Commonwealth Bank of Australia
Annual Report 2005

Plain-text annual report

CB002_CoverArt 2/9/05 6:28 PM Page 1 Commonwealth Bank of Australia ACN 123 123 124 Annual Report 2005 2005 C o m m o n w e a l t h B a n k o f A u s t r a l i a A n n u a l R e p o r t 2 0 0 5 Commonwealth Bank of Australia ACN 123 123 124 Commonwealth Bank of Australia ACN 123 123 124 Annual Report 2005 Table of Contents Chairman's Statement.....................................................................................................................................................................3 Chief Executive Officer’s Statement ...............................................................................................................................................5 Highlights ........................................................................................................................................................................................6 Which new Bank Summary...........................................................................................................................................................10 Banking Analysis...........................................................................................................................................................................12 Funds Management Analysis .......................................................................................................................................................20 Insurance Analysis........................................................................................................................................................................24 Shareholder Investment Returns ..................................................................................................................................................27 Life Company Valuations ..............................................................................................................................................................28 Presentation of Financial Information ...........................................................................................................................................29 Integrated Risk Management........................................................................................................................................................30 Description of Business Environment ...........................................................................................................................................33 Corporate Governance .................................................................................................................................................................37 Directors' Report ...........................................................................................................................................................................43 Five Year Financial Summary.......................................................................................................................................................68 Financial Statements ....................................................................................................................................................................70 Statements of Financial Performance ..............................................................................................................................71 Statements of Financial Position ......................................................................................................................................72 Statements of Changes in Shareholders' Equity ..............................................................................................................73 Statements of Cash Flows................................................................................................................................................74 Notes to the Financial Statements....................................................................................................................................75 Directors' Declaration……………………………………………………………………………………..………………………………181 Independent Audit Report………………………………………………………………………………………...……………………...182 Shareholding Information…………………………………………………………………………………………………………………183 International Representation……………………………………………………………………………………………………………..186 Chairman’s Statement Introduction in the I am very pleased to report another strong year of growth for the Bank during 2004/2005, despite increased competition financial services sector and expectations throughout the year of slower economic growth. This excellent result was achieved as the Bank continued to progress the Which new Bank program to transform the customer service experience. We are now well established to meet and, in many cases exceed, targets set at the commencement of the program in September 2003, and have laid a strong strategic platform for future growth. Results The Bank reported a statutory full year net profit after tax (NPAT) of $3,991 million for the year ended 30 June 2005, an increase of 55% over the previous year. Cash net profit (NPAT excluding appraisal value uplift and goodwill amortisation) increased 31% to $3,538 million, which is at the upper end of guidance provided to the market in February 2005. On an underlying basis, which excludes Which new Bank expenses and Shareholder Investment Returns, NPAT rose 13% to $3,466 million for the full year. These results were achieved by strong revenue growth in a very competitive market and broadly flat expenses. The Bank its commitment made at the start of Which new Bank to achieve between 4% and 6% compound annual growth productivity improvements over the three years of the program on a cash basis. is well on to meet track A favourable Banking result was achieved for the year, supported by strong growth in home and personal lending. The net interest margin has been stable for the last three half years, with margin contraction for the full year of eight basis points to 2.45%, well within the Bank’s expectations. This was a particularly good outcome, given lending and deposit increased competition across to be well products. Loan asset quality continued managed, in line with the Bank’s risk management policies. The Fund Management business recorded a 28% increase in underlying NPAT reflecting growth in Funds under Administration supported by favourable investment flows, markets. FirstChoice again achieved excellent particularly in the retail segment due to competitive pricing, superior service and extensive distribution. Investment performance also stood out, with 95% of retail domestic funds outperforming the benchmark on a one year basis. The Bank’s Insurance business delivered a strong result for the year in both its Australian and international operations. The Australian insurance business maintained its number one market position in life risk premiums with 13.8% market share. The New Zealand business, operating under the Sovereign brand, improved volumes across all major business lines and experienced a positive claims result for the year. The Bank’s international banking, funds management and insurance businesses continued to grow and develop, providing the Bank with opportunities for expansion in select markets in the future. Commonwealth Bank acquired interests in two banks in China during the year - an 11% interest in Jinan City Commercial Bank and a 19.9% interest in Hangzhou City Commercial Bank (subject to regulatory approval). PT Bank Commonwealth (PTBC), our Indonesian banking business, has been operating since 1997 and continues to attract new customers of customers. Australian Commonwealth Bank can now access their funds from any of PTBCs 12 ATMs located in Jakarta, Bali, Surabaya and Bandung. This is a valuable service for the growing number of Australians working and travelling throughout Indonesia. The Bank has also established a representative office in Bangalore, India. These interests are low risk growth options which position us well for future growth in the region’s key markets. Dividends and Capital record dividend The Bank paid another to Shareholders with the full year dividend payment totalling 197 cents per share, an increase of 14 cents per share on the previous year. This is the 13th year of increases in the full year dividend payment to Shareholders since the Bank was privatised. The full year dividend payout ratio (cash basis) is 73.9%, consistent with the 2003/2004 payout ratio which excluded Which new Bank expenses. This is an outstanding result for Shareholders. The final dividend payment of $1.12 per share, fully franked, will be paid to Shareholders on 23 September 2005. The Bank continues to issue new shares to satisfy the requirements of the Dividend Reinvestment Plan, which is capped at 10,000 shares per shareholder. During the year, dividend payments were also made to the holders of PERLS, PERLS II, Trust Preferred Securities, ASB Capital preference shares and ASB Capital No. 2 preference shares. The Bank maintained its strong capital position during the year with capital ratios sitting above the Bank’s target minimum ratios. Credit ratings remain unchanged and were re-affirmed by the major ratings agencies in June 2005. Two capital management initiatives undertaken during the year were well received by the market and provide additional capital flexibility for the Bank in the future. These included the issue of NZ$350 million of Perpetual Preference Shares in December 2004 by ASB Capital No. 2 Limited and an issue of NZ$350 million of Redeemable Preference Shares by CBA Capital Australia Limited in May 2005. Which new Bank The Bank made significant progress with Which new Bank during the year, meeting all critical milestones set for 2004/2005 and many initiatives exceeding expectations. Net benefits for the year totalled $724 million, well in excess of the year. Considerable progress was made across many initiatives and highlights are detailed in the Chief Executive Officer’s Statement on page 5 of the Annual Report. the $620 million expected for It has been a Which new Bank is a three year program which now has significant momentum. time of transformational change for the Bank and I am pleased with our progress at a time of enormous change for our people. The Which new Bank program as originally formulated is to conclude during 2006 and the Bank is now working on that customer service enhancements will continue as more systems and processes are refined and our people remain committed to providing customers with a better service. initiatives which will ensure further Outlook From an international perspective, we anticipate respectable economic growth and strong continuing commodity prices. Although domestic growth has slowed, a combination of widespread investment in capacity expansion, and favourable terms of trade together suggest some pick up in growth. Progress of the domestic economy is therefore contingent upon continuing strong terms of trade and the success of business investment. Australia’s fiscal position, credit quality, employment levels and business confidence are strong and provide a positive overall environment financial services businesses. Robust demand for business credit is helping offset the continuing moderation of demand for housing credit from its record peak. Competition across the banking industry, particularly for deposits, is likely to continue, with margins declining generally in line with experience in recent years. for 3 Chairman’s Statement (continued) In February 2005, the Bank increased its expected compound annual growth rate in cash earnings per share for the period 2003 to 2006 from exceeding 10 percent per annum to exceeding 12 percent per annum. Subject to market conditions, the Bank remains committed to at least achieving this goal. For the 2006 fiscal year, the Bank remains confident that the momentum within the business from Which new Bank will ensure that the Bank delivers EPS growth which equals or exceeds the average of its peers. As a consequence, the Bank expects dividend per share to further increase in the 2006 fiscal year subject to the factors considered in its dividend policy. Corporate Governance The Bank continues to place great emphasis on its responsibilities for good corporate governance, and always strives to increase shareholder value. Recent increases in for compliance with corporate governance demands requirements have placed pressure on corporate time. While resources and precious management appropriate I am concerned that the current rate of growth in regulation hinders the ability of business to compete and prosper. The Bank will continue to find the right balance to have excellent corporate governance while striving for innovation and growth to benefit shareholders. regulation are needed, levels of CEO Transition September 2005 also marks David Murray’s retirement after 39 years of service to the Commonwealth Bank, the past 13 years as Chief Executive Officer. David and the Board considered that this was an appropriate time for a new Chief Executive Officer to be appointed, with the Which new Bank program on track for completion during 2006 and sufficient time for the new CEO to develop the Bank’s future strategy. The Bank has undergone enormous change under David’s leadership. David took the Bank from a partly privatised company with a market capitalisation of $6 billion in 1992 to a fully integrated financial services provider with a market capitalisation of around $50 billion in 2005. Shareholder value has grown over David’s 13 year term as CEO with Total Shareholder Returns (including gross dividend payments) of more than 24% per annum (compound annual growth), an outstanding achievement for a public company to attain over an extended period. Significant milestones occurred under David’s leadership, including full privitisation, the integration of State Bank of Victoria and the merger with Colonial Limited in 2000. The introduction and development of CommSec, the Bank’s online broker, and NetBank also occurred during David’s time as CEO. thank David The Board, and myself as Chairman, would like to personally for his commitment and contribution to the Bank and for the substantial legacy he leaves. David’s commitment to the Commonwealth Bank has been outstanding and his distinguished career serves as a role model, not only to our people, but to all those who have chosen a career in the financial services industry. Ralph Norris will commence as Chief Executive Officer and Managing Director of the Bank from close of business on 22 September 2005. Ralph joins us from Air New Zealand Limited where he was Managing Director and Chief Executive Officer from February 2002 to August 2005. He has twice been honoured with New Zealand’s Executive of the Year - in 1997 while at ASB Bank and in 2004 while at Air New Zealand. From 1991 to 2001 Ralph was Managing Director and Chief Executive Officer of ASB Bank Limited, the Bank’s New Zealand banking operation. Ralph oversaw tremendous growth while at ASB, increasing market share, expanding the footprint of the business and growing its profitability. It is in view of these exceptional achievements the Board has every confidence in Ralph’s track record and his ability to lead the Bank beyond Which new Bank. that John Schubert Chairman 10 August 2005 4 Chief Executive Officer’s Statement This 2005 fiscal year has been another great year for the Bank and it has once again been a privilege to work along side our people serving our customers and providing our shareholders with another year of solid returns. The Bank starts the current year in a stronger position based on an improved and improving value proposition for our customers. The fact that nearly half of Australians have a financial relationship with the Bank attests to the enormous strength of our brand and the commitment we have made over the years to building our infrastructure and the service culture needed to meet the needs of our customers. The Which new Bank transformation is just one example of the extent to which we are prepared to go to ensure that we maintain our compelling service proposition. Over the three years of the programme, which commenced in 2003, we will have invested almost $1.5 billion in a wide range of initiatives designed to transform the way our people work with our customers to enable them to realise their expectations. Two years in, I am pleased to report that we have achieved all our significant milestones for 2005 with net benefits totalling $724 million and are on track to achieve the 2006 milestones in the third and final year. Over the past 12 months, the Bank has made significant progress in our three main streams of work – customer service, engaged people and simpler processes: Customer Service − We have been able to measure the success of the programme by improved customer survey scores and positive from our customers. These improvements have, in turn, driven increased market record shares, better dividend payments. financial performance and feedback − The implementation of a new information system, which commenced nationally in April 2005, is enabling our staff to have a single view of our customers’ dealings with us, to record details of each interaction we have with them, to efficiently refer customers to specialists across the Bank. − the new branch environment and − A total of 127 branches have been refurbished this year, bringing the total number of refurbished and modernised branches to 252. Customers have the welcomed significant reduction in queue time, with the majority of our branches now serving customers within 2 minutes. In June 2005, the Bank launched NetBank Saver, an internet deposit savings account that offers our customers a high interest rate, no bank fees, and facilities to instantly transfer funds to and from the linked Streamline account available 24 hours a day, 7 days a week. Engaged People − 300 senior leaders of the Bank have completed an upgraded leadership development programme, which provides them with a common understanding of the Bank’s approach to leadership and encourages desired behaviours that underpin our cultural transformation. − Over 27,000 staff have completed training to be able to apply common service and sales principles in their everyday work. Recent scores internal and independent surveys have reaffirmed that our people are more engaged than ever. Results indicate that our people have a clear understanding of the Bank’s customer service vision, know where the Bank is heading, and agree that the Bank has an environment where ideas and knowledge are shared freely. from times we are achieving Simpler Processes − Customers are benefiting from the improved turn around the implementation of a culture of continuous improvement. Already, customers are receiving quicker credit decisions for home loans and personal loans and further service improvements will follow from a number of additional processes which are now being simplified. through − for our In April 2005, the Bank introduced the new NetBank platform providing enhanced services and greater two million online customers. flexibility Improvements include simpler processes when transferring money or making multiple payments, better and real-time access to transaction information and improved technology that provides our customers with the highest level of security. Offshore Developments Internationally, we are focussing on countries in Asia large whose economies are growing and whose populations have rapidly rising incomes. The Bank has made two strategic investments in China. In September 2004, it entered into a strategic co- operation agreement with Jinan City Commercial Bank (‘JNCCB’). Approval by the China Banking Regulatory Commission has been obtained