million. In accordance with the new Standard, no provision for dividend has been recognised at year end. The change in accounting policy has had no effect on basic and fully diluted earnings per share. determined declared, are or 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 was a one off expense in the 2003 financial year. In addition, 2003 year ESAP expense accrued for the 2003 financial year was $20 million. Similarly, the Executive Reward Plan was restructured effective from 1 July 2002, whereby incentives allocated were in the form of Reward shares and not options. This resulted in an increased expense for the 2003 year of $5 million. Other share based compensation expense for the 2003 year was $69 million. This was 63 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued incurred and charged against profit on a consistent basis with prior periods. (pp) International Financial Reporting Standards (IFRS) Transition Management The Bank is well progressed in the process of ensuring that it will comply with the Australian equivalent of International Financial Reporting Standards (“IFRS”) by June 2005. This is in line with the conversion timetable as set out by the Financial Reporting Council of Australia. The Bank completed its review of the IFRS and their impact during the planning stage of the project. Conversion issues were then identified and methodologies designed to resolve these issues. The Bank is now progressing to the implementation of these changes and will complete this process prior to 30 June 2005. The Bank has not finalised the financial impact of the change to IFRS. Key Accounting Issues The following key areas of difference between current accounting practice and the treatment under IFRS have been identified: (i) Hedge Accounting Under financial IFRS all derivative instruments, including those used for balance sheet hedging purposes, are to be recognised on-balance sheet and measured at fair value. Hedge accounting can be applied, subject to certain rules, for fair value hedges, cash flow hedges, and hedges of investments in foreign operations. The Bank has formulated a strategy based on the use of both cash flow and fair value hedging. Cash flow hedges are expected to be the predominant form of hedging applied by the Bank. It is expected that these new rules around accounting for hedge instruments will introduce significant volatility within equity reserves, and the potential for some minor volatility within the statement of financial performance. (ii) Employee Benefits With the introduction of IFRS, the net surpluses or deficits that arise within defined benefit superannuation plans must be recognised in the statement of financial position. The annual movements in those surpluses or deficits must be recorded in the statement of financial performance. The Bank currently sponsors two defined benefit plans. Actuarial valuations of these plans are carried out periodically, and a large surplus currently exists on a net basis. On transition to IFRS, the comparative period beginning 1 July 2004 will record an opening Retained Earnings adjustment reflecting the value of this surplus. For subsequent periods, the profit is likely to be affected by significant volatility as the value of the surplus fluctuates. Given the potential significance of this item we expect to show it as a separate line item in the statement of financial performance. (iii) Provisions for Loan Impairment In line with market practice, the Bank’s current general provisioning for impaired loans is designed to take account of our expectations of probable future losses and latent risks inherent in the credit portfolio. Under IFRS the Bank must raise collective provisions in respect of only those losses for which there is ‘objective evidence’ of impairment as at each balance date. The methodology to calculate this provision is still being developed. As a result of this change, there may be a reduction in the amount of the Bank’s general provisioning for impaired loans. The practice of recording specific provisions for loan impairment will continue under IFRS, however, such provisions must be based on the discounted values of estimated future cash flows. The discount unwinds during the period between the initial recognition of the provision and the eventual recovery of the written down amount, resulting in the recording of interest in the statement of financial performance, within interest income. (iv) Consolidation of Special Purpose Vehicles IFRS requires the consolidation of certain special purpose vehicles that are not consolidated under the current accounting standards. Vehicles related to the securitisation of Bank assets, and certain other customer asset securitisation vehicles, may be consolidated under IFRS. This would result in a gross up of the assets and liabilities recorded within the statement of financial position. There is not expected to be any profit impact arising from consolidation of these vehicles. (v) Classification of Hybrid Financial Instruments The Bank currently has on issue two types of hybrid financial instruments: Perpetual Exchangeable Resettable Listed Securities (“PERLS I and II”); and Trust Preferred Securities (“TPS”). Refer to Note 29 for details. These instruments are currently classified as equity instruments. Under IFRS these instruments will be reclassified as debt within the statement of financial position and dividends paid will be shown as interest expense. (vi) Revenue and Expense Recognition Under IFRS, the Bank will change the way it currently recognises certain revenue and expense items. Any fee income integral to the yield of an originated financial instrument, net of any direct incremental costs, must be capitalised and deferred over the expected life of the instrument. This is not expected to have a material impact on net profit within the statement of financial performance, however, some re-classifications of revenue between fee income and interest income will occur. (vii) Accounting for Life Insurance Business On transition to IFRS, the asset representing the excess of the net market value over net assets of the Bank’s life insurance controlled entities can no longer be recognised in full. As a result, the Bank will, on the adoption of the IFRS, cease to recognise any movement in the appraisal value in the statement of financial performance. The write off of the internally generated component will ultimately be reflected against the General Reserve; and the acquired component will be reclassified as Goodwill within the statement of financial position and subjected to an annual impairment test. (viii) Accounting for Goodwill On transition to IFRS, Goodwill will no longer be amortised, but instead, is subject to an annual assessment for impairment to ensure that the carrying value of Goodwill is not greater than the recoverable amount. As a result, the statement of financial performance will no longer include an expense item reflecting the annual Goodwill amortisation. (ix) Taxation A “balance sheet” approach to tax effect accounting is followed under IFRS replacing the current “statement of financial performance” approach. This approach recognises deferred tax balances when there is a difference between the carrying value of an asset or liability and its tax base. It is likely there will be some increases in levels of deferred tax assets and liabilities. (x) Statement of Financial Position The following new material line items are expected to appear within the statement of financial position. - ‘Derivative assets’ line item, being the fair value of the Bank’s hedging derivative financial instruments portfolio which have a positive market value; and a ‘Derivative liabilities’ line item, being the fair value of the Bank’s hedging derivative financial instruments portfolio which have a negative market value. An ‘Available-for-sale assets’ line item, being the fair investment securities and other value of financial assets categorised as available-for-sale. A ‘Retirement benefit surplus’ asset line item, being the defined benefit plan surplus. those - - 64 Notes to the financial statements 65 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued - - - An ‘Investment contract liabilities’ line item, being the fair value of the policyholder liabilities associated with those investment style contracts, which can no longer be classified as insurance contracts. A ‘Cash Flow Hedge Reserve’, being the hedge reserve associated with cash flow hedge accounting. ‘Available-for-Sale Securities Revaluation An Reserve’ being the reserve associated with the unrealised fair value gains and losses on investment securities and other financial assets categorised as available-for-sale. Regulatory Capital Treatment Several of the above accounting issues affect the assets and equity items currently included in the calculation of the Bank’s regulatory capital. Current accounting definitions for asset and equity measurement are central to the capital adequacy requirements set by prudential regulators. The Bank anticipates that APRA will review the measurement rules in its Prudential Standards in response to the IFRS changes, however, it is unclear whether capital measurement will be fully immunised from the IFRS changes. NOTE 2 Operating Profit Profit from ordinary activities before income tax has been determined as follows: Interest Income Loans Other financial institutions Cash and liquid assets Trading securities Investment securities Dividends on redeemable preference shares Controlled entities Total Interest Income 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 (loss)/profit on sale of property, plant and equipment Funds management income Insurance income Other (1) Total Other Operating Income Total Net Operating Income before appraisal value uplift/(reduction) Charge for Bad and Doubtful Debts (Note 13) General provisions Total Charge for Bad and Doubtful Debts 2004 $M 2003 $M 11,675 182 198 600 607 25 - 13,287 5,949 160 1,506 - 262 7,877 5,410 724 1,503 228 165 106 - 6 80 (11) 1,333 902 45 5,081 10,126 191 150 454 566 41 - 11,528 4,732 198 1,352 - 220 6,502 5,026 652 1,394 200 190 112 - 4 (9) 22 1,066 680 62 4,373 GROUP 2002 $M 9,231 165 142 359 517 41 - 10,455 4,256 193 1,064 - 232 5,745 4,710 618 1,242 243 113 133 - 5 78 12 1,147 712 55 4,358 2004 $M 9,504 90 214 486 229 3 527 11,053 4,833 159 1,081 282 294 6,649 4,404 702 1,256 203 128 106 794 4 (416) (10) - - 545 3,312 BANK 2003 $M 8,077 70 135 362 256 - 577 9,477 3,795 197 889 243 212 5,336 4,141 599 1,157 175 162 112 577 2 (9) 13 - - 566 3,354 10,491 9,399 9,068 7,716 7,495 276 276 305 305 449 449 263 263 266 266 (1) Includes an equity accounted loss of $32 million for the year ended 30 June 2004. Principally relates to a change in revenue recognition accounting policy by the associate entity. 65 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 Comparable business Initiatives including Which new Bank Total Staff Expenses (excluding share based compensation) Share Based Compensation Comparable business Initiatives including Which new Bank Total Share Based Compensation Occupancy and Equipment Expenses Operating lease rentals Depreciation Buildings Leasehold improvements Equipment Repairs and maintenance Other Comparable business Initiatives including Which new Bank Total Occupancy and Equipment Expenses Information Technology Services Projects and development Data processing Desktop Communications Software amortisation Information technology equipment depreciation Comparable business Initiatives including Which new Bank Total Information Technology Services Other Expenses Postage Stationery Fees and commissions Advertising, marketing and loyalty Other Comparable business Initiatives including Which new Bank Total Other Expenses Comparable business Initiatives including Which new Bank 2004 $M 2,152 8 41 115 32 100 2,448 273 2003 $M 2,106 13 11 107 26 120 2,383 155 GROUP 2002 $M 2,016 11 44 92 32 132 2327 - 2004 $M 1,683 (14) 34 101 28 46 1,878 267 BANK 2003 $M 1,694 (3) 5 95 24 78 1,893 155 2,721 2,538 2,327 2,145 2,048 105 - 105 340 21 55 50 68 47 581 20 601 281 238 159 205 11 1 895 292 1,187 112 114 598 311 336 1,471 164 1,635 5,500 749 94 25 119 354 24 51 53 58 69 609 3 612 194 255 178 171 78 1 877 30 907 109 118 551 259 312 1,349 26 1,375 5,312 239 63 - 63 104 - 104 324 26 47 55 56 70 578 - 578 189 275 169 175 44 - 852 - 852 111 104 609 242 315 1,381 - 1,381 5,201 - 280 18 45 22 61 28 454 20 474 247 214 157 178 2 1 799 274 1,073 98 88 369 260 176 991 164 1,155 4,226 725 93 25 118 289 20 41 22 49 52 473 3 476 165 227 176 144 71 1 784 30 814 96 90 210 204 154 754 26 780 3,997 239 Total Operating Expenses before goodwill amortisation 6,249 5,551 5,201 4,951 4,236 Appraisal value uplift/(reduction) Goodwill amortisation Profit from ordinary activities before income tax 201 (324) 3,843 (245) (322) 2,976 477 (323) 3,572 - (186) 2,316 - (186) 2,807 66 Notes to the financial statements NOTE 3 Revenue from Ordinary Activities Banking Interest income Fee 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 Insurance Funds management income including premiums Insurance premium and related income Investment income 2004 $M 13,287 2,227 499 6 69 874 45 17,007 GROUP 2002 $M 2003 $M 11,528 2,046 502 4 72 56 53 14,261 10,455 1,860 489 5 109 609 108 13,635 2004 $M 11,053 1,958 437 798 9 1,398 535 16,188 BANK 2003 $M 9,477 1,756 449 579 65 2 555 12,883 1,175 1,012 2,807 4,994 1,149 1,131 628 2,908 1,083 866 (100) 1,849 - - - - - - - - Appraisal value uplift(1) Total revenue from ordinary activities 201 22,202 - 17,169 477 15,961 - 16,188 - 12,883 There were no sources of revenue from non-operating activities. (1) Appraisal value reduction of $ 245 million for year ended 30 June 2003. 67 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 the years ending 30 June 2002, 30 June 2003 and 30 June 2004. 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 reflect the overseas cost of funds. Non-accrual loans are included in Interest Earning Assets under loans, advances and other receivables. Full Year Ended 2004 2003 Average Interest Average Average Interest Average Average Interest Average Rate Balance % $M Rate Balance $M Rate Balance $M 2002 $M $M $M % % Average Interest Earning Asset and Income Expense 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 4,027 868 3,382 3,776 - 62 9,682 3,445 4,411 8,440 181 17 32 150 - - 444 156 298 310 149,487 26,607 - 9,927 1,772 - - 4,102 - 17 4.5 2.0 0.9 4.0 - - 4.6 4.5 6.8 3.7 6.6 6.7 - - 0.4 3,293 813 133 17 2,446 3,734 37 154 - 56 7,360 3,395 4,240 8,062 - - 326 128 261 305 131,746 23,125 - 8,538 1,629 - - 3,604 - 31 4.0 2.1 1.5 4.1 - - 4.4 3.8 6.2 3.8 6.5 7.0 - - 0.9 4,290 285 138 4 3,231 2,663 - 174 5,138 2,698 3,774 7,339 69 96 - - 248 111 211 306 121,597 19,445 - 7,984 1,288 - - 3,232 - 65 218,289 13,304 (17) (4,102) 6.1 0.4 191,874 11,559 (31) (3,604) 6.0 0.9 173,866 10,520 (65) (3,232) 3.2 1.4 2.1 3.6 - - 4.8 4.1 5.6 4.2 6.6 6.6 - - 2.0 6.1 2.0 214,187 13,287 6.2 188,270 11,528 6.1 170,634 10,455 6.1 Average Non-Interest Earning Assets Bank acceptances Australia Overseas 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 13,877 1 24,430 4,120 792 161 29,452 2,264 (1,411) (150) 73,536 287,723 13,144 53 26,333 4,070 627 197 24,046 3,303 (1,497) (150) 70,126 258,396 18.7% 19.5% 68 11,965 66 26,853 4,129 681 203 23,617 3,411 (1,546) (143) 69,236 239,870 18.1% Notes to the financial statements NOTE 4 Average Balances and Related Interest continued Average Liabilities and Interest Expense Full Year Ended 2003 Average Interest Average Average Interest Average Average Interest Average Rate Balance % $M Average Interest Bearing Liabilities and Loan Capital and Interest Expense Rate Balance $M Rate Balance $M 2002 2004 $M $M $M % % 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 57,186 15,963 2,683 1,062 31,178 3,028 514 105 39,044 3,432 1,499 86 1,916 5,042 35 125 21,885 12,855 1,292 213 5,793 210 - 4,102 - 255 8 - 17 - 4.7 6.7 1.6 3.5 3.8 2.5 1.8 2.5 5.9 1.7 4.4 3.8 - 0.4 - 45,674 14,255 1,956 876 32,780 2,788 492 100 34,043 2,906 1,230 78 1,752 6,712 34 164 17,651 10,738 1,047 305 5,234 204 - 3,604 - 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 - 0.9 - 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 5,491 88 - 3,232 - 65 128 800 264 227 5 - 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 - 2.0 - 3.6 2.0 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 197,532 201,634 (4,102) Non-Interest Bearing Liabilities Deposits not bearing interest Australia Overseas Liability on bank acceptances Australia Overseas 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 5,112 1,059 13,877 1 20,658 3,548 20,655 3,131 68,041 265,573 22,150 287,723 18.2% 7,894 (17) 3.9 0.4 178,341 (3,604) 6,533 (31) 3.7 160,337 (3,232) 0.9 5,810 (65) 7,877 4.0 174,737 6,502 3.7 157,105 5,745 3.7 5,424 705 11,965 66 23,092 3,457 14,628 3,026 62,363 219,468 20,402 239,870 17.9% 4,784 871 13,146 53 20,828 3,596 16,034 2,739 62,051 236,788 21,608 258,396 18.9% 69 Notes to the financial statements NOTE 4 Average Balances and Related Interest continued Changes in Net Interest Income: Volume and Rate Analysis Volume $M Rate $M Total $M Volume $M Rate $M Total $M 30/06/04 vs 30/06/03 Changes due to 30/06/03 vs 30/06/02 Changes due to 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 31 1 12 2 105 2 11 14 1,164 239 - - 3 1,615 (3) 1,597 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 517 109 (25) 8 186 14 3 (41) 251 48 24 - - 3 - 877 (3) 879 673 (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 31 (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) (5) - 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 17 (1) 48 - (5) (4) 118 28 37 5 1,389 143 - - (14) 1,745 14 1,759 727 186 22 5 269 8 1 (39) 245 (92) 43 - - (14) - 1,361 14 1,375 384 (17) (6) 13 26 26 (9) 225 (96) - - (17) 130 17 162 210 77 47 (3) 83 (6) (2) 2 (6) (140) 19 - - (17) - 484 17 496 (289) 70 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 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). Net interest income Average interest earning assets Interest Margins and Spreads 2004 $M GROUP 2002 $M 2003 $M 5,410 214,187 5,026 188,270 4,710 170,634 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) Net Interest Margin (3) Overseas Interest Spread (1) Benefit of net free liabilities, provisions and equity (2) Net Interest Margin (3) Group Interest Spread (1) Benefit of net free liabilities, provisions and equity (2) Net Interest Margin (3) 2004 % 2003 % 2002 % 2.46 0.22 2.68 1.18 0.56 1.74 2.22 0.31 2.53 2.68 0.20 2.88 1.22 0.49 1.71 2.40 0.27 2.67 2.75 0.25 3.00 1.16 0.43 1.59 2.47 0.29 2.76 (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 year. 71 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 Insurance Appraisal value uplift/(reduction) Goodwill amortisation Prima facie income tax at 30% Banking Funds Management Insurance Appraisal value uplift/(reduction) Goodwill amortisation Add/(deduct) permanent differences expressed on a tax effect basis: Current Period Specific provisions for offshore bad and doubtful debts not tax effected Taxation offsets (net of accruals) Tax adjustment referable to policy holder 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 deductible intergroup losses Tax losses recognised Employee share acquisition plan Other Prior Periods Other Total Income Tax Expense Income tax attributable to profit from ordinary activities Banking Funds management 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 2004 $M 2003 $M GROUP 2002 $M BANK 2003 $M 2004 $M 3,091 504 371 201 (324) 3,843 927 151 111 60 (97) 1,152 3 (47) 142 (30) (60) 97 - - - 17 122 3,165 217 161 (245) (322) 2,976 950 65 48 (73) (97) 893 13 (36) (41) (18) 73 97 - (18) - (5) 65 (12) 1,262 - 958 914 79 66 1,059 203 1,262 931 57 28 1,016 (58) 958 1,128 138 (24) 23 (3) 1,262 977 156 1,133 99 30 129 917 (24) 45 22 (2) 958 853 112 965 (1) (6) (7) 2,884 399 135 477 (323) 3,572 866 120 40 143 (97) 1,072 (3) (24) (25) (25) (143) 97 - (35) (8) 17 (149) (7) 916 816 96 40 952 (36) 916 1,385 (408) (86) 12 13 916 1,239 146 1,385 (403) (66) (469) 2,502 - - - (186) 2,316 751 - - - (56) 695 (2) (224) - - - 56 136 1 - 5 (28) 2 669 669 - - 669 - 669 639 (32) 57 5 - 669 633 12 645 20 4 24 2,993 - - - (186) 2,807 898 - - - (56) 842 8 (146) - - - 56 - - - (52) (134) - 708 708 - - 708 - 708 625 42 35 6 - 708 610 15 625 83 - 83 72 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) Intergroup deferred tax receivable (Note 21) Deferred income tax liabilities arising from: Leveraged leasing Lease financing Other Total deferred income tax liabilities (Note 24) Intergroup deferred tax payable (Note 27) 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) Tax Consolidation for Australian Legislation has been enacted to allow Australian resident entities to elect to consolidate and be treated as a single entity tax purposes. The Commonwealth Bank of Australia has elected to be taxed as a single entity with effect from 1 July 2002. The Bank has formally notified the Australian Taxation Office of its adoption of the tax consolidation regime. Members of the tax consolidation group have entered into a tax sharing arrangement which provides for the allocation of income tax liabilities between the entities should the head entity, Commonwealth Bank of Australia, default on its tax payment obligations. The Commonwealth Bank of Australia has also entered into a tax funding agreement with the members of the tax consolidation group. The tax funding agreement is effective from 1 July 2002. The agreement is aimed at achieving an allocation of the Group’s income tax liability to subsidiaries within the tax consolidated group as if they were operating on a stand-alone basis. The subsidiaries party to the agreement will reimburse the Commonwealth Bank of Australia for an amount calculated as if they were the taxed Commonwealth Bank of Australia will reimburse subsidiaries for losses when they are utilised to reduce the group tax payable. basis. Similarly, stand-alone on a 2004 $M GROUP 2002 $M 2003 $M 2004 $M BANK 2003 $M 369 195 564 - 232 100 52 384 - 353 172 525 - 302 96 16 414 - 337 288 625 - 240 100 240 580 - 274 149 423 317 232 100 - 332 153 242 70 312 - 116 2 44 162 - 5 36 124 - - 142 (6) (6) 40 170 168 (34) (18) 26 142 146 (8) (27) 57 168 62 (3) (5) 40 94 132 (71) (17) 18 62 Calculations at 30 June 2004 have been based on legislation enacted to that date. Legislation in respect of leasing and leasing partnerships has not yet been finalised. Based on the enacted legislation, these calculations have resulted in a tax credit adjustment of $37 million to the consolidated tax expense for the year ended 30 June 2004. The tax benefit principally arises from the generation of capital losses which have been offset against capital gains arising during the year. This tax benefit has been partially offset by non tax effected capital writedowns. ASB Bank The ASB Bank is being audited by the Inland Revenue Department as part of the normal Inland Revenue Department procedures, with a particular focus on structured finance transactions. No tax assessments have been issued. 73 Notes to the financial statements NOTE 6 Dividends 2004 $M 2003 $M GROUP 2002 $M BANK 2003 $M 2004 $M Ordinary Shares Interim ordinary dividend (fully franked) (2004: 79 cents, 2003: 69 cents, 2002: 68 cents) Interim ordinary dividend paid - cash component only Interim ordinary dividend paid - dividend reinvestment plan 808 188 699 166 693 159 808 188 699 166 Declared final ordinary dividend (fully franked) (2004: nil provided, 2003: nil provided, 2002: 82 cents) Provision for final ordinary dividend - cash component only Provision for final ordinary dividend - dividend reinvestment plan - - - - 832 195 - - - - Preference Shares Preference dividends paid (fully franked) (2004: 1,065 cents, 2003: 1,019 cents, 2002: 970 cents) Provision for preference dividend Other Equity Instruments Dividends paid Dividends to outside equity interests Total Dividends Provided or Paid Other provision carried Dividends proposed and not recognised as a liability (fully franked) (2004: 104 cents, 2003: 85 cents, 2002: nil)(1) 28 9 55 8 1,096 5 28 8 - 4 905 4 26 8 28 9 - - 1,913 15 - 1,048 5 4 28 8 - - 901 4 1,315 1,066 - 1,315 1,066 (1) The 2003 final dividend was satisfied by cash disbursements of $865 million and the issue of $201 million of ordinary shares through the dividend reinvestment plan. The 2004 final dividend is expected to be satisfied by cash disbursements of $1,065 million and the estimated issue of $250 million of ordinary shares through the dividend reinvestment plan. Dividend Franking Account After fully franking the final dividend to be paid for the year ended 30 June 2004 the amount of credits available as at 30 June 2004 to frank dividends for subsequent financial years is $75 million (2003: $417 million). This figure is based on the combined franking accounts of the Bank at 30 June 2004, 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 2004, franking debits that will arise from the payment of dividends proposed for the year and franking credits that the Bank may be prevented from distributing in subsequent financial periods. The Bank expects that future tax payments will generate sufficient franking credits for the Bank to be able to continue future dividend payments. Dividend payments on or after 1 July 2004 will be franked at the 30% tax rate. These calculations have been based on the taxation law as at 30 June 2004. frank fully to Dividend History Half Year Ended 31 December 2001 30 June 2002 31 December 2002 30 June 2003 31 December 2003 30 June 2004 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) $ 68 82 69 85 79 104 71.8% 71.6% 143.2% 77.7% 82.7% 103.8% - 71.7% - 97.7% - 93.5% - 76.2% - 75.9% - 89.1% 32 31.9 24.8 28 31.6 - 18.7% 19.0% 19.2% 18.9% 18.8% - (1) (2) (3) Dividend Payout Ratio: dividends divided by earnings. Payout ratio based on net profit after tax before goodwill amortisation and appraisal value uplift/(reduction). DRP Participation Rate: the percentage of total issued share capital participating in the Dividend Reinvestment Plan. 74 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: Other equity instrument dividends Less: Dividends to outside equity interests 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 Underlying 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 Securities purchased under 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 75 2004 c 2003 c GROUP 2002 c 196.9 196.8 157.4 157.3 209.6 209.3 $M $M $M 2,581 (37) (55) (8) (9) 2,472 2,018 (36) - (4) (6) 1,972 2,656 (34) - - (1) 2,621 Number of Shares 2004 M 2003 M 2002 M 1,256 1 1,253 1 1,250 2 1,257 1,254 1,252 Cents 237.1 237.0 Cents 210.2 210.2 Cents 194.6 194.3 GROUP 2003 $M 2004 $M 1,488 3 4,091 158 5,740 60 261 18 374 713 6,453 1,426 14 2,900 217 4,557 65 377 33 543 1,018 5,575 GROUP 2003 $M 2004 $M 4,914 3,455 8,369 3,324 3,742 7,066 2004 $M 1,423 - 4,091 156 5,670 - 77 - 738 815 6,485 2004 $M 4,910 2,158 7,068 BANK 2003 $M 1,330 - 2,900 218 4,448 2 14 - 892 908 5,356 BANK 2003 $M 3,287 2,149 5,436 Notes to the financial statements NOTE 10 Trading Securities Australia Listed: Australian Public Securities Commonwealth and States Local and semi-government Bills of exchange Commercial paper Certificates of deposit Medium term notes Other securities Unlisted: Medium term notes Other securities Total Australia Overseas Listed: Government securities Eurobonds Bills of exchange Floating rate notes Commercial paper Unlisted: Commercial paper Other securities Total Overseas Total Trading Securities 2004 $M GROUP 2003 $M 621 1,114 1,576 885 5,088 1,410 273 268 75 11,310 826 524 772 836 403 17 208 3,586 14,896 551 755 947 397 2,141 745 679 106 13 6,334 698 938 785 603 726 - 351 4,101 10,435 2004 $M 621 1,114 1,576 889 5,088 1,410 267 268 - 11,233 284 524 - 836 - - - 1,644 12,877 BANK 2003 $M 551 755 947 505 2,142 745 675 106 13 6,439 87 938 - 608 - - - 1,633 8,072 76 Notes to the financial statements NOTE 11 Investment Securities 2004 $M 2003 $M GROUP 2002 $M 2004 $M BANK 2003 $M Australia Listed: Australian Public Securities Commonwealth and States Bills of exchange Other securities and equity investments Unlisted: Australian Public Securities Local and semi-government 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 Eurobonds Medium term notes Floating rate notes Other securities and equity investments Total Overseas Total Investment Securities 2,209 30 444 80 448 611 3,822 758 - 1,242 792 425 732 1,121 137 155 1,200 709 354 7,625 11,447 1,915 - 439 80 942 965 4,341 484 5 1,357 993 239 324 1,392 98 230 583 900 90 6,695 11,036 1,969 18 456 80 968 578 4,069 804 - 1,379 1,045 - 377 787 113 212 114 784 1,082 6,697 10,766 2,209 - 433 - 58 69 2,769 715 - 1,228 655 142 121 279 - 155 189 273 100 3,857 6,626 1,915 - 433 - 57 58 2,463 463 - 1,343 796 239 111 631 - 230 117 438 - 4,368 6,831 77 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 investments 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 2004 $M 2,328 30 449 1,034 3,841 897 - 1,223 983 1,622 1,442 1,482 7,649 11,490 43 GROUP Market Value at 30 June 2002 2003 $M $M 2,118 - 935 1,400 4,453 593 5 1,357 1,260 816 1,215 1,488 6,734 11,187 151 2,109 18 973 1,042 4,142 928 - 1,379 1,263 114 1,158 1,867 6,709 10,851 85 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 2004 Amortised Cost $M Gross Unrealised Losses Gains $M $M Fair Amortised Gross Unrealised Losses $M Cost Gains $M Value $M $M At 30 June 2003 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 2,289 30 448 1,055 3,822 895 - 1,242 947 1,625 1,441 46 - 1 11 58 3 - - 36 - 1 1,475 7,625 11,447 7 47 105 7 - - 32 39 1 - 19 - 3 - - 23 62 2,328 30 449 1,034 3,841 897 - 1,223 983 1,622 1,442 1,995 - 942 1,404 4,341 582 5 1,357 1,223 822 1,224 1,482 7,649 11,490 1,482 6,695 11,036 123 - 4 - 127 11 - - 56 12 - 6 85 212 - - 11 4 15 - - - 19 18 9 - 46 61 2,118 - 935 1,400 4,453 593 5 1,357 1,260 816 1,215 1,488 6,734 11,187 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 $31 million of net deferred gains on these contracts (2003: $4 million net deferred gains) which offset the above unrealised losses and these are disclosed within Note 39. At the end of the financial year there were no net deferred gains or losses (2003: $1 million of deferred losses) included in the amortised cost value. 78 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 2004 Total $M 5 to 10 years 10 years or more % $M $M % Australia Australian Public Securities Commonwealth and States Bills of exchange Medium term notes Other securities, commercial paper and equity investments Total Australia Overseas Government securities 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 Additional Disclosure 6.09 5.30 7.40 5.03 3.06 2.16 6.02 5.72 4.16 4.26 204 30 425 334 993 633 1,228 190 92 446 16 2,605 3,598 3,587 1,303 - 23 721 2,047 196 14 695 942 722 529 3,098 5,145 5,200 5.97 - 9.19 5.61 2.23 0.74 5.76 3.82 3.88 4.68 717 - - - 717 66 - 62 591 232 930 1,881 2,598 2,597 6.41 - - - 1.33 - 5.50 4.21 4.00 5.81 65 - - - 65 - - - - 41 - 41 106 106 6.14 - - - - - - - 1.02 - 2,289 30 448 1,055 3,822 895 1,242 947 1,625 1,441 1,475 7,625 11,447 11,490 Realised capital gains were $6 million and realised capital losses were $4 million (2003: realised capital gains $7 million and realised capital losses $5 million; 2002: realised capital gains $86 million and realised capital losses $14 million). Proceeds at or close investment securities were $24,407 million (2003: $17,719 million; 2002: $22,192 million). to maturity of Proceeds from sale of investment securities were $697 million (2003: $23 million; 2002: $295 million). 79 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 Reedemable preference share financing 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 2004 $M 2,423 104,883 5,890 3,843 3,454 39,708 37 1,120 420 161,778 2,481 16,967 358 175 10,314 262 60 30,617 192,395 (1,393) (143) (758) (541) (111) (23) (35) (3,004) 189,391 GROUP 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 2004 $M 2,423 101,717 5,890 1,279 3,454 36,943 37 433 587 152,763 - 46 - 81 3,222 - - 3,349 156,112 (1,242) (121) (412) (151) (21) (23) (3) (1,973) 154,139 BANK 2003 $M 2,452 87,149 5,227 1,543 2,303 31,115 - 446 618 130,853 - 51 - 80 2,098 - - 2,229 133,082 (1,152) (157) (12) (157) (39) (25) (3) (1,545) 131,537 1,072 2,405 3,477 1,402 2,234 3,636 592 617 1,209 743 724 1,467 Leasing Arrangements Retail Banking Services provides vehicle and equipment lease finance to a broad range of industries including transport, service, earthmoving, construction, manufacturing finance and mining. Most arrangements are for terms of between three and five years and rentals are generally payable monthly in lease advance. Premium Business Services 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. 80 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 2004 $M 1,189 1,861 968 4,018 421 546 153 1,120 GROUP 2003 $M 1,385 2,082 718 4,185 304 575 397 1,276 2004 $M 640 570 150 1,360 217 97 119 433 BANK 2003 $M 826 686 111 1,623 59 203 184 446 81 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 2004. GROUP Maturity Period at 30 June 2004 Maturing Maturing Between One Year One & Five Years $M or Less $M Maturing After Five Years $M 241 1,451 2,754 14,417 3,786 5,029 1,564 17,889 47,131 69 619 2,211 2,268 5 375 66 2,094 7,707 54,838 32,398 3,558 35,956 14,733 4,149 18,882 54,838 339 1,595 468 13,411 718 5,139 2,299 7,343 31,312 78 1,292 1,816 5,220 2 39 109 1,091 9,647 40,959 17,523 2,827 20,350 13,789 6,820 20,609 40,959 552 879 471 77,055 294 47 1,100 2,937 83,335 35 1,366 1,830 9,479 - 1 - 552 13,263 96,598 53,767 3,935 57,702 29,568 9,328 38,896 96,598 Total $M 1,132 3,925 3,693 104,883 4,798 10,215 4,963 28,169 161,778 182 3,277 5,857 16,967 7 415 175 3,737 30,617 192,395 103,688 10,320 114,008 58,090 20,297 78,387 192,395 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 (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 five years. Financing real estate and land development projects. 82 Notes to the financial statements NOTE 13 Provisions For Impairment 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 Charge to profit and loss for bad and doubtful debts comprises: General provisions Specific provisions Total Charge for Bad and Doubtful Debts Ratio of net charge-offs during the period to average gross loans, advances and other receivables outstanding during the period 2004 $M 2003 $M 2002 $M GROUP 2000 $M 2001 $M 1,325 276 - (202) 79 2 1,480 (87) 1,393 205 - - 264 (62) 202 1,356 305 - (350) 74 (9) 1,376 (51) 1,325 270 - - 416 (66) 350 1,399 449 - (495) 56 1 1,410 (54) 1,356 234 - - 546 (51) 495 1,358 385 51 (411) 88 (29) 1,442 (43) 1,399 432 - 6 495 (84) 411 1,081 196 214 (140) 54 (3) 1,402 (44) 1,358 275 - 219 236 (96) 140 2004 $M 1,152 263 - (189) 66 19 1,311 (69) 1,242 157 - - 243 (54) 189 BANK 2003 $M 1,190 266 - (322) 63 (3) 1,194 (42) 1,152 231 - - 382 (60) 322 3 410 (267) 143 1,536 (11) 609 (404) 205 1,530 (11) 718 (448) 270 1,626 (17) 832 (598) 234 1,633 5 639 (207) 432 1,790 2 348 (227) 121 1,363 (17) 536 (379) 157 1,309 143 - 143 205 - 205 270 - 270 233 1 234 431 1 432 121 - 121 157 - 157 % % % % % % % 42.06 32.08 30.54 36.06 43.03 36.00 24.84 451.76 239.44 183.94 251.62 178.29 403.55 207.25 0.82 0.90 0.96 1.01 1.06 0.79 0.84 $M $M $M $M $M $M $M 276 - 276 305 - 305 449 - 449 385 - 385 196 - 196 263 - 263 266 - 266 0.16% 0.19% 0.31% 0.28% 0.16% 0.18% 0.21% 83 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 2004 $M 276 GROUP 2003 $M 305 264 (62) 202 (202) - 87 (79) 66 202 276 276 416 (66) 350 (350) - 51 (74) (22) 350 305 305 2004 $M 263 243 (54) 189 (189) - 69 (66) 71 189 263 263 BANK 2003 $M 266 382 (60) 322 (322) - 42 (63) (35) 322 266 266 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 2000, 2001, 2002, 2003 and 2004. 2004 $M 2003 $M 2002 $M GROUP At 30 June 2000 $M 2001 $M Australia Government and public authorities Agriculture, forestry and fishing Financial, investment and insurance Real estate Mortgage (1) Construction (2) Personal Lease financing Other commercial and industrial Total Australia Overseas Government and public authorities Agriculture, forestry and fishing Financial, investment and insurance Real estate Mortgage (1) Construction (2) Personal Lease financing Other commercial and industrial Total Overseas Total Specific Provisions - 2 1 6 4 38 3 74 128 - - - 6 - 8 - 1 15 143 - 3 2 6 - 36 4 112 163 10 1 - 7 - 4 - 20 42 205 - 10 26 6 4 35 6 134 221 11 - 12 3 - 3 - 20 49 270 - 8 24 4 6 28 7 77 154 15 - 4 7 - 3 - 51 80 234 - 35 23 8 6 17 6 110 205 13 - 1 3 - 69 - 141 227 432 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 84 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 2000, 2001, 2002, 2003 and 2004. 2004 $M 2003 $M 2002 $M GROUP Year Ended 30 June 2000 2001 $M $M - 2 6 - 4 26 - 6 6 - 10 1 - 6 2 11 4 177 18 178 400 1 - 58 2 - 6 - 35 102 502 49 7 56 446 10 14 142 16 301 494 8 24 104 11 90 245 - - 6 - - - 1 - 38 - 102 147 1 - 4 - 1 6 641 251 59 29 88 553 46 8 54 197 Bad Debts Written Off 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 5 1 228 8 75 325 6 - 1 1 - 7 - 14 29 8 - 209 11 171 429 - - 16 2 - 7 - 1 26 Gross Bad Debts Written Off 354 455 Bad Debts Recovered Australia Overseas Bad Debts Recovered Net Bad Debts Written Off 73 6 79 275 57 17 74 381 (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 Recovered by Industry Category The following table sets forth the Group’s bad debts recovered by industry category for financial years ended 30 June 2000, 2001, 2002, 2003 and 2004. Australia Government and public authorities Agriculture, forestry and fishing Financial, investment and insurance Real estate Mortgage (1) Construction (2) Personal Lease financing Other commercial and industrial Total Australia Overseas Government and public authorities Agriculture, forestry and fishing Financial, investment and insurance Real estate Mortgage (1) Construction (2) Personal Lease financing Other commercial and industrial Total Overseas Bad Debts Recovered (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 2004 $M 2003 $M 2002 $M GROUP Year Ended 30 June 2000 $M 2001 $M - 5 1 1 - 50 3 13 73 - - 1 - - 4 - 1 6 79 - 1 4 - - 38 2 12 57 - - 1 - - 4 - 12 17 74 - 1 - 1 - 30 - 17 49 - - 1 - 3 - - 3 7 56 - - 9 1 1 30 1 17 59 - - - - 1 3 - 25 29 88 - 2 1 1 2 28 2 10 46 - - 2 - 1 3 - 2 8 54 86 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 amount ultimately the borrower. recoverable from 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 uses 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 in credit derivative transactions, has purchased various assets in the market, and has carried out various asset securitisations and a Collateralised Loan Obligation issue. involved is 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 underwriting incorporate 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 unit with an overview by the Risk Asset Review unit. in Facilities the statistically managed segment become classified for remedial management by centralised units based on arrears status. Impaired assets in this segment are those ‘classified’ facilities 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 annually, unless 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. 87 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 2000, 2001, 2002, 2003 and 2004. The industry profile of the loans, advances and other receivables content for the five financial years to 30 June 2004 is shown on page 93. 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 Total Gross Credit Risk Less Unearned Income Total Credit Risk Charge for Bad and Doubtful Debts Loss Rate (3) 2004 $M 2003 $M 2002 $M GROUP At 30 June 2000 $M 2001 $M 5,672 5,616 26,301 110,209 5,791 10,665 4,963 57,539 226,756 2,307 3,277 22,098 17,722 8 420 175 6,144 52,151 278,907 (1,410) 277,497 276 0.10% 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 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 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 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) 196,426 305 0.13% 449 0.20% 385 0.19% 196 0.11% (1) (2) (3) Principally owner occupied housing. Primarily financing real estate and land development projects. The loss rate is the charge as a percentage of the credit risk. The Group has a good quality and well diversified credit portfolio in Australia, with 48.7% of the exposure in mortgage loans and a further 11.6% in finance, investment and insurance (primarily banks). 18.7% of exposure is overseas, of which 34.0% is in mortgage loans. Overall over 67% of individually risk rated exposures in the commercial portfolio (including government and finance) are of investment grade or equivalent quality. 88 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 2004. 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 Securities Securities Receivables of Customers Liabilities Derivatives $M $M $M $M $M $M Total $M 1,735 2,289 - - 6,664 - - - - - - - - - 2,911 11,310 1,533 3,822 1,132 3,925 3,693 104,883 4,798 10,215 4,963 28,169 161,778 11 1,517 437 65 684 1,186 - 302 333 - 5,326 642 116 - 68 5,672 109 5,616 9,160 21,387 - - 110,209 5,791 1 10,665 4,963 - 49 12,172 15,019 5,956 13,728 6,798 57,539 16,185 221,842 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 - 2,058 - - - - - 478 3,586 14,896 1,050 902 182 - 98 37 2,269 - 3,277 - - - 3,277 5,592 - - - - - 1,131 7,625 11,447 5,857 - 16,967 7 415 175 3,737 30,617 192,395 - - - - - - - - 15,019 1,733 - 755 1 2 - 551 3,140 16,868 3,403 18,643 - - - 17,722 - 8 420 3 175 - 247 6,144 3,690 48,658 19,875 270,500 8,369 38 278,907 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. Risk concentrations for contingent liabilities and derivatives are based on the credit equivalent balance in Note 38, Contingent Liabilities and Assets and Note 39, Market Risk respectively. 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 as 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 Securities Securities Receivables of Customers $M $M $M $M Liabilities Derivatives $M $M Total $M 1,703 - 3,089 - - - - 1,542 6,334 1,995 - 1,505 3,677 2 1,281 494 74 111 68 5,810 5,100 - 2,024 699 1,766 8,964 16,542 - - - - 2,346 4,341 87,592 1,701 11,972 5,264 26,449 140,184 - 387 263 - 10,490 13,122 4,364 420 90 - 4,499 11,707 - 214 2 - 6,143 91,956 2,722 12,327 5,264 51,469 15,502 191,190 698 - 582 - 222 2,278 - - 148 - 36 - 1,686 2,278 1,135 3,143 3,210 62 1,773 1,764 11,087 - - - - 2,268 4,101 10,435 - - - - 2,970 6,695 11,036 12,611 209 1,391 197 2,959 23,077 163,261 - - - - 13 75 13,197 817 - - - 662 3,400 15,107 - 1 - - 208 2,009 13,428 210 1,391 197 9,080 39,357 17,511 230,547 Other Risk Concentrations Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 7,066 23 237,636 90 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 2004. 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 5,672 5,616 21,387 110,209 5,791 10,665 4,963 57,539 221,842 2,269 3,277 18,643 17,722 8 420 175 6,144 48,658 270,500 8,369 38 278,907 Impaired Provisions for Assets $M - 19 6 - 15 6 5 294 345 - - 5 11 - 1 - 1 18 363 Impairment Write-offs Recoveries $M $M $M - 2 1 - 2 6 6 4 38 3 74 128 5 1 228 8 75 325 - - - 6 - 8 - 1 15 143 6 - 1 1 - 7 - 14 29 354 - (5) (1) (1) - (50) (3) (13) (73) - - (1) - - (4) - (1) (6) (79) Net Write-offs $M - (3) 5 4 1 178 5 62 252 6 - - 1 - 3 - 13 23 275 (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 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 $M Write-offs $M Net Recoveries Write-offs $M $M - 19 6 - 5 11 12 492 545 46 - 5 - - 1 - 68 120 665 - 3 2 6 - 36 4 112 163 10 1 - 7 - 4 - 20 42 205 - 4 26 8 - 209 11 171 429 - - 16 2 - 7 - 1 26 455 - (1) (4) - - (38) (2) (12) (57) - - (1) - - (4) - (12) (17) (74) - 3 22 8 - 171 9 159 372 - - 15 2 - 3 - (11) 9 381 5,810 5,100 16,542 91,956 2,722 12,327 5,264 51,469 191,190 1,686 2,278 11,087 13,428 210 1,391 197 9,080 39,357 230,547 7,066 23 237,636 (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 Industrial the Bank’s counterparty Corporate and exposures (including direct and contingent exposure) which individually were greater than 5% of the Group’s capital resources (Tier One and Tier Two capital): 2004 Number 2003 Number 2002 Number 2001 Number 2000 Number 10% to less than 15% of Group's capital resources 5% to less than 10% of Group's capital resources - 1 - - - 1 - 2 - 1 92 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 2000, 2001, 2002, 2003 and 2004. 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 2004 $M 1,132 3,925 3,693 104,883 4,798 10,215 4,963 28,169 161,778 182 3,277 5,857 16,967 7 415 175 3,737 30,617 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 At 30 June 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 15,837 192,395 163,261 150,046 139,195 135,768 (3,004) (2,914) (2,972) (3,136) (3,504) 189,391 160,347 147,074 136,059 132,264 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 93 Notes to the financial statements NOTE 15 Asset Quality Impaired Assets The Group the Australian disclosure requirements for impaired assets contained in AASB 1032: Specific Disclosures by Financial Institutions. follows There are three classifications of impaired assets: (cid:131) (a) Non accruals, comprising: (cid:131) (cid:131) (cid:131) 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: 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:131) (cid:131) (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 percentage of risk weighted assets Net impaired assets as percentage 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 2004 % 2003 % GROUP 2002 % 0.20 0.44 0.63 0.12 0.79 0.30 1.96 0.44 2.92 GROUP Year Ended 30 June 2002 $M 2003 $M 651 530 159 121 786 30 920 673 225 247 810 30 2004 $M 346 194 94 152 499 14 94 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 2000, 2001, 2002, 2003 and 2004. 2003 $M 545 (25) 520 (163) 357 - - - - - - - - 357 120 (1) 119 (42) 77 - - - - - - - - 77 434 2002 $M 732 (54) 678 (221) 457 - - - - - - - - 457 211 (5) 206 (49) 157 - - - - - - - - 157 614 GROUP At 30 June 2000 $M 722 (128) 594 (205) 389 1 - 1 - 1 1 - 1 391 410 (3) 407 (226) 181 - - - - - 1 (1) - 181 572 2001 $M 518 (63) 455 (154) 301 1 - 1 - 1 - - - 302 197 (5) 192 (79) 113 - - - - - 1 (1) - 113 415 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 2004 $M 345 (23) 322 (128) 194 - - - - - - - - 194 18 - 18 (15) 3 - - - - - - - - 3 197 95 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 2000, 2001, 2002, 2003 and 2004. 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 Loans Accruing But Past Due 90 Days or More Accruing loans past due 90 days or more Housing loans Other loans Total 2004 $M 665 532 (278) (556) 363 - 363 2004 $M 168 78 246 2003 $M 943 617 (456) (439) 665 - 665 2003 $M 157 91 248 Net Interest Foregone on Impaired Assets Interest income forgone Australia non accrual facilities Overseas non accrual facilities Total 2004 $M 2003 $M 10 - 10 15 3 18 2002 $M 717 1,069 (481) (362) 943 - 943 2002 $M 176 73 249 2002 $M 21 7 28 Interest Taken to Profit on Impaired Assets 2004 $M 2003 $M 2002 $M GROUP Year Ended 30 June 2000 $M 2001 $M 1,135 707 (666) (459) 717 - 717 657 414 (226) (194) 651 484 1,135 GROUP At 30 June 2000 $M 2001 $M 218 90 308 211 64 275 GROUP Year Ended 30 June 2000(1) $M 2001 $M 8 8 16 4 5 9 GROUP Year Ended 30 June 2000(1) $M 2001 $M Australia Non accrual facilities Restructured facilities Overseas Non accrual facilities OREO Total Interest Taken to Profit (1) Excluding Colonial 11 - 3 - 14 26 - 4 - 30 27 - 3 - 30 37 - 14 - 51 45 - 6 - 51 96 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 Australia Overseas 2004 $M 2004 $M 193 152 345 (23) 322 (128) 194 13 5 18 - 18 (15) 3 GROUP Total 2004 $M 206 157 363 (23) 340 (143) 197 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 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 345 (23) 322 (128) 194 18 - 18 (15) 3 108 114 123 345 13 5 - 18 363 (23) 340 (143) 197 121 119 123 363 545 (25) 520 (163) 357 158 138 249 545 120 (1) 119 (42) 77 1 6 113 120 665 (26) 639 (205) 434 159 144 362 665 Accruing Loans 90 days past due or more(1) 224 22 246 227 21 248 (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. 97 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 the NSW Government on a quarterly basis. indemnities are reimbursed by loan Selected Regional Exposures Asia Over 66% of total exposures relate to financial institutions. Exposures to Indonesia, Thailand and Korea represent approximately 25% of the Group’s Asian credit risk. The Group’s credit risk exposure to Asian countries as at 30 June 2004 is set out below. The exposures exclude Group equity investments. Asian Exposures Country Finance Corporate/ Government CUSTOMER TYPE China Hong Kong Japan Malaysia Singapore Phillipines Taiwan Other Indonesia South Korea Thailand Total Multinational $M $M 171 803 974 411 100 592 641 313 1 2,058 17 636 199 852 3,884 5 462 467 94 240 244 - 1 2 581 16 85 4 105 1,153 $M - - - 35 40 7 - - - 82 171 264 17 452 534 Project Finance(1) $M - - - - - - - - - - 32 - - 32 32 APL/NZPL $M 1 227 228 6 - 37 - - - 43 10 - - 10 281 2004 Total Exposure(2) $M GROUP 2003 Total Exposure $M 177 1,492 1,669 546 380 880 641 314 3 2,764 246 985 220 1,451 5,884 165 1,878 2,043 759 111 498 - 22 2 1,392 137 477 91 705 4,140 Other Regional Exposures Region Finance Corporate/ Government CUSTOMER TYPE Multinational $M $M Eastern Europe Latin America Middle East - - 65 1 - 8 $M - - - Project Finance(1) $M - - - APL/NZPL $M - - - 2004 Total GROUP 2003 Total Exposure(2) Exposure $M $M 1 - 73 - - 56 (1) (2) Project Finance - Long term lending for large scale projects (such as mining and infrastructure) where repayment is primarily reliant on the cash flow from the project. 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. 