to purchase an 11 percent shareholding in JNCCB, with options to increase this to 20 percent at a later stage. In April 2005, the Bank entered into its second strategic co-operation agreement, this time with Hangzhou City Commercial Bank (‘HZCCB’) and subject to approval by the China Banking Regulatory to purchase a 19.9 percent Commission, shareholding in HZCCB. An important component of these initiatives is to provide these organisations with access to our banking capabilities which will significantly enhance their performance and provide them with the skills they need to meet the increasingly sophisticated needs of their local customers. The Bank investigating development opportunities in other Asian countries. In June 2005, the Bank obtained approval from the Reserve Bank of India to establish a Representation Office in Bangalore. is also it plans CEO Transition In June this year, the Bank announced that I will be retiring and that Ralph Norris had been appointed Chief Executive Officer. Subsequently, we have announced that I will be leaving the Bank on 22 September and that Ralph Norris will take up the position from the close of business on that date. This, therefore, will be my last message to you. During my time as Chief Executive Officer over the past thirteen years, I have been proud to lead the Bank through a number of significant achievements, full privatisation, integration of State Bank of Victoria and merger with Colonial Limited. including When we announced Which new Bank, I said that this would be the biggest programme that the Bank had undertaken since privatisation. Over the past two years, I have felt among our people a growing passion and enthusiasm for the direction in which the Bank is heading. They have enthusiastically embraced the Which new Bank vision and are committed to delivering a better service for our customers. The exceptional outcomes we have achieved, both domestically and internationally, have been made possible only by the dedication and commitment of our people. I have As Chief Executive Officer, indeed been fortunate in the encouragement and counsel I have received from the Board. I would also like to take this opportunity to thank my Executive Team and all our people for their support and commitment to our customers and to thank shareholders for their continuing loyalty to the Bank and their confidence in its future. I am confident that Ralph will successfully build on the momentum which exists within the Bank and will enjoy the same level of support which I have had during my tenure as Chief Executive of the Bank. David Murray Managing Director and Chief Executive Officer 10 August 2005 5 Highlights Financial Performance and Business Review Net profit after income tax Statutory basis Cash basis Underlying basis Full Year ended 30/06/05 $M 3,991 3,538 3,466 30/06/04 $M 2,572 2,695 3,078 Jun 05 vs Jun 04 % 55 31 13 The Bank’s net profit after tax (“statutory basis”) increased by 55% to $3,991 million for the year ended 30 June 2005. This result includes an Appraisal Value uplift of $778 million ($201 million in 2004) and goodwill amortisation of $325 million (which is consistent with 2004). − Net profit after tax (“cash basis”) increased by 31% to $3,538 million compared with $2,695 million in the prior year. Earnings per share (“cash basis”) was $2.68, an increase of 30%, which is at the upper end of the market guidance provided in February. Net profit after tax (“cash basis”) includes: − Shareholder investment returns, which increased from $152 million after tax in 2004 to $177 million after tax; and Substantially lower Which new Bank expenses of $105 million after tax, compared with $535 million in 2004. Excluding these items, net profit after tax (“underlying basis”) increased by 13% to $3,466 million compared with $3,078 million in the prior year. Strong income growth and good cost control contributed to the strong result, with: − Growth in lending assets of 15%, with market share growth across a range of products, and net interest margins remaining flat over the year; Growth in Funds under Administration of 12%, with the gross margin declining by only two basis points; Insurance revenues benefiting from a 8% growth in inforce premiums, despite severe weather storms in February; Expenses remaining virtually flat for three halves, despite being impacted by higher spend on compliance projects and a stronger NZ dollar; and The charge proportion of Risk Weighted Assets consistent with the previous year at 17 basis points. Total Shareholder Return (TSR) over the two years ended 30 June 2005 was 50.5%. This is in excess of the 40.6% increase in the ASX Accumulation Financial Index over the same period. for bad and doubtful debts as a remaining − − − − The result for the second half of the year was also strong, with Total Operating increasing 5% compared with the first half and operating expenses remaining flat. Income Net profit after tax (“underlying basis”) increased by 8% on the first half year. The operating environment was characterised by significantly stronger price competition in the retail deposit market, and a moderate slowdown in home lending volumes. Weaker shareholder investment earnings in the second half (down 41%) and a substantially higher Which new Bank expense ($86 million compared with $19 million in the first half) resulted in net profit after tax (“cash basis”) increasing by 1% to $1,782 million. Which new Bank The Bank has continued to meet or exceed its Which new Bank market commitments and critical project milestones. A comprehensive discussion of progress and outcomes is set out on pages 10 and 11. 6 Financial Condition The Group’s assets increased by $23 billion to $329 billion (2004: $306 billion) over the year. Total lending assets increased by $30 billion from $206 billion to $236 billion at 30 June 2005 reflecting growth across a range of lending products. The Bank’s capital position remained strong throughout the year, sitting comfortably above the Bank’s target minimum ratios and the requirements of the regulators. The Tier One capital ratio increased from 7.43% to 7.46% and the Total Capital ratio decreased from 10.25% to 9.75% during the year to 30 June 2005. in compliance with During the year, the Bank’s risk-weighted assets grew from $169 billion to $190 billion. The Bank’s long term credit ratings remain unchanged. At 30 June 2005, the Bank’s credit ratings were: Credit Rating Fitch Ratings Moody’s Investor Services Standard & Poor’s Long-term Short-term F1+ P-1 A-1+ AA Aa3 AA- − The following significant capital management initiatives were undertaken to actively manage the Bank’s Tier One capital: − Issue of NZ$350 million (A$323 million) of Perpetual Preference Shares in December 2004; Issue of $200 million of shares in March 2005 to satisfy the DRP in respect of the interim dividend for 2004/2005; and In accordance with APRA guidelines, the estimated issue of $272 million of shares to satisfy the DRP in respect of the final dividend for 2004/2005. As required by APRA, the Bank’s investment in its life insurance and funds management companies is deducted from regulatory capital to arrive at the Bank’s Capital Ratios. The Bank’s life and funds management companies held an estimated $580 million excess over regulatory capital requirements at 30 June 2005 in aggregate. − The Bank has an integrated risk management framework to identify, assess and manage risks in the business. The Bank’s risk profile is measured by the difference between capital available to absorb loss and risk as assessed by target equity required. This risk framework is described more fully elsewhere in this report. Dividends The total dividend for the year is another record at $1.97 per share, an increase of 14 cents or 8% on the prior year. The dividend payout ratio (“cash basis”) for the year is 73.9% consistent with the payout ratio in the prior year, after adjusting the additional Which new Bank expenses in that year. for The dividend payment for the second half of the year is $1.12 per share ($1.04 per share in the previous year). This dividend payment is fully franked and will be paid on 23 September 2005 to owners of ordinary shares at the close of business on 19 August 2005 (“record date”). Shares will be quoted ex-dividend on 15 August 2005. The Bank issued $200 million of shares to satisfy shareholder participation in the Dividend Reinvestment Plan (“DRP”) in respect of the interim dividend for 2004/2005. It expects to issue around $272 million of shares in respect of the DRP for the final dividend for 2004/2005. Highlights (continued) Full Year Ended Half Year Ended Contributions to Profit (after income tax) Banking Funds Management Insurance NPAT ("underlying basis") Shareholder Investment Returns (after tax) Which new Bank (after tax) NPAT ("cash basis") Appraisal value uplift Goodwill amortisation NPAT ("statutory basis") 30/06/05 $M 2,959 351 156 3,466 177 (105) 3,538 778 (325) 3,991 30/06/04 Jun 05 vs $M Jun 04 % 11 28 21 13 16 large 31 large - 55 2,675 274 129 3,078 152 (535) 2,695 201 (324) 2,572 30/06/05 31/12/04 $M 1,427 170 67 1,664 111 (19) 1,756 $M 1,532 181 89 1,802 66 (86) 1,782 513 (163) 2,132 265 (162) 1,859 Jun 05 vs Dec 04 % 7 6 33 8 (41) large 1 large 1 15 Dividends on preference shares paid(1) Dividends on ordinary shares paid/declared 131 2,517 109 2,311 70 1,434 61 1,083 (1) Includes dividends paid on Perls, Perls II, Trust Preferred securities and ASB preference shares. Full Year Ended Half Year Ended Shareholder Summary Dividend 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(1) Weighted ave(2) number of shares – basic Weighted ave(2) number of shares – fully diluted Return on Equity – cash (%) Return on Equity – underlying (%) 30/06/05 30/06/04 197 1.4 1.3 303.1 303.0 267.6 267.5 261.9 261.8 65.2 73.9 1,273 1,274 16.0 15.6 183 1.1 1.3 196.9 196.8 206.6 206.5 237.1 237.0 93.5 73.9 1,256 1,257 12.7 14.6 Jun 05 vs Jun 04 % 14 cents 54 54 30 30 10 10 330 bpts 100 bpts 30/06/05 31/12/04 112 1.2 1.2 161.5 161.4 134.1 134.0 135.5 135.5 69.5 83.8 1,277 1,278 15.9 16.1 85 1.6 1.5 141.6 141.6 133.5 133.5 126.3 126.3 60.2 63.9 1,269 1,270 16.0 15.1 Jun 05 vs Dec 04 % 27 cents 14 14 - - 7 7 (10) bpts 100 bpts (1) Dividend payout ratio for June 2004 excludes the impact of Which new Bank expenses ($535 million after tax), as communicated at the commencement of the program. No adjustment has been made for 2005. ave: average (2) Underlying growth of 13% on prior year $ m 3,800 3,600 3,400 3,200 3,000 2,800 2,600 2,400 2,200 2,000 3,078 284 11% 77 28% 3,466 27 21% 177 (105) 3,538 Underlying NPAT June 04 Banking Funds Management Insurance Underlying NPAT June 05 S'holder Invest Returns (after tax) Which new Bank (after tax) Cash NPAT June 05 7 Highlights (continued) Important Dates for Shareholders 15 August 2005 19 August 2005 23 September 2005 28 October 2005 15 February 2006 Ex-Dividend Date Record Date Final Dividend Payment Annual General Meeting 2006 Interim Results Announcement Group Performance Summary NPAT ("statutory basis") NPAT ("cash basis") NPAT ("underlying basis") (1) Net Interest Income Other banking income Funds management income Insurance income Total Operating Income Shareholder investment returns Policyholder tax benefit Total Income Operating expenses Which new Bank Total Operating Expenses Charge for bad and doubtful debts Net Profit Before Income Tax Policyholder tax expense Corporate tax expense Outside equity interests NPAT ("cash basis") Appraisal value uplift Goodwill amortisation NPAT ("statutory basis") Full Year Ended 30/06/05 $M 3,991 3,538 3,466 30/06/04 $M 2,572 2,695 3,078 Jun 05 vs Jun 04 % 55 31 13 30/06/05 $M 2,132 1,782 1,802 Half Year Ended 31/12/04 $M 1,859 1,756 1,664 Jun 05 vs Dec 04 % 15 1 8 5,966 2,915 1,261 747 10,889 237 228 11,354 5,697 150 5,847 322 5,185 228 1,409 10 3,538 778 (325) 3,991 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 10 2 9 10 8 21 12 8 4 large (6) 17 31 12 33 11 31 large - 55 3,033 1,503 646 387 5,569 92 117 5,778 2,869 122 2,991 176 2,611 117 707 5 1,782 513 (163) 2,132 2,933 1,412 615 360 5,320 145 111 5,576 2,828 28 2,856 146 2,574 111 702 5 1,756 265 (162) 1,859 3 6 5 8 5 (37) 5 4 1 large 5 21 1 5 1 - 1 large 1 15 (1) Underlying basis excludes Which new Bank and Shareholder investment returns. Key Performance Indicators Banking Net interest margin (%) Average interest earning assets Average interest bearing liabilities Funds Management Operating income to average funds under administration (%) Funds under administration - spot Insurance Inforce premiums Capital Adequacy Tier 1 (%) Total (%) Adjusted Common Equity Credit Ratings Fitch Ratings Moody's Investor Services Standards & Poor's Full Year Ended 30/06/05 $M 30/06/04 $M Jun 05 vs Jun 04 % 30/06/05 $M Half Year Ended 31/12/04 $M Jun 05 vs Dec 04 % 2.45 243,948 225,592 2.53 214,187 197,532 (8) bpts 14 14 2.45 249,586 230,354 2.44 238,402 220,908 1 bpt 5 4 1.09 123,064 1.11 109,883 (2) bpts 12 1.09 123,064 1.10 117,440 (1) bpt 5 1,265 1,167 8 1,265 1,199 6 7.46 9.75 4.91 7.43 10.25 4.75 7.46 9.75 4.91 7.46 9.60 4.76 Long-term Short-term F1+ P-1 A-1+ AA Aa3 AA- Affirmed Jun 05 Jun 05 Jun 05 The Bank continues to maintain a strong capital position, reflected in its credit ratings which remained unchanged for the year. Additional information regarding the Bank’s capital is disclosed in Note 31. 8 Highlights (continued) Balance Sheet Summary Lending Assets(1) Total assets Total liabilities Shareholders' equity Assets held and FUA(3) On Balance Sheet Banking assets Insurance Funds under administration Other insurance and internal funds management assets Off Balance Sheet Funds under administration 30/06/05 $M 235,849 329,035 302,975 26,060 292,026 22,959 14,050 329,035 100,105 429,140 As at 31/12/04 $M 224,402 320,952 295,885 25,067 284,258 23,221 13,473 320,952 94,219 415,171 30/06/04 $M 205,946 305,995 281,110 24,885 269,066(2) 22,952 13,977(2) 305,995 86,931 392,926 Jun 05 vs Dec 04 % 5 Jun 05 vs Jun 04 % 15 3 2 4 3 (1) 4 3 6 3 8 8 5 9 - 1 8 15 9 (1) Lending assets comprise Loans, Advances, and Other Receivables (gross of provisions for impairment) and Bank acceptances of customers. (2) Comparatives for 30 June 2004 have been restated to reflect a restructure and subsequent realignment in business segments. (3) FUA: Funds under Administration Productivity and Efficiency Banking Expense to income (%) Underlying expense to income (%) Funds Management Expense to average FUA (%) Underlying expense to average FUA (%) Insurance Expense to average inforce premiums (%) Underlying expense to average inforce premiums (%) Full Year Ended 30/06/05 30/06/04 Jun 05 vs Jun 04 % 30/06/05 31/12/04 Jun 05 vs Dec 04 % Half Year Ended 50.2 48.9 59.2 50.8 0.73 0.70 0.80 0.76 45.5 47.3 45.3 46.1 15.2 3.7 8.8 7.9 3.8 1.7 50.3 48.1 50.1 49.7 0.72 0.68 0.74 0.72 46.6 44.9 46.5 44.8 (0.4) 3.2 2.7 5.6 (3.8) (3.8) 54.7% 50.4% 0.87% Expense ratios (1) CAGR = 4.2% CAGR = 5.1% CAGR = 8.4% Jun 03 (1) On a cash basis (2) Expense to income (3) Expense to average inforce premiums (4) Expense to average funds under administration 50.2% Banking(2) Insurance(3) 45.5% 0.73% Funds Mgt(4) Jun 05 9 Which new Bank Summary Background In September 2003, the Bank launched its Which new Bank customer service vision “To excel in customer service”. The service transformation consists of three themes; excellent customer service through engaged people supported by simple processes. The Bank estimated a spend of $1,480 million over the three years to 2006. This included $600 million of normal project spend, and an additional $620 million in areas such as systems and process simplification, technology and staff training and $260 million invested in the branch network. The Bank provided the following financial guidance: − An increase in cash EPS exceeding 10% compound average growth rate (CAGR) over the three years, which has subsequently been revised upwards to exceed 12% CAGR; Achieving a 4-6%pa productivity improvement; Regaining profitable market share in key business lines; and Increasing dividends each year. − − − Progress in 2005 (home loans, personal The Bank continues to make significant progress on its market commitments, with net benefits in 2005 totalling $724 million. Market shares in key business lines have funds improved management) or are showing signs of turn-around (business lending, deposits). Efficiency gains are being recorded in each segment. Dividends have continued to increase throughout the program. Progress within the major initiatives include the following: − lending, to the new improvement across many of “CommLeader” the Bank’s leadership program which provides a common understanding of our approach to leadership and desired behaviours that underpin the cultural change, has been completed by 300 senior leaders; Service and sales training for 27,000 staff has been completed, thereby equipping staff and managers to provide higher quality needs analysis and improved service to our customers; “CommWay” initiatives have achieved turnaround time the Bank’s processes. In addition, a significant improvement in response times for home loans and personal loans has been achieved with end-to-end systems and process redesign. “CommSee” customer management platform, that provides our customer service staff with ready access imaged client documents and authorities, is making it easier to view customer information. More than half our branches now have CommSee operating and we are averaging over 90,000 referrals per month and maintaining a conversion rate of around 30%. Although CommSee is still being implemented across the country, the momentum gained during the second half of the year will position us well to benefit fully from this customer service initiative; A further 127 branches have been refurbished this year, bringing the number of branches modernised to help our people provide faster, more efficient service, to 252; The new NetBank platform was introduced in April 2005 providing enhanced functionality and greater flexibility for our 2 million on line customers; A redesign of Support Functions has led to the implementation of new business models, achieving simplification and efficiency gains and improving customer service as reflected in the internal customer service survey results; and The Wealth Management team achieved its June 2005 goal of reducing the number of product systems − − − − − − − to seven. This brings the number of systems decommissioned to 10, since the beginning of Which new Bank. Key metrics Customer service Product sales per retail staff member for the June 2005 quarter are 25% higher than at the commencement of Which new Bank in September 2003. Customer queue times across branches have improved with 85% of branches now serving customers, on average, within two minutes, compared with 41% at the start of the program. Our internal Service Quality Index, which tracks a number of our service indicators, has moved from 7.7 in June 2003 in June 2005. Our Strength of Relationship score has increased slightly from 5.7 in the June 2003 quarter to 5.9 in the June 2005 quarter. to 8.5 Engaged People The annual employee workplace (Gallup) survey, measuring employee engagement, showed the Bank increased its percentile rating from 74th in May 2003 to 77th in May 2005. This is against our target of exceeding the global best practice mark at the 75th percentile. Our recently introduced internal customer service survey, which surveys our support and operations staff for quality of service provided, has risen third successive quarter. The latest result show 88% of internal customers agree that they receive excellent service. the for The staff engagement survey reaffirmed progress with results improving in the last six months. This includes staff having a clear understanding of the customer service vision, where the Bank is headed and that we have an environment where ideas and knowledge are more freely shared. Simple processes CommWay, the Bank’s approach to continuous improvement, has completed 41 projects averaging a 49% improvement in turnaround times as well as achieving efficiency gains. Projects were completed across all major operations and support areas. In addition, the program has the Bank, with over 450 built competencies across business people skilled tools and the methodologies as part of their everyday role. in applying for home loans and personal Customers are being provided with quicker credit decisions loans. The proportion of conditional approvals able to be provided on- the-spot has increased to 71% for home loans in branches, and 45% for personal loans, compared with 47% and 0% respectively at the start of the program. This will continue to rise as additional initiatives are fully implemented. Focus for 2006 The Bank continues to make significant progress in its customer service transformation and remains confident that with the momentum gained so far, it will meet all the Which new Bank market commitments. The 2006 financial year will see the completion of all major Which new Bank projects including the deployment of CommSee across Australia. We expect customer service to continue to improve as our people further embrace the service and sales culture, our customer service staff are provided with better tools to serve customers and turnaround times continue to reduce. 10 Which new Bank Summary (continued) Which New Bank (WnB) Gross spend Change in provision for future costs Investments capitalised Net Which new Bank expenses Less: Normal project spend Expensing of previously capitalised software Incremental WnB expense – before tax Incremental WnB expense – after tax Which new Bank expense to date Incremental WnB expense by Segment Banking Funds Management Insurance Incremental WnB expense – before tax Which new Bank benefits – total Gross benefits – Revenue Less: Additional operating expenses Net benefits – Revenue Gross benefits - Expenses Net benefits pre tax Full Year Ended Half Year Ended 30/06/05 $M 601 (97) (154) 350 (200) - 150 105 1,235 30/06/04 $M 634 208 (112) 730 (200) 219 749 535 634 30/06/05 $M 346 (40) (84) 222 (100) - 122 86 1,235 31/12/04 $M 255 (57) (70) 128 (100) - 28 19 889 Full Year Ended Half Year Ended 30/06/05 $M 112 36 2 150 30/06/04 $M 698 37 14 749 30/06/05 $M 97 24 1 122 31/12/04 $M 15 12 1 28 Full Year Ended Half Year Ended 30/06/05 $M 340 (67) 273 451 724 30/06/04 $M 152 (60) 92 145 237 30/06/05 $M 192 (36) 156 267 423 31/12/04 $M 148 (31) 117 184 301 Target communicated to market 620 200 The impact on current full year expenses is the net of $451 million cost benefits, less the impact of additional operating expenses of $67 million, totalling $384 million. The ratio of net benefits is: revenue 38% : expenses 62% (2004 was 39% and 61% respectively). Investment capitalised under WnB Branch Refurbishment IT systems Total amount capitalised Full Year Ended Half Year Ended 30/06/05 $M 58 96 154 30/06/04 $M 74 38 112 30/06/05 $M 45 39 84 31/12/04 $M 13 57 70 The balance of capitalised IT systems at 30 June 2005 was $182 million. June 2005 Milestone Percentage complete* Target date r e m o t s u C l e p o e P s s e c o r P 1. Service & Sales Management - remaining staff trained 2. Branch Refurbishment - refurbish 125 3. NetBank - new service implemented 4. CommSee - platform built and deployment commenced 5. CommSee - 40% customer-facing staff trained 6. Segment Model - pilot completed 7. Performance Culture - performance management system implemented 8. Performance Culture - new learning curriculum available 9. CommWay - 40 process simplification initiatives completed 10. Support Function Redesign - implementation of 14 functions completed 11. Wealth management systems - reduced from 11 to 7 12. Procurement - 10 key categories renegotiated 13. IT Efficiency - run-rate savings of $80m realised 100% Jun 05 100% Jun 05 100% Mar 05 100% Apr 05 100% Jun 05 100% Jun 05 100% Dec 04 100% Jun 05 100% Jun 05 100% Jun 05 100% Jun 05 100% Jun 05 100% Jun 05 * As at end June 2005 As at May 2005 WnB progress update 11 and to complement our existing branch, mobile and broker channels. Premium, Business & Corporate and Institutional Premium Business Services provides financial services to a broad client base that incorporates the institutional, corporate and business segments as well as the Bank’s high-net worth personal clients. Our working capital services business had a strong year with continued market share growth and good earnings momentum. The global markets trading business was limited by the low volatility in the Australian dollar and in particular Australian interest rates, leading to some decline in domestic customer activity. The lending business saw intense competition, especially for larger credit and particularly during the first half of the year. While business reduced slightly, the Bank’s pricing and credit discipline led to further improvements in credit quality. lending market share − The Bank’s relationship-based service approach has been successful for a broad range of investment products including primary offerings of equities and debt. Other performance highlights include: Lead roles in a number of new financings, including a $1 billion bond issue for Goldman Sachs and a $1.9 billion Syndicated Standby Revolving and Term Loan Facility for Qantas Airways Ltd. This was the largest Australian dollar syndicated debt raising by an Australian corporate in the market last year; and The acquisition of AOT Australia, which further leverages CommSec’s scale into the institutional market. CommSec continues to be the most active broker by number of transactions on the ASX and has the busiest single purpose website in Australia. − Asia Pacific Asia Pacific Banking incorporates the retail and commercial banking operations in New Zealand, Fiji, and Indonesia. ASB Bank in New Zealand represents the majority of this business. During the year, the Bank acquired an 11% interest in Jinan City Commercial Bank, one of the 10 largest city commercial banks in China by assets. Subject to regulatory approval, the Bank will also acquire a 19.9% interest in Hzangzhou City Commercial Bank, ranked in the top five city commercial banks by assets. The New Zealand banking sector has continued to remain buoyant during the second half, with some evidence of a slowdown in the home loan market. The impact of the cash rate increases continues to be negative across the market and competition remains intense. ASB Bank has strengthened its position, further increasing its market share in home lending throughout the year. ASB Bank was recognised for the third consecutive year as the "Bank of the Year" for New Zealand (Source: Banker Magazine, UK) reflecting the Bank’s strong operational performance and commitment to customer service. Banking Analysis Financial Performance − − − − increased by 11% The 2005 underlying profit after tax for the banking to $2,959 million. The business performance during the year was underpinned by: − Strong volume growth in home lending, up 15% to $140 billion and personal lending, up 19% to $16 billion; Stable net interest margin since June 2004 to bring the full year NIM to 2.45%, eight basis points below the average for the prior year; Continued market share growth in the key retail lending products; Good cost control, with relatively flat costs, and Bad debt expense as a proportion of Risk Weighted Assets remaining at 17 basis points. The underlying result for the second half of the year increased 7% to $1,532 million from $1,427 million in the first half. The second half performance reflects: − Home lending volumes remaining ahead of market growth, despite a slow down across the market in the second half; Continued stable product margins; Operating costs being relatively flat compared with the first half; and Improved productivity with the underlying cost to income ratio dropping to 48.1%. − − − Business Review Australian Retail The Australian retail banking operations performed strongly over the year. The Bank was able to further improve its market share position in home lending, credit cards and other personal lending through a combination of competitive products, effective marketing and good customer service. Margins increased in all products except home loans, where there was only a minor contraction, reflecting growth in third party volumes. Credit quality remained sound. A decision was taken to increase the risk profile on personal lending unsecured credit, which had a positive impact on lending volume and revenue growth, but with some increase in the bad debt expense. The Bank’s personal loan quality remains on par with the average of major competitors. There has been some loss of retail deposit market share in the high interest rate segment as competitors aggressively price in an effort to gain market share. The Bank’s strategy remains focused on delivering segmented product offers as the basis for maintaining profitable market share. In June, the Bank introduced its new NetBank Saver account to meet the needs of customers in this market segment. The Bank introduced changes to its mortgage broker business model during the year with a progressive implementation from April 2005. Results to date have been in line with expectations, including a significant reduction in “honeymoon” introductory the proportion of business. Separately, development continues on the Bank’s new commission-only proprietary home loan channel “Innovators” (launched late 2004), with early results encouraging. The new channel is designed to acquire new home loan customers from external sources, rate or 12 Banking Analysis (continued) Key Performance Indicators Net interest income Other operating income Total Operating Income Operating expenses Which new Bank Total Operating Expenses Charge for bad and doubtful debts Net profit before Income Tax Income tax expense Outside equity interests NPAT ("cash basis") NPAT("underlying basis") (1) Productivity and other measures Expense to income (%) Expense to income - underlying (%) Effective corporate tax rate (%) Balance Sheet Lending assets ($m) (2) 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 as a % of Risk weighted assets annualised (%) Full Year Ended Half Year Ended 30/06/05 30/06/04 $M 5,410 2,846 8,256 4,191 698 4,889 276 3,091 914 1 2,176 2,675 $M 5,966 2,915 8,881 4,344 112 4,456 322 4,103 1,220 3 2,880 2,959 Jun 05 vs Jun 04 % 10 2 8 4 large (9) 17 33 33 - 32 11 30/06/05 31/12/04 $M 2,933 1,412 4,345 2,160 15 2,175 146 2,024 605 2 1,417 1,427 $M 3,033 1,503 4,536 2,184 97 2,281 176 2,079 615 1 1,463 1,532 Jun 05 vs Dec 04 % 3 6 4 1 large 5 21 3 2 - 3 7 50.2 48.9 29.7 59.2 50.8 29.6 15.2 3.7 10 bpts 50.3 48.1 29.6 50.1 49.7 29.9 (0.4) 3.2 (30) bpts 235,849 243,948 225,592 205,946 214,187 197,532 15 14 14 235,849 249,586 230,354 224,202 238,402 220,908 5 5 4 189,559 219 0.73 169,321 197 0.82 12 11 (9) bpts 189,559 219 0.73 180,673 238 0.76 5 (8) (3) bpts 411.4 451.8 - 411.4 373.0 - 0.17 0.16 1 bpt 0.19 0.16 3 bpts Underlying growth of 11% on prior year 556 69 (46) (153) (142) 2,959 (79) 2,880 $ m 3,400 3,200 3,000 2,800 2,600 2,400 2,200 2,000 2,675 Underlying NPAT June 04 Net Interest Income Other Banking Income Bad Debts Expenses Tax + OEI Underlying NPAT June 05 W hich new Bank (after tax) Cash NPAT June 05 (1) Underlying basis excludes Which new Bank. (2) Lending assets comprise Loans, Advances, and Other Receivables (gross of provisions for impairment) and Bank acceptances of customers. 13 Banking Analysis (continued) Total Banking Income Total banking income comprises income from the Australian Retail; Premium, Business & Corporate and Institutional; Group Treasury and Asia Pacific operations. Total Banking Income Australian Retail Premium, Business, Corporate and Institutional and Group Treasury Asia Pacific Trading income Other Total Banking Income Net Interest Income Other Banking Income Total Banking Income 30/06/2005 30/06/2004 30/06/2005 31/12/2004 $M 2,287 Full Year $M 4,679 2,877 833 440 52 8,881 5,966 2,915 8,881 $M 4,292 2,715 710 499 40 8,256 5,410 2,846 8,256 Half Year $M 2,392 1,443 428 221 52 4,536 3,033 1,503 4,536 1,434 405 219 - 4,345 2,933 1,412 4,345 − − − Australian Retail Banking Services: Total income increased by 9% from the prior year to $4,679 million, driven largely by higher interest income, with growth in lending assets of 15% while margins remained stable. Income during the second half was 5% above the first half. Premium, Business & Corporate and Institutional and Group Treasury: Total income was 6% above the prior full year and reflects improved growth in lending assets. Income in the second half of the year was relatively flat compared with the first half. Asia Pacific: The increase in total income by 17% from the prior year reflects the benefits of continued strong lending growth in ASB Bank combined with a stronger New Zealand Dollar. Income in the second half of the year was 6% above the first half. Net Interest Income Net interest income for the year increased by 10% to $5,966 million. The growth was driven by a 14% increase in average interest earning assets, partially offset by an eight basis points contraction in the net interest margin to 2.45%. During the second half of the year, with evidence of a slow down in home lending activity, net interest income increased 3% on the first half. This was the result of a 5% growth in average interest earning assets, a stable net interest margin (2.45%) and three less days in the second half compared with the first half. ) 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 Average Interest Earning Assets and NIM Trends (Half Years) 300,000 250,000 200,000 150,000 100,000 50,000 0 2.46% 224,160 40,884 183,276 2.44% 238,402 39,161 199,241 2.45% 249,586 37,897 211,689 Jun-04 Dec-04 Jun-05 Lending Assets (excl Bank Accept) Total NIM Non-Lending Interest Earning Assets Volume Average interest earning assets increased by $26 billion over the year to $250 billion, reflecting a $28 billion increase in lending assets. Average liquid assets reduced by $3 billion during the year. The largest contributor to the increase in average interest earning assets was the continued resilience of home lending in Australia and New Zealand. Average home loan balances increased by 19% since 30 June 2004 to $132 billion (19% growth excluding securtisation). This growth was ahead of the market, in both the Australia and New Zealand residential lending sectors. During the second half of the year, home lending activity across the market slowed as expected. Average home lending balances increased 6% (down from 10% in the first half). Personal lending average balances increased $2 billion (15%) since June 2004, with strong growth across all major products including personal loans, credit cards and margin lending. Average balances for Business, Corporate and Institutional lending grew 13% over the full year, across a number of lines of business including variable lending, hire purchase and term loans. During the second half average balances grew by 5% relative to the first half. Interest Margin The net interest margin for the full year of 2.45% was eight basis points below the prior year. Following the contraction which occurred during the second half of last year, the NIM has remained stable over the past 12 months. The average monthly margin for the June 2005 half year of 2.45% was in line with the average margin for the June 2004 half year of 2.46%. 2.6% 2.5% 2.4% 2.3% 2.2% 2.1% 2.0% NIM movement since June 2004 2.46% (0.04)% 0.02% 0.01% 2.45% June 04 Half Year Funding Mix Asset mix Other June 05 Half Year Factors impacting on the margin relative to the June − increased (lower margin 2004 half year included: Funding Mix: reliance on wholesale − funding as a result of the strong growth in home lending outpacing retail deposit growth. The impact was to reduce NIM by four basis points. Asset Mix: continued strong growth in home loans than other products) balances compared with other lending caused a slight reduction in NIM, but this was more than offset by the reduced level of non-lending liquid assets. Other: while competition remained strong across all products, the Bank continued to focus on maintaining the net interest margin. Most product margins remained relatively flat, which together with a slight benefit from a cash rate increase led to a one basis point increase in NIM. During the second half of the year the net interest margin stabilised at 2.45%, up one basis point from the first half. This outcome reflected relatively stable margins across the major lending assets. − 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 14 Banking Analysis (continued) Other Banking Income Commissions and Fees Lending fees Trading income Other Other Banking Income Full Year Ended 30/06/05 30/06/04 $M 1,503 724 499 120 2,846 $M 1,595 753 440 127 2,915 Half Year Ended 30/06/05 31/12/04 $M 797 358 219 38 1,412 $M 798 395 221 89 1,503 Other banking income increased 2% to $2,915 million compared with $2,846 million in the prior year. During the current year higher volume related commission and lending fees income were partially offset by lower trading income. During the second half of the year, income increased 6% over the first half with increased volumes, changes in upfront commission payments to mortgage brokers and higher leasing income attributable to a change in tax legislation. Commission and trading income were broadly in line with the first half of the year. 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Other Banking Income $ millions 2,627 79 502 652 1,394 2,846 120 499 724 2,915 127 440 753 1,503 1,595 Jun-03 Jun-04 Jun-05 Commissions Lending fees Trading Income Other − During the year: − Commissions and Fees increased 6% to $1,595 million driven by increased volumes and completion of major infrastructure transactions (including Tollways) during the first half of the year. Credit card volume increases were driven by increased activity levels, combined with the launch of the Platinum card during March 2004. There was no significant growth in commission and fee income in the second half, relative to the first half of the year. Lending Fees increased 4% to $753 million with volume increases in bill and overdraft facilities being the primary drivers. Second half income increased 10% on the first half, reflecting a reduction in upfront commission payments to mortgage brokers, combined with continued higher volumes in personal lending, overdraft and bill facilities. Trading Income of $440 million was 12% below the prior year with lower market volatility and difficult trading conditions while lower volumes were recorded across the derivatives and foreign exchange sectors. Second half trading income levels were in line with the first half. − − Other Banking Income was relatively flat for the year. Current year income includes an amount of $52 million due to the change in tax consolidation legislation for leasing (recognised in the second half of the year). The prior year included profits from strategic assets sales (Bank of Queensland and Fleet Lease) totalling $71 million, partially offset by a $31 million equity accounting loss of an associated entity due to a change in it’s accounting policy. 