98 Notes to the financial statements NOTE 16 Insurance Investment Assets Equity Security Investments Direct Indirect Debt Security Investments Direct Indirect Property Investments Direct Indirect Other Assets Total Insurance Investment Assets the Direct investments refer to investments that are directly with Indirect investments refer to investments that are held through unit trusts or similar investment vehicles. Disclosure on Asset Restriction investment. issuer of the Investments held in the Australian statutory funds can only be used within the restrictions imposed under the Life Insurance Act 1995. The main restrictions are that assets in a fund can only be used to meet the liabilities and expense of the fund, to acquire investments to further the business of the fund or as distributions when solvency and capital adequacy requirements are met. NOTE 17 Deposits with Regulatory Authorities Central Banks Overseas Total Deposits with Regulatory Authorities NOTE 18 Shares in and Loans to Controlled Entities 2004 $M 4,433 8,025 12,458 3,518 7,710 11,228 80 2,330 2,410 2,846 28,942 GROUP 2003 $M 3,559 8,408 11,967 3,574 8,273 11,847 80 2,151 2,231 1,790 27,835 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. 2004 $M 38 38 GROUP 2003 $M 23 23 2004 $M GROUP 2003 $M 2004 $M 4 4 2004 $M 12,156 11,521 23,677 BANK 2003 $M 2 2 BANK 2003 $M 11,772 11,787 23,559 Shares in controlled entities Loans to controlled entities Total Shares in and Loans to Controlled Entities - - - - - - 99 Notes to the financial statements NOTE 19 Property, Plant and Equipment (a) Land and Buildings Land At 30 June 2004 valuation At 30 June 2003 valuation Closing balance Buildings At 30 June 2004 valuation At 30 June 2003 valuation Closing balance Total Land and Buildings 2004 $M GROUP 2003 $M 2004 $M BANK 2003 $M 160 - 160 253 - 253 413 - 141 141 - 302 302 443 148 - 148 231 - 231 379 - 129 129 - 233 233 362 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 (d) Assets Under Lease At cost Provision for depreciation Closing balance (e) Investment Property (1) At cost 657 (376) 281 639 (448) 191 579 (351) 228 557 (407) 150 545 (310) 235 333 (225) 108 458 (283) 175 279 (208) 71 67 - 67 - - - - - - - - - 252 - - - Total Property, Plant and Equipment 1,204 821 722 608 (1) This investment represents a 50% interest in a long term freehold lease over property. 100 Notes to the financial statements NOTE 19 Property, Plant and Equipment continued Reconciliation 2004 $M GROUP 2003 $M 2004 $M BANK 2003 $M Reconciliation of the carrying amount of property, plant and equipment at the beginning and end of the 2004 and 2003 financial years. Land Opening balance Disposals Net revaluations Closing balance Buildings Opening balance Acquisitions Disposals Revaluation Depreciation Closing balance Leasehold Improvements Opening balance Acquisitions Disposals Depreciation Closing balance Equipment Opening balance Acquisitions Disposals Depreciation Closing balance Assets Under Lease Opening balance Acquisitions Depreciation Closing balance Investment Property Opening balance Acquisitions Closing balance 141 (8) 27 160 302 2 (57) 27 (21) 253 228 119 (11) (55) 281 150 96 (4) (51) 191 - 67 - 67 - 252 252 160 (19) - 141 358 1 (33) - (24) 302 205 78 (4) (51) 228 139 64 - (53) 150 - - - - - - - 129 (3) 22 148 149 (20) - 129 233 - (5) 21 (18) 231 276 1 (24) - (20) 233 175 117 (12) (45) 235 158 62 (4) (41) 175 71 58 - (21) 108 58 35 - (22) 71 - - - - - - - - - - - - - - 101 2004 $M 5,591 1,155 (332) (1,709) 4,705 GROUP 2003 $M 5,591 1,155 (332) (1,385) 5,029 2004 $M 2,671 835 - (984) 2,522 BANK 2003 $M 2,671 835 - (798) 2,708 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 Segment Allocation of Goodwill In recognition of the disclosure requirements of US SFAS 141: Business Combinations and the Australian Intangible Assets Accounting Standard AASB 138: (effective 1 July 2005), the Group’s carrying amount of goodwill at 30 June 2004 is disclosed for each segment of business. Segment Banking(1) Funds Management(2) Insurance(2) Total 2004 $M 4,379 253 73 4,705 2003 $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 principally relates to the goodwill on acquisition of Colonial. funds management and insurance to 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) Intergroup current tax receivable Intergroup deferred tax receivable Other (2) Total Other Assets 2004 $M 1,208 223 600 1,540 564 GROUP 2003 $M 1,023 145 492 727 525 2004 $M 1,247 80 602 1,347 423 BANK 2003 $M 1,239 50 268 500 312 5,741 111 12,827 - - 2,478 25,292 5,540 111 13,907 - - 989 23,459 - - 12,798 104 317 1,931 18,849 - - 13,908 - - 471 16,748 (1) (2) This is an outside equity interest in a funds management business acquired during 2003, and is not included in the revaluation in Note 34 Life Insurance Business. Increase primarily relates to increased volume and exchange rate increments receivable on forward foreign exchange balance sheet hedging contracts. Potential future income tax benefits of the Company arising from: (cid:131) Capital losses arising under the tax consolidations (cid:131) system; and Tax loses and timing differences in offshore centres, recognised as assets because have not been recovery is not virtually certain. These benefits could amount to: (cid:131) (cid:131) $34 million in tax consolidation potential benefits; and $136 million (2003: $142 million) in offshore centres. These potential tax benefits will only be obtained if: (cid:131) The Company derives future capital gains and assessable income of a nature and of an amount sufficient to enable the benefit from the losses to be realised; The Company continues to comply with the conditions losses and deductions imposed by tax legislation; and for claiming capital (cid:131) (cid:131) No changes in tax legislation adversely affect the the in realising the benefit from Company deductions for the losses. Excess of net market value over net assets of controlled entities of the life insurance businesses: Commonwealth and Colonial entities ASB entities Commonwealth and Colonial entities ASB entities GROUP At 30 June 2004 Excess of Market Value Over Net Assets $M 5,178 563 5,741 GROUP At 30 June 2003 Excess of Market Value Over Net Assets $M 5,071 469 5,540 Net Assets $M 2,246 415 2,661 Net Assets $M 2,626 380 3,006 Market Value $M 7,424 978 8,402 Market Value $M 7,697 849 8,546 103 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 2004 $M 20,516 38,530 71,115 5,407 3,585 139,153 3,716 11,724 6,852 1,174 558 24,024 163,177 GROUP 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 2004 $M 20,516 36,714 71,289 5,431 3,648 137,598 1,906 2,448 73 11 433 4,871 142,469 BANK 2003 $M 11,228 30,992 68,932 5,031 2,688 118,871 1,130 2,295 59 7 584 4,075 122,946 Maturity Distribution of Certificates of Deposit and Time Deposits The following table sets forth the maturity distribution of the Group’s certificates of deposit and time deposits as at 30 June 2004. GROUP At 30 June 2004 Maturing Between Six & Twelve Months $M Maturing After Twelve Months $M 293 3,087 3,380 276 818 1,094 4,474 2,127 1,776 3,903 1 528 529 4,432 Total $M 20,516 38,530 59,046 3,716 11,724 15,440 74,486 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 16,874 20,777 37,651 2,728 8,484 11,212 48,863 1,222 12,890 14,112 711 1,894 2,605 16,717 (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 2004 $M 2,383 4,258 6,641 GROUP 2003 $M 2,527 5,011 7,538 2004 $M 402 355 757 25 29 54 811 GROUP 2003 $M 433 414 847 29 - 29 876 2004 $M 2,383 4,228 6,611 2004 $M 352 332 684 6 - 6 690 BANK 2003 $M 2,527 4,977 7,504 BANK 2003 $M 355 162 517 10 - 10 527 105 Notes to the financial statements NOTE 25 Other Provisions Provision for: Long service leave Annual leave Other employee entitlements Which new Bank costs Restructuring costs General insurance claims Self insurance/non lending losses Other Total Other Provisions Which new Bank costs: Opening balance Additional provision Amounts utilised during the year Closing balance 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 2004 $M GROUP 2003 $M 300 130 98 208 - 79 60 122 997 2004 $M - 208 - 208 30 - (30) - 66 44 (31) 79 56 13 (9) 60 107 70 (54) (1) 122 300 143 117 - 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 2004 $M 293 112 98 208 - - 59 49 819 2004 $M - 208 - 208 29 - (29) - - - - - 55 13 (9) 59 63 6 (20) - 49 BANK 2003 $M 294 127 116 - 29 - 55 63 684 BANK 2003 $M - - - - 21 20 (12) 29 - - - - 53 12 (10) 55 30 39 (6) - 63 106 Notes to the financial statements NOTE 26 Debt Issues Short term debt issues Long term debt issues Total Debt Issues Short Term Debt Issues 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 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 (“EMTNs”) up to an aggregate amount of USD25 billion. Notes issued under the programme are both fixed and variable rates. Interest rate risk associated with the notes is incorporated within the Bank’s interest rate risk framework. (cid:131) (cid:131) (cid:131) Subsequent to 30 June 2004, the Bank has issued: USD medium term notes: 3 months to less than 12 months – USD26 million (AUD38 million); between 1 and 5 years – USD964 million (AUD1,379 million); greater than 5 years – USD468 million (AUD669 million); CHF medium term notes: between 1 and 5 years – CHF250million (AUD287 million); EUR medium term notes: 3 months to less than 12 months – EUR6.7 million (AUD11.5 million); between 1 and 5 years – EUR356 million (AUD613 million); greater than 5 years – EUR2.5 million (AUD4.3 million); 2004 $M 20,401 23,641 44,042 1,450 490 9,381 3,638 GROUP 2003 $M 17,255 13,374 30,629 2004 $M 6,127 18,322 24,449 1,643 777 6,163 5,738 - - - 2,498 5,442 20,401 2,934 17,255 3,629 6,127 8,790 4,453 734 3,837 5,583 40 204 23,641 6,949 13,452 17,542 6,099 44,042 4,517 3,510 414 1,799 2,752 187 195 13,374 13,348 3,907 10,426 2,948 30,629 8,146 2,813 520 1,981 4,822 40 - 18,322 1,925 4,202 12,224 6,098 24,449 BANK 2003 $M 6,577 10,107 16,684 - - - 3,842 2,735 6,577 4,517 2,307 414 - 2,682 187 - 10,107 3,994 2,696 7,958 2,036 16,684 (cid:131) (cid:131) (cid:131) JPY medium term notes: Greater than 5 years – JPY1.2 billion (AUD15.3 million); CAD medium term notes: between 1 and 5 years – CAD400 million (AUD431 million); and HKD medium terms notes: Greater than 5 years – HKD202 million (AUD307 million). 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 2002, 2003 and 2004. 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 2004 2002 2003 (AUD Millions, except where indicated) 9,381 11,983 8,161 1.1% 1.2% 3,638 6,402 4,798 1.0% 1.2% - - - - - 1,940 3,216 2,675 5.2% 5.6% 6,163 8,973 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% 6,082 7,158 6,173 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% (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 AUD 1.00 = 30 June 2004 30 June 2003 USD GBP JPY NZD HKD DEM CHF IDR THB FJD PHP EUR 0.6894 0.3823 74.914 1.097 5.378 1.116 0.8720 6,487 28.229 1.239 38.731 0.5706 0.6677 0.4043 80.036 1.145 5.207 1.143 0.9037 5,528 28.051 1.250 35.737 0.5842 108 (cid:131) (cid:131) to write new business or The CDBL’s liabilities continue to remain guaranteed by the Commonwealth; and CDBL ceased 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 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. to 2004 $M 980 1,325 1,151 1,649 12,188 - 1,847 19,140 GROUP 2003 $M 993 991 740 699 13,528 - 2,076 19,027 2004 $M 950 1,140 829 1,458 12,156 153 1,202 17,888 BANK 2003 $M 874 842 567 479 13,502 - 1,192 17,456 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:131) (cid:131) term deposits were All demand deposits and 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 the Commonwealth sold 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 Bank of the Commonwealth of Australia’s shareholding in the CDBL: (cid:131) All lending assets as at 30 June 1996 have been quarantined in CDBL, consistent with the charter terms on which they were written; . 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) Intergroup deferred tax payable Other liabilities Total Bills Payable and Other Liabilities 109 Notes to the financial statements NOTE 28 Loan Capital Currency Amount (M) Footnotes 2004 $M 2003 $M GROUP 2002 $M 2004 $M 2003 $M BANK 2002 $M Tier 1 Capital Exchangeable Exchangeable Undated 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 Subordinated Subordinated Subordinated Subordinated FRN FRN FRN TPS USD38 USD95 USD100 USD550 FRN FRN MTN FRN FRN MTN FRN Notes FRN EMTN EMTN EMTN EMTN EMTN EMTN EMTN Loan FRN FRN Notes Other Notes EMTN MTN FRN EMTN EMTN AUD25 AUD275 AUD185 AUD115 AUD25 AUD200 AUD50 USD300 USD450 JPY20,000 USD200 USD75 USD100 USD400 GBP200 JPY30,000 NZD100 AUD210 AUD38 AUD130 AUD21 USD350 GBP150 AUD300 AUD200 JPY 10,000 USD250 (1) (2) (3) (4) (5) (5) (6) (6) (7) (8) (8) (9) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (24) (25) (26) Total Loan Capital 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. Outstanding notes at 30 June 2004 were: : USD0.5 million Due July 2004 : USD32.5 million Due July 2006 : USD5 million Undated (2) USD 400 million undated FRNs issued 22 February 1989 exchangeable into dated FRNs. Outstanding notes at 30 June 2004 were: : USD64 million Due February 2005 : USD24 million Due February 2006 : USD7 million Due February 2008 55 138 145 59 142 150 - - 351 338 25 25 275 275 - 185 - 115 25 25 200 199 50 50 549 549 650 672 240 248 313 313 115 115 152 152 501 501 408 408 429 444 92 88 210 210 38 38 130 130 21 35 512 524 373 373 300 - 200 - 127 - 358 - 5,674 6,025 6,293 6,631 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 - - - - - - 5,012 5,427 55 59 70 138 142 168 145 150 177 799 - - 351 415 1,137 25 275 - - 25 200 50 549 650 240 313 115 152 501 408 429 25 275 185 115 25 199 50 549 672 248 313 115 152 501 408 444 25 275 186 115 25 199 50 532 795 293 313 115 152 501 408 525 - - - 210 210 38 38 130 130 21 35 512 524 - 373 373 - 300 - - 200 - - 127 - - 358 - - 4,922 5,586 5,337 5,937 210 38 130 35 6,201 7,338 fully USD 100 million undated capital notes issued on 15 October 1986. The Bank has entered into separate agreements with the Commonwealth of Australia relating to each of the above issues (the ‘Agreements’) which qualify the issues as Tier One capital. The agreements provide that, upon the occurrence of certain events listed below, the Bank may issue either the ordinary Commonwealth of Australia or (with the consent of the Commonwealth of Australia) 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. shares rights paid to (3) 110 Notes to the financial statements NOTE 28 Loan Capital continued Any one or more of the following events may trigger the issue of shares to the Commonwealth of Australia or a rights issue: (cid:131) 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. (cid:131) (cid:131) (cid:131) (cid:131) (4) (5) the Commonwealth of Any payment made by 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 FRNs which have matured to date, the Bank and the Commonwealth agreed to amend the relevant Agreement to reflect that the Commonwealth of Australia was not called upon to subscribe for fully paid ordinary shares up to an amount equal to the principal value of the maturing FRNs. USD550 million undated Trust Preferred Securities (TPS) issued on 6 August 2003. AUD300 million extendible floating rate note 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 Two capital. For capital adequacy purposes Tier Two debt based capital is reduced each year by 20% of the original amount during the last 5 years to maturity. The agreement provides for the Bank to issue either fully paid ordinary shares to the Commonwealth of Australia or (with the consent of the Commonwealth of Australia) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the note issue plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price will be determined by reference to the prevailing market price for the Bank’s shares. Any one or more of the following events will trigger the issue of shares to the Commonwealth of Australia or a rights issue: (cid:131) 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; The Bank, if required by the Commonwealth of Australia and subject to the agreement of the APRA, exercises its option to redeem such issue; or (cid:131) (cid:131) (6) (7) (8) to the trigger issue of shares the Commonwealth of Any payment made by Australia pursuant to its guarantee in respect of the issue will the Commonwealth of Australia to the value of such payment. AUD300 million subordinated notes, issued February 1999; due February 2009, split into AUD185 million fixed rate notes and AUD115 million floating rate notes. Called and redeemed February 2004. AUD25 million subordinated FRN, issued April 1999, due April 2029. AUD250 million issued subordinated November 1999, due November 2009; split into AUD200 million fixed rate notes and AUD50 million floating rate notes. notes, (9) USD750 million subordinated notes, issued June 2000, due June 2010; split into USD300 million fixed rate notes and USD450 million floating rate notes. JPY20 billion perpetual subordinated EMTN, issued February 1999. (10) (11) USD200 million subordinated EMTN, issued November 1999, due November 2009. (12) USD75 million subordinated EMTN, issued January 2000, due January 2010. (13) USD100 million subordinated EMTN, issued January 2000, due January 2010. (14) USD400 million subordinated EMTN issued June 1996 due July 2006. (15) GBP200 million subordinated EMTN issued March (16) 1996 due December 2006. JPY30 billion subordinated EMTN issued October 1995 due October 2015. (17) NZD100 million subordinated loan matures 15 December 2009. (18) AUD210 million Euro FRN issued September 1996, maturing September 2004. (19) AUD38 million FRN issued December 1997, maturing December 2004. (20) AUD130 million subordinated notes comprised as follows: AUD10 million fixed rate notes issued 12 December 1995, maturing 12 December 2005. issued 12 AUD110 million December 1995, maturing 12 December 2005. AUD5 million fixed rate notes issued 17 December 1996, maturing 12 December 2005. AUD5 million floating rate notes issued 17 December 1996, maturing 12 December 2005. rate notes floating (21) Comprises 8 subordinated notes and FRN issues. The face value amounts are less than $10 million each and are all in Australian Dollars. The maturities range from August 2009 to October 2009. (22) USD350 million subordinated fixed rate note, issued June 2003, due June 2018. (23) GBP150 million subordinated EMTN, issued June 2003, due December 2023. (24) AUD500 million subordinated notes, issued February 2004, due February 2014; split into AUD300 million fixed rate notes and AUD200 million floating rate notes. JPY10 billion subordinated EMTN, issued May 2004, due May 2034. (25) (26) USD250 million subordinated EMTN issued June 2004, due August 2014. Subsequent to 30 June 2004, the Bank has issued: USD250 million increase to the subordinated EMTN issued June 2004, due August 2014. 111 Notes to the financial statements NOTE 29 Share Capital Issued and Paid Up Ordinary Capital Ordinary Share Capital Opening balance Dividend Reinvestment Plan: 2002/2003 Final Dividend Dividend Reinvestment Plan: 2003/2004 Interim Dividend Share buy back Share purchase plan 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 Dividend reinvestment plan issues: 2002/2003 Final Dividend fully paid ordinary shares at $28.03 2003/2004 Interim Dividend fully paid ordinary shares at $31.61 Share buy back Share purchase plan shares issued at $31.36 Buy Back for DRP: 2001/2002 Final Dividend 2001/2002 Final Dividend fully paid shares at $31.92 Buyback for 2002/2003 Interim Dividend 2002/2003 Interim Dividend fully paid ordinary shares at $24.75 Exercise under Executive Option Plan Closing balance 2004 $M 12,678 201 188 (213) 467 - - - - 38 13,359 BANK 2003 $M 12,665 - - - - (195) 195 (166) 166 13 12,678 Number 1,253,581,363 Number 1,252,921,363 7,165,289 5,916,319 (19,360,759) 14,891,250 - - - - 1,812,600 1,264,006,062 - - (6,111,510) 6,111,510 (6,753,320) 6,753,320 660,000 1,253,581,363 Terms and Conditions of Ordinary Share Capital Ordinary shares have the right to receive dividends as declared and in the event of winding up the company, to participate in the proceeds from sale of surplus assets in proportion to the number of and amounts paid up on shares held. A shareholder has one vote on a show of hands and one vote for each fully paid share on a poll. A shareholder may be present at a general meeting in person or by proxy or attorney, and if a body corporate it may also authorise a representative. Preference Share Capital PERLS PERLS Capital issued and paid up 2004 $M 687 BANK 2003 $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 its ordinary shares until dividends on any of 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. Other Equity Instruments Other equity instruments issued and paid up 2004 $M 1,573 Number 4,300,000 GROUP 2003 $M - Number - 2004 $M 737 Number 550,000 BANK 2003 $M - Number - 112 Notes to the financial statements NOTE 29 Share Capital continued Issue of other equity instruments Trust Preferred Securities On 6 August 2003 a wholly owned entity of the Bank issued USD550 million (AUD832 million) of perpetual non call 12 year trust preferred securities into the US Capital Markets. These securities offer a non-cumulative fixed rate distribution of 5.805% per annum payable semi-annually. The securities qualify as Tier One capital of the Bank. PERLS II On 6 January 2004 a wholly owned entity of the Bank (Commonwealth Managed Investments Limited as Responsible Entity of the PERLS II Trust) issued $750 million of Perpetual Exchangeable Resettable Listed Securities (“PERLS II”). These securities are units in a registered managed investments scheme, perpetual in nature, offering a non-cumulative floating rate distribution payable quarterly. The securities qualify as Tier One capital of the Bank. Share Buy-back On 29 March 2004 the Bank announced the successful completion of its off-market share buy-back. A total of 19,360,759 shares were bought back at $27.50 per share, for a total cost of $532.4 million. An amount of $11 per share of the consideration for each share bought back was charged to paid up capital (total $213.0 million). The balance of $16.50 per share was deemed to be a fully franked dividend for tax purposes and charged to retained profits (total $319.4 million). In accordance with the draft ATO Class Ruling CR2004/65, the "market value" of the shares bought back for tax purposes is $30.42 ("Tax Value"). For capital gains tax purposes an Australian resident individual or complying superannuation entity shareholder participating in the buy- back will be deemed to have disposed of each share bought back for deemed capital proceeds of $11.00 plus the amount by which the Tax Value exceeds the buy-back price. The Tax Value exceeds the buy-back price by $2.92 ($30.42 - $27.50). Accordingly, for capital gains tax purposes, the deemed disposal price for each share sold into the buy-back is $13.92 ($11.00 + $2.92). Share Purchase Plan The Bank introduced a Share Purchase Plan (SPP) during the year. On 25 June 2004 a total of 14,891,250 shares were issued at $31.36 per share, for a total of $467 million, in respect of the SPP. Dividends The Directors have declared a fully franked (at 30%) final dividend of 104 cents per share amounting to $1,315 million. The dividend will be payable on 24 September 2004 to shareholders on the register at 5pm on 20 August 2004. Dividends per share are based on net profit after tax (“cash basis”) per share, having regard to a range of factors including: (cid:131) Current and expected rates of business growth and the mix of business; Capital needs to support economic, regulatory and credit ratings requirements; The rate of return on assets; and Investments and/or divestments to support business development. Dividends paid since the end of the previous financial (cid:131) (cid:131) (cid:131) year: (cid:131) As declared in last year’s Annual Report, a fully franked final dividend of 85 cents per share amounting to $1,066 million was paid on 8 October 2003. The payment comprised cash disbursements of $865 million with $201 million being reinvested by participants through the Dividend Reinvestment Plan; and 113 (cid:131) (cid:131) cash comprised disbursements In respect of the current year, a fully franked interim dividend of 79 cents per share amounting to $996 million was paid on 30 March 2004. The of payment $808 million with $188 million being reinvested by participants through the Dividend Reinvestment Plan. Additionally, quarterly dividends totaling $37 million for the year were paid on the PERLS preference shares; $15 million on the PERLS II (for distributions in March 2004 and June 2004); $40 million on the Trust Preferred Securities, and; $9 million on the ASB Capital preference shares. Dividend Reinvestment Plan The Bank expects to issue around $250 million of shares in respect of the DRP for the final dividend for 2003/04. The Dividend Reinvestment Plan continues to be capped at 10,000 shares per shareholder. Record Date The register closes for determination of dividend entitlement and the dividend for participation reinvestment plan at 5:00pm on 20 August 2004 at ASX Perpetual Registrars Limited, Locked Bag A14, Sydney South, 1235. in Ex Dividend Date The ex dividend date is 16 August 2004. Employee Share Plans The Bank has in place the following employee share plans: (cid:131) (cid:131) (cid:131) (cid:131) 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. Employee Share Acquisition Plan (“ESAP”) The ESAP was introduced in 1996 and provides employees 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 ESAP receive full dividend entitlements, voting rights and there are no forfeiture or vesting conditions attached to the shares granted. Effective from 1 July 2002, shares granted under ESAP offers have been expensed against the profit and loss account. In the current year, 683,617 shares were granted to eligible employees in respect of the 2003 grant. The Bank has determined to allocate each eligible employee shares up to a value of $1,000 in respect of the 2004 grant. As a result, an amount of $24 million has been accrued in respect of the year ended 30 June 2004. The shares will be purchased on-market at the then market price. Notes to the financial statements NOTE 29 Share Capital continued From 1 July 2000 to 30 June 2002, details of issues under ESAP were: Issue Date 13 Oct 2000 20 Dec 2000 31 Oct 2001 3 Dec 2001 31 Jan 2002 Bonus Ordinary Shares Issued(1) 872,620 805 893,554 3,876 1,938 No. of Participants 24,932 23 26,281 114 57 Shares issued to Each Participant 35 35 34 34 34 Issue Price(2) $27.78 $27.78 $28.95 $28.95 $28.95 From 1 July 2002, details of shares purchased under ESAP are as follows: Purchase Date Ordinary Shares Purchased No. of Participants Shares Allocated to Each Participant 31 Oct 2002 22 Jan 2003 31 Oct 2003 830,874 1,584 683,617 25,178 48 23,573 33 33 29 Allocation Price(3) $29.71 $29.71 $27.53 (1) (2) (3) For Offers in 2000 and 2001 both new and existing shareholders were granted Bonus Ordinary Shares 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 for the 2002 Offer and $800 of free shares for the 2003 Offer. Equity Participation Plan (“EPP”) The EPP facilitates the voluntary sacrifice of both fixed remuneration and annual short term incentives (STIs) to be applied in the acquisition of shares. The Plan also facilitates the mandatory sacrifice of STI payments. All shares acquired by employees under this Plan are purchased on-market at the current market price. A total number of 5,812,425 shares have been acquired under the EPP since the plan commenced in 2001. Details of purchases under the EPP from 1 July 2003 to 30 June 2004 were as follows: Allotment Date Participants Shares Purchased Average Purchase Price 30 Sept 2003 31 Oct 2003 31 Dec 2003 31 Mar 2004 30 Jun 2004 62 2,453 73 63 71 8,175 2,147,975 9,915 7,527 9,496 $27.89 $27.62 $29.46 $33.32 $32.72 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 purchased under the voluntary component of the EPP carry full dividend entitlements, voting rights and there are no forfeiture or vesting conditions attached to the shares. 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. The vesting condition attached to the shares specifies that participants must remain employees of the Bank until the vesting date (generally a period of one and two years after the STI award period). Each participant of the mandatory component of the EPP for whom shares are held by the Trustee on their behalf, has a right to receive dividends. Once the shares vest, dividends which have accrued during the vesting period are paid to participants. 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 purchased under the mandatory component of the EPP has been as follows: Details of Movements July 02 - June 03 July 03 - June 04 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 1,478,423 1,968,197 (836,437) (112,999) 2,497,184 2,497,184 2,121,075 (1,715,807) (112,099) 2,790,353 Shares acquired under both the voluntary and mandatory components of the EPP have been expensed against the profit and loss account. In the current year, $67 million was expensed against the profit and loss account to reflect the cost of allocations under the Plan. 114 Notes to the financial statements NOTE 29 Share Capital continued 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. From 2002/03, Reward Shares have only been 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:131) in the ASX’s 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. (previously companies The comparator group ‘Banks and Finance represented Accumulation the Bank) was widened in 2001/02 to better reflect the Bank’s business mix; and 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:131) For 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 fifth rating reaches anniversary, but the maximum vesting will be 50%. the 50th percentile prior the to Reward 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 have the Group. not been recorded as an expense by 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 2000 13 Sep 2000 7 Feb 01 577,500 402,500 13 Sep 2000 31 Oct 01 12,500 - 2001 3 Sep 2001 31 Oct 01 2,882,000 2,122,700 3 Sep 2001 31 Jan 02 12,500 12,500 3 Sep 2001 15 Apr 02 100,000 100,000 16 1 61 1 1 Exercise Price $26.97(2) $26.97(2) $30.12(3) $30.12(3) $30.12(3) Exercise Period 14 Sep 2003 to 13 Sep 2010(4) 14 Sep 2003 to 13 Sep 2010(4) 4 Sep 2004 to 3 Sep 2011(5) 4 Sep 2004 to 3 Sep 2011(5) 4 Sep 2004 to 3 Sep 2011(5) (1) Options outstanding as at the date of the report. (2) The premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil. (3) Will be subject to adjustment by the premium formula (based on the actual difference between the dividend and bond yields at the date of the vesting). Performance hurdle was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010. Performance hurdle must be satisfied between 4 September 2004 and 3 September 2006, otherwise options will lapse. (4) (5) Options - Details of Movements Year of Grant Total options: Held by participants at the start of year Granted during year Exercised during year Lapsed during year Outstanding at the end of year Granted from 30 June to date of report Exercised from 30 June to date of report Lapsed from 30 June to date of report Outstanding as at the date of report July 02 - June 03 2001 2000 July 03 - June 04 2001 2000 572,500 - - 145,000 427,500 - - - 427,500 2,863,100 - - 526,700 2,336,400 - - - 2,336,400 427,500 - - - 427,500 - 25,000 - 402,500 2,336,400 - - 101,200 2,235,200 - - - 2,235,200 115 Notes to the financial statements NOTE 29 Share Capital continued Reward Shares Year of Grant Purchase Date Shares Purchased Shares Allocated Participants Vesting Period 2000 2001 2002 2003 20 Feb 2001 31 Oct 2001 31 Oct 2001 22 Nov 2002 12 Nov 2003 361,100 2,000 652,100 357,500 285,531 361,100 2,000 661,500(1) 545,500(2) 595,600(3) 61 1 241 195 255 14 Sept 2003 to 13 Sept 2005(4) 14 Sept 2003 to 13 Sept 2005(4) 4 Sept 2004 to 3 Sept 2006(5) 3 Sept 2005 to 2 Sept 2007(5) 2 Sept 2006 to 1 Sept 2008(5) Average Purchase Price $29.72 $29.25 $29.25 $28.26 $28.33 (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 shares were re-allocated to participants receiving the 2002 grant as a result of 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. In November 2003, 310,069 shares were re-allocated to participants receiving the 2003 grant as a result of shares forfeited from previous grants. The total number of Reward Shares allocated in 2003 represents fifty percent of the maximum entitlement that participants may receive – refer to footnote 2 above for further information. (4) Performance hurdle was satisfied on 31 March 2004 and as a result 195,700 shares vested to participants of the 2000 grant. (5) Performance hurdle must be satisfied within the vesting period, otherwise shares will be forfeited. Reward Shares - Details of Movements Year of Grant 2000 2001 2002 2000 2001 2002 2003 July 02 - June 03 July 03 - June 04 Total reward shares: Held by participants at the start of year Granted during year Vested during year Lapsed during year Outstanding at the end of year Granted from 30 June to date of report Vested from 30 June to date of report Lapsed from 30 June to date of report Outstanding as at the date of report 337,300 - - 120,200 217,100 - - - 217,100 638,800 - - 120,300 518,500 - - - 518,500 - 552,000 - 36,700 515,300 - - - 515,300 217,100 - 195,700 21,400 - - - - - 518,500 - - 59,000 459,500 - - 22,500 437,000 515,300 - - 43,225 472,075 - - 26,250 445,825 - 597,100 - 10,725 586,375 - - 28,875 557,500 During the vesting period, Reward Shares are held in Trust. Each participant on behalf of whom Reward Shares are held by the Trustee, has 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. For a limited number of executives including overseas based staff and those approved by the Chief Executive Officer and ratified by Remuneration Committee and Board, a cash based ‘share replicator’ ERP scheme is operated by way of grants of performance units. The performance unit grants are subject to the same vesting conditions as the Reward Share component of the ERP. On meeting the vesting condition, a cash payment is made to executives whereby the value is determined based on the current share price on vesting plus an accrued dividend value. An amount of $5 million has been expensed to the profit and loss account in respect of the year ended 30 June 2004 to reflect future payments which may be required under the ‘share replicator’ plan. Executive Option Plan (“EOP”) As previously notified to shareholders, this plan was discontinued in 2000/01. the EOP, Under 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 option plan did not grant rights to the option holders to participate in a share issue of any other body corporate. The performance hurdle is the same TSR comparator hurdle as outlined above for the Equity Reward Plan (“ERP”) grants prior to 2002/03. The last grant under EOP was made in September 2000. The performance hurdles for the August 1999 grant and the September 2000 grant were met in 2004. 116 Notes to the financial statements NOTE 29 Share Capital continued Details of issues made under EOP as well as movements for 2002/03 and 2003/04 are as follows: Executive Option Plan (“EOP”) Commencement Date 3 Nov 1997 25 Aug 1998 24 Aug 1999 13 Sep 2000 Issue Date 11 Dec 1997 30 Sep 1998 24 Sep 1999 13 Oct 2000 Options Issued 2,875,000 3,275,000 3,855,000 2,002,500 Options Outstanding - - 1,875,000 1,144,600 Participants 27 32 38 50 Exercise Price(1) $15.53(2) $19.58(2) $23.84(2) $26.97(2) Exercise Period 4 Nov 00 to 3 Nov 02 26 Aug 01 to 25 Aug 03 25 Aug 02 to 24 Aug 09(3) 14 Sep 03 to 13 Sep 10(4) (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. (2) Premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil. (3) Performance hurdle for the 1999 grant was satisfied on 28 February 2004 and options may be exercised up to 24 August 2009. (4) Performance hurdle for the 2000 grant was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010. Details of Movements Year of Grant Total options - Held by participants at the start of year Exercised during year Lapsed during year Outstanding at the end of year Exercised from 30 June to date of report Lapsed from 30 June to date of report Outstanding as at the date of report 1 July 2002 to 30 June 2003(1) 1 July 2003 to 30 June 2004(1) 1997 1998 1999 2000 1998 1999 2000 50,000 - 50,000 - - - - 1,047,500 660,000 3,525,000 - 1,691,700 312,500 - 312,500 3,221,000 1,271,000 1,336,200 129,100 - 304,000 355,500 387,500 3,221,000 1,336,200 - 75,000 - - - - 312,500 3,221,000 1,336,200 - - - - - 25,000 12,500 1,925,000 1,194,600 50,000 50,000 - - 1,875,000 1,144,600 (1) The EOP was discontinued in 2000/01 and no options have been granted under the plan during the last two reporting periods. Summary of shares issued during the period 1 July 2003 to the date of the report as a result of options being exercised are: Option Issue Date 30 Sep 1998 24 Sep 1999 13 Oct 2000 7 Feb 2001 Shares Issued 312,500 1,321,000 179,100 25,000 Price paid per Share $19.58 $23.84 $26.97 $26.97 Total Consideration Paid $6,118,750 $31,492,640 $4,830,327 $674,250 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. 117 Notes to the financial statements NOTE 29 Share Capital continued 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 a total of 34,009 shares have been purchased under the NEDSP since the plan commenced in 2001. Details of grants under the NEDSP from 1 July 2003 to 30 June 2004 were as follows: Quarter Ending 30/09/2003 31/12/2003 31/03/2004 30/06/2004 Total Fees Sacrificed $74,636 $74,650 $73,762 $73,616 Participants Shares Purchased Average Purchase Price 11 11 11 11 2,678 2,534 2,214 2,250 $27.87 $29.46 $33.32 $32.72 No trading restrictions were lifted on shares during the period 1 July 2003 to the date of this report. For the current year, $297,000 was expensed to the profit and loss account reflecting shares purchased and allocated under the NEDSP. 2004 $M 300 - 4 2,176 2,480 GROUP 2003 $M 300 - 4 1,824 2,128 NOTE 30 Outside Equity Interests Controlled Entities: Share capital (1) Reserves Retained profits Life insurance statutory funds Total Outside Equity Interests (1) ASB Perpetual Preference Shares - $182 million. 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 million. 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”) approved a proposal which saw CPA acquire the 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. 118 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 risk weighted on and off balance sheet assets. 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 life insurance and funds management businesses are not consolidated for capital adequacy purposes. Regulatory capital is divided into Tier One and Tier Two capital. Certain deductions are made from the sum of Tier One and Tier Two capital to arrive at the capital base. Tier One 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 Two 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 One and Tier Two capital to arrive at the capital base. the In accordance with APRA’s methodology, 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 the 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 Bank are shown on page 121. An analysis of the movement in the capital ratios is shown on page 120. 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. Under APRA guidelines, the expected dividend must be deducted from Tier One 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 2004 ASB Bank Limited Group had a Tier One ratio of 8.22% and a Total Capital ratio of 10.18%. Regulatory Capital Requirements for Life Insurance and Funds Management Business The Group’s life insurance businesses in Australia are also regulated by APRA. The Life Insurance Act 1995 includes a framework for the calculation of the regulatory capital requirements for life insurance companies. The required calculations are based on tests aimed at ensuring each statutory fund in each life insurance company has sufficient assets to meet policy and other liabilities under a range of adverse circumstances. There are two tiers to the regulatory capital requirements – ‘solvency’ and ‘capital adequacy’. The solvency test is made assuming each fund is closed to new business. Failure to meet the solvency test may result in the appointment of a judicial manager by APRA. The capital adequacy test assumes each fund remains open to new business and the reasonable 119 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. Failure may also result in closer regulatory monitoring by APRA. The capital adequacy test is always equal to or greater than the solvency test. At all times during the year to 30 June 2004, all statutory funds of the Group’s life insurance companies in Australia met the capital adequacy test. At 30 June 2004, the estimated excess over capital adequacy within statutory funds amounted to $337 million in aggregate. insurance companies, for Australian life The Group owns two life insurance companies in Australia: Commonwealth Insurance Holdings Limited (“CIHL”), and The Colonial Mutual Life Assurance Society Limited insurance business of life Commonwealth Life Limited (“CLL”) was amalgamated into CMLA on 1 July 2003 using the provisions of part 9 of the Life Insurance Act. CLL was subsequently deregistered. (“CMLA”). The There are no regulatory capital requirements for life insurance companies in New Zealand. However, the Group determines the capital requirements for New Zealand on a basis similar to Australia. life is regulated by the Insurance Authority of Hong Kong. The minimum regulatory requirement comprises a solvency test as defined in local regulations and ordinances. insurance business in Hong Kong The Funds managers in Australia are subject to responsible entity regulation by the Australian Securities and Investment Commission (“ASIC”). The regulatory capital responsible entities depending on the type of Australian Financial Services or Authorised Representatives’ Licence held but a requirement of up to $5 million of net tangible assets applies. requirements vary for APRA approved supervises tangible assets of at of superannuation funds and requires them to also maintain least $5 million. These net requirements are not cumulative where an entity is both an approved trustee for superannuation purposes and a responsible entity. trustees The total Group’s funds management companies held an estimated $710 million excess over regulatory capital requirements at 30 June 2004 in aggregate. life and Regulatory Changes Basel II In June 2004, the Basel Committee on Banking Supervision (“the Basel Committee”) issued the Revised Framework for the calculation of capital adequacy for banks, commonly known as Basel II. The objective of the to develop capital adequacy Basel guidelines that are more accurately aligned with the individual risk profile of banks. II Framework is ratings-based the Basel two II Framework. internal The Basel II Framework 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 These are risk under Standardised and (“IRB”) approaches. The Standardised Approach is a modified version of the current approach, but with risk weights ratings of borrowers and aligned with counterparties. Under the IRB approaches (Foundation and Advanced), banks such as Commonwealth Bank that 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 the credit Active Capital Management The Bank maintains a strong capital position. The Tier One Capital Ratio increased from 6.96% to 7.43% and the Total Capital Ratio increased from 9.73% to 10.25% during the year to 30 June 2004. The Bank’s credit ratings remained unchanged. (cid:131) (cid:131) (cid:131) During the year, the Bank achieved strong growth in Risk Weighted Assets from $147 billion to $169 billion. The following significant initiatives were undertaken to actively manage the Bank’s capital: Tier One Capital Issue of USD550 million (AUD832 million) of trust preferred securities in August 2003; Issue of $750 million of Perpetual Exchangeable Resettable Listed Securities (“PERLS II”) in January 2004; Issue of $201 million shares in October 2003 to satisfy the Dividend Reinvestment Plan (“DRP”) in respect to the final dividend for 2002/03; Issue of $188 million shares in March 2004 to satisfy the DRP in respect to the interim dividend for 2003/04; In accordance with APRA guidelines, the estimated issue of $250 million shares to satisfy the DRP in respect of the final dividend for 2003/04; The issue of $467 million shares pursuant to a Share Purchase Plan (“SPP”); and An off-market share buy-back of $532 million in March 2004 which reduced Tier One Capital. (cid:131) (cid:131) (cid:131) (cid:131) Further details of these transactions are provided in Note 29. (cid:131) (cid:131) (cid:131) Tier Two Capital Issue of $500 million subordinated medium term notes settled in February 2004. The notes mature in 2014 and are callable in 2009. The notes qualify as Lower Tier Two capital; Issue of JPY10 billion (AUD127 million) subordinated medium term notes settled in May 2004. The notes mature in May 2034 and are callable in May 2010. The notes qualify as Lower Tier Two capital; and Issue (AUD358 million) subordinated medium term notes settled in June 2004. The notes mature in August 2014 and are callable in August 2009. The notes qualify as Lower Tier Two capital. Deductions from Total Capital The following movements in deductions have occurred of USD250 million during the year: (cid:131) (cid:131) Sale of investment in Bank of Queensland; and Dividend of $194 million paid to the Bank from the life insurance and funds management businesses in excess of the dividend paid in respect of the after-tax profits of these businesses. In July 2004, the Bank issued USD250 million (AUD357 million) subordinated medium term notes. The notes mature in 2014 and are callable in 2009. The notes qualify as Lower Tier Two capital. Notes to the financial statements NOTE 31 Capital Adequacy continued used by the bank Commonwealth Bank Advanced IRB approach. The Basel in is its internal models. The the implement to intending II Framework introduces a capital requirement for operational risk. As with credit risk, there are multiple approaches. The Bank to implement the Advanced Measurement Approach. intending is The Basel Committee intends member countries to adopt and implement the Basel II Framework for financial years ending in 2006. However, the most advanced approaches risk will be to credit and operational implemented for financial years ending in 2007, in order that further impact studies and parallel calculations can be completed. The current capital requirements for market risk are not expected to change significantly under the Basel II Framework. There remain a number of uncertainties regarding the Basel II Framework as it will be applied by APRA and it is the to provide reliable not possible regulatory position of the Bank under the new rules. information on International Financial Reporting Standards The Bank will be required to adopt International Financial Reporting Standards (“IFRS”) for the financial year commencing 1 July 2005 and will report for the first time under IFRS when the results for the half year ended 31 December 2005 are announced. Many of the IFRS changes will have an affect upon the reporting of the Bank’s assets and equity. Current accounting definitions for asset and equity measurement are central to the capital adequacy requirements set by prudential regulators. APRA has stated that it will revise its prudential standards in response to the IFRS changes. However, it is currently unclear the impact this will have on the Bank’s capital adequacy position. Refer to page 64 for further discussion of IFRS. Conglomerate Groups APRA has advised that a third level of capital adequacy (“Level 3”) will be implemented to coincide with Basel II. APRA defines a conglomerate group as a group of companies containing one or more Australian incorporated Authorised Deposit-taking Institutions (“ADIs”). The Bank is an ADI and 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. 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. The proposals indicate that the use of internal capital estimation and allocation models may be permitted. However, APRA has not yet specified their requirements for internal models, nor when they will complete their review of the Bank’s models. Whilst the Bank considers 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 Bank meets the Level 3 capital requirements. that it Capital Expenditure From 1 July 2004, APRA requires banks to deduct certain capitalised expenses from Tier One capital. On a pro-forma basis, at 30 June 2004 this deduction would have been $111 million resulting in a decrease in Tier One Capital from 7.43% to 7.37% and a decrease in Total Capital from 10.25% to 10.18%. 120 Notes to the financial statements NOTE 31 Capital Adequacy continued Risk Weighted Capital Ratios Tier One Tier Two Less deductions Total Adjusted Common Equity(1) Regulatory Capital Tier One capital Shareholders' equity Eligible loan capital Estimated reinvestment under Dividend Reinvestment Plan(2) Foreign currency translation reserve related to non-consolidated subsidiaries Deduct: Asset revaluation reserve Goodwill Expected dividend Intangible component of investment in non-consolidated subsidiaries(3) Outside equity interest in entities controlled by non-consolidated subsidiaries Outside equity interest in insurance statutory funds and other funds Other Total Tier One Capital Tier Two capital Asset revaluation reserve General provision for bad and doubtful debts(4) Future Income Tax Benefit related to general provision Upper Tier Two note and bond issues Lower Tier Two note and bond issues(5)(6) Total Tier Two Capital 2004 Actual % 7.43 3.93 (1.11) 10.25 4.75 2004 $M 24,885 338 250 179 (61) (4,705) (1,315) (4,674) (114) (2,176) (19) 12,588 61 1,390 (398) 267 5,338 6,658 GROUP 2003 Actual % 6.96 4.21 (1.44) 9.73 GROUP 2003 $M 22,152 351 - 147 (7) (5,029) (1,066) (4,388) (123) (1,824) - 10,213 7 1,321 (391) 250 4,990 6,177 Total capital Deduct: Investment in non-consolidated subsidiaries (net of intangible component deducted from Tier One capital)(3) Other deductions Capital Base 19,246 16,390 (1,886) (5) 17,355 (2,072) (42) 14,276 (1) (2) (3) (4) (5) (6) Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating. The ACE ratio has been calculated in accordance with the Standard & Poor’s methodology. As the Bank did not disclose this ratio for the previous year, no comparatives are published. Based on reinvestment experience related to the Bank’s Dividend Reinvestment Plan. Refer to Note 34 for a reconciliation of the components of the carrying value of the life insurance and funds management business to the value of investments in non-consolidated subsidiaries. Excludes general provision for bad and doubtful debts in non-consolidated subsidiaries. APRA requires these Lower Tier Two note and bond issues to be included as if they were un-hedged. For regulatory capital purposes, Lower Tier Two note and bond issues are amortised by 20% of the original amount during each of the last five years to maturity. 121 Notes to the financial statements NOTE 31 Capital Adequacy continued Adjusted Common Equity(1) Tier One capital Deduct: Eligible loan capital Preference share capital Other equity instruments Outside equity interest (net of outside equity interest component deducted from Tier One capital) Investment in non-consolidated subsidiaries (net of intangible component deducted from Tier One capital)(2) Other deductions Other Total Adjusted Common Equity 2004 $M 12,588 (338) (687) (1,573) (190) (1,886) (5) 139 8,048 (1) Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating. The ACE ratio has been calculated in accordance with the Standard & Poor’s methodology. As the Bank did not disclose this ratio for the previous year, no comparatives are published. (2) Refer to Note 34 for a reconciliation of the components of the carrying value of the life insurance and funds management business to the value of investments in non-consolidated subsidiaries. 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) Face Value 2004 $M 2003 $M Risk Weights % GROUP Risk-Weighted Balance 2003 $M 2004 $M 27,554 15,020 125,026 83,256 250,856 23,832 12,427 103,987 74,472 214,718 0% 20% 50% 100% - 3,004 62,513 83,256 148,773 - 2,485 51,993 74,472 128,950 Face Value 2004 $M 2003 $M Credit Equivalent 2003 $M 2004 $M GROUP Risk-Weighted Balance 2003 $M 2004 $M Off-balance sheet exposures Direct credit substitutes Trade and performance related items Commitments Foreign exchange, interest rate and other 769,742 market related transactions Total Off Balance Sheet Exposures - Credit Risk(4) 839,201 Total risk weighted assets - credit risk Risk weighted assets - market risk Total Risk Weighted Assets 3,293 1,069 65,097 3,746 992 58,674 3,293 483 12,745 3,746 463 10,882 2,836 453 9,238 3,238 435 7,832 603,726 667,138 20,069 36,590 17,475 32,566 5,614 18,141 5,028 16,533 166,914 145,483 1,325 169,321 146,808 2,407 (1) (2) (3) (4) 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 secured by the residential property account for $6.2 billion of off balance sheet credit equivalent assets ($3.1 billion of off balance sheet risk weighted assets). 122 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 39. GROUP Maturity Period At 30 June 2004 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(3) 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 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 888 - 5,565 - - - 774 - - 2,646 - 51 390 4,749 - - - 4,904 - - - 4,904 7,126 14,896 1,952 27,597 8,643 2,948 17,963 86,690 80 - 1,646 70 - 5,145 319 - 2,704 19,883 6,376 554 5 28,544 39,957 - 3,924 - 95,797 - 3,466 - 49,096 102,286 (1,393) - 17,999 174 16,780 - - - - Total $M 6,453 8,369 14,896 11,447 189,391 15,019 28,942 18,532 293,049 88,691 - 48,863 21,191 3,594 838 - 163,177 536 - - - 9 89,236 - - - - - - 4,564 8,643 - 7,160 17,996 87,226 1,529 6,376 - 13,699 918 43,713 12 - - 19,162 32 22,800 - - - 10,249 8 11,095 - - 24,638 403 196 25,237 6,641 15,019 24,638 50,673 19,159 279,307 (1) (2) (3) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months. $102 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 the 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 retail deposits and wholesale funding. 123 Notes to the financial statements NOTE 32 Maturity Analysis of Monetary Assets and Liabilities continued GROUP Maturity Period At 30 June 2003 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 0 to 3 At Call Overdrafts months $M $M $M 3 to 12 Months $M 1 to 5 years $M Over 5 years $M Not specified $M 1,033 1,256 - - - - - - 4,542 - - - 5,054 10,435 1,339 756 - 2,034 - - 6,407 - - 1,256 - - - - Total $M 5,575 7,066 10,435 11,036 1,515 4,457 14,128 18,094 37,167 86,311 (1,325) 160,347 - - 582 4,386 - - - 4,457 13,197 3,922 15,616 68,233 - 656 7 21,547 - 4,075 5 47,654 - 3,878 - 91,445 - 15,304 631 14,610 13,197 27,835 16,841 252,332 Liabilities Deposits and other public borrowings(3) Payables due to other financial institutions Bank acceptances Life liabilities(4) Debt issues and loan capital Other monetary liabilities Total Monetary Liabilities 81,385 1,438 - - - 1 82,824 - - - - - - - 38,334 15,138 4,962 1,155 - 140,974 5,724 13,197 - 13,352 17,043 87,650 376 - - 3,911 24 19,449 - - - 12,005 - 16,967 - - - 6,970 - 8,125 - - 23,861 416 284 24,561 7,538 13,197 23,861 36,654 17,352 239,576 (1) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within three months. (2) $87 billion of this figure represents owner occupied housing loans. While most of these loans would have a contractual term of 20 years (3) 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. (4) The maturity profile of Life assets has been reclassified to be on a consistent basis with current year. 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. 124 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 Appraisal value uplift/(reduction) Total Revenue GROUP Year Ended 30 June 2004 Funds Banking Management $M $M 13,287 - 3,720 - 17,007 - - 3,142 (95) 3,047 Insurance $M - 1,012 840 296 2,148 Total $M 13,287 1,012 7,702 201 22,202 Interest expense 7,877 - - 7,877 3,091 (914) 2,177 (1) 504 (228) 371 (120) 3,966 (1,262) 276 (8) 251 - 2,176 (302) - 1,874 268 (17) (95) 156 251 (5) 296 542 302 276 110 427 38 17 - 8 - 3 5 - 9 - - 2,704 (9) 2,695 (324) 201 2,572 324 276 127 427 41 265,062 19,878 21,055 305,995 518 194 254,284 6 1 17,439 9 44 9,387 533 239 281,110 Segment result before income tax, goodwill amortisation and appraisal value uplift/(reduction) Income tax expense Segment result after income tax and before goodwill amortisation and appraisal value uplift/(reduction) Outside equity interest Segment result after tax and outside equity interest before goodwill amortisation and appraisal value uplift/(reduction) Goodwill amortisation Appraisal value uplift/(reduction) Net Profit Attributable to Shareholders of the Bank Non-Cash Expenses Goodwill amortisation Charge for bad and doubtful debts Depreciation Which new Bank initiatives Other Financial Position Total Assets Acquisition of Property, Plant & Equipment, Intangibles and other Non-Current Assets Associate Investments Total Liabilities 125 Notes to the financial statements NOTE 33 Financial Reporting by Segments continued Financial Performance Interest income Premium and related revenue Other income Total Revenue Interest expense Segment result before income tax, goodwill amortisation and appraisal value (reduction)/uplift Income tax (expense)/credit Segment result after income tax and before goodwill amortisation and appraisal value (reduction)/uplift Outside equity interest Segment result after income tax and outside equity interest before goodwill amortisation and appraisal value (reduction)/uplift Goodwill amortisation(1) Appraisal value (reduction)/uplift Net Profit Attributable to Shareholders of the Bank Non-Cash Expenses Goodwill amortisation Charge for bad and doubtful debts Depreciation Appraisal value reduction/(uplift) Other Financial Position Total Assets Acquisition of Property, Plant & Equipment, Intangibles and other Non-current Assets Associate Investments Total Liabilities GROUP Year Ended 30 June 2003 Funds Banking Management $M $M Insurance $M 11,528 - 2,733 14,261 6,502 3,165 (931) 2,234 - 2,234 (300) - 1,934 300 305 109 - 112 - - 1,157 1,157 - 217 5 222 (6) 216 (18) (291) (93) 18 - 8 291 1 Total $M 11,528 1,131 4,510 17,169 - 1,131 620 1,751 - 6,502 161 (32) 129 - 129 (4) 46 171 4 - 11 (46) - 3,543 (958) 2,585 (6) 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) Prior years have been restated to reflect the allocations of goodwill amortisation across businesses. 126 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, 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 & Equipment, Intangibles and other Non-current Assets Associate Investments Total Liabilities GROUP Year Ended 30 June 2002 Funds Banking Management $M $M Insurance $M 10,455 - 3,180 - 13,635 5,745 2,884 (816) 2,068 (1) 2,067 (301) - 1,766 301 449 109 87 - - 690 381 1,071 - 399 (31) 368 - 368 (18) 381 731 18 - 7 2 Total $M 10,455 866 4,163 477 15,961 - 866 293 96 1,255 - 5,745 135 (69) 66 - 66 (4) 96 158 4 - 12 1 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 30 18,123 - 48 9,584 164 313 228,592 127 Notes to the financial statements NOTE 33 Financial Reporting by Segments continued Secondary Segment GEOGRAPHICAL SEGMENTS Revenue Australia New Zealand Other Countries(1) Net profit attributable to shareholders of the Bank Australia New Zealand Other Countries(1) Assets Australia New Zealand Other Countries(1) Acquisition of Property, Plant & Equipment, Intangibles and other Non-current Assets Australia New Zealand Other Countries(1) 2004 $M 17,746 2,671 1,785 22,202 2,091 309 172 2,572 252,652 35,059 18,284 305,995 % 80.0 12.0 8.0 2003 $M % 2002 $M % 14,008 2,025 1,136 81.6 11.8 6.6 12,651 1,591 1,719 79.3 10.0 10.7 100.0 17,169 100.0 15,961 100.0 81.3 12.0 6.7 100.0 82.6 11.4 6.0 1,659 265 88 82.4 13.2 4.4 2,012 100.0 2,569 178 (92) 2,655 96.8 6.7 (3.5) 100.0 221,248 27,567 16,295 83.5 10.4 6.1 208,673 24,579 16,396 83.6 9.8 6.6 100.0 265,110 100.0 249,648 100.0 495 29 9 533 92.9 5.4 1.7 100.0 98 6 16 120 81.7 5.0 13.3 100.0 134 26 4 164 81.7 15.9 2.4 100.0 (1) 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. The New Zealand net profit for 2003 has been restated onto a consistent basis with other years. 128 Notes to the financial statements NOTE 34 Life Insurance Business The following information, in accordance with AASB 1038: Life Insurance Business, 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 to Notes 1(ii) and 21. The life insurance segment result is prepared on a business segment basis, refer to 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 profit after income tax Outside equity interest in operating profit after income tax Net Profit After Income Tax Sources of life insurance operating profit The Margin on Services operating profit after income tax is represented by: Emergence of planned profit margins Difference between actual and planned experience Movement in excess of net market value over net assets of controlled entities Reversal of previously recognised losses or loss recognition on groups of related products Investment earnings on assets in excess of policyholder liabilities Operating Profit After Income Tax Life insurance premiums received and receivable Life insurance claims paid and payable 2004 $M 1,362 (194) (501) 139 1,582 558 238 399 (2,315) 1,268 201 1,469 (447) 1,022 (300) 722 (8) 714 186 6 201 10 311 714 3,688 4,356 GROUP 2003 $M 1,326 (200) (471) 132 (680) 894 374 46 (546) 875 (245) 630 (697) (67) 45 (22) - (22) 228 (67) (245) (11) 73 (22) 4,158 5,843 129 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 2003 Profits Net capital movements(2) Dividends paid Foreign exchange movements Change in Shareholders net tangible assets Appraisal value uplift/(reduction) Increase/(Decrease) to 30 June 2004 Shareholders’ Net Tangible Assets 30 June 2003 balance Profits Net capital movements(2) Dividends paid Foreign exchange movements 30 June 2004 Balance Value Inforce Business 30 June 2003 balance Uplift/(reduction) 30 June 2004 Balance Value Future New Business 30 June 2003 balance Uplift/(reduction) 30 June 2004 Balance Carrying Value at 30 June 2004 Shareholders’ net tangible assets Value inforce business Embedded value Value future new business Carrying Value Life Insurance Funds Management $M Australia New Zealand $M $M Asia(1) $M 268 (27) (470) (10) (239) (95) (334) $M 754 268 (27) (470) (10) 515 $M 1,123 727 1,850 $M 3,596 (822) 2,774 $M 515 1,850 2,365 2,774 5,139 180 108 (421) - (133) 206 73 $M 1,264 180 108 (421) - 1,131 $M 245 50 295 $M 79 156 235 $M 1,131 295 1,426 235 1,661 54 (29) (9) 19 35 94 129 $M 380 54 (29) (9) 19 415 $M 191 95 286 $M 278 (1) 277 $M 415 286 701 277 978 17 - - (25) (8) (4) (12) $M 608 17 - - (25) 600 $M 4 (4) - $M 24 - 24 $M 600 - 600 24 624 Total $M 519 52 (900) (16) (345) 201 (144) $M 3,006 519 52 (900) (16) 2,661 $M 1,563 868 2,431 $M 3,977 (667) 3,310 $M 2,661 2,431 5,092 3,310 8,402 (1) (2) 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, subject to impairment. Includes capital injections and movements in intergroup loans. 130 Notes to the financial statements NOTE 34 Life Insurance Business continued The following table reconciles the carrying values of the life insurance 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 One capital comprises: Value future new business Value of self-generated inforce business Other (1) 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 inforce business Less non-recourse debt 2004 $M 3,310 1,279 85 4,674 2,661 351 1,152 (2,278) 1,886 2003 $M 3,977 411 - 4,388 3,006 286 1,152 (2,372) 2,072 (1) Relates to revised APRA Prudential Standards effective 1 July 2003. Key Assumptions Used in Appraisal Values The following key assumptions have been used 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 2004 Life insurance entities Australia New Zealand Asia - Hong Kong - Other Funds management entities Australia As at 30 June 2003 Life Insurance entities Australia New Zealand Asia - Hong Kong - Other Funds management entities Australia New Business Multiplier 8 9 8 Various n/a New Business Multiplier 8 8 8 various Risk Discount Rate % 10.9 10.3 12.0 Various 12.5 Risk Discount Rate % 10.8 10.9 11.5 various Value of Franking Credits % 70 - - - 70 Value of Franking Credits % 70 - - - n/a 11.9 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 on the Australian funds management business. The assumptions for the future new business are set after considering current levels of new business and the expected growth in business. A review of current experience has resulted in a reduction in the future sales assumption for Australian funds management. 131 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. 2004 $M 27,779 1,346 1,762 1,472 (527) (7,266) 72 24,638 2003 $M 27,426 1,188 1,637 1,420 (916) (6,956) 62 23,861 Taxation Actuarial Methods and Assumptions Taxation has been allowed for in the determination of policy liabilities in accordance with the relevant legislation applicable in each territory. 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’) Insurance Actuarial Standards Board (‘LIASB’). The principal methods and profit carriers used for particular product groups, are as follows: issued by the Life Product Type Method Profit Carrier 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 Projection Projection Accumulation Projection Projection Projection Projection Accumulation Accumulation Projection Bonuses or expected claim payments Bonuses or funds under management Not applicable Premiums/claims Expected claim payments Annuity payments Bonuses or funds under management Not applicable Not applicable Expected claim payments 132 Actuarial Assumptions 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 were the rates used to discount further cash flows to determine their net present value in the policy liabilities. The discount rates were 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 and asset mix. Discount Rates June 2004 Rate Range % 6.11 – 6.86 7.46 – 8.40 6.17 – 6.98 3.45 – 4.15 3.45 – 4.15 5.93 5.61 – 6.04 7.37 – 7.42 8.41 – 8.80 4.32 5.25 6.13 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 5.21 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. Voluntary Discontinuance Discontinuance rates were based on recent company and industry experience and vary by territory, product, age and duration inforce. The experience has generally been favourable resulting in reductions in discontinuance rates for some product lines. Surrender Values Current surrender value bases were 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. Notes to the financial statements NOTE 34 Life Insurance Business continued The ‘Projection Method’ measures the present values of estimated future policy cash flows to calculate policy liabilities. The policy cash flows incorporate investment income, premiums, expenses, redemptions and benefit payments. the accumulation of amounts The ‘Accumulation Method’ for investment linked invested by measures policyholders plus investment earnings less fees specified in the policy to calculate policy liabilities. Deferred acquisition costs were offset against this liability. to Bonuses are amounts added, at the discretion of the the benefits currently payable under insurer, life Participating Business. Under the Life Act, bonuses are a distribution to policyholders of profits and may take a number of forms including reversionary bonuses, interest credits and capital growth bonuses (payable on the termination of the policy). Class of Business Traditional – ordinary business (after tax) Traditional – superannuation business (after tax) Annuity business (after tax) Term insurance – ordinary business (after tax) Term 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) Investment account – exempt (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 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 with adjustments for actual experience, and are assumed to increase in line with inflation each year. 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 to these assumptions. Inflation The inflation assumption investment earning assumptions. Benefit Indexation is consistent with the The indexation rates are based on an analysis of past experience and estimated long term inflation and vary by 133 Managed Assets and Fiduciary Activities Arrangements were 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, that were distinguished from each other and from the shareholders’ funds. The financial statements of Australian in accordance with AASB 1038: Life Insurance Business, (and which are the relevant Australian regulators) show all major components of the financial statements disaggregated between life the various insurance statutory funds and their shareholder funds. insurers prepared lodged with life Notes to the financial statements NOTE 34 Life Insurance Business continued Solvency Australian Life Insurers Australian life insurers are required to hold prudential reserves in excess of the amount of policy liabilities. These reserves were 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 be held in each life insurance fund. All controlled Australian life 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 - Overseas life insurance subsidiaries were 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. 134 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 GROUP 2003 $'000 2004 $'000 2004 $'000 BANK 2003 $'000 7,714 134 7,848 1,113 222 203 13 569 2,120 6,634 137 6,771 2,792 - 2,792 752 325 628 1,263 321 3,289 894 136 203 13 284 1,530 2,555 - 2,555 571 170 528 827 122 2,218 Total Remuneration of Auditors 9,968 10,060 4,322 4,773 The Audit Committee has considered the non-audit services provided by Ernst & Young and is satisfied that the services and the level of fees are compatible with maintaining auditors’ independence. 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. to statutory and relation in Audit related fees principally include accounting and regulatory consultations, due diligence in connection with acquisitions and dispositions, and investigations and verifications of internal control systems and financial or regulatory information. Taxation tax and GST compliance and related advice, and tax technology and related training. income include fees All other fees principally include transaction support services related to potential and actual acquisition and disposition transactions, advice regarding implementation of revised compliance and regulatory requirements, and provision of personnel to assist alleviate short term non- management resource and skill needs. 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 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. 135 GROUP 2003 $M 2004 $M 44 2 46 48 - 48 2004 $M 42 - 42 BANK 2003 $M 23 - 23 GROUP 2003 $M 2004 $M 2004 $M BANK 2003 $M 295 646 207 1,148 264 587 160 1,011 241 522 150 913 228 503 104 835 12 16 - 28 9 18 1 28 Rental payments are determined in terms of relevant lease requirements, usually reflecting market rentals. 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. Notes to the financial statements NOTE 38 Contingent Liabilities and Assets The Group is involved in a range of transactions that give rise to contingent and/or future liabilities. These transactions meet the financing requirements of customers and include endorsed bills of exchange, letters of credit, guarantees and commitments to provide credit. foreign exchange and These transactions combine varying levels of credit, In interest rate, 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. liquidity risk. 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 2003 $M GROUP Credit Equivalent 2003 $M 2004 $M 2,075 380 589 110 882 58,310 2,720 65,066 2,230 362 308 34 449 12,329 1,156 16,868 2,075 380 589 22 441 10,519 1,081 15,107 2004 $M 2,230 362 308 171 898 64,651 7,158 75,778 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. letters of Documentary 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. credit Performance undertakings by a customer fails obligation. related the Group to involve if fulfil a contractual non-monetary third parties contingents to pay Commitments to provide credit include all obligations on the part of the Group to provide credit facilities. The Other commitments include the Group’s obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities. 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 event of non performance by the Group counterparty. in 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. Contingent Assets The credit risk related contingent liabilities of $75,778 (2003: $65,066 million) detailed above also million 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. 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. 136 Notes to the financial statements NOTE 38 Contingent Liabilities and Assets 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 administration Australia United Kingdom New Zealand Asia Funds under custody Australia(1) The Group and its associated entities conduct investment management and other fiduciary activities as responsible entity, trustee, custodian or manager for numerous including superannuation and approved deposit funds, wholesale and retail trusts. The amounts of funds concerned that are not reported in the Group’s balance sheet are as follows: funds and investment trusts, 2004 $M 67,393 10,721 7,614 1,203 86,931 2003 $M 61,556 6,908 6,590 1,369 76,423 - 57,777 (1) The Group has agreed to novate or transfer all of this business to other custodians during the 2004 financial year. Certain entities within the Group act as responsible entity or trustee of virtually all managed schemes (“schemes”), wholesale and retail trusts (“trusts”) managed by the Group in Australia, United Kingdom and New Zealand. The above funds under administration do not include on balance sheet investments and policyholder liabilities held in the statutory funds of the life insurance business (refer to Note 16) where an entity within the Group may act as a trustee. 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 2004. 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 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, the Bank entered into a 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. Liquidity support In accordance with the regulations and procedures governing clearing arrangements contained within the Australian Paper Clearing System (“Clearing Stream 1”) and the Bulk Electronic Clearing System (“Clearing Stream 2”) and the High Value Clearing System (“Clearing Stream 4”, only if operating in ‘bypass mode’) of the Australian Payments Clearing Association Limited, 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. the Bank 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 2004 was $8 million (2003: $10.6 million). 137 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 or a loss of value, 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 Rrisk 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 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. (cid:131) 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:131) (cid:131) 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. 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 funds. 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 fallen from 67% in June 2003 to 60% in June 2004 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 of pensioner deeming accounts. The cost of funds for Financial Year 2004, calculated as a percentage of interest exposure to average interest bearing liabilities, was 4.0% on a group basis compared with the 3.7% on a group basis for Financial Year 2003. The Group obtains a significant proportion of its funding for the domestic balance sheet from wholesale sources – approximately 29.7% (2003: 22.7%), excluding Bank Acceptances. The cost of funds raised in the wholesale markets is affected by independently assessed credit ratings. 138 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. 2004 $M 24,699 31,067 38,530 20,756 27,688 15,019 20,516 20,834 6,539 3,585 2,383 211,616 28,282 8,776 3,804 7,578 92 - 48,532 260,148 20,962 281,110 GROUP 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 7,802 3,418 3,250 88 75 40,254 222,225 20,733 242,958 139 (b) Economic value Some of the Bank’s assets and liabilities have interest rate risk that is not fully captured within a measure 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 possible the VaR methodology. The interest rate scenarios are based on actual interest rate movements that have occurred over one year and five year historical observation periods. The measured VaR exposure is an estimate to a 97.5% confidence level (one-tail) of the potential loss that could occur if the balance sheet positions were to be held unchanged for a one month holding period. For example, VaR exposure of $1 million means that in 97.5 cases out of 100, the expected net present value will not decrease by more than $1 million given the historical movement in interest rates. The figures in the following table represent the net present value of the expected change in future earnings in all future periods for the remaining term of all existing assets and liabilities held for purposes other than trading. Exposure as at 30 June Average monthly exposure High month exposure Low month exposure 2004 $M 2003 $M 19 40 92 19 34 24 64 4 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 purposes other than trading. (expressed as a percentage of expected next 12 months' earnings) 2004 % 2003 % Average monthly exposure High month exposure Low month exposure 0.9 1.3 0.5 1.3 2.1 0.4 140 Notes to the financial statements NOTE 39 Market Risk continued The following table represents the Bank’s contractual interest rate sensitivity for repricing mismatches as at 30 June 2004 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. Interest Rate Risk Sensitivity 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 2004 Not Weighted Interest Average Rate % 1 to 5 Over 5 years $M years Bearing $M $M Australia Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers 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 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 5,740 4,802 - - 4,914 11,310 3,822 3,657 11,310 81 1,076 - 180 78 - 792 4 2 - 17 - - 934 3.27 - - 1,966 - - 782 101 - 4 2.88 3.53 6.09 158,915 96,547 10,283 8,776 14,148 28,444 1,989 (1,272) 6.89 15,019 - - - - - - 15,019 - 24,673 761 2,090 203 247 2,934 2,514 15,924 4.62 - - - - - - - - - 1,053 4,270 23,236 - - - 252,952 117,158 - - - 13,629 - - - - - - 9,849 14,418 33,344 - - - - - - 5,285 1,053 4,270 23,236 59,269 - - - 5.16 139,153 90,121 20,032 14,160 3,418 3,133 826 7,463 3.89 2,383 15,019 14 757 954 20,834 27,688 2,147 - - - - - 1,428 58 - - - - - 2,258 15,802 6,539 229,143 - 331 94,027 - 221 22,569 153 - - - - - 1,834 - 613 16,760 4 - - - - - 20 - - - - - 2,022 14,370 - - - - - - 5,776 1 15,019 14 757 954 20,834 (1) - - 999 - 1,825 6,443 19,348 - 2,550 9,152 15,802 - 60,844 1.19 - - - - - 5.27 - 4.57 3.14 21,079 2,288 23,367 - - - - - - - - - - - - - - - - - - 21,079 2,288 23,367 (2) (2) (2) (2) (2) (2) (10,161) (426) - - (12,663) - - 5,171 8,173 176 - (10,311) 954 - - 6,264 8,150 75 - (902) 5,547 175 - (222) 12,544 12,544 (16,432) (3,888) (8,873) 15,193 21,319 1,633 2,432 23,751 25,384 (12,761) - - - (24,942) 442 (3) (3) (3) (3) (3) (3) (1) (2) (3) Technically, the 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. No balance sheet amount applicable. No rate applicable. 141 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 2004 Not Weighted Interest Average Rate % years Bearing $M 1 to 5 Over 5 years $M $M Overseas Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers 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 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 713 493 116 - 30 - - 74 2.23 3,455 3,586 7,625 2,005 2,021 827 1,423 1,237 2,193 15 221 622 - 60 374 - 25 1,843 - 22 1,766 12 - - 3.20 4.29 4.00 30,476 10,868 2,671 2,616 4,233 9,509 700 (121) 6.87 - - - - - - - - - 4,269 67 54 32 71 990 955 2,100 2.11 38 - - - - - - 38 - 151 435 2,295 53,043 - - - 16,281 - - - 7,694 - - - 3,506 - - - - - - 4,768 12,367 - - - 3,443 151 435 2,295 4,984 - - - 5.22 24,024 14,697 4,636 2,605 1,095 515 14 462 4.22 4,258 - - 54 43 3,804 16,354 3,338 92 51,967 2,844 - - - - - 2,919 - - 20,460 928 - - - - - 2,411 485 - - - - - 8,504 1 - - - - - 328 - - - - - - 1,664 - - - - - - 481 - - 7,975 - 92 11,686 - - 1,424 - - 2,179 - - 495 - - - 54 43 3,804 47 3,338 - 7,748 2.80 - - - - - 1.72 - 8.22 2.74 1,326 192 1,518 - - - - - - - - - - - - - - - - - - 1,326 192 1,518 (1) (1) (1) (1) (1) (1) 3,273 - (820) - (1,726) (1,726) 5,205 - (137) 218 5,005 3,279 (186) (61) 547 (185) (8,065) (4,786) (2,073) 61 410 526 2,268 (2,518) (6,381) - - (559) 3,248 730 115 - - - 3,063 3,793 47 - - - (4,235) (442) (2) (2) (2) (2) (2) (2) (1) (2) No balance sheet amount applicable. No rate 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. 142 Notes to the financial statements NOTE 39 Market Risk continued Balance Sheet Total $M 0 to 1 month $M 1 to 3 months $M 3 to 6 months $M 6 to 12 months $M Repricing Period at 30 June 2003 Not Weighted Interest Average Rate % 1 to 5 Over 5 years $M years Bearing $M $M Australia Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers 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 Insurance policy liabilities Debt issues Bills payable and other liabilities Loan capital Total Liabilities 4,557 3,667 - 3,325 6,334 4,341 1,266 6,334 82 1,070 - 521 - 753 - 36 - - - 36 - 499 - - 2,720 - - 467 890 200 - 16 137,424 80,485 7,167 8,482 14,772 25,336 2,370 (1,188) 3.55 1.41 4.64 5.38 6.32 13,122 - - 24,185 5,344 444 - - - - 71 - - - - 13,122 - 305 2,178 2,240 13,603 4.04 - - - - - 628 4,552 21,966 220,434 - - - 97,178 - - - 9,202 - - - 9,342 - - - - - - 15,612 30,234 - - - 5,077 628 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 2,527 13,122 12 850 777 20,443 19,576 1,486 - - - - - 4,452 16,867 5,937 200,476 - 734 89,069 892 - - - - - 6,378 - 2,050 24,892 132 - - - - - 1,458 - 15 9,515 - - - 17 - - - - - - - - - - - - - - - 13,122 12 850 777 (1) - 1,152 - 4,949 - 1,187 20,443 - - - - 1,320 5,455 10,515 - 1,818 3,866 16,867 - 57,164 1.54 - - - - - 5.50 - 3.31 2.44 - - - - - - - - - 19,910 1,936 21,846 Shareholders’ Equity Share capital Outside equity interests Total Shareholders' Equity 19,910 1,936 21,846 - - - - - - Off Balance Sheet Items Swaps FRAs Futures Net Mismatch Cumulative Mismatch (2) (2) (2) (2) (2) (21,935) - - (13,826) (13,826) 8,186 - - (7,504) (21,330) 623 - - 450 (20,880) 39 - - 7,673 - - 10,196 27,392 5,414 - - 6,625 (10,684) 16,708 23,333 - - - (25,221) (1,888) (3) (3) (3) (3) (3) (1) (2) (3) Technically, the 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. No balance sheet amount applicable. No rate applicable. 143 Notes to the financial statements NOTE 39 Market Risk continued Balance Sheet Total $M 0 to 1 1 to 3 month months $M $M 3 to 6 months $M 6 to 12 months $M Repricing Period at 30 June 2003 Not Weighted Interest Average Rate % 1 to 5 Over 5 years $M years Bearing $M $M Overseas Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers 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 Insurance policy liabilities Debt issues Bills payable and other liabilities Loan capital Total Liabilities Shareholders’ Equity Share capital Outside equity interests Total Shareholders' Equity 1,018 868 53 1 - - - 3,741 4,101 6,695 1,424 495 626 2,145 1,519 1,816 79 448 1,252 - 237 458 84 1,064 2,146 - 308 397 96 9 30 - 1.75 4.32 4.31 6.26 22,923 9,155 1,972 2,390 3,687 5,273 483 (37) 7.36 75 - 3,650 117 23 8 - 43 - - 24 - - - - 75 - 73 966 710 1,717 2.54 - - - 15 2.06 193 477 1,780 44,676 - - - 12,693 - - - 7,548 - - - 4,194 - - - 4,455 - - - 9,533 - - - 1,898 193 477 1,780 4,355 - - - 5.72 20,609 11,472 4,299 2,193 749 861 149 886 4.53 5,011 75 - 26 42 3,418 11,053 2,160 88 42,482 114 192 306 4,021 - - - - - 1,050 763 - - - - - 7,987 159 - - - - - 331 - - 16,543 - 88 13,137 - - 2,683 - - - - - - - - - 68 - - - - - 76 - - 893 - - - - - - - - - 1,470 - - 2,331 - - - - - - - - - 139 - - 288 - - - - 75 - 26 42 3,418 - 2,160 - 6,607 114 192 306 3.12 - - - - - 2.01 - 8.13 3.11 Off Balance Sheet Items Options Swaps FRAs Futures Net Mismatch Cumulative Mismatch (1) (1) (1) (1) (1) (1) (1) (2) No balance sheet amount applicable. No rate applicable. 579 368 514 (1,827) (4,216) (4,216) 4,065 (562) 101 (3,260) (5,245) (9,461) 405 392 (550) (305) (2,495) (445) (109) (1,016) (2,349) 247 44 4,991 1,453 (8,008) (503) 10,135 1,624 (8,511) (205) - - 1,417 2,822 4,446 - - - - (2,558) 1,888 (2) (2) (2) (2) (2) (2) 144 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 2004 2003 $M $M Interest Rate Related Contracts 2004 2003 $M $M 99 4 (21) 59 7 148 2 (3) 1 189 (8) 181 (34) (13) 16 (190) (698) (919) (11) 6 17 13 143 168 2004 $M 65 (9) (5) (131) (691) (771) Total 2003 $M (9) 3 18 202 135 349 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 future transactions, together with the expected term of deferral are shown above. 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 $31 million of net deferred gains on derivatives (2003: $4 million net deferred gains) 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 asset returns and guaranteed liability returns on some policy changes (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. As at 30 June 2004, shareholders funds in the life insurance business are invested 73% in income assets (cash and fixed interest) and 27% in growth assets (shares and property) with the asset mix varying from company to to meet company. Policyholder policyholder reasonable expectations without putting the shareholder at undue risk. funds are invested 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 Premium Business Services. The Group trades and distributes financial markets products and provides risk management services to clients on a global basis. The objectives of the Group’s financial markets activities are to: (cid:131) (cid:131) (cid:131) 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 145 an inventory of treasury and capital market instruments, including a broad range of securities and derivatives. is a major participant In foreign exchange, the Group is a participant in all the major currencies and Australian dollar market, providing services for central banks, 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 to the financial statements. institutional, corporate and in 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. Market liquidity risk is controlled by concentrating trading activity in highly liquid markets. Note 2 to the financial statements details Financial Markets Trading Income contribution of $499 million (2003: $502 million) to the income of the Group. The contribution is significant and provides important diversification benefits to the Group. 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. Derivative Contracts The table on the next page 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 from non-traded assets, liabilities and commitments in Australia and offshore centres. The ‘Face Value’ is the notional or contractual amount of the derivatives. This amount is not necessarily exchanged and predominantly acts as a reference value upon which interest payments and net settlements can be calculated and on which revaluation is based. The ‘Credit Equivalent’ is 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). Notes to the financial statements NOTE 39 Market Risk continued Derivatives Exchange rate related contracts Forwards Trading Other than trading Total Forwards Swaps Trading Other than trading Total Swaps Futures Trading Other than trading Total Futures Options purchased and sold(1) 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 (1) Trading Other than trading Total Futures Options purchased and sold Trading Other than trading Total Options Purchased and Sold Total Interest Rate Related Contracts Credit risk related contracts Swaps Trading Other than trading Total Swaps Total Credit Risk Related Contracts Equity risk related contracts Swaps Other than trading Options purchased and sold Trading Other than trading Total Options Purchased and Sold Total Equity Risk Related Contracts Total Derivatives Exposures 2004 $M Face Value 2003 $M GROUP Credit Equivalent 2003 $M 2004 $M 151,595 30,983 182,578 61,688 38,671 100,359 1 - 1 64,930 126 65,056 347,994 28,311 500 28,811 139,297 201,510 340,807 38,525 17,251 55,776 15,100 4,683 19,783 445,177 147,998 5,329 153,327 47,821 19,737 67,558 3,083 1,504 4,587 5,242 2,855 8,097 - - - - - - 69,984 - 69,984 290,869 33,398 2,292 35,690 125,610 127,882 253,492 47,881 - 47,881 14,028 5,602 19,630 356,693 856 2 858 13,542 13 11 24 2,276 3,033 5,309 67 - 67 110 15 125 5,525 348 393 741 741 4,201 291 4,492 3,787 1,569 5,356 - - - 1,234 27 1,261 11,109 4 37 41 3,722 1,719 5,441 18 - 18 152 28 180 5,680 15 623 638 638 2,870 3,490 6,360 6,360 702 1,204 1,906 1,906 340 355 33 29 313 25 338 678 800,209 247 - 247 602 650,070 33 1 34 67 19,875 55 - 55 84 17,511 (1) Prior year face value comparatives have been restated. The Bank has also entered swaps to hedge property values and income related to investment property risk. Each of these has a face value of $252 million and a credit equivalent of $1 million. 146 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 Credit related trading derivative contracts Swaps: Gross unrealised gains Gross unrealised losses Net Unrealised Gains on Credit Related Contracts Equity related contracts Options purchased and sold: Gross unrealised gains Gross unrealised losses Net Unrealised Gains on Equity 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 to Note 2). In aggregate, derivatives trading was profitable for the Group during the year. Fair Value 2003 $M 2004 $M Average Fair Value 2003 $M 2004 $M 2,417 (2,742) (325) 5,718 (4,335) 1,383 4,753 (4,922) (169) 3,599 (2,390) 1,209 - (3) (3) 2 - 2 482 (634) (152) 903 832 (1,138) (306) 736 2,673 (2,975) (302) 5,370 (4,145) 1,225 1 (3) (2) 822 (1,167) (345) 576 3,198 (3,245) (47) 2,996 (2,078) 918 - - - 783 (920) (137) 734 4 (4) - 4 (4) - 6 (5) 1 7 (7) - 4,084 (4,362) (278) 4,431 (4,899) (468) 4,833 (5,209) (376) 4,294 (4,793) (499) 24 (25) (1) 66 (57) 9 (270) 17 (11) 6 15 (18) (3) 258 (145) 113 (358) 13 (12) 1 41 (50) (9) 155 (123) 32 (352) 16 (13) 3 15 (15) - 639 20 (20) - 379 12 (12) - 227 33 (23) 10 223 (146) 77 (412) 7 (6) 1 17 (17) - 323 147 Notes to the financial statements NOTE 39 Market Risk continued 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 2004 $M 12,827 12,188 639 Fair Value 2003 $M 13,907 13,528 379 148 Notes to the financial statements NOTE 40 Superannuation Commitments The Group sponsors a range of superannuation plans for its employees world wide. Details of major defined benefit plans with assets in excess of $10 million are: Name of Plan Type Form of Benefit Date of Last Actuarial Review of the Fund Officers’ Superannuation Fund (“OSF”) Commonwealth Bank of Australia (UK) Staff Benefits Scheme (“CBA(UK)SBS”) Defined Benefits and Accumulation Defined Benefits and Accumulation Indexed pensions and lump sums Indexed pensions and lump sums 30 June 2003 1 August 2003 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 relevant accounting and actuarial accordance with standards and practices. To maintain consistency in these values after each values, the Bank updates actuarial assessment of the fund (when the present value of accrued benefits would be calculated). In view of market volatility, the Bank updates the following values annually using most recently available information (including values obtained from unaudited fund financial statements). Net Market Value of Assets(3) Present Value of Accrued Benefits(4) Difference between Net Market of Assets and Present Value of Accrued Benefits Difference as a Percentage of Plan Assets Value of Vested Benefits(4) OSF(1) $M 5,416 3,988 1,428 26% 3,988 CBA (UK)SBS(2) $M 333 409 (76) 23% 304 Total $M 5,749 4,397 1,352 24% 4,292 (1) (2) (3) (4) The values for the OSF are the fund actuary’s estimates as at 31 March 2004. The OSF’s values include the values for the former Colonial Group Staff Superannuation Scheme (“CGSSS”) which was terminated on 3 October 2003 with the plan’s assets, liabilities, member contributions and benefit arrangements transferred to the OSF. The values for the CBA(UK)SBS are the fund actuary’s estimates as at 31 March 2004. The CBA(UK)SBS’s values include the values for the former Colonial UK Staff Pension Scheme (“CUKSPS”) and Stewart Ivory & Company Limited Retirement Benefits Scheme (“SI&CRBS”) which were terminated on 31 July 2003 with each plan’s assets, liabilities, member contributions and benefit arrangements transferred to the CBA(UK)SBS. 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 have been calculated in accordance with the Australian Accounting Standards AAS25 – Financial Reporting by Superannuation Plans. For CBA(UK)SBS, the Present Value of Accrued Benefits and Value of Vested Benefits have been calculated in accordance with relevant UK actuarial standards and practices. An actuarial review of the CBA(UK)SBS at 1 August 2003, which was finalised in August 2004, revealed a deficit of around $80 million and the actuary recommended contributions of 26% of salary (dollar contributions estimated at $5 million per annum) to finance future accrual of defined benefits and additional contributions of around $8 million per annum payable over 15 years to finance the fund deficit. The Bank is currently considering these recommendations. 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 2003 was completed during the year ended 30 June 2004. the In line with assessment, to make contributions to the OSF until further consideration of the next actuarial assessment of the OSF as at 30 June 2006. the actuarial advice contained the Bank does not intend in . 149 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 Investments Pty Limited Commonwealth Property Limited Infravest (No. 2) 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 Preferred Capital Limited Newport Limited Padang Pty Ltd M Land Pty Ltd PERLS II Trust GT Funding No.1 Pty Ltd GT Operating No.1 Pty Ltd Watermark Limited Emerald Limited Loft No.1 Pty Ltd Loft No.2 Pty Ltd Fringe Pty Ltd Reliance Achiever Pty Ltd RA Partnership Lily Pty Ltd Pavillion Limited Leaseway Transportation Pty Limited Medallion 2003-2G (b) Insurance and Funds Management Commonwealth Insurance Limited 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 Colonial First State Investments Limited Avanteos Pty Limited Colonial First State Property Limited Colonial First Statutory Funds Management Limited 150 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 Australia Australia Australia Australia Australia Australia Australia 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 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 Fiji Indonesia USA USA USA United Kingdom Malta Malta 51 Notes to the financial statements NOTE 41 Controlled Entities continued Entity Name (b) Insurance and Funds Management continued 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 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 PIF Managed Property Pty Limited Colonial Protection Insurance 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) 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 National Bank of Fiji Limited PT Bank Commonwealth CBA Capital Holdings Inc CBA Capital Trust 1 CBA Funding Trust 1 Seahorse Investments UK Ltd CommInternational Limited CommFinance Limited 151 Notes to the financial statements NOTE 41 Controlled Entities continued Entity Name (b) 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 Stewart Ivory Holdings Limited Waterloo & Victoria Limited Extent of Beneficial Interest if not 100% Incorporated in Bermuda Bermuda Hong Kong Hong Kong Singapore Fiji United Kingdom Fiji United Kingdom Fiji Fiji United Kingdom United Kingdom Cayman Islands 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. 152 Notes to the financial statements NOTE 42 Investments in Associated Entities and Joint Ventures Extent of Principal Activities GROUP Ownership 2004 $M 2003 $M Interest % Balance Date EDS (Australia) Pty Limited(1) 193 225 Computer Fleet Management Cyberlynx Procurement Services PT Astra CMG Life Allday Enterprises Ltd China Life CMG Life Assurance Company Limited(2) Bao Minh CMG Life Insurance Company CMG Mahon (China) Investment Management Limited Mahon and Associates Limited CMG CH China Funds Management Limited Colonial First State Private Ltd - - 12 1 20 12 - - 1 - - - 12 1 36 12 - - 1 - Total 239 287 35 50 30 50 30 49 50 50 50 50 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 Investment Management 31 December 30 June 30 June 31 December 31 December 31 December 31 December 30 June 30 June 31 March 30 June (1) (2) Equity accounted loss of $32 million principally relates to a change in revenue recognition policy by EDSA. Equity accounted loss of $16 million principally relates to a write-off of capitalised start up costs. 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 benefit 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) 2004 $M (44) 12 (32) 287 - - (16) - (32) 239 Financing arrangements accessible Bank overdraft Revolving credit Available 2004 $M Unused 2004 $M Available 2003 $M 70 - 70 58 - 58 72 - 72 GROUP 2003 $M 1 - 1 313 6 (21) (9) (3) 1 287 GROUP Unused 2003 $M 23 - 23 153 Notes to the financial statements NOTE 44 Director and Executive Disclosures This note outlines the remuneration arrangements for In the Bank’s Directors and Specified Executives. accordance with accounting standard AASB 1046 this note also outlines details of equity holdings, loans and other transactions Directors and Specified Executives have with the Bank and its subsidiaries. Remuneration Committee The Bank’s remuneration arrangements are overseen by the Remuneration Committee of the Board. The Committee considers changes in remuneration policy likely to have a material impact on the Bank and is informed of in leadership performance, employment issues, industrial agreements and incentive plans operating across the Bank. compliance legislative The Committee also considers senior appointments and remuneration arrangements for senior management. The remuneration arrangements for the CEO and his direct reports are approved by the full Board. 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. The Committee engages an external consultant to advise it directly in relation to the remuneration of executives. Non-Executive Directors Remuneration for Non-Executive Directors consists of base and committee fees within an aggregate total of $1,500,000 per year as approved by shareholders at the Annual General Meeting held on 28 October 1999. Non- Executive Directors have 20% of their annual fees applied to the mandatory on-market acquisition of shares in the Bank. The Bank contributes to compulsory superannuation on behalf of Non-Executive Directors. Under the Directors’ Retirement Allowance Scheme, which was approved by shareholders at the 1997 Annual General Meeting, Directors accumulate a retirement benefit on a pro rata basis to a maximum of four years’ total emoluments after twelve years’ service. No benefit accrues until the Director has served three years on the Board. In 2002 the Board decided to discontinue the Directors’ Retirement Allowance Scheme without affecting the entitlements of then existing Non-Executive Directors. After that time new Directors are not entitled to participate in the scheme. As part of a proposed arrangement relating to remuneration, the Board will be seeking shareholder approval at the 2004 Annual General Meeting to terminate accrual of further benefits under the Scheme and freeze the entitlements of current members until their respective retirements. This approach will result in remuneration arrangements being expressed in a more transparent manner which does not include retirement benefits (other than compulsory superannuation). Executives (including the Chief Executive Officer) The Bank’s remuneration framework aims to reward executives with a mix of remuneration appropriate to their level in the organisation and incorporates a significant weighting to towards variable (‘at risk’) pay performance, both short term and long term. This focus aims to: (cid:131) linked interests of executives with reward executives for bankwide, business unit and targets set by individual performance against reference to appropriate benchmarks; align shareholders; link executive reward with the strategic goals and performance of the Bank; and ensure total remuneration is competitive by market standards. Remuneration and those of terms and conditions of employment are specified in an individual contract of employment with each executive which is signed by the executive and the Bank. Remuneration of the Bank’s executives consists of three key elements: (cid:131) (cid:131) (cid:131) the (cid:131) (cid:131) (cid:131) Fixed Remuneration; Short Term Incentive (“STI”); and Long Term Incentive (“LTI”). The relationship of fixed remuneration and variable pay (potential short term and long term incentives) is established for each level of executive management by the Remuneration Committee. Currently, the variable component of remuneration is in the general range of around 35% to 80% of an executive’s total potential remuneration and increases with their level in the organisation. As a result of the review with the external consultant of developments in the market, and benchmarking against peer organisations, the distribution of total potential remuneration for executives is being modified in the current year so as to increase the percentage for the STI component and decrease the percentage for the LTI component. For senior executives, including the CEO, the maximum STI potential available will generally be an amount equal to fixed remuneration. The structure for some specialists differs from that which applies generally to executive management. With specialists, a greater proportion of the variable component of remuneration may be in short term rather than long term incentives but the overall mix of remuneration is still heavily weighted towards ‘at risk’ pay. Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles) as well as employer to superannuation. contributions Actual STI payments for executives depend on the extent to which targets set at the beginning of the financial year are met. These targets consist of a number of Key Result Areas (“KRAs”) covering both financial and non- financial measures of performance. Included are measures such as contribution to net profit after tax (NPAT), customer service, risk management, product management, and leadership / team contribution. STI Payments to executives are usually delivered in two components: (cid:131) (cid:131) Fifty percent made as an immediate cash payment; and Fifty percent deferred in the form of shares in the Bank. The shares acquired vest in two equal instalments after one and two years respectively. Dividends on the deferred shares are not paid to the executive unless and until the shares vest. Generally, to receive the shares, the executive will need to be an employee of the Bank at the relevant vesting date. LTI grants to executives are delivered in the form of Reward Shares under the Bank’s Equity Reward Plan (“ERP”). No value will accrue to the executive unless the Bank’s Total Shareholder Return (“TSR”) at least meets the median of a peer comparator group of companies which consists of other Australian banks and financial institutions. To receive the full value of the LTI grant, the Bank’s performance must be in the top quartile of the peer group. Using a comparative TSR based hurdle ensures that executives only gain where shareholders also benefit. the severance arrangements The Bank’s executive contracts generally provide for severance payments of up to six months in the case of retrenchment. The contracts generally provide for a four week notice period. In the case of the Chief Executive Officer, in Mr Murray’s contract, other than for misconduct, provide for a notice period of six months and a pro-rata payment of the average of the previous three years short term incentive payment, payable in the event of termination by the Bank, after 1 May but before 30 June. In such circumstances, Mr Murray may exercise all vested options and obtain vested shares (including those that vest within two years from the Termination Date) within a period of three years from the Termination Date. Refer Note 38 – Service Agreements. 154 Notes to the financial statements NOTE 44 Director and Executive Disclosures On exit from the Bank, executives are entitled to receive their statutory entitlements of accrued annual and long service leave as well as accrued superannuation benefits. Individual remuneration details of Directors and Specified Executives are set out below. Remuneration of Directors Other than for the Managing Director, Directors receive their remuneration in the form of fees, apportioned between cash and amounts sacrificed on a mandatory basis under the Non-Executive Directors Share Plan (“NEDSP”), superannuation and the Director’s Retirement Allowance Scheme (see earlier comments regarding discontinuance of the Scheme). PRIMARY BENEFITS POST EMPLOYMENT BENEFITS EQUITY BENEFITS TOTAL REMUNERATION Cash Non Monetary STI paid in Cash Year ending 30 June Super - Annuation Retirement Allowance Scheme (Note 2) (Note 3) Deferred STI LTI Options NEDSP LTI Reward Shares (Note 1) (Note 1) $ $ $ $ $ $ $ $ $ $ Mr J T Ralph, AC Chairman 245,887 248,000 2004 2003 - - - - -(5) 5,626 36,479 127,635 Dr J M Schubert Deputy Chairman - - 130,545 128,000 2004 2003 - - 11,749 11,520 46,981 102,537 - - - - - - - - - - - - 61,472 62,000 32,636 32,000 343,838 443,261 221,911 274,057 Mr D V Murray Managing Director (see notes to table of remuneration for Specified Executives for details of individual 2004 2003 1,680,000 1,625,000 - 450,000 - 375,000 items) 136,080 131,625 - - 365,000 326,250 431,666 1,363,362 751,258 868,892 - - 4,426,108 4,078,025 Mr N R Adler, AO Non-Executive Director 2004 2003 90,435 88,000 - - - - Mr R J Clairs, AO Non-Executive Director 2004 2003 86,424 84,000 - - - - 8,318 7,920 7,778 7,560 23,717 34,867 38,988 44,194 Mr A B Daniels, OAM Non-Executive Director 2004 2003 86,424 84,000 - - - - 7,778 7,560 41,663 103,796 Mr C R Galbraith, AM Non-Executive Director 2004 2003 89,460 92,000 - - - - 8,051 8,280 46,418 104,132 - - - - - - - - Ms S C Kay Non-Executive Director (appointed a Director on 5 March 2003) 2004 2003 97,482 32,328 - - - - 8,773 2,910 - - Mr W G Kent, AO Non-Executive Director 2004 2003 89,460 92,000 - - - - 8,051 8,280 46,418 104,132 Mr F D Ryan Non-Executive Director 2004 2003 90,435 88,000 - - - - 8,139 7,920 46,466 109,074 Mr F J Swan Non-Executive Director 2004 2003 89,460 92,000 - - - - Ms B K Ward Non-Executive Director 2004 2003 90,435 88,000 - - - - 8,051 8,280 8,139 7,920 44,429 46,924 51,566 53,672 Total Remuneration for Directors - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 22,609 22,000 21,606 21,000 21,606 21,000 22,365 23,000 24,370 8,082 22,365 23,000 22,609 22,000 22,365 23,000 22,609 22,000 145,079 152,787 154,796 156,754 157,471 216,356 166,294 227,412 130,625 43,320 166,294 227,412 167,649 226,994 164,305 170,204 172,749 171,592 2004 2,866,447 2003(4) 2,741,328 - 450,000 - 375,000 220,907 215,401 423,125 830,963 365,000 326,250 431,666 1,363,362 751,258 868,892 296,612 279,082 6,417,119 6,388,174 155 Notes to the financial statements NOTE 44 Director and Executive Disclosures continued Notes Amounts in the above table reflect remuneration from the date the Director joined the Board if the Director was not in that role at the beginning of the financial year. Where this date is after 1 July 2002, the relevant date has been shown in the table. (1) (2) (3) For Non-Executive Directors, this includes base fees and committee fees paid as cash. Non-Executive Directors also sacrifice 20% of their fees on a mandatory basis under the NEDSP. Further detail on the NEDSP is contained in Note 29. The Bank is not currently contributing to its staff superannuation fund (the Officers’ Superannuation Fund) and a notional cost of contribution has been determined on an individual basis for those Non-Executive Directors who are a member of that fund. Some Directors have superannuation contributions made to other funds. For Non-Executive Directors this represents the increase in their accrued benefit in the year under the Director’s Retirement Allowance Scheme which was approved by shareholders at the 1997 Annual General Meeting. See earlier comments regarding discontinuance of the Scheme. (4) Group totals in respect of the financial year ended 30 June 2003 do not necessarily equal the sum of amounts disclosed for individuals specified in 2004 as there are differences to the individuals specified in 2003. (5) Mr J T Ralph turned 71 during the 2003/04 financial year. The Bank’s compulsory superannuation obligations generally cease after a person obtains age 70. 156 Notes to the financial statements NOTE 44 Director and Executive Disclosures continued Remuneration of Specified Executives PRIMARY BENEFITS POST EMPLOYMENT BENEFITS EQUITY BENEFITS OTHER BENEFITS TOTAL REMUN- ERATION Year ending 30 June Cash Non Monetary (Note 1) (Note 2) STI paid in cash Superannuation Deferred STI LTI Options (Note 3) (Note 4) (Note 5) (Note 6) LTI Reward Shares (Note 6) Termination Benefits All other benefits (Note 7) (Note 8) $ $ $ $ $ $ $ $ $ $ Mr M A Cameron Group Executive, Financial & Risk Management (commenced in role on 1 April 2003) 243,200 10,770 170,000 33,034 150,325 10,586 600,000 149,589 13,000 3,241 99,375 - 2004 2003 - - - 150,000 - - 1,275,900 357,220 Mr A R Cosenza Group Executive, Group Strategic Development (ceased in role on 16 June 2004 and proceeded on 2004 2003 575,410 560,000 12,503 13,000 144,262 160,000 45,530 40,320 Long Service Leave) 145,464 118,750 98,214 154,873 365,062 315,056 Mr L G Cupper Group Executive, Human Resources 2004 2003 580,000 560,000 13,000 13,000 156,000 157,500 115,200 60,100 156,875 146,250 118,642 181,946 415,022 342,553 Mr S I Grimshaw Group Executive, Investment & Insurance Services 2004 2003 891,000 774,836 13,000 13,000 280,000 262,500 89,880 399,505 196,875 - 130,054 130,054 498,873 299,538 - - - - - - Mr H D Harley Group Executive, Retail Banking Services (commenced in role on 16 October 2002) 101,500 57,582 700,000 381,699 321,078 153,287 230,000 98,959 130,000 68,675 13,000 9,189 75,578 75,795 2004 2003 - - Mr M A Katz Group Executive, Premium Business Services 237,500 228,500 290,000 240,000 910,000 870,000 132,100 67,500 13,000 13,000 2004 2003 197,736 303,243 677,520 563,376 Mr R V McKinnon Group Executive, Technology 2004 2003 540,000 520,000 13,000 13,000 142,500 127,500 38,880 37,440 122,688 105,188 55,804 76,905 253,061 175,191 Mr G L Mackrell Group Executive, International Financial Services 2004 2003 600,000 540,000 13,000 13,000 202,500 185,000 80,500 66,802 166,250 103,500 113,718 162,251 391,143 316,556 - - - - - - Mr J K O’Sullivan Chief Solicitor and General Counsel (commenced in role on 17 October 2003) 2004 2003 493,443 - 9,164 - 140,984 - 35,528 - - - - - 105,232 - - - Mr G A Peterson Group Executive, Group Strategic Development (commenced in role 17 June 2004) 2004 2003 16,716 - 497 - 4,208 - 2,762 - 2,960 - - - 2,559 - - - - - - - - - - - - - - - - - - - - - 1,386,445 1,361,999 1,554,739 1,461,349 2,099,682 1,879,433 1,571,156 845,186 2,457,856 2,285,619 1,165,933 1,055,224 1,567,111 1,387,109 784,351 - 29,702 - Mr M J Ullmer Group Executive, Institutional & Business Services (ceased in role 23 May 2004) 2004 2003 754,959 820,000 6,536 13,000 250,000 217,500 118,202 132,300 244,208 211,000 177,206 303,243 607,176 845,000 332,848 563,376 - - 3,336,135 2,260,419 Total Remuneration for Specified Executives 2004 6,661,528 2003(9) 5,176,124 119,700 2,010,454 103,430 1,481,993 Notes 1,003,282 1,502,195 981,863 1,388,310 2,739,519 966,952 3,787,051 845,000 332,848 - 150,000 17,229,010 12,893,558 872,319 Amounts in the above table reflect remuneration for the time the executive has been in the role of a Specified Executive, i.e. pro-rating is applied relative to the date the executive commenced or ceased in the role of a Specified Executive. Remuneration earned as an executive prior to appointment to a role as a Specified Executive is not included in the amounts shown for that executive. Where appropriate, comparative information has been reclassified into appropriate categories. (1) Reflects amounts paid in the year ended 30 June and is calculated on a total cost basis. Included may be salary sacrifice amounts (e.g. motor vehicles plus FBT) with the exception of salary sacrifice superannuation which is included under ‘Post Employment Benefits’. (2) Represents the cost of car parking (including FBT). 157 Notes to the financial statements NOTE 44 Director and Executive Disclosures (3) Represents the STI payment made in cash for the year ended 30 June. Payment made in cash represents the amount of the payment that is not deferred in the form of shares under the mandatory component of the Equity Participation Plan (“EPP”) nor voluntarily sacrificed in the form of shares under the voluntary component of the EPP or into superannuation via voluntary sacrifice. Amounts deferred under the mandatory component of the EPP are amortised over two years from the date to which the payment relates. Where part of the payment is sacrificed into superannuation, the amount sacrificed is included under “Post Employment Benefits”. Mr Ullmer’s STI payment for the year ended 30 June 2004 has been made fully in cash with no mandatory deferral being applied due to his departure from the Bank. (4) Represents company contribution to superannuation and includes any allocations made by way of salary sacrifice by executives. (5) Deferred STI represents the cost of shares acquired under the mandatory component of the EPP. Shares vest in two equal tranches after one and two years respectively. For example, for STI payments for the year ended 30 June 2003, half the shares vest on 1 July 2004 and half vest on 1 July 2005. The amount included in remuneration each year has been amortised on a straight-line basis over the vesting period for each tranche of shares. In the case of Mr Ullmer the value that would have been amortised in the year ended 30 June 2005 has also been included for the year ended 30 June 2004 as all unvested shares granted under the mandatory component of the EPP vest to him on his departure from the Bank. See Note 29 for further details on the operation of the EPP. The value of LTIs disclosed above was calculated as follows: (6) (cid:131) The ‘fair value’ of options has been calculated using the Black-Scholes valuation model that incorporates the assumptions below: Commencement Date 24 Aug 1999 24 Aug 1999 (CEO Options) 13 Sept 2000 3 Sept 2001 Fair Value $3.14 $3.48 $3.47 $4.01 Exercise Price $23.84 $23.84 $26.97 $30.12 Assumptions Risk Free Rate Term Dividend Yield Volatility 5.82% 37 mths 4.82% 20.0% 5.82% 6.00% 5.24% 49 mths 4.82% 37 mths 37 mths 4.41% 4.61% 20.0% 17.9% 20.8% (cid:131) The ‘fair value’ of shares is the Bank’s closing share price at the Commencement Date for each grant, i.e., $27.64 for shares granted on 13 Sep 2000, $29.50 for shares granted on 3 Sep 2001, $31.42 for shares granted on 2 Sep 2002 and $27.48 for shares granted on 1 Sep 2003. (cid:131) As required under AASB 1046 the Bank has estimated the number of options and shares expected to vest in relation to each grant. The assessment has been made as at 30 June 2004 based on the Bank’s performance against the relative hurdle. In respect of options and shares granted in 1999 and 2000, 100% of the number granted have vested. For options and shares granted in 2001, the Bank currently expects 100% of the number granted to vest. For shares granted in 2002 and 2003, the Bank currently estimates that 50% of the number granted will vest. (cid:131) The annualised equivalent of the ‘fair value’ in respect of each grant of options and shares (multiplied by the number that have, or are expected to, vest), has been amortised 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 options granted to Mr Murray on 24 Aug 1999). (7) Represents any severance payments made on termination of employment (excluding any payment in lieu of notice). (8) All Other Benefits payable that are not covered above, including any payment made in lieu of notice on termination of employment and other contractual payments. (9) Group totals in respect of the financial year ended 30 June 2003 do not necessarily equal the sum of amounts disclosed in 2003. there are differences individuals specified individuals specified in 2004 as the for to 158 Notes to the financial statements NOTE 44 Director and Executive Disclosures continued Equity Holdings of Directors and Specified Executives Employee Equity Plans – Shares and Options Vested and Exercised During the Year Name Deferred STI Vested Reward Shares Vested Options Vested Shares Granted on Exercise of Options Value in excess of Exercise Price(1) Exercise Price No. Directors Mr D V Murray 10,853 - 1,000,000 - - - Specified Executives Mr M A Cameron Mr A R Cosenza Mr L G Cupper Mr S I Grimshaw Mr H D Harley Mr M A Katz Mr R V McKinnon Mr G L Mackrell Mr J K O’Sullivan Mr G A Petersen Mr M J Ullmer Total Specified Executives - 3,851 4,708 - 3,224 7,752 3,491 3,322 - 1,133 6,910 - 10,500 12,500 - 6,300 20,900 4,200 9,600 - - 20,900 - - 87,500 - 162,500 100,000 225,000 150,000 - 50,000 375,000 250,000 - - - - 325,000 200,000 25,000 157,500 - - - $23.84 $23.84 - $23.84 $23.84 - - - - $23.84 34,391 84,900 1,357,500 750,000 N/A - $8.81 $8.91 - $9.46 $8.29 - - - - $8.91 N/A Notes (1) Difference between the exercise price and closing market value of CBA shares on date of exercise. Options Mr Murray is the only Director holding options in the Bank and he did not exercise any during the year ended 30 June 2004. The Bank’s Non-Executive Directors do not hold any options. Name Balance 1 Jul 2003 Granted as Remuneration Options Exercised Balance 30 Jun 2004 Vested and exercisable at 30 June 2004 No Exercise Price Directors Mr D V Murray 1,250,000 Total for Directors 1,250,000 Specified Executives Mr M A Cameron Mr A R Cosenza Mr L G Cupper Mr SI Grimshaw Mr H D Harley Mr M A Katz Mr R V McKinnon Mr G L Mackrell Mr J K O’Sullivan Mr G A Petersen Mr M J Ullmer Total for Specified Executives - 227,500 300,000 100,000 137,500 500,000 62,500 232,500 - - 450,000 2,010,000 - - - - - - - - - - - - - - - - 1,250,000 1,000,000 1,250,000 1,000,000 $23.84(1) $23.84(1) - (100,000) (150,000) - (50,000) (250,000) - - 127,500 150,000 100,000 87,500 250,000 62,500 - 232,500 - - (200,000) - - 250,000 (750,000) 1,260,000 - 62,500 75,000 - 37,500 125,000 25,000 100,000 57,500 - - 125,000 100,000 507,500 - $26.97 $26.97 - $26.97 $26.97 $26.97 $23.84(1) $26.97 - - $26.97 $23.84(1) $26.97 Notes (1) For most executives, ‘Vested and exercisable’ options represents those granted on 13 September 2000 with an exercise price of $26.97. Mr Murray and Mr Mackrell hold vested but unexercised options granted on 24 August 1999 that have an exercise price of $23.84. 159 Notes to the financial statements NOTE 44 Director and Executive Disclosures continued Shares Details of shareholdings of Directors and Specified Executives (or relatives or entities controlled or significantly influenced by them) are as follows: Name Class Balance 1 Jul 2003 Acquired/Granted as Remuneration(1) Net Change Other(2) Balance 30 Jun 2004 Directors Mr J T Ralph, AC Dr J M Schubert Mr D V Murray Ordinary Ordinary Ordinary Deferred STI Reward Shares Ordinary Mr N R Adler, AO Ordinary Mr R J Clairs, AO Mr A B Daniels, OAM Ordinary Mr C R Galbraith, AM Ordinary Ordinary Ms S C Kay Ordinary Mr W G Kent, AO Ordinary Mr F D Ryan Ordinary Mr F J Swan Ms B K Ward(3) Ordinary Total for Directors Ordinary Deferred STI Reward Shares 21,339 14,428 214,242 16,704 152,000 8,636 11,927 15,135 6,579 2,184 9,708 5,935 4,038 4,059 318,210 16,704 152,000 2,007 1,064 - 13,576 90,000 736 704 704 731 796 731 736 731 736 9,676 13,576 90,000 515 776 61,287 (10,853) - 118 - 553 379 - 4,083 - 227 119 68,057 (10,853) - 23,861 16,268 275,529 19,427 242,000 9,490 12,631 16,392 7,689 2,980 14,522 6,671 4,996 4,914 395,943 19,427 242,000 Notes (1) For Non-Executive Directors, represents shares acquired under NEDSP on 30 Sep 2003, 2 Jan 2004, 31 Mar 2004 and 29 Jun 2004 by mandatory sacrifice of fees. All shares are subject to a 10 year trading restriction (shares will be tradeable earlier if the Director leaves the Board). See Note 29 for further details on the NEDSP. For Mr Murray, represents: (cid:131) Deferred STI - acquired under the mandatory component of the Bank’s Equity Participation Plan (“EPP”). Shares were purchased on 31 Oct 2003 in two equal tranches, vesting on 1 July 2004 and 1 July 2005 respectively. See Note 29 for further details on the EPP. Reward Shares - granted under the Equity Reward Plan (“ERP”) on 1 Sep 2003 and are subject to a performance hurdle. The first possible date for meeting the performance hurdle is 2 Sep 2006 with the last possible date for vesting being 1 Sep 2008. See Note 29 for further details on the ERP. (cid:131) (2) ‘Net change other’ incorporates changes resulting from purchases and sales during the year by Directors and, for Mr Murray, vesting of Deferred STI shares (which became Ordinary shares). (3) Ms Ward also purchased 250 PERLS II securities during the year and continued to hold them at 30 June 2004. 160 Notes to the financial statements NOTE 44 Director and Executive Disclosures continued Name Class Balance 1 Jul 2003 Acquired/Granted as Remuneration(1) On Exercise of Options Net Change Other(2) Balance 30 Jun 2004 Specified Executives Mr M A Cameron Mr A R Cosenza Mr L G Cupper Mr SI Grimshaw Mr H D Harley Mr M A Katz(3) Mr R V McKinnon Mr G L Mackrell Mr J K O’Sullivan Mr G A Petersen Mr M J Ullmer Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares Ordinary Deferred STI Reward Shares - - 10,000 20,000 6,034 50,000 9,365 7,415 53,000 1,000 - 53,000 3,792 4,971 35,300 473,734 11,769 86,900 1,601 5,382 29,700 7,414 5,243 50,100 5,401 - - 1,623 2,266 11,000 - 10,753 86,900 523,930 53,833 Total for Specified Executives Ordinary Deferred STI Reward Shares 465,900 Notes (1) Represents: - 4,797 22,300 - 5,793 24,700 - 5,702 29,500 - 9,503 37,300 - 5,069 28,700 - 8,689 48,000 - 4,616 20,000 - 6,698 25,600 - - 33,500 - 2,953 8,000 - 7,874 48,000 - 61,694 325,600 - - - 100,000 - - 150,000 - - - - - 50,000 - - 250,000 - - - - - - - - - - - - - - 200,000 - - 750,000 - - - - - (89,500) (3,851) (10,500) (132,159) (4,708) (12,500) (744) - - (40,081) (3,224) (6,300) (316,348) (7,752) (20,900) 7,691 (3,491) (4,200) 13,674 (3,322) (9,600) 164 - - 1,133 (1,133) - (179,100) (6,910) (20,900) (735,270) (34,391) (84,900) - 4,797 32,300 30,500 7,976 64,200 27,206 8,409 70,000 256 9,503 90,300 13,711 6,816 57,700 407,386 12,706 114,000 9,292 6,507 45,500 21,088 8,619 66,100 5,565 - 33,500 2,756 4,086 19,000 20,900 11,717 114,000 538,660 81,136 706,600 (cid:131) Deferred STI - acquired under the mandatory component of the Bank’s Equity Participation Plan (“EPP”). Shares were purchased on 31 Oct 2003 in two equal tranches, vesting on 1 July 2004 and 1 July 2005 respectively. See Note 29 for further details on the EPP. (cid:131) Reward Shares - granted under the Equity Reward Plan (“ERP”) on 1 Sep 2003 and are subject to a performance hurdle. The first possible date for meeting the performance hurdle is 2 Sep 2006 with the last possible date for vesting being 1 Sep 2008. See Note 29 for further details on the ERP. (2) ‘Net change other’ incorporates changes resulting from purchases and sales during the year by Executives and vesting of Deferred STI and Reward Shares (which became Ordinary shares). (3) Mr Katz also purchased 250 PERLS II securities during the year and continued to hold them at 30 June 2004. ASIC Class Order Australian banks, parent entities of Australian banks and controlled entities of Australian banks have been exempted, subject to certain conditions, under an ASIC Class Order No. 98/110 (as amended by ASIC Class Order No. 04/667), from making disclosures of any loan made, guaranteed or secured by a bank to related parties (other than for directors, specified executives and entities controlled or significantly influenced by them) and financial instrument transactions (other than shares and share options) of a bank where a director, or a specified executive, 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 financial assets or services. to a bank, other than 161 Notes to the financial statements NOTE 44 Director and Executive Disclosures continued The Class Order does not apply to a loan or financial instrument transaction which any director, or a specified executive, 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 Loans to Directors and Specified Executives 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. Details of aggregates of loans to Directors and Specified Executives (or entities controlled or significantly influenced by them) are as follows: Balance 1 July Interest Charged Interest Not Charged Write-off Balance 30 June $000s $000s $000s $000s $000s Number in Group at 30 June Year Ended 30 June 2004 2003 Directors Specified Executives 2004 2003 36 29 4,633 3,845 3 3 377 193 380 196 - - - - - - - - - - - - 22 36 8,829 2,434 8,851 2,470 2 1 6 3 8 4 Total Directors and Specified Executives 2004 2003 4,669 3,874 Details of individuals with loans above $100,000 in the reporting period are as follows: Name Directors Not Applicable Specified Executives Mr S I Grimshaw Mr H D Harley Mr M A Katz Mr G L Mackrell Mr J K O’Sullivan Mr G A Petersen Balance 1 July 2003 $000s Interest Charged Interest Not Charged Write-off $000s $000s $000s Balance 30 June 2004 $000s Highest in Period $000s - - - - - - - - - - - - - - - - - - - - 1,543 2,639 1,543 335 272 245 250 204 116 321 175 175 295 146 1,500 200 861 208 900 800 338 931 245 253 205 116 321 175 175 303 150 1,502 200 941 208 900 800 - - 335 904 208 251 204 55 274 175 175 300 124 1,500 - - - - - 19 14 26 35 13 15 13 3 22 11 10 20 9 91 <1 37 8 9 9 - - - - - - - - - - - - - - - - - - - 162 Notes to the financial statements NOTE 44 Director and Executive Disclosures continued Terms and conditions of Loans All loans with Directors and Specified Executives (or related entities controlled or significantly influenced by them) have been provided on an arms-length commercial basis including the term of the loan, security required and the interest rate (which may be fixed or variable). Shares of Directors All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Directors’ Share Plan (or in the case of Mr Murray the Equity Reward Plan, the previous Executive Option Plan or the Equity Participation Plan). Mr Murray did not exercise any 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 Murray was also awarded rights to 90,000 shares under the Equity Reward Plan and 13,576 shares under the Equity Participation Plan during the year. He has a total holding of 242,000 shares under the Equity Reward Plan and 19,427 shares under the Equity Participation Plan. Shares awarded under the Equity Reward Plan and Equity Participation Plan are registered in the name of the Trustee. The transfer of legal title to Mr Murray is subject to vesting conditions, and, in the case of the Equity Reward Plan, is conditional on the Bank achieving a prescribed performance hurdle over a minimum three year period. For further details of the Non-Executive Directors’ Share Plan, Equity Reward Plan, previous Executive Option Plan and Equity Participation Plan refer to Note 29. In addition, Mr Ralph holds an investment of $175,780 in Commonwealth Property Securities Fund and an investment of $532,739 in Colonial First State Global Diversified Strategies Fund. Both holdings are held beneficially. Dr Schubert holds an investment of $654,683 in Colonial First State Wholesale Diversified Fund. Mr Daniels beneficially holds an investment of $54,919 in Colonial First State Global Health and Biotech Fund. A related party of Mr Daniels holds an investment of $235,972 in Colonial First State Future Leaders Fund and $221,772 in Colonial First State Imputation Fund. Other Transactions of Directors, Specified Executives and Other Related Parties Financial Instrument Transactions Financial instrument transactions (other than loans and shares disclosed above) of Directors and Specified Executives with 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. 