15 Operating Expenses − in the New Zealand Banking Operating expenses within the Banking business increased 4% to $4,344 million during the current year. Operating expenses during the year were impacted by: − Average increase of 4% in staff expenses reflecting labour market movements and other inflation-related cost increases; Volume growth operations; A stronger New Zealand Dollar contributing an additional $20 million in costs; and Increased costs associated with large compliance related projects (e.g. Basel II, IFRS and Sarbanes Oxley) totalling $35 million for the year ($15 million in 2004). Excluding the impact of the higher New Zealand Dollar and increased compliance project costs, operating expenses increased by 3%. − − During the second half of the year, operating costs were virtually flat, increasing by only 1% to $2,184 million. Costs across the core Australian banking segments were at or below the first half, offset by volume related increases within the New Zealand Banking operations. Productivity Underlying Banking Expense to Income Ratio 53% 52% 52% 51% 51% 50% 50% 49% 49% 48% 52.0% 50.8% 48.9% Jun-03 Jun-04 Jun-05 The underlying Banking expense to income ratio dropped to below 50% for the first time to 48.9% over the year. This favourable result was attributable to higher income (8% increase) without a corresponding rise in underlying expenses. The benefits realised under the Which new Bank program continue to increase. The underlying Banking expense to income ratio for the second half was 48.1%, down from 49.7% in the first half and 50.8% in the prior June half year. Bad and Doubtful Debts The total charge for bad and doubtful debts for the full year was $322 million, which is 17 basis points of Risk Weighted Assets. This level is consistent with the prior year. Impaired assets were $395m at year end, down from $445m at December 2004 and up from $363m at June 2004. The Bank remains well provisioned, with total provisions for impairment as a percentage of gross impaired assets net of interest reserved of 411% (December 2004: 373%, June 2004: 452%). General provision as a percentage of risk weighted assets is 0.73% compared with 0.76% as at 31 December 2004 and 0.82% as at 30 June 2004. Taxation Expense The corporate tax charge for the full year was $1,220 million, an effective tax rate of 29.7% compared with 29.6% in the prior year. The effective tax rate in the second half of the current year was 29.6%, down from 29.9% in the first half. Banking Analysis (continued) Assets & Liabilities Retail Lending Major Balance Sheet Items (gross of impairment) Lending assets - Home Lending (excl. securitisation) Lending assets - Home Lending Lending assets - Personal Lending Market Share Percentage Home Loans Credit cards (1) As reported in the June 2004 Profit Announcement Home Lending Home loan balances (net of securitisation) increased by 14% from 30 June 2004 to $119 billion. Excluding the impact of securitisation, (there were a number of tranches in the past six months), the growth since June 2004 totalled 15% and 7% since December 2004. Home lending market share improved, rising 63 basis points since June 2004 (up 31 basis points from December 2004) to 19.9% as at June 2005. Market share has improved each month in the year to June 2005. The Bank’s branches continue to perform strongly, with growth ahead of the overall market. This has been supported by further increases in broker originated loans which now account for 21% of the Bank’s total Australian book. 30/06/05 $M 129,913 119,094 15,477 As at 31/12/04 $M 121,704 115,313 14,317 30/06/04 $M 112,488 104,883 13,160 Jun 05 vs Dec 04 % Jun 05 vs Jun 04 % 7 3 8 15 14 18 19.9 22.9 19.6 23.2 19.3(1) 22.7(1) Personal Lending Personal lending balances increased by 18% over the full year to $15.5 billion, and by 8% over the past six months. Personal Loans have grown strongly, as the Bank has sought to optimise the relationship between risk and reward. Growth in credit card balances reflected higher activity levels and the launch of a new Platinum card in March 2004. Market share in credit cards has improved 20 basis points since June 2004. Margin Lending balances continued to grow throughout the year, assisted by strong equity markets. Business, Corporate and Institutional Lending (1) As at Major Balance Sheet Items (gross of impairment) Interest earning lending assets Bank acceptances of customers Cash and other liquid assets Trading & investment securities Market Share Percentage Business Lending Asset Finance(3) Transaction Services (Commercial)(4) Transaction Services (Corporate)(5) 30/06/05 $M 31/12/04 $M 30/06/04 $M Jun 05 vs Dec 04 % Jun 05 vs Jun 04 % 51,584 16,786 11,144 22,057 48,424 16,297 10,667 23,525 45,899 15,019 13,379 23,884 7 3 4 (6) 12 12 (17) (8) 13.4 16.6 24.8 22.1 13.5 16.7(2) 24.4(2) 21.4(2) 13.8 16.8 24.4(2) 20.9(2) (1) (2) (3) Includes Group Treasury As reported in the December 2004 Profit Announcement Source: AELA (Aust Equip Lessors Assoc) as at May 2005. The comparatives have been restated to now also include other CBA receivables (previously included CBFC business only) (4) Source: East & Partners as at February 2005. Survey (5) respondents included companies with $20 million to $340 million turnover. Source: East & Partners as at May 2005. Survey respondents are companies with turnover greater than $340 million Lending Assets Business, Corporate and Institutional interest earning lending has increased $5.7 billion or 12% over the year to $51.6 billion at June 2005 ($3.2 billion or 7% growth since December 2004). Bank acceptances increased by 12% since June 2004 (3% growth since December 2004) with Bill facilities continuing to be a valuable source of financing for our customers. Total lending growth market share (including bank acceptances) decreased slightly during the second half of the year to 13.4%. Business credit spreads, particularly for large transactions, contracted further throughout the year, reflecting the higher competitive business environment. Trading and Investment Securities Trading and Investment securities decreased by $1.8 billion over the year ($1.5 billion since December 2005) to $22.1 billion at June 2005. Transaction Services Transaction market share for medium (commercial) and large corporations continued to grow, increasing 40 and 70 basis points respectively over the past half year. 16 Banking Analysis (continued) Deposits Australia Transaction Deposits Savings Deposits Investment Deposits Deposits not bearing Interest Sub Total Deposits (excl CD’s and other) Certificate of Deposits and other (1) Total Deposits (Australia) Debt issues Market Share Percentage Household Deposits(2) Retail Deposits(3) 30/06/05 $M 30,501 34,205 52,286 5,823 122,815 18,299 141,114 51,682 As at 31/12/04 $M 29,394 33,603 50,566 5,885 119,448 21,360 140,808 45,465 30/06/04 $M Jun 05 vs Dec 04 % Jun 05 vs Jun 04 % 28,887 32,914 47,844 5,407 115,052 24,101 139,153 38,542 4 2 3 (1) 3 (14) - 14 6 4 9 8 7 (24) 1 34 29.8 22.9 30.3 23.4 30.7 23.6 (4) (1) Other includes securities sold under agreement to repurchase and short sales. (2) Source: APRA (3) Source: RBA (4) As reported in the June 2004 Profit Announcement Deposits In a competitive market, characterised by aggressive pricing, the Bank has grown its total deposits excluding Certificates of Deposit (CD’s) by 7% over the year to 30 June 2005 (up 3% since 31 December 2004), whilst improving product margins. Across the three deposit categories, Investment Deposits, which have increased 9% over the past twelve months. the strongest growth was in Transaction and Savings Deposits grew by 6% and 4% respectively during the past year. Savings performance reflected heightened competition as a number of competitors looked to compete aggressively on price in an effort to grow market share. The Bank’s strategy remains focussed on delivering segmented product offers as the basis for maintaining profitable market share. As part of this strategy the Bank introduced its new NetBank Saver account in June 2005. Debt Issues Debt issues were $51.7 billion at 30 June 2005, an increase of $13 billion or 34% from 30 June 2004 (14% or $6 billion increase since December 2004). The growth of debt issues reflects the wholesale funding requirement following the strong asset growth over the past twelve months. The majority of these issues were from offshore markets, where there was favourable market conditions and attractive funding rates. Asia Pacific Major Balance Sheet Items (gross of impairment) Home Lending Other Lending assets Trading & investment securities Cash and liquid assets Debt issues Deposits (1) 30/06/05 $M 20,765 12,132 2,843 821 6,939 23,006 As at 31/12/04 $M 18,945 10,906 3,378 1,469 5,881 21,492 30/06/04 $M 16,967 10,018 2,459 1,481 5,500 19,176 Jun 05 vs Dec 04 % 10 11 (16) (44) 18 7 Jun 05 vs Jun 04 % 22 21 16 (45) 26 20 Market Share Percentage NZ Lending for housing (3) NZ Retail Deposits(3) 23.0 19.5 22.7 18.7 22.2(4) 17.5(2) (1) (2) Asia Pacific Deposits exclude deposits held in other overseas countries (30 June 2005, $3,909 million). As reported in the June 2004 Profit Announcement. Source: Reserve Bank of NZ. (3) (4) Under the current definition used by the RBNZ, the equivalent prior period market share would be 22.4%. Lending Assets Total Asia Pacific home lending remained strong over the past twelve months, increasing by 22% to $20.8 billion at 30 June 2005. Growth in the second half of the year has been maintained, increasing 10% relative to December 2004. The strong performance reflects ASB Bank’s prominence in the Auckland market, continued excellence in customer service and ongoing successful marketing campaigns. ASB Bank has continued to grow its home lending market share increasing 30 basis points over the past six months to 23.0% by 30 June 2005. Other lending assets, which comprise personal, rural and business/commercial lending assets, achieved similar growth levels to that of housing, increasing 21% in the twelve months to 30 June 2005. Deposits ASB Bank’s retail deposits increased 20% over the year and 7% in the past six months. Growth in deposits have been ahead of market with market share increasing to 19.5% at June 2005 up from 17.5% at June 2004 and 18.7% at December 2004. The ASB Bank net interest margin decreased over the year, primarily in the first half of the year. This was attributable to the impact of competitive pressures and higher wholesale funding costs. 17 Banking Analysis (continued) Total Banking Interest Earning Assets Home Loans excl. securitisation Less: Securitisation Home Loans Personal Business and Corporate Loans, Advances and Other Receivables (1) Cash and other liquid assets(2) Trading Securities Investment Securities Non Lending Interest Earning Assets Total Interest Earning Assets Other Assets(3) Total Assets Interest Bearing Liabilities Transaction Deposits Savings Deposits Investment Deposits Certificates of Deposit and other Total Interest Bearing Deposits Deposits not bearing interest Deposits and Other Public Borrowings Due to Other Financial Institutions Debt Issues Loan Capital Sub-Total Other Non Interest Bearing Liabilities Total Liabilities 30/06/05 $M As at 31/12/04 $M 30/06/04 Jun 05 vs $M Dec 04 % Jun 05 vs Jun 04 % 150,677 (10,818) 139,859 15,668 63,536 219,063 10,627 14,628 10,272 35,527 254,590 74,445 329,035 34,694 38,461 66,087 21,809 161,051 6,978 168,029 8,023 58,621 6,291 240,964 62,011 302,975 140,649 (6,391) 134,258 14,806 58,841 207,905 10,284 15,881 11,022 37,187 245,092 75,860 320,952 32,608 38,052 64,312 25,440 160,412 7,013 167,425 9,512 51,346 5,801 234,084 61,801 295,885 129,455 (7,605) 121,850 13,208 55,869 190,927 13,704 14,896 11,447 40,047 230,974 75,021 305,995 31,104 37,549 59,693 28,250 156,596 6,581 163,177 6,641 44,042 6,631 220,491 60,619 281,110 7 69 4 6 8 5 3 (8) (7) (4) 4 (2) 3 6 1 3 (14) - - - (16) 14 8 3 - 2 16 42 15 19 14 15 (22) (2) (10) (11) 10 (1) 8 12 2 11 (23) 3 6 3 21 33 (5) 9 2 8 (1) Gross of provisions for impairment, which are included in “other assets”. (2) Includes interest earning portion only. Non interest earning portion is included under “other assets”. (3) Other assets include Bank acceptances of customers and provision for impairment. Australian Home Loan Balances by Product Type at 30 June 2005 Origination of Home Loans funded for the six months to June 2005 (Australia only) Investment 35 % (Jun 04: 35%) Third Party 29% (Jun 04: 28%) Owner Occupied 55% (Jun 04: 57%) Line of Credit 10% (Jun 04: 8%) Australian Home Loan Balances by Loan Type at 30 June 2005 Variable Rate 67% (Jun 04: 63%) Fixed Rate 21% (Jun 04: 20%) Honeymoon 12% (Jun 04: 17%) Proprietary 71% (Jun 04: 72%) 250,000 200,000 150,000 100,000 50,000 0 Lending Assets 205,946 15,019 55,869 13,208 121,850 224,202 16,297 58,841 14,806 235,849 16,786 63,536 15,668 134,258 139,859 Jun-04 Dec-04 Jun-05 s n o i l l i m $ Housing Personal Institutional and Business Bank Acceptances 18 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 annualised. Total provisions for impairment for the Bank at 30 June 2005 were $1,547 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 increased by 10% to $157 million at 30 June 2005 as a result of an increase in the level of gross impaired assets over the year from $363 million to $395 million. The general provision for impairment has decreased to $1,390 million at 30 June 2005. The general provision as 30/06/05 $M 1,390 157 1,547 As at 31/12/04 $M 1,379 180 1,559 30/06/04 $M 1,393 143 1,536 411.4 373.0 451.8 41.8 0.73 0.17 43.1 0.76 0.16 42.1 0.82 0.16 a percentage of Risk Weighted Assets reduced to 0.73% from 0.82% in the prior year. The general provision as a percentage of risk weighted assets has declined over the last three years reflecting: − The majority of growth in credit has been in home loans, which have a lower credit risk than other portfolios; The continuing strong asset quality in the business lending book; and − − A level of impaired assets which is at the lower level achieved over the past decade. Growth in Assets of $28bn drives growth in RWA of $19bn $ m 300,000 250,000 200,000 150,000 100,000 50,000 0 Gross Assets (spot) (+11%) $28bn 278,457 +$9bn 92,510 +$19bn 143,746 -$0.3bn -$0.1bn 14,754 27,447 Jun-05 250,856 83,256 125,026 15,020 27,554 Jun-04 Risk weighted on balance sheet assets (+12%) $19bn 167,334 +$9b 92,510 148,773 83,256 62,513 +$9bn 71,873 Jun-04 Jun-05 Risk Weighting 0% Risk Weighting 20% Risk Weighting 50% Risk Weighting 100% 19 Funds Management Analysis Financial Performance and Business Review Performance Highlights The full year underlying net profit after tax for the funds management business increased by 28% to $351 million. The performance during the year reflects: − Strong funds under administration growth of 12% to − $123 billion at 30 June; and Tight cost control which limited operating expenses growth including commissions to 1%. The full year cash profit after tax increased by 30% to $349 million. Cash profit was also supported by strong investment markets which increased shareholder investment returns by 27% to $33 million. The underlying result for the second half of the year increased 6% to $181 million from $170 million in the first half despite a higher effective tax rate. Profit momentum was sustained with operating income increasing by 5%, while costs remained flat. The cash net profit after tax for the six months to June 2005 decreased by 5% to $170 million. The result was impacted by lower shareholder investment returns following less buoyant investment markets in the second half of the year, higher Which new Bank investment spend and changes to the effective tax rate. Business Review The operating environment was favourable, with revenue growth and fund flows benefiting from strong investment markets. At the same time competition remained intense. While the market environment has been conducive to volume growth, the focus of the business on expense control and margins has ensured this volume growth has translated to an excellent profit result. The year also saw a significant improvement in retail flows and a corresponding increase in retail market share (following several years of declining share). Retail flows were the FirstChoice product which continues to driven by dominate industry retail flows due to a combination of competitive pricing, excellent service and extensive distribution reach. Another highlight investment performance, where 95% (by value) of our domestic funds outperformed benchmark including our flagship Australian Equity funds which all ranked in first or second quartile. the year was for Other key developments within the business during the year included: − Acquisition of a minority stake in 452 Capital, which gives access to the rapidly growing boutique segment of the market; − Establishment of a new quantitative asset management business (as a joint venture with Acadian); − Continuing progress in rationalising legacy systems and products (now down to seven systems from 17 at the start of the program); − Organisational changes which saw the creation of a discrete asset management business, quite separate from the platform/retail distribution business; and − Excellent progress funds management in selling products through the Bank network, with productivity of planners up 38%. Investment Performance of the The investment performance asset management business continues to improve with 95% of retail domestic funds exceeding benchmark on a one year basis. This compares with 57% last year. the investment performance of our flagship Australian Equity funds are now well ahead of benchmark on a one year basis with rankings in first and second quartiles. Importantly, Operating Income Operating income for the year increased by 8% to $1,271 million. Income growth was supported by a 12% increase in funds under administration balances to $123 billion as at 30 June 2005. Margins were maintained against a background of increasing competition. The gross revenue margin for the business was 109 basis points, a decrease of two basis points on 2004. The good margin result is due to a combination of the wholesale net flows being skewed toward higher margin products, and the strong investment returns which meant there was little decline in the funds under management on the older retail products. During the second half of the year operating income to $651 million. This result was increased by 5% funds under underpinned by a 5% administration spot balances and margin contraction of one basis point. increase in Operating Expenses Operating expenses for the year of $812 million were virtually flat compared with 2004. Volume expenses, which grew 2% for the year due to stronger sales volumes, accounted for all of the growth in expenses. Other operating expenses were flat year on year, despite the additional cost base of the Symetry business which was acquired during the year. Key drivers of expenses for the period were: − Significant savings due to WnB initiatives including the rationalisation of the legacy product systems; − Redesign and rationalisation of back office functions resulting in head count savings, offset by; − Average salary increases of 4%. Expenses to average funds under administration for the year were 0.73%, a decline of seven basis points, reflecting good cost management during the year. On an underlying basis the ratio was 0.70% which represents an improvement of six basis points. This represents a productivity improvement of 8% for the year. During the second half of the year, operating costs were flat compared with the first half. Taxation The corporate tax charge for the year was $100 million, with an effective tax rate of 21.9% compared with 22.3% for the prior year. The low effective tax rate in this business is due to the impact of transitional tax relief on investment style funds management products within life insurance legal entities and utilisation of prior period tax losses in offshore businesses. This is the last year where transitional relief is granted to life companies and the effective tax rate will be closer to the corporate tax rate in future periods. 