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, Specified Executive and entities controlled or significantly influenced by them. All such financial instrument transactions that have occurred between the banks and their Directors and Specified Executives 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, Specified Executives and their 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. The interests of Mr Ralph, Dr Schubert and Mr Daniels in investment funds managed by Colonial First State are detailed above. Additionally, Mr 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 amounted to $4,059,827. All other such transactions that have occurred with Directors, Specified Executives and their 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. The Directors' Retirement Allowance Scheme The entitlements of the non-executive directors under the Directors’ Retirement Allowance Scheme are: 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 (1) Mr W G Kent, AO Mr F D Ryan Mr F J Swan Ms B K Ward Increase in accrued benefit in year $ Entitlement as at 30 June 2004 $ 36,479 46,981 23,717 38,988 41,663 46,418 - 46,418 46,466 44,429 51,566 1,196,479 624,241 419,059 184,788 145,459 150,550 - 150,550 155,540 258,086 352,955 (1) Ms Kay was appointed as a Director after the closure of the scheme 163 Notes to the financial statements NOTE 45 Related Party Disclosures Ultimate Parent Commonwealth Bank of Australia is the ultimate The Bank’s aggregate investment in and loans to Australian parent company in the Group. 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. Other Related Entities An amount of $548 million (2003: $567 million) was transactions and services the Group in incurred by provided by other related entities. 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. 164 Notes to the financial statements NOTE 46 Statements of Cash Flow GROUP 2004 $M 2003 $M 2002 $M 2004 $M BANK 2003 $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 1,548 440 4,124 (3,266) 2,846 1,492 641 2,528 (3,233) 1,428 2,056 495 2,709 (2,762) 2,498 1,421 233 3,230 (3,245) 1,639 1,332 232 1,943 (3,230) 277 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:131) Customer deposits to and withdrawals from deposit; (cid:131) 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 Net (gain)/loss on sale of controlled entities 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 Revaluation of life insurance assets Gain on sale of life insurance assets Other Net Cash (used in)/provided by Operating Activities (cid:131) (cid:131) Sales and purchases of trading securities; and Proceeds from and repayment of short term debt issues. 2004 $M 2,581 (186) 334 (4,324) (2) 11 (43) 276 450 185 (36) (29) (39) (107) 412 12 (260) (201) 777 (1,430) (456) (296) (2,371) GROUP 2002 $M 2003 $M 2,018 (78) 62 (2,484) 9 (22) - 305 450 (15) (234) (166) 100 (94) 6 6 (269) 245 (2,056) 164 (154) 82 (2,125) 2,656 210 (60) (1,159) (78) (12) - 449 451 (120) 443 (522) 69 (17) (162) 18 723 (477) (1,112) 264 140 289 1,993 2004 $M 1,647 (8) 298 (4,672) (2) 10 453 263 271 143 (7) 323 (532) (334) 262 11 (264) - - - - (12) (2,150) BANK 2003 $M 2,099 (273) 103 (1,814) 9 (13) - 266 269 (7) (137) 10 (3) 143 (73) 6 (246) - - - - (21) 318 Note (d) Non Cash Financing and Investing Activities Shares issued under the Dividend Reinvestment Plan for 2004 were $389 million. 165 Notes to the financial statements NOTE 46 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 Other assets Other provisions 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 Profit/(loss) on sale Inflow of cash from disposal Cash proceeds Note (g) Financing Facilities Standby funding lines are immaterial. 2004 $M 2003 $M 2002 $M - - - - - - - - - - - - - - - - - 71 - 2 73 29 29 (8) (33) - 17 26 30 73 71 - (29) 42 56 1 - 57 - - - - - - 57 - 57 56 1 - 57 2004 $M 2003 $M 2002 $M 63 63 20 43 63 63 63 33 33 65 (32) 33 33 33 - - - - - - - 166 Notes to the financial statements NOTE 47 Disclosures about Fair Value of Financial Instruments These amounts represent estimates of net fair values at a point in time. Significant estimates regarding economic conditions, loss experience, risk characteristics associated with particular financial instruments and other factors were used for the purposes of this disclosure. These estimates are subjective in nature and involve matters of judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could have a material impact on the amounts estimated. to represent estimates at which While the estimated net fair value amounts are these designed instruments could be exchanged in a current transaction between willing parties, many of the Group’s financial instruments trading market as characterised by willing parties engaging in an exchange transaction. In addition, it is the Bank’s intent to hold most of its financial instruments to maturity and therefore it is not probable that the net fair values shown 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. 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 information with that of other financial institutions. It is important that the many uncertainties discussed above be considered when using the estimated net fair value disclosures and 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 because of realise to 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 to Note 39) Carrying Value $M 6,453 8,369 14,896 11,447 189,391 15,019 28,942 38 24,721 163,177 6,641 15,019 24,638 44,042 19,140 6,631 - 2004 Net Fair Value $M 6,453 8,369 14,896 11,490 188,954 15,019 28,942 38 24,721 163,645 6,641 15,019 24,638 43,651 19,148 6,740 (740) 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 23,094 141,186 7,538 13,197 23,862 30,356 18,819 6,350 353 The net fair value estimates were determined by the following methodologies and assumptions: Liquid assets and bank acceptances of customers The carrying values of cash and liquid assets, receivables due from other financial institutions and bank acceptances of customers approximate their net fair value as they are short term in nature or are receivable on demand. Securities Trading securities are carried at net market/net fair value and investment securities have their net fair value determined based on quoted market prices, broker or dealer price quotations. Loans, advances and other receivables The carrying value of loans, advances and other receivables is net of general and specific provisions for doubtful debts and interest/fees reserved. For variable rate loans, excluding impaired loans, the carrying amount is a reasonable estimate of net fair value. The net fair value for fixed rate loans was calculated by utilising discounted cash flow 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. 167 Notes to the financial statements NOTE 47 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 interest payable and includes unrealised expenses payable the carrying for which 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 in Included fees receivable, this category are unrealised income, investments in associates of $239 million (2003: $287 million), and excess of net market value over net assets of life insurance controlled entities of $5,741 million (2003: $5,540 million), where the carrying amount is considered to be a reasonable estimate of net fair value. Other financial assets are net of goodwill, future tax benefits and prepayments/unamortised financial these do not constitute a income payments, as instrument. Deposits and other public borrowings The net fair value of non interest bearing, call and variable rate deposits, and fixed rate deposits repricing within six months, is the carrying value as at 30 June. Discounted cash flow models based upon deposit type and its related maturity, were used to calculate the net fair value of other term deposits. Short term liabilities The carrying value of payables due to other financial institutions and bank acceptances approximate their net fair value as they are short term in nature and reprice frequently. Debt issues and loan capital The net fair values of debt issues and loan capital were calculated based on quoted market prices as at 30 June. 168 Directors’ Declaration In accordance with a resolution of the directors of the Commonwealth Bank of Australia, the directors declare that: (a) the financial statements and notes thereto comply with Accounting Standards and in their opinion are in accordance with the Corporations Act 2001; (b) (c) 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 2004 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 11 August 2004 D V Murray Managing Director and Chief Executive Officer 169 Independent audit report to the members of Commonwealth Bank of Australia Matters relating to the Electronic Presentation of the Audited Financial Report This audit report relates to the financial report of Commonwealth Bank of Australia for the year ended 30 June 2004 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 and the consolidated Group, for the year ended 30 June 2004. 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. 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 and the consolidated Group, for the year ended 30 June 2004. 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 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: (cid:131) 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. (cid:131) 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 judgement 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 Commonwealth Bank of Australia and the Group at 30 June 2004 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 11 August 2004 S J Ferguson Partner 170 Shareholding Information Top 20 Holders of Fully Paid Ordinary Shares as at 10 August 2004 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 Limited National Nominees Limited Westpac Custodian Nominees Ltd Citicorp Nominees Pty Limited RBC Global Services Australia Nominees Pty Limited Queensland Investment Corporation Cogent Nominees Limited AMP Life Limited ANZ Nominees Limited Australian Foundation Investment Company Limited HSBC Custody Nominees (Australia) Limited CSS Board & PSS Board Bond Street Custodians Limited Invia Custodian Pty Limited Government Superannuation Office UBS Warburg Private Clients Nominees Pty Ltd IAG Nominees Pty Limited Westpac Financial Services Ltd Suncorp Custodian Services Pty Ltd Australian Trustees Pty Ltd 121,384,680 90,577,461 87,818,339 63,935,139 30,671,740 19,482,371 16,693,388 15,615,127 15,511,420 6,705,245 6,087,368 4,942,977 4,940,303 4,774,535 4,229,927 3,617,893 3,548,578 3,458,245 2,821,839 2,644,549 % 9.60 7.17 6.95 5.06 2.43 1.54 1.32 1.24 1.23 0.53 0.48 0.39 0.39 0.38 0.33 0.29 0.28 0.27 0.22 0.21 The twenty largest shareholders hold 509,461,124 shares which is equal to 40.31% 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 11 August 2004 Shares Options 1,250,000 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 23,861 16,268 288,168 9,490 12,631 16,392 7,689 2,980 14,522 6,671 4,996 4,914 Mr Murray has a total holding of 242,000 shares under the Equity Reward Plan, registered in the name of the Trustee and 6,788 shares under the Mandatory Equity Participation plan, also registered in the name of the Trustee. In addition, Mr Ralph beneficially holds 100,000 units in Commonwealth Property Securities Fund and 495,294 units in Colonial First State Global Diversified Strategies Fund. Dr Schubert holds 483,554 units in Colonial First State Wholesale Diversified Fund. 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. 171 Shareholding Information Guidelines for Dealings by Directors in Shares in the securities of The restrictions imposed by law on dealings by the Bank have been Directors the Board of Directors adopting supplemented by guidelines which 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 further 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): 10 August 2004 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 and over Total Less than marketable parcel of $500 541,661 153,521 13,405 5,646 259 714,492 13,329 75.80% 21.49% 1.88% 0.79% 0.04% 186,343,047 307,584,350 91,805,490 108,615,541 569,657,634 100.00% 1,264,006,062 84,336 14.74% 24.33% 7.26% 8.59% 45.08% 100.00% Voting Rights Under the Bank’s Constitution, each member present at a general meeting of the Bank in person or by proxy, attorney or official representative is entitled: (cid:131) on a show of hands – to one vote; and (cid:131) 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 present for a member: (cid:131) (cid:131) 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:131) 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:131) 172 Shareholding Information Top 20 Holders of Preferred Exchangeable Resettable Listed Shares (PERLS) as at 10 August 2004 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 Citicorp Nominees Pty Ltd Westpac Custodian Nominees Ltd National Nominees Limited RBC Global Services Australia Nominees Pty Limited ANZ Executors & Trustee Company Limited Bond Street Custodians Limited Tower Trust Limited Invia Custodian Pty Limited UBS Private Clients Australia Nominees Pty Ltd Boxall Marine Pty Ltd Permanent Trustee Australia Limited Questor Financial Services Limited The Australian National University National Superannuation Trusts P/L Brencorp No 11 Pty Limited Livingstone Investments (NSW) Pty Limited Ms Thelma Joan Martin-Weber BT Portfolio Services Limited Albert Investments Pty Limited Felden Pty Ltd Marbear Holdings Pty Limited Mrs Fay Cleo Martin-Weber Swinburne University of Technology 127,230 67,117 65,120 63,802 42,330 29,764 28,969 27,599 26,293 25,000 25,000 24,292 24,049 21,447 17,667 15,000 12,500 11,200 10,000 10,000 10,000 10,000 10,000 % 3.64 1.92 1.86 1.82 1.21 0.85 0.83 0.79 0.75 0.71 0.71 0.69 0.69 0.61 0.50 0.43 0.36 0.32 0.29 0.29 0.29 0.29 0.29 The twenty three largest PERLS shareholders hold 704,379 shares which is equal to 20.13% 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 trade symbol Australian Stock Exchange under CBAPA, with Sydney being the home exchange. Details the of trading activity are published in most daily newspapers, generally under the abbreviation of CBA or C’wealth Bank (pref). Range of Shares (PERLS): 10 August 2004 Range 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Total Less than marketable parcel of $500 Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 20,911 268 20 14 1 21,214 4 98.58% 1.26% 0.09% 0.07% 0.00% 100.00% 2,263,069 529,055 150,319 430,938 126,619 3,500,000 5 64.66% 15.12% 4.29% 12.31% 3.62% 100.00% 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 meeting of the Bank except in the following circumstances: (cid:131) 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; On a proposal to wind up the Bank; that affects rights attached (cid:131) (cid:131) to (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) 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:131) 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. (cid:131) 173 Shareholding Information Top 20 Holders of Perpetual Exchangeable Resettable Listed Securities II (“PERLS II”) as at 10 August 2004 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 National Nominees Limited Westpac Custodian Nominees Limited RBC Global Services Australia Nominees Pty Limited J P Morgan Nominees Australia Limited AMP Life Limited UBS Private Clients Australia Nominees Pty Ltd Citicorp Nominees Pty Limited UBS Nominees Pty Ltd Cogent Nominees Pty Limited Invia Custodian Limited J Neave Investments Pty Limited Elise Nominees Pty Limited ANZ Nominees Limited Questor Financial Services Limited Cryton Investments No 9 Pty Ltd Lutovi Investments Pty Limited Votraint No.1019 Pty Ltd Vision Super Pty Ltd Gordon Merchant No 2 Pty Ltd Marbear Holdings Pty Limited 469,501 259,653 165,001 155,447 105,208 99,086 86,710 54,340 45,028 30,768 30,000 29,380 27,273 26,226 25,000 25,000 25,000 24,832 24,440 22,500 % 12.52 6.92 4.40 4.15 2.81 2.64 2.31 1.45 1.20 0.82 0.80 0.78 0.73 0.70 0.67 0.67 0.67 0.66 0.65 0.60 The twenty largest PERLS II shareholders hold 1,730,393 shares which is equal to 46.14% of the total shares on issue. Stock Exchange Listing Commonwealth Bank PERLS II are listed on the Australian Stock Exchange under the trade symbol PCBPA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers. Range of Shares (PERLS II): 10 August 2004 Range 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Total Less than marketable parcel of $500 Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 7,175 289 28 24 4 7,520 1 95.42% 3.84% 0.37% 0.32% 0.05% 100.00% 1,088,882 642,311 232,496 796,502 989,809 3,750,000 5 29.04% 17.13% 6.20% 21.24% 26.39% 100.00% Voting Rights PERLS II do not confer any voting rights in the Bank but if they are exchanged for or convert into ordinary shares or preference shares of the Bank in accordance with their terms of issue, the voting rights of the ordinary or preference shares (as the case may be) will be as set out on pages 172 and 173 respectively for the Bank’s ordinary shares and PERLS preference shares. Trust Preferred Securities 550,000 Trust Preferred Securities were issued on 6 August 2003. Cede & Co is registered as the sole holder of these securities. The Trust Preferred Securities do not confer any voting rights in the Bank but if they are exchanged for or convert into ordinary shares or preference shares of the Bank in accordance with their terms of issue, the voting rights of the ordinary or preference shares (as the case may be) will be as set out on pages 172 and 173 respectively for the Bank’s ordinary shares and PERLS preference shares. 174 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 Torquat 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 First State Investments (UK) Limited 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 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 PT First State Investments Indonesia 29th Floor, Gedung Artha Graha Sudirman Central Business District Jl. Jend. Sudirman Kav. 52-53 Jakarta 12190 Tel: 62 21 515 0088 Tel: 62 21 515 0033 Chief Executive Officer, First State International T Waring 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) 6538 0008 Facsimile: (65) 6538 0800 Chief Executive Officer, First State International T Waring First State Investments (Singapore) Pte 3 Temasek Avenue #20-01 Centennial Tower Singapore 039190 Telephone: (65) 6538 0008 Facsimile: (65) 6538 0800 Chief Executive Officer, First State International T Waring 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 175 CONTACT US www.commbank.com.au 13 2221 General Enquiries For your everyday banking including paying bills using BPAY our automated service is available 24 hours a day, 365 days a year. From overseas call +61 13 2221. Operator assistance is available between 8am and 8pm, Monday to Friday. 13 2224 Home Loans & Investment Home Loans To apply for a new home loan/investment home loan or to maintain an existing loan. Available from 8am to 10pm, 365 days a year. 13 1431 Personal Loan Sales To apply for a new personal loan. Available from 8am to 8pm, Monday to Friday. 13 15 19 CommSec (Commonwealth Securities) Available from 8am to 7pm (EST), Monday to Friday. CommSec provides the information and tools to make smart investment easy, accessible and affordable for all Australians, by phone or Internet at www.commsec.com.au 13 17 09 CommSec Margin Loan Enables you to expand your portfolio by borrowing against your existing shares and managed funds. To find out more simply call 13 17 09 8am to 5pm (EST) Monday to Friday or visit www.commsec.com.au. 1800 240 889 Telephone Typewriter Service A special telephone banking service for our hearing and speech impaired customers. The service covers all the services available on 13 2221. Available from 8am to 8pm, Monday to Friday. 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 1235 Telephone: (02) 8280 7199 Facsimile: (02) 9287 0303 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 1800 011 217 Lost or Stolen Cards To report a lost or stolen card 24 hours a day, 365 days a year. Australian Stock Exchange Listing CBA Annual Report To request a copy of the annual report please call 1800 022 440 13 1998 Business Line For a full range of business banking solutions. Available from 8am to 8pm, Monday to Friday. 13 2015 Commonwealth Financial Services For enquires on retirement and superannuation products, or managed investments. Available from 8am to 8pm (EST), Monday to Friday. Unit prices are available 24 hours a day, 365 days a year. CommInsure For all your general insurance needs call 13 2423 8am to 8pm (EST), Monday to Friday – or visit www.comminsure.com.au For general claims assistance call 13 2420, 24 hours a day, 365 days a year. For all your life insurance needs call 13 1056 8am to 8pm (EST), Monday to Friday – or visit www.comminsure.com.au Internet Banking You can apply for a home loan, credit card, personal loan, term deposit or a savings account on the internet by visiting our website at www.commbank.com.au available 24 hours a day, 365 days a year. Do your everyday banking on our internet banking service NetBank at www.commbank.com.au/netbank available 24 hours a day, 365 days a year. To apply for access to NetBank, call 13 2828 between 8am and 8pm (EST), Monday to Friday. 176 u a . m o c . m m a . w w w – 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 2004 Commonwealth Bank of Australia ACN 123 123 124 Annual Report 2004 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 A I A N N U A L R E P O R T 2 0 0 4 

Continue reading text version or see original annual report in PDF format above