20 Funds Management Analysis (continued) Profit Summary Key Performance Indicators Operating income - external Operating income - internal Total Operating Income Shareholder investment returns Policyholder tax expense Funds Management Income Operating expenses Which new Bank Total Operating Expenses Net Profit before Income Tax Policyholder tax expense Corporate tax expense Outside equity interests NPAT ("cash basis") NPAT ("underlying basis") (1) Funds Under Administration Funds under administration - average Funds under administration - spot Net flows Total Retail net flows 30/06/05 $M 1,261 10 1,271 33 104 1,408 Full Year Ended 30/06/04 $M 1,158 14 1,172 26 149 1,347 Jun 05 vs Jun 04 % 9 (29) 8 27 (30) 5 Half Year Ended 30/06/05 31/12/04 $M 615 5 620 24 52 696 $M 646 5 651 9 52 712 Jun 05 vs Dec 04 % 5 - 5 (63) - 2 812 36 848 560 104 100 7 349 351 806 37 843 504 149 79 8 268 274 116,262 123,064 456 2,190 105,458 109,883 846 (35) 1 (3) 1 11 (30) 27 (13) 30 28 10 12 (46) large 406 24 430 282 52 56 4 170 181 406 12 418 278 52 44 3 179 170 120,507 123,064 (394) 547 112,185 117,440 850 1,643 - large 3 1 - 27 33 (5) 6 7 5 large large Productivity and Other Measures Operating income to ave FUA Expenses to ave FUA actual (%) Expenses to ave FUA underlying (%) Effective corporate tax rate (%) (1) Underlying basis excludes shareholder investment returns and Which new Bank. 1.11 0.80 0.76 22.3 1.09 0.73 0.70 21.9 (2) bpts (7) bpts (6) bpts (40) bpts 1.09 0.72 0.68 24.3 1.10 0.74 0.72 19.5 (1) bpts (2) bpts (4) bpts 480 bpts $ m 400 350 300 250 200 150 100 Underlying growth of 28% on prior year 99 (6) (16) 351 22 (26) 349 274 Underlying NPAT June 04 Operating income Operating expenses Tax - Corporate Underlying NPAT June 05 S'holder Invest Returns Which new Bank (after tax) Cash NPAT June 05 21 Funds Management Analysis (continued) Funds under Administration Market Share Funds under Administration (spot balances) have increased by 12% over the year to $123 billion as at 30 June 2005. The growth in Funds under Administration was due predominantly to strong investment markets which contributed $13 billion. Net flows for the year were $0.5 billion. Pleasingly, overall retail flows were positive $2.2 billion, a turnaround on the flat net flows in the prior year. Average Funds under Administration of $116.3 billion were 10% higher than the prior year. The key drivers of funds flows were: − Continuation of market leading flows into FirstChoice capturing in excess of 25% of the market net flows; − Outflows from the cash management product due to from attractively priced retail deposit competition products; − Outflows in other retail products which include closed legacy products, which was consistent with the prior year; − Continuing outflows from GDP Equities Plus despite − the improved investment performance; Loss of lower margin cash and indexed wholesale mandates; and − Good flows into higher margin equity products in the International business. Market Share Percentage Australian Retail – administrator view(3) New Zealand Australian Property(6) (1) As reported in the December 2004 Profit Announcement. (2) As reported in the June 2004 Profit Announcement. (3) Source: Plan for Life. The administrator view considers market share from the perspective of the company which administers includes badged products distributed by separate entities. Prior period market shares have not been restated to reflect the product, and also The Australian retail market share increased from 14.2% at 30 June 2004 to 14.8% at 31 March 2005 (31 December 2004: 14.7%). This was due to a reclassification of $3.1 billion of wholesale Funds under Administration to retail (equivalent to 0.6% of market share), following the launch of FirstChoice Wholesale. The business has seen a significant turnaround in the net flow position of retail Funds under Administration in recent quarters. The most recent Plan for Life survey showed the Bank ranking No. 4 for total retail net flows and No. 3 for retail flows excluding cash trusts. 30/06/05 14.8 12.7 4.8 31/12/04(1) 30/06/04(2) 14.4(4) 13.2(5) 5.5 14.7 13.3 5.2 the transfer of $3.1 billion of funds into FirstChoice Wholesale (a retail product). (4) As at March 2004. (5) Source: Fund Source Research. Prior period market shares have been updated to reflect total FUA rather than retail FUA as previously reported. (6) Source: UBS Warburg. 2005 FirstChoice - Fund Manager 2005 FirstChoice - Sources of Funds External 56% (Jun 04: 62%) CBA 44% (Jun 04: 38%) Self Directed 11% (Jun 04: 9%) Other advisors 31% (Jun 04: 28%) Online brokers 1% (Jun 04: 2%) CBA Third party 10% (Jun 04: 18%) Branch network 47% (Jun 04: 43%) 22 Funds Management Analysis (continued) Funds Under Administration FirstChoice & Avanteos (1) Cash Management Other Retail Australian Retail Wholesale (1) Property Other Domestically Sourced Internationally Sourced Total Funds Under Administration FirstChoice & Avanteos Cash Management Other Retail Australian Retail Wholesale Property Other Domestically Sourced Internationally Sourced Total Funds Under Administration FirstChoice & Avanteos Cash Management Other Retail Australian Retail Wholesale Property Other Domestically Sourced Internationally Sourced Total Full Year Ended 30 June 2005 Opening Balance(1) 30/06/04 Inflows Outflows Investment Acquisitions Closing Fx & other Balance Income & Disposals Movements(2) 30/06/05 $M 12,075 4,414 34,705 51,194 23,955 12,624 3,033 90,806 19,077 109,883 $M 10,377 2,961 4,417 17,755 10,841 1,207 248 30,051 9,209 39,260 $M (4,265) (3,425) (7,875) (15,565) (13,350) (1,172) (786) (30,873) (7,931) (38,804) $M 1,153 232 3,951 5,336 3,177 1,668 391 10,572 2,453 13,025 $M - - - - - - - - - - $M (271)(1) - 871(3) 600 271 (871)(3) - - (300) (300) $M 19,069 4,182 36,069 59,320 24,894 13,456 2,886 100,556 22,508 123,064 Full Year Ended 30 June 2004 Opening Balance 30/06/03 Inflows Outflows $M 4,192 4,963 34,498 43,653 25,485 11,790 3,251 84,179 14,387 98,566 $M 5,431 3,178 4,893 13,502 12,322 2,023 - 27,847 7,769 35,616 $M (1,370) (3,930) (8,237) (13,537) (13,453) (2,079) (583) (29,652) (5,118) (34,770) Investment Closing Fx & other Balance Income & Disposals Movements(2) 30/06/04 Acquisition $M 757 203 3,551 4,511 2,666 890 365 8,432 1,592 10,024 $M - - - - - - - - (255)(4) (255) $M - - - - - - - - 702 702 $M 9,010 4,414 34,705 48,129 27,020 12,624 3,033 90,806 19,077 109,883 Opening Balance 31/12/04 $M 16,266 4,460 35,743 56,469 24,274 12,797 2,887 96,427 21,013 117,440 Opening Balance 30/06/04 Half Year Ended 30 June 2005 Inflows Outflows $M 5,287 1,330 1,822 8,439 5,805 740 - 14,984 3,600 18,584 $M (2,317) (1,788) (3,787) (7,892) (6,445) (661) (674) (15,672) (3,306) (18,978) Investment Income Closing Acquisitions Fx & other Balance & Disposals Movements(2) 30/06/05 $M 104 180 1,420 1,704 989 1,451 673 4,817 912 5,729 $M - - - - - - - - - - $M (271)(1) - 871(3) 600 271 (871)(3) - - 289 289 $M 19,069 4,182 36,069 59,320 24,894 13,456 2,886 100,556 22,508 123,064 Half Year Ended 31 December 2004 Inflows Outflows Investment Income Closing Fx & other Balance Acquisitions & Disposals Movements(2) 31/12/04 Funds Under Administration FirstChoice & Avanteos Cash Management Other Retail Australian Retail Wholesale Property Other Domestically Sourced Internationally Sourced Total $M 16,266 4,460 35,743 56,469 24,274 12,797 2,887 96,427 21,013 117,440 (1) During the period a wholesale version of FirstChoice was introduced targeted at retail customers. FUA flows to this product are categorised as retail FUA. To ensure consistency, $3.1 billion of existing wholesale business was reclassified from Wholesale to FirstChoice in the opening balance of the current year. During the half year ended 30 June 2005, an amount of $271 million was transferred from FirstChoice to wholesale business. $M (1,948) (1,637) (4,088) (7,673) (6,905) (511) (112) (15,201) (4,625) (19,826) $M 12,075 4,414 34,705 51,194 23,955 12,624 3,033 90,806 19,077 109,883 $M 5,090 1,631 2,595 9,316 5,036 467 248 15,067 5,609 20,676 $M 1,049 52 2,531 3,632 2,188 217 (282) 5,755 1,541 7,296 $M - - - - - - - - (589) (589) $M - - - - - - - - - - (2) Includes foreign exchange gains and losses from translation of internationally sourced business. (3) Aligns classification to source of funds rather than product grouping. (4) Scheduled withdrawal of Winterthur funds. 23 Insurance Analysis Financial Performance and Business Review Performance Highlights The Bank is the largest life insurer in the Australian, New Zealand and Fiji markets. The Insurance business delivered a strong profit result for the year, with underlying net profit after tax increasing by 21% to $156 million. The performance during the year was underpinned by: − Operating income growth of 10% − In force premium growth of 8% to $1,265 million The full year cash net profit after tax increased by 23% to $309 million. The result was supported by investment markets which increased shareholder investment returns by 20% to $204 million. The underlying result for the second half of the year increased 33% to $89 million, due to continuing growth in income and a lower effective tax rate in the second half. However, the cash net profit after tax decreased by 7% to $149 million due to lower investment returns. Business Review Australia The Australian business delivered a good profit result for the year, achieved improved underwriting performance, reduced unit costs and favourable Life Insurance claims experience. revenue growth, through − Key drivers were: insurance revenue growth, with insurance Life premiums increasing by 5%, despite the loss of a large Group risk mandate; life − Positive claims experience in life insurance products; offset by − Significant weather related claims in the general insurance portfolio, predominantly attributed to the February Eastern Seaboard storms. The Bank maintained its number one market share of Australian risk premiums with 13.8% of the life insurance risk market. The Bank’s share of retail life sales (new business) was 12.9%. Total operating margin in the Australian business for the year increased by 21% to $94 million. Improved operating margins in Life Insurance offset the lower contribution from the underwritten General Insurance business. The Bank has the largest branch based general insurance distribution footprint in Australia. Cash net profit after tax increased by 4% to $186 million lower as stronger operating margins were offset by shareholder investment returns. New Zealand The life insurance operations in New Zealand trade predominantly under the Sovereign brand. Sovereign has continued to focus on the delivery of operational improvements and the successful execution of service excellence initiatives. The three key achievements during the year were: − Continued strengthening of business volumes across all major business lines; Further improvements to operations and systems infrastructure; and Positive claims experience. Total cash net profit after tax was $74 million for the year, an increase of 35% on prior year, while the operating margin was $52 million, 41% above same period last year. − − Sovereign’s sales momentum has continued into the second half of the year. New business market share increased significantly to 30.4% (March 2005 quarter), up from 28.4% in the previous corresponding period. The business has also maintained its market leadership position with 27.5% of the ‘in- force’ premium market. (Source: ISI). 24 Asia life the Asia includes insurance and pension administration operations life businesses in China, Vietnam, Indonesia and Fiji. The Hong Kong businesses represent the largest operations in the region. in Hong Kong, and The total cash net profit after tax in the Asia business was $49 million, up from $17 million in the prior year. Operating margin for the year was $8 million, an increase from $3 million in the prior year. This primarily reflects positive investment returns, partly offset by a stronger Australian dollar. Post balance date, the Bank has entered into an agreement to sell its Hong Kong based life insurance, pensions administration and financial planning businesses to Sun Life Financial. The for completion within three months, is subject to regulatory approvals. More detail is set out on page 47. transaction, targeted Operating Income Operating income of $747 million was 10% higher than the prior year. This result was mainly attributable to favourable Life Insurance claims experience in all regions, particularly on the Lump Sum and Wholesale life insurance business. During the second half of the year, operating income increased 8%. This was also driven by the Life Insurance business. Operating Expenses Underlying Expenses to average inforce premiums 50.4% 55% 50% 45% 40% 46.1% 45.3% Jun-03 Jun-04 Jun-05 Operating expenses of $551 million were 7% higher than last year. The underlying expense to average in force premium ratio was 45.3% a drop of 2% on the previous year. The higher expenses were primarily related to the New Zealand operations, which was affected by: − Adverse foreign exchange movements, − Higher staff expenses driven by wage associated with a tighter labour market; and inflation − Sales volume growth resulting in an increase in commission costs. Corporate Taxation The effective corporate tax rate for the year was 22.4% compared with 20.8% in the prior year. The increase in the effective corporate tax is due to the increased profitability and permanent differences. The tax rate is lower than the corporate tax rate due to utilisation of tax losses in the overseas businesses. Insurance Analysis (continued) Summary Financial Performance (excluding appraisal value uplift) Insurance Life Insurance Operating Income General Insurance Operating Income Total Operating Income Shareholder investment returns Policyholder tax Total Insurance Income Operating expenses(1) Which new Bank Total operating expenses Net profit before income tax Income tax expense attributable to: Policyholder Corporate NPAT ("cash basis") NPAT ("underlying basis") (2) 30/06/05 $M Full Year Ended 30/06/04 $M Jun 05 vs Jun 04 % 30/06/05 $M Half Year Ended 31/12/04 $M Jun 05 vs Dec 04 % 693 54 747 204 124 1,075 551 2 553 522 124 89 309 156 618 60 678 170 54 902 517 14 531 371 54 66 251 129 12 (10) 10 20 large 19 7 large 4 41 large 35 23 21 363 24 387 83 65 535 284 1 285 250 65 36 149 89 330 30 360 121 59 540 267 1 268 272 59 53 160 67 10 (20) 8 (31) 10 (1) 6 - 6 (8) 10 (32) (7) 33 Productivity and Other Measures Expenses to ave inforce premiums (actual %) Expenses to ave inforce premiums (underlying %)(2) Effective corporate tax rate (%) 45.5 47.3 3.8 46.6 44.9 (3.8) 45.3 22.4 46.1 20.8 1.7 160 bpts 46.5 19.5 44.8 24.9 (3.8) (540) bpts (1) Operating expenses include $10 million internal expenses (2004: $14 million). (2) Underlying basis excludes shareholder investment returns and Which new Bank. Sources of Profit from Insurance Activities 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") 122 27 (8) 13 154 155 309 107 - (8) 19 118 133 251 14 large - (32) 31 17 23 60 28 (8) 6 86 63 149 62 (1) - 7 68 92 160 (3) large large (14) 26 (32) (7) Geographical Analysis of Business Performance Full Year Ended Net Profit after Income Tax "Cash Basis" 30/06/05 $M 30/06/04 $M 30/06/05 $M 30/06/04 $M 30/06/05 $M 30/06/04 $M 30/06/05 $M 30/06/04 $M Australia New Zealand Asia Total Operating margins After tax shareholder investment returns Net Profit after Income Tax 94 92 186 78 101 179 52 22 74 37 18 55 8 41 49 3 14 17 154 155 309 118 133 251 Net Profit after Income Tax "Cash Basis" 30/06/05 $M 30/12/04 $M 30/06/05 $M 31/12/04 $M 30/06/05 $M 31/12/04 $M 30/06/05 $M 31/12/04 $M Australia New Zealand Asia Total Half Year Ended Operating margins After tax shareholder investment returns Net Profit after Income Tax 55 44 99 39 48 87 26 12 38 26 10 36 5 7 12 3 34 37 86 63 149 68 92 160 25 Insurance Analysis (continued) Full Year Ended 30 June 2005 Annual Inforce Premiums (2) General Insurance(3) Personal Life Group Life Total Australia New Zealand Asia Total Annual Inforce Premiums(2) General Insurance(3) Personal Life Group Life Total Australia New Zealand Asia Total Annual Inforce Premiums(2) General Insurance(3) Personal Life Group Life Total Australia New Zealand Asia Total Opening Balance Sales/New Business 30/06/04 $M $M 62 192 164 703 272 74 300 1,167 Lapses Movements(1) $M - 7 6 13 $M (39) (89) (87) (215) Closing Other Balance 30/06/05 $M 215 785 265 1,265 815 258 94 1,167 228 48 24 300 (187) (15) (13) (215) - 5 8 13 856 296 113 1,265 Full Year Ended 30 June 2004 Opening Balance Sales/New Business 30/06/03 $M $M 196 46 156 626 254 53 255 1,076 Other Lapses Movements(1) $M - 6 (1) 5 $M (50) (85) (34) (169) 771 221 84 1,076 177 42 36 255 (133) (16) (20) (169) - 11 (6) 5 Half Year Ended 30 June 2005 Opening Balance Sales/New Business 31/12/04 $M $M 33 205 84 750 244 42 159 1,199 Other Lapses Movements(1) $M - (2) (2) (4) $M (23) (47) (19) (89) 809 281 109 1,199 123 24 12 159 (76) (6) (7) (89) - (3) (1) (4) Closing Balance 30/06/04 $M 192 703 272 1,167 815 258 94 1,167 Closing Balance 30/06/05 $M 215 785 265 1,265 856 296 113 1,265 (1) Consists mainly of foreign exchange movements. (2) Inforce premium relates to risk business. Savings products are disclosed within Funds Management. (3) General insurance inforce premiums includes approximately $40 million of badged premium. Inforce Premiums Annual in force premiums grew by 8.4% for the year to $1,265 million. General Insurance and personal insurance premiums increased by 12.0% and 11.7% respectively. There was a decrease of 2.6% in the Group Life in force premiums mainly attributable to the loss of a large mandate in the Australian Life Insurance business in the first half of the year. Australia maintained its leading position of inforce premiums with 13.8% of market share in total life insurance at 31 March 2005. Sovereign maintained its leading position in New Zealand with a market share of 27.5%. During the second half of the year, inforce premiums increased by 8.6% in Group Life insurance, followed by 4.9% and 4.7% growth in General Insurance and retail life insurance premiums respectively. Market Share Percentage – Annual Inforce Premiums Australia (Total Risk)(4) Australia (Individual Risk)(4) New Zealand(5) Hong Kong(6) 30/06/05 13.8 13.0 27.5 2.5 31/12/04(2) 30/06/04(1) 14.8(3) 12.7(2) 27.5(2) 2.5(3) 14.6 12.7 27.4 2.5 (1) As reported in the June 2004 Profit Announcement (2) As reported in the December 2004 Profit Announcement (3) As at March 2004 (4) Source: Plan for Life (5) Source: ISI Statistics (6) Source: HK Insurance Assoc 26 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 Half Year Ended 30/06/05 30/06/04 $M 26 170 196 44 152 $M 33 204 237 60 177 Jun 05 vs Jun 04 % 27 20 21 36 16 30/06/05 $M 9 83 92 26 66 31/12/04 $M 24 121 145 34 111 Jun 05 vs Dec 04 % (63) (31) (37) (24) (41) Shareholder Investments Asset Mix (%) Local equities International equities Property Other Growth Fixed interest Cash Other (1) Income Total Shareholder Investments Asset Mix ($M) Local equities International equities Property Other Growth Fixed interest Cash Other (1) Income Total (1) Other mainly includes non revenue generating assets Domestic and investment markets international rebounded strongly over the year, with the benchmark S&P/ASX200 price index increasing by 21.1% and the MSCI World index by 8.3%. All other asset classes (fixed interest, property and cash) posted positive returns. Shareholder investment returns of $237 million pre tax for the year represent an increase of 21% over the prior year. This reflected lower returns in Australia due to lower level of capital held in the business offset by the strong international investment markets. Australia % 7 3 20 - 30 24 46 - 70 100 Australia $M 107 50 306 - 463 370 684 - 1,054 1,517 As at 30 June 2005 New Zealand % 1 6 5 4 16 54 27 3 84 100 As at 30 June 2005 New Zealand $M 4 26 19 12 61 224 112 12 348 409 Asia % 5 8 1 2 16 59 6 19 84 100 Asia $M 30 50 6 10 96 346 36 109 491 587 Total % 5 5 13 1 24 37 33 6 76 100 Total $M 141 126 331 22 620 940 832 121 1,893 2,513 Capital reduced during the year as a result of dividends to the shareholder in excess of profit ($56 million), foreign exchange movements ($58 million) and the acquisition of Symmetry Limited. During the second half of the year, shareholder investment returns were 37% lower due to lower growth investment markets globally. rates across most 27 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 2005 ($450 million lower at 30 June 2004) than that determined by Trowbridge Deloitte. Carrying Value at 30 June 2005 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 2004 Analysis of Movement Since 30 June 2004 Profits Net Capital movements (2) Dividends paid Acquisitions (3) FX Movements Change in Shareholders NTA Acquired excess Net Appraisal value uplift/(reduction) Increase/(Decrease) to 30 June 2005 Life Insurance Funds Management $M 500 1,859 2,359 3,096 5,455 Australia $M 1,017 533 1,550 330 1,880 New Zealand $M 409 359 768 350 1,118 Asia(1) $M 587 - 587 22 609 316 219 140 (15) Life Insurance Funds Management $M 349 (121) (213) (30) - (15) 30 301 316 Australia $M 176 195 (485) - - (114) - 333 219 New Zealand $M 71 (79) - - 2 (6) - 146 140 Asia(1) $M 50 1 (4) - (60) (13) - (2) (15) Total $M 2,513 2,751 5,264 3,798 9,062 660 Total $M 646 (4) (702) (30) (58) (148) 30 778 660 (1) 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. Subject to gaining the appropriate regulatory approval, the disposal of the Hong Kong life insurance operations will occur subsequent to 30 June 2005. Refer Note 1 (pp) to the financial statements for further information. Includes capital injections, transfers and movements in intergroup loans. (2) (3) Represents the purchase of Symmetry Limited. The goodwill on acquisition is reclassified as acquired excess, representing the difference between appraisal value and net assets at the time of acquisition. Change in Valuations The valuations adopted have resulted in a total positive change in value of $660 million since 30 June 2004. The main components comprised: − An appraisal value uplift of $778 million, reflecting growth in Funds under Administration, and improved fund flows while persistency levels and claims ratios improved across each of the insurance businesses. The uplift also includes the negative impact of continued uncertainty of investment markets and industry funds flows; Decrease due to dividends in excess of profits of $56 million; and A $62 million decrease in net tangible assets due to net capital and foreign exchange movements. − − $m $m 10000 10000 9000 9000 8000 8000 7000 7000 6000 6000 5000 5000 Movement in Directors’ Valuation Movement in Directors’ Valuation Profit Profit 332 332 8,402 8,402 Uplift in Uplift in Value Value 265 265 8,496 8,496 Profit Profit 314 314 Capital Capital movement movement (503) (503) Capital Capital movement movement (261) (261) Uplift Uplift in value in value 513 513 9,062 9,062 Directors’ Directors’ Valuation Valuation Jun 04 Jun 04 Directors’ Directors’ Valuation Valuation Dec 04 Dec 04 28 Directors’ Directors’ Valuation Valuation Jun 05 Jun 05 "Operating Expenses – Which new Bank” refers to incremental expenses associated with the Which new Bank Program. These incremental costs principally relate to restructuring expenses. “Operating expenses – Which new Bank” plus “operating expenses — comparable business” is equal to the Australian GAAP measure "operating expenses". Management believes it is meaningful to highlight these items in an analysis of our results. "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. − − − "Underlying" productivity ratios: Exclude expenses of “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. "Underlying" productivity ratios have been presented to provide what management believes to be a more ratios. presentation relevant productivity our Management believes these adjustments enable comparison of our productivity ratios from period to period to be more meaningful as it reflects our core operating performance. of that 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). Management believes "cash basis" is a meaningful measure of the Bank’s performance and provides the determination of the Bank’s dividends. Also for the years ended 30 June 2005 and 30 June 2004, the Bank added back 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 uplift or reduction is a movement in the value of the funds management and life insurance businesses which in part is driven by external economic factors and markets, such as world equity markets and interest rates. ‘Which new Bank’ costs the non-recurring the basis for 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 29 Integrated Risk Management Risk Management The integrated framework identifies, assesses, manages and reports risks and risk adjusted returns on a consistent and reliable basis. risk management Independent review is carried out through the audit role. The 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 insurance risks in the banking, and wealth management (insurance and funds management) businesses of the Bank. In the banking business, economic capital is a measure of the potential risk of loss of cash earnings. In the wealth management businesses, target equity is a measure of the potential risk of loss of the fair value of the business. This is then adjusted so as to allow comparison between the banking and wealth management businesses target equity. The following sections describe the integrated risk 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: − 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 − − − credit portfolio. The credit portfolio is managed in two distinct segments: − − − 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 businesses. Credit facilities are approved using scoring and check sheet techniques. Risk Rated Segment Comprises all other credit exposures. Management is based on the internal credit risk rating system, which makes an assessment of the potential for default for each exposure and the amount of loss if default should occur. 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 and insurance liabilities 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 the Financial Statements. 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. to In the trading book of the banking business, market risk is measured by a Value-at-Risk (VaR) model. This model uses the distribution of historical changes in market prices to assess the potential for future losses. The VaR model takes into account correlations between risks and the potential for movements in one portfolio to offset movements in another. Actual results are backtested to check the validity of the VaR model. In addition, because the VaR model cannot encompass all possible outcomes, tests covering a variety of stress scenarios are regularly performed to simulate the effect of extreme market conditions. 30 Integrated Risk Management (continued) The following table provides a summary of VaR by product. This is one element of the total integrated risk model used by the 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 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 Total Average VaR During June 2005 Half Year $M Average VaR During December 2004 Half Year $M Average VaR During June 2004 Half Year $M 3.44 0.26 0.49 0.04 0.18 0.38 0.22 (0.98) 4.03 4.85 8.88 3.68 0.58 0.53 0.22 0.34 0.54 0.26 (1.64) 4.51 4.67 9.18 2.88 1.09 0.84 0.70 0.37 0.58 0.14 (2.49) 4.11 4.92 9.03 Average VaR During June 2005 Half Year $M Average VaR During December 2004 Half Year $M Average VaR During June 2004 Half Year $M 4.78 0.31 0.73 0.05 0.21 0.38 0.32 (1.28) 5.50 5.75 11.25 4.72 0.70 0.70 0.30 0.41 0.54 0.34 (2.01) 5.70 5.54 11.24 3.69 1.28 1.04 0.98 0.45 0.58 0.19 (3.21) 5.00 5.84 10.84 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. Wherever possible, the Bank 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 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 31 liabilities themselves. A policy large proportion of policyholder’s assets are held for investment linked policies where the policyholder takes the risk of falls in the market value of the assets. A smaller proportion of policyholder’s assets are held to support policies where life companies have guaranteed either the principal invested or the investment return (‘guaranteed policies’) where investment mandates for these classes of policies emphasise lower volatility assets such as cash and fixed interest. The Bank no longer sells guaranteed policies. Inforce business contains guaranteed policies sold in the past and on which the Bank continues to collect premiums. 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. Furthermore, processing time for claims and redemptions enables each company to forecast and manage its liquidity needs. 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 the Bank’s to for future Basel and position II requirements. This methodology combines expert assessment of individual to calculate risk exposures with operational risk economic equity. loss data internal 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 for efficiency and insurance through a effectiveness. This methodology to optimise total shareholder returns in determining the most appropriate blend of insurance risk transfer and economic capital. is primarily achieved 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) exposure to market risk. The Bank participates in both exchange traded and Over the Counter (“OTC”) derivatives markets. Exchange Traded Derivatives Exchange traded derivatives are executed through a registered exchange, for example the Sydney Futures Exchange and the Australian Stock Exchange. The contracts have standardised terms and require lodgment of initial and variation margins in cash or other collateral at the Exchange, which guarantees ultimate settlement. 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 failed − − − internal processes and gain or loss resulting from: Inadequate or − methodologies; People; Systems; or External events. Strategic Business Risk is defined as the risk of economic gain or loss resulting from changes in the business environment caused by the following factors: − − − − Economic; Competitive; Social trends; or Regulatory. In each of the businesses, management is responsible identification, assessment and treatment of these risks. The Bank’s operational risk framework and governance structures supports these efforts through a suite of risk mitigating policies, the reporting of internal loss incidents and key risk indicators, expert assessment of risk exposures, and skilled operational risk people employed throughout the Group. the for The Bank’s risk measurement operational methodology has been enhanced to meet internal needs 32 Description of Business Environment Competition Australia Financial services providers in Australia offer a wide range of products and services to retail and business customers, encompassing for the most part banking, funds management and insurance. The Australian financial services environment has been undergoing significant change over the last decade. The strong growth in lending over that time has been a significant driver of profitability for the sector. More recently however, the expectation is for lower credit growth going forward. This could conceivably intensifying competition between traditional players in the banking sector, and to ongoing downward pressure on margins. lead to Traditional competitors comprise the major banks, the five ‘regional’ banks and smaller domestic players. New entrants have emerged in recent years and include both local operators and global entities. The four major banks in Australia are Commonwealth Bank of Australia, National Bank of Australia, Westpac Banking Corporation and ANZ Banking Group. Each of the major banks offers a full range of financial products and services through branch networks across Australia. The five ‘regional’ banks, whilst smaller than the majors, now mostly operate across state borders, or nationally. They have experienced strong growth primarily in mortgage lending, the proliferation of non-bank facilitated by mortgage originators and brokers. through There are thirteen foreign-owned banks operating in incorporated subsidiaries. Australia An additional twenty-four banks conduct operations through a foreign bank branch. Five foreign banks have both a locally incorporated subsidiary and a branch. locally 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 have been making headway in achieving multi- state coverage, partly encouraged by a more accommodating regulatory environment. Over recent years ‘community banks’ have emerged. 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. In addition to the expectation of margin pressures from traditional players, incumbent banks are facing increased competition from new entrants. These new entrants may be smaller, locally based operations, or may be large global entities. In both cases, they are attacking the segments of the market where margins are typically the widest. The local new entrants have been encroaching on product markets such as housing loans and credit cards, and on distribution markets such as mortgage broking and business banking broking. The global new entrants enjoy the benefits of being scale players with some of their operations located in low cost markets. They are entering the deposit, home loan, credit card and business banking markets. Another longer term development has been the substantial growth in funds under management, especially within the superannuation (pension funds) industry. Future growth will be underpinned by the Australian Government’s continued encouragement of long-term saving through defined superannuation percentage of the employee’s salary to a retirement fund on behalf of the employee. The employer then receives taxation concessions for the monies contributed). This growth potential continues to attract new entrants to this market, whether they be international fund managers or boutique players. (employers contribute a For the major banks, the expectation of continuing but slower growth in credit, and the recognition of the potentially higher growth in wealth management, has resulted in their expansion into funds management and/or insurance, either agreements with third parties. through acquisition or through in The growing size of overall funds under management, when combined with the percentage of funds pre-allocated to fixed-income type investments, provides borrowers with a number of alternative sources of capital to pure bank finance. Indeed the corporate bond market in Australia has benefited from the growth in funds under management with many of the major Australian corporates now directly accessing capital markets domestically 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 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. New Zealand Changes the As in Australia, the New Zealand banking system is characterised by strong competition. The Bank’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 National Australia Bank), 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. Financial System Regulation in Australia 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 regulatory framework. The previous framework, which applied regulations according to the type of institution in similar products being being regulated differently. The new functional approach regulates products consistently regardless of the particular type of institutions providing them. regulated, resulted 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. 33 Description of Business Environment (continued) 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 disclosure and a single authorisation procedure for 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 same levels of consumer 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. CLERP 9 is 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. 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 II. For information on the capital position of the Bank, see Note 31 Capital Adequacy. 34 (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. 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 ACCC in relation to competition considerations and APRA on prudential matters. The Treasurer may also delegate approval powers to APRA where one financial institution seeks to acquire another. The Government’s present policy is that mergers among the four major banks will not be permitted until the Government is satisfied that competition from new and established participants industry, in particularly in respect of small business lending, has increased sufficiently. financial the Proposals for foreign acquisition of Australian banks are subject to approval by the Treasurer under the Foreign Acquisitions and Takeovers Act 1975. (v) Banks’ Association With Non-Banks There are formal guidelines (including maximum exposure limits) that control investments and dealings with subsidiaries and associates. A bank’s equity associations with other institutions should normally be in the field of finance. APRA has expressed an unwillingness to allow subsidiaries of a bank to exceed a size which would endanger the stability of the parent. No bank can enter into any agreements or arrangements for the sale or disposal of its business, or effect a reconstruction or carry on business in partnership with another bank, without the consent of the Commonwealth Treasurer. (vi) Supervision of Non-Bank Group Entities The Australian life insurance company subsidiaries, general the insurance company subsidiaries and superannuation trustees 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. Trustees operating APRA regulated superannuation entities are now required to apply for a Registrable Superannuation Entity (“RSE”) licence from APRA. Description of Business Environment (continued) General risk management insurance companies are subject to prudential standards including capital adequacy, liability reinsurance valuation, arrangements. Compliance with APRA regulation for general insurance companies is monitored through regular returns, lodgement of an audited annual return, and auditor certification covering prudential matters. and The financial condition of life insurance companies is monitored through regular financial reporting, lodgment of audited accounts, the preparation of a financial conditions report (prepared by the company’s approved actuary) and supervisory inspections. 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. Provisions for Impairment these policies and the 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. General Provision to a specific 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. 35 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: − Business assumptions including: - Amount, timing and duration of claims/policy payments; - Policy lapse rates; and - Acquisition and long term maintenance expense levels; − − 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 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 assessed periodically as part of the valuation of investments with changes in value taken to profit. This excess does not require amortisation in the financial statements. Appraisal valuations are used to assist the directors in setting the market value. There are several key economic and business assumptions involved in the appraisal valuations, 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 Description of Business Environment (continued) 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 $91 million was outstanding at 30 June 2005, 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. Minimal additional provisions for ‘Which new Bank’ costs are expected to be established over the remaining period. International Financial Reporting Standards On 1 July 2005 the Bank commenced application of the Australian equivalent of International Financial Reporting Standards (“AIFRS”) to the maintenance of all financial records. This is in line with the conversion deadline set out by the Financial Reporting Council of Australia. Descriptions of the key AIFRS issues are set out in Note 1 (qq) of the Financial Statements. Business assumptions relate to the performance of the Group’s businesses, both stand alone and relative to the market. These assumptions are only altered when there is a long-term change in views, which is supported by clearly discernible trends. The assumption setting process is similar to that used for Margin on Services policyholder liabilities. The major business assumptions life 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 On transition are set out in Note 34 Life Insurance Business. to the Australian equivalent of International Financial Reporting Standards (“AIFRS”) on 1 July 2005, the asset “Excess of Net Market Value over Net Tangible Assets of Life Insurance Controlled Entities” can no longer be recognised in full. As a result, the Bank will, on adoption of AIFRS, cease to recognise any movement in the appraisal value in the Statement of Financial Performance. The write off of the internally generated component will principally be reflected against General Reserve; and the acquired component will be reclassified as Goodwill. 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 additional expenditure in the key areas of staff training and skilling, simplification, and technology. In the year to 30 June 2005 such expenses have totalled $150 million and principally comprised redundancies and process improvement costs. In the period to 30 June 2004 such expenses have totalled $749 redundancies, million and principally comprised of systems and process 36 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 and financial objectives; − Approving major corporate initiatives; − Establishing appropriate systems 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 − − − − 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 Composition There are currently 10 Directors of the Bank and their experience, qualifications, special details of responsibilities and attendance at meetings are set out in the Directors’ Report. Membership of the Board and Committees is set out below: DIRECTOR(2) BOARD MEMBERSHIP COMMITTEE MEMBERSHIP J M Schubert D V Murray(1) R J Clairs A B Daniels C R Galbraith S C H Kay W G Kent F D Ryan F J Swan B K Ward Non-executive, Independent Executive Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Non-executive, Independent Nominations People & Audit Risk Remuneration Chairman Chairman Member Chief Executive Officer Chairman Member Member Member Member Member Member Member Member Member Member Member Member Chairman Member Member Chairman Member Member (1) Mr D V Murray will retire as Chief Executive Officer and Director on 22 September 2005 and will be replaced by Mr R J Norris. (2) Mr J T Ralph and Mr N R Adler retired from the Board on 5 November 2004. - 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 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). 37 Corporate Governance (continued) Independence The Board regularly assesses the independence of each Director. For this purpose an independent Director is a non-executive Director whom the Board considers to be independent of management and free of any business or other relationship that could materially interfere with the exercise of unfettered and independent judgment. In addition to being required to conduct themselves in accordance with the ethical policies of the Bank, Directors are required to be meticulous in their disclosure of any material contract or relationship in accordance with the Corporations Act and this disclosure extends to the interests of family companies and spouses. Directors are required to strictly adhere to the constraints on their participation and voting in relation to matters in which they may have an interest in accordance with the Corporations Act and the Bank's policies. Each Director may from time to time have personal dealings with the Bank. Each Director is involved with other companies or professional firms which may from time to time have dealings with the Bank. Details of offices held by Directors with other organisations are set out in the Directors' Report and on the Bank's website. Full details of related party dealings are set out the Company's accounts as required by law. in notes to All the current non-executive Directors of the Bank have been assessed as independent Directors. 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; − − − the − Where applicable, related party dealings referrable to each Director, noting that those dealings are not material under accounting standards; That no Director is, or has been associated directly with, a substantial shareholder of the Bank; That no non-executive Director has ever been employed by the Bank or any of its subsidiaries; That no Director is, or has been associated with a supplier, professional adviser, consultant to or customer of the Bank which is material under accounting standards; and That no non-executive Director personally carries on any role for the Bank otherwise than as a Director of the Bank. The Bank does not consider that term of service on the Board is a factor affecting a Director's ability to act in the best interests of the Bank. Independence is judged against the ability, integrity and willingness of the Director to act. The Board 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 programme 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. − − − − 38 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 and relevant Board policies including time commitment, code of ethics and continuing education. All current Directors have been provided with a letter confirming the terms of their appointment. A copy of the form of letter of appointment appears on the Bank’s website. 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, People & 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 regularly 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 Corporate Governance (continued) that any such advice is generally made available to all Directors. Ethical Standards Conflicts of Interest interest. In accordance with 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 an the Corporations Act 2001 any Director with a material personal interest in a matter being considered by the Board will not be present when the matter is being considered and will not vote on the matter. 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. Share Trading 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 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 the date of the annual general meeting until 14 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 For executives, any trading (including hedging) in positions prior to vesting of shares or options. Remuneration Arrangements Details of the governance arrangements and policies relevant to remuneration are set out in the Directors’ Report - Remuneration Report. 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; the chief − − − − 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 Corporations Act and the Securities and Exchange Commission (“SEC”) of the USA. − − − relevant In carrying out these functions, the Committee: − Reviews the financial statements and reports of the Group; Reviews accounting policies to ensure compliance with regulations and laws, current 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. − the rules of 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 attributes defined under the SEC, his responsibilities are the same as those of the other Audit Committee members. He is not an auditor, does not 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 Independent Auditor Services Policy which only permits the Independent Auditor to carry out audit services which are required by statute and related services which are an extension of, or an adjunct to, those audit services. All other non-audit the Audit Committee services are prohibited unless determines otherwise in any particular case. 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; 39 − − − − and design − − − − systems functions, information Corporate Governance (continued) − − to accounting investment adviser or including acting as an 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: 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; Related services connected with the lodgement of statements or documents with the 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. investment − − − − − − − The Bank information requested. is producing the documents and Although the Bank cannot predict the nature of any future action if the SEC determines that any services 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 underwriting standards designed to achieve portfolio risk/return outcomes consistent with expectations. In addition, the Committee reviews the the Group’s 40 Group’s credit portfolios and management for provisioning for bad and doubtful debts. recommendations by 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 of Australia Board and 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. the boards of 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 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: − − Corporate Governance (continued) 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, the rewarding work, challenging and importance of attracting and retaining high quality staff and consequently, being in a position to excel in customer service. recognising There are various policies and systems in place to enable achievement of these goals, including: − − − − − − − − − Fair Treatment Review; Equal Employment Opportunity; Occupational Health and Safety; Recruitment and selection; Performance management; Talent management and succession planning; Remuneration and recognition; Employee share plans; 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. 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. A number of provisions of this Act apply 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. include: − − − − Some of the more significant certifications generally 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 have materially affected, or are 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 Financial Officer, with the assistance of other the Group’s management, have members of 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 adverse changes in the Group’s internal control over financial reporting that have to materially affected, or are reasonably 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. likely The Group is also required to disclose in its annual report on Form 20-F for the 2005 financial year, whether it has adopted a written code of ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Group has adopted such a code. 41 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 of Australia since 1994. From 1985-1994, he was a solicitor with the Bank’s Legal Department. He has a Bachelor of Laws degree from Sydney University and was admitted as a solicitor in New South Wales. He is a Fellow of 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 Services Department in January 1979 and has approximately 25 years experience as an in-house lawyer. He has a Bachelor of Arts from Sydney University and a Bachelor of Laws degree from the University of New South Wales. He is a Member of the Law Society of New South Wales; Australian Corporate Lawyers Association; City of Sydney Law Society; and the Risk Management Association – Australia. Carla Collingwood was appointed a Company Secretary to the Bank in July 2005 to replace Henry Broekhuijse. From 1994 until 2005, she was a solicitor with the Bank’s Legal Services Department, before being appointed to the position of General Manager, Secretariat. She holds a Bachelor of Laws degree (Hons.) and a Graduate Diploma in Company Secretary Practice from Chartered Secretaries Australia. Corporate Governance (continued) 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: − − − − − − the 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; financial That based on statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Group as of, and for, the periods presented in the report; That for establishing and maintaining disclosure controls and procedures (as defined in the US Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Group and have: disclosure − Designed they are responsible 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; controls such − 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 adverse change in the Group’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Group’s internal control over financial reporting; and 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 financial operation of reporting which are reasonably likely to adversely affect the Group’s ability to record, process, summarise and report financial data; and internal controls over − 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 2005. 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 adverse changes in our internal controls over financial reporting occurred during the year ended 30 June 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over 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 (qq) to the Financial Statements. 42 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 2005. The names of the Directors holding office during the financial year and until the date of this report are set out together with details of Directors’ experience, below qualifications, special responsibilities and organisations in which each of the Directors has declared an interest. John M Schubert, Chairman Dr Schubert has been a member of the Board since 1991 and Chairman since November 2004. He is chairman of the Nominations Committee and a member of the Risk and People & Remuneration 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 International Limited and former Chairman and Managing Director of Esso Australia Ltd. the Chairman: G2 Therapies Limited. A B (Tony) Daniels, OAM Mr Daniels has been a member of the Board since March 2000 and is a member of the People & Remuneration and Risk Committees. He has extensive experience in manufacturing and distribution, being Managing Director of Tubemakers of Australia for eight years to December 1995, during a long career with that company. He has also worked with government in superannuation, competition policy and export facilitation. Director: Australian Gas Light Company 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 70. Colin R Galbraith, AM Mr Galbraith has been a member of the Board since June 2000 and is a member of the Nominations, Audit and Risk Committees. He was previously a Director of Colonial Limited, appointed 1996. He is a partner of Allens Arthur Robinson, Lawyers. Director: BHP Billiton Limited, BHP Billiton Plc, and Qantas Airways Limited. Chairman: BHP Billiton Community Trust. Other Interests: Academy of Technological Science and Engineering (Fellow), Institute of Engineers (Fellow), and AGSM Advisory Board (Member). Dr Schubert is a resident of New South Wales. Age 62. 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 is a member of the Risk Committee. He holds a Bachelor of Business, Master of Business Administration, an honorary PhD from Macquarie University and has thirty-eight years experience in banking. Chairman: Business/Industry/Higher Education Collaboration Council. Director: GasNet Australia (Group) and OneSteel Limited. 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 57. S Carolyn H Kay Ms Kay has been a member of the Board since March 2003 and is also a member of the People & Remuneration and Risk Committees. 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: Tara Anglican School Limited. for Girls Foundation Director: Mayne Group Limited and Deputy Chair Victorian Funds Management Corporation. Interests: International Monetary Conference Other (Member), Asian Bankers’ Association (Member), Australian Bankers’ Association (Member), Asia Pacific Bankers' Club (Member), Business Council of Australia (Member), and the Financial Sector Advisory Council (Member). Mr Murray is a resident of New South Wales. Age 56. Reg J Clairs, AO Mr Clairs has been a member of the Board since March 1999 and is Chairman of the People & Remuneration Committee and a member of the Risk Committee. As the former Chief Executive Officer of Woolworths Limited, he had thirty-three years experience in retailing, branding and customer service. Director: David Jones Limited 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 67. Other Interests: Australian Institute of Company Directors (Fellow). Ms Kay is resident in New South Wales. Age 43. Warwick G Kent, AO Mr Kent has been a member of the Board since June 2000 and is a member of the Audit and Risk Committees. 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 (Retired 31 July 2005), and Hoyts Corporation Pty Ltd. 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 69. 43 Directors’ Report (continued) Fergus D Ryan Mr Ryan has been a member of the Board since March 2000 and is Chairman of the Audit Committee and a the Risk Committee. He has extensive member of experience risk in accounting, audit, 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. finance and 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 62. Frank J Swan Mr Swan has been a member of the Board since July 1997 and is Chairman of the Risk Committee and a member of the Nominations Committee. He holds a Bachelor of three years senior Science degree and has management experience food and beverage industries. twenty the in 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 64. 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, Record Investments Limited, 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 51. Ralph J Norris , Incoming Managing Director and Chief Executive Officer Mr Norris’ appointment as Managing Director and Chief Executive Officer was announced on 14 June 2005 with effect from 22 September 2005. Mr Norris has been Chief Executive Officer and Managing Director of Air New Zealand since February 2002 and has been a Director of that company since August 1998. He retired from that Board in August 2005 to take up his position with the Bank. Prior to his appointment at Air New Zealand, Mr Norris had a 30 year career in banking. He was Chief Executive Officer of ASB Bank Limited from March 1991 until September 2001 and Head of International Financial Services from August 1999 until 2001. In August 2005, Mr Norris retired from the Board of Fletcher Building Limited where he had been a Director since 2001. Other Management and Fellow New Zealand Computer Society. Interests: Fellow New Zealand Institute of Mr Norris has become a resident of New South Wales. Age 56 N R (Ross) Adler, AO, Retired 5 November 2004 Mr Adler had been a member of the Board since 1990 and was 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. John T Ralph, AC, Retired 5 November 2004 Mr Ralph had been a member of the Board since 1985 and Chairman since 1999. He was also Chairman of the Risk, People & Remuneration and Nominations Committees. He is a Fellow of the Australian Society of Certified Practising Accountants and has had 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 72. 44 Directors’ Report (continued) Other Directorships The Directors held directorships on other listed companies within the last three years as follows: DIRECTOR Company Date Appointed Date of Ceasing (if applicable) J M Schubert R J Clairs A B Daniels C R Galbraith S C H Kay W G Kent F D Ryan F J Swan B K Ward J T Ralph BHP Billiton Limited BHP Billiton Plc Qantas Limited Worley Group Limited David Jones Limited Cellnet Group Limited The Australian Gas Light Company Orica Limited Onesteel Limited GasNet Australia Group Mayne Group Limited Ansell Limited West Australian Newspapers Holdings Limited Coventry Group Limited Perpetual Trustees Australia Limited (Group) Australian Foundation Investment Company Limited Foster's Group Limited National Foods Limited Southcorp Limited Lion Nathan Limited Multiplex Group Record Investments Limited Telstra Corporation Limited BHP Billiton Plc 01/06/2000 29/06/2001 23/10/2000 28/11/2002 22/02/1999 01/07/2004 04/08/1999 01/03/1995 25/10/2000 17/12/2001 28/09/2001 19/05/2000 02/02/1998 01/07/2001 01/05/1998 08/08/2001 25/10/1999 11/03/1997 26/05/2005 20/02/2003 26/10/2003 29/04/2005 14/10/1996 01/11/1997 28/02/2005 17/12/2003 01/11/2002 31/07/2005 30/06/2005 29/07/2005 04/11/2002 45 Directors’ Report (continued) Directors’ Meetings The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Commonwealth Bank of Australia during the financial year were: No. of Meetings Held(1) DIRECTORS’ MEETINGS DIRECTOR J M Schubert D V Murray R J Clairs A B Daniels C R Galbraith S C H Kay W G Kent F D Ryan F J Swan B K Ward N R Adler J T Ralph 13 13 13 13 13 13 13 13 13 13 4 4 No. of Meetings Attended 13 12 13 13 12 13 13 13 12 13 4 4 (1) The number of meetings held during the time the Director held office during the year. Risk Committee Audit Committee COMMITTEE MEETINGS DIRECTOR No. of Meetings Held(1) No. of Meetings Attended No. of Meetings Held(1) No. of Meetings Attended People & Remuneration Committee No. of Meetings Held(1) No. of Meetings Attended J M Schubert D V Murray R J Clairs A B Daniels C R Galbraith S C H Kay W G Kent F D Ryan F J Swan B K Ward N R Adler J T Ralph DIRECTOR J M Schubert C R Galbraith F J Swan 6 6 6 6 6 6 6 6 6 6 2 2 6 6 6 5 6 6 6 6 4 6 2 2 2 4 4 6 6 2 2 4 4 6 6 2 7 8 8 5 3 7 6 8 5 3 No. of Meetings Held(1) No. of Meetings Attended NOMINATIONS COMMITTEE 2 2 2 2 2 2 (1) The number of meetings held during the time the Director was a member of the relevant committee. Principal Activities including integrated superannuation, retail, business and life The Commonwealth Bank Group leading providers of is one of financial Australia’s institutional services banking, general insurance, funds management, broking services and finance company activities. The principal activities of the Commonwealth Bank Group during the financial year were: (i) Banking insurance, 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 46 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 The Group is Australia’s largest funds manager and largest retail funds manager in terms of its total value of Funds under Administration. The Group’s funds management business is managed as part of the Wealth Management division. This business manages a wide range of wholesale and retail investment, superannuation and retirement funds. Investments are across all major asset classes International shares, property, fixed interest and cash. including Australian and 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 The Group is Australia’s largest insurer based on life insurance assets held, and is Australia’s largest manager Directors’ Report (continued) 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 2005 was $3,991 million (2004: $2,542 million). The net operating profit for the year ended 30 June 2005 after tax, and before goodwill amortisation, appraisal value uplift, shareholder investment returns and costs related to initiatives including Which new Bank was $3,466 million. This is an increase of $388 million or 13% over the year ended 30 June 2004. In September 2003, the Group launched its Which new Bank customer service vision. This is a three year transformation program with an estimated spend of $1,480 million over the period. This includes $600 million of normal project spend, and an additional $620 million in areas of staff training, systems and process simplification and technology, and $260 million invested in the branch network. The Bank has continued to meet all of its Which new Bank commitments and critical project milestones, with net benefits in 2005 totalling $724 million. Market shares in key business lines have improved (home loans, personal lending, funds management) or are showing signs of (business-lending, deposits). Efficiency gains are being recorded in each segment. turn-around to factors increase The principal contributing the profit increase were a growth in net interest income reflecting growth across a range of lending products, combined with an in commissions. Underlying expenses increased by only 4%, despite higher spend on compliance and the impact of a stronger NZ dollar. Funds management and insurance income rose which reflects buoyant equity markets for most of the year, growth in inforce Funds under Administration and growth life premiums. Additionally appraisal values of insurance and funds management businesses increased by $778 million reflecting the growth in Funds under Administration and improved equity markets. the in Dividends The Directors have declared a fully franked (at 30%) final dividend of 112 cents per share amounting to $1,434 million. The dividend will be payable on 23 September 2005 to shareholders on the register at 5pm on 19 August 2005. Dividends paid since the end of the previous financial year: − through comprised As declared in last year’s report, a fully franked final dividend of 104 cents per share amounting to $1,315 million was paid on 24 September 2004. The cash disbursements of payment $1,069 million with $246 million being reinvested by participants the Dividend Reinvestment Plan; In respect of the current year, a fully franked interim dividend of 85 cents per share amounting to $1,083 million was paid on 31 March 2005. The payment cash disbursements of $883 million with $200 million being reinvested by participants the Dividend Reinvestment Plan; and Additionally, quarterly dividends totalling $39 million for the year were paid on the PERLS; $34 million on the PERLS II; $42 million on the Trust Preferred Securities; $9 million on the ASB Capital preference shares; and $7 million on the ASB Capital No.2 preference shares. comprised through − − Review of Operations An analysis of operations for the financial year is set out in the Highlights on page 6 and business review sections for Banking, Funds Management and Insurance on pages 12, 20 and 24 respectively. A review of the financial condition of the Bank is set out in the Highlights on page 6. Changes in State of Affairs During the year, the Bank continued to make 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. Progress within the major initiatives included the following: − − − the the banking it easier is making customer new “Commsee,” management platform, as well as providing frontline staff with ready access to imaged client documents and authorities, to share customer information. More than half the branches now have CommSee operating and are averaging over 90,000 referrals per month. “CommWay” initiatives have led to turnaround time improvements and a significant reduction in home loan and personal loan approval times, through the implementation of end-to-end systems and process improvements. A further 127 branches have been refurbished this year, bringing total number of branches modernised to help provide faster, more efficient service to 253. The new NetBank platform was introduced in April 2005 providing enhanced functionality and greater flexibility for 2 million online customers. The Wealth Management team achieved its goal of reducing the number of product systems to seven, total number of product systems bringing decommissioned to 10 since the beginning of Which new Bank. The Chairman of Commonwealth Bank of Australia, Dr. John Schubert, announced on 14 June 2005 that the Board had appointed Mr. Ralph Norris to take over the role of Managing Director and Chief Executive Officer on the retirement of Mr. David Murray. Mr. Murray will retire from the Bank on 22 September 2005. Mr. Norris is currently Managing Director and Chief Executive Officer of Air New Zealand Limited. the − − There were no other significant changes in the state of affairs of the Group during the financial year. Events Subsequent to Balance Date On 7 July 2005 the Bank entered into an agreement to sell its life insurance and financial planning business in Hong Kong for approximately $600 million to Sun Life Financial. The business consisted of CMG Asia Limited, CommServe Financial Limited and Financial Solutions Limited, with a combined carrying value of $527 million under current Australian GAAP. The carrying value will be different under AIFRS, principally due to differences in discount the actuarial valuation of policyholder liabilities and differences in treatment of historic foreign exchange losses under AIFRS. The impact of conversion to AIFRS is included in Note 1 (qq) to the Financial Statements. rates used in The transaction, targeted for completion within three months, and together with the determination of the final profit is subject to conditions precedent. The Directors are not aware of any other matter or circumstance that has occurred since the end of the financial year that has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. 47 Business prospects strategies, Directors’ Report (continued) Business Strategies and Future Developments and future developments, which may affect the operations of the Group in subsequent financial years, are referred to in the Chairman’s Statement on page 3, Highlights on page 6 and Which new Bank Summary on page 10. 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 liabilities as a lender. The Bank has developed credit policies to ensure this is managed appropriately. incur environmental Directors’ Shareholdings Particulars of shares in the Commonwealth Bank or in a related body corporate are set out the Remuneration Report within this report. Options An Executive Option Plan (“EOP”) was approved by shareholders at the Annual General Meeting on 8 October 1996 and its continuation was further approved by shareholders at the Annual General Meeting on 29 October 1998. At the 2000 Annual General Meeting, 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 hurdle for the 2001 ERP grant was met. All option grants have now met their specified performance hurdles. During the financial year and for the period to the date of this report 2,741,600 shares were allotted by the Bank consequent to the exercise of options granted under the EOP and ERP. Full details of the Plan are disclosed in Note 29 to the financial statements. No options have been allocated since the beginning of the 2001/2002 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 the Remuneration Report within this report. Directors’ Interests in Contracts A number of Directors have given written notices, stating that they hold office in specified companies and accordingly are to be regarded as having an interest in any contract or proposed contract that may be made between the Bank and any of those companies. Directors’ and Officers’ Indemnity Articles 19.1, 19.2 and 19.3 of the Commonwealth Bank of Australia’s Constitution provides: “19. Indemnity 19.1 Persons to whom articles 19.2 and 19.4 apply Articles 19.2 and 19.4 apply: (a) to each person who is or has been a director, secretary or senior manager of the company; and (b) to such other officers, employees, former officers or former employees of the company or of its related bodies corporate as the directors in each case determine, (each an “Officer” for the purposes of this article). 19.2 Indemnity The company must indemnify each Officer on a full indemnity basis and to the full extent permitted by law against all losses, liabilities, costs, charges and expenses (“Liabilities”) incurred by the Officer as an officer of the company or of a related body corporate. 19.3 Extent of indemnity The indemnity in article 19.2: (a) is enforceable without the Officer having to first incur any expense or make any payment; (b) is a continuing obligation and is enforceable by the Officer even though the Officer may have ceased to be an officer of the company or its related bodies corporate; and (c) applies to Liabilities incurred both before and after the adoption of this constitution.” An indemnity for employees, who are not directors, secretaries or senior managers, is not expressly restricted in any way by the Corporations Act 2001. The Directors, as named on pages 43 and 44 of this report, and the Secretaries of the Commonwealth Bank of Australia, being J D Hatton, H J Broekhuijse (resigned 12 July 2005) and C F Collingwood (appointed 12 July 2005) are indemnified under article 19.1, 19.2 and 19.3 as are all the senior managers of the Commonwealth Bank of Australia. Deeds of Indemnity have been executed by Commonwealth Bank of Australia consistent with article 19.1, 19.2 and 19.3 above in favour of each Director. Directors’ and Officers’ Insurance The Commonwealth Bank has, during the financial year, paid an insurance premium in respect of an insurance policy for the benefit of those named and referred to above and the directors, secretaries, executive officers and employees of any related bodies corporate as defined in the insurance policy. The insurance grants indemnity against liabilities permitted to be indemnified by the company under Section 199B of the Corporations Act 2001. the insurance policy prohibits disclosure of the terms of the policy including the nature of the liability insured against and the amount of the premium. In accordance with commercial practice, 48 Directors’ Report – Remuneration Report Introduction Remuneration Policy This report details the Bank’s remuneration policy for Directors and Executives (including senior managers and company secretaries) and the links between the performance of the Bank and individual remuneration outcomes. Remuneration arrangements, including details of equity holdings, loans and other transactions for Directors and Specified Executives of the Bank, are also disclosed. In compiling this report the Bank has met the disclosure requirements of accounting standard AASB 1046, as well as those prescribed by the Corporations Act 2001. People & Remuneration Committee The Bank’s remuneration arrangements are overseen by the People & Remuneration Committee of the Board, which currently consists of Mr R J Clairs (Chairman), Dr J M Schubert, Mr A B Daniels and Ms S C H Kay. Prior to Mr J T Ralph’s retirement on 5 November 2004, the Committee consisted of Messrs Ralph (Chairman), Daniels and Clairs. The Committee’s activities are governed by its terms of reference which is at available http://shareholders.commbank.com.au. website Bank’s the on The Committee considers changes in remuneration policy likely to have a material impact on the Bank and is informed legislative compliance on employment issues, industrial agreements and incentive plans operating across the Bank. performance, leadership of The Committee also considers senior appointments and remuneration arrangements for senior management. The remuneration arrangements for the Chief Executive Officer (CEO) and Group Executives (senior direct reports to the CEO) are approved by the full Board. The policy of the Board is that the Committee shall consist entirely of independent Non-Executive Directors. The CEO attends Committee meetings by invitation but does not attend in relation to matters that can affect him. The Bank’s remuneration systems complement and reinforce its performance culture, and leadership and talent management systems. The remuneration systems aim to: (cid:131) (cid:131) (cid:131) Attract and retain high calibre employees; Align individual and Bank goals; and Ensure total remuneration is competitive by market standards. For Executives, this also aims to reward with an appropriate mix of remuneration according to their level in the organisation, with a significant weighting towards both short term and long term variable (‘at risk’) pay linked to performance. This focus aims to: (cid:131) Reward Executives for Bankwide, business unit and individual performance against targets set by reference to appropriate benchmarks and against behavioural standards; Align the interests of Executives with those of shareholders; and Link Executive reward with the strategic goals and sustainable performance of the Bank. In determining appropriate levels of Executive remuneration, the People & Remuneration Committee engages an external consultant to provide independent advice. This ensures that the remuneration of Executives is set competitively compared to market. It also helps the in Committee understand movements and Executive remuneration that should be factored into considerations regarding the remuneration of Executives. 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 and trends (cid:131) (cid:131) The following diagram illustrates the annual cycle of for senior remuneration arrangements the Bank’s executives. 1 July Performance Planning Performance targets, fixed remuneration, STI(1) and LTI(2) potentials set for each Executive 1 January Mid year Performance Review Review progress to achieve continuous development and performance improvement 30 June Performance Review Performance assessed against Key Result Areas and STI payments calculated 50% of STI payment deferred in cash(3) Deferred cash paid after 12 months(3) 50% STI payment paid in cash (1) STI refers to Short Term Incentive. (2) LTI refers to Long Term Incentive. LTI grant allocations are made by September each year. After three years the grant is measured against the performance hurdle to assess what portion of the grant, if any, will vest at that time. Refer to page 50 for further detail. (3) STI deferral applies generally to the CEO and to executives who, in a reporting sense, are no more than two levels removed from the CEO. Payment is subject to forfeiture on resignation or misconduct including misrepresentation of performance outcomes. Remuneration Structure 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 ‘mix’ of these components for each Executive varies according to their role, as outlined below. Fixed Remuneration 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 contributions to superannuation. 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 People & Remuneration Committee through a process that considers 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. Variable (‘At Risk’) Remuneration The relationship of fixed and variable remuneration (potential short term and long term incentives) is approved for each level of Executive management by the People & Remuneration Committee. 49 Directors’ Report – Remuneration Report (continued) The Bank’s remuneration structure is designed to motivate employees for short and long term performance. This mix between short term and long term variable components maintains a focus on the sustainable short term performance of the Bank, whilst ensuring a clear line of sight in positioning the Bank for its longer term success. The current target mix of remuneration components for Executives is illustrated in the following table. Current target potential remuneration mix for Executives Fixed Component (Base Remuneration and Superannuation) % STI Component % LTI Component % CEO Group Executives 25 30 25 30 50 40 (cid:131) (cid:131) 50 percent made as immediate cash payment; and 50 percent in cash deferred for one year. Generally, the Executive will need to be an employee of the Bank at the end of the deferral period to receive this portion. This represents a simplification from previous years where the deferral was made in shares, half of which vested after one year, and the remainder vested after two years. Long Term Incentive (LTI) Arrangements Under the Bank’s Equity Reward Plan (ERP), LTI grants to Executives are delivered in the form of ordinary shares in the Bank that vest in the Executive if and to the extent that a performance hurdle is met. LTI grants are made to Executives who are able to directly influence the generation of shareholder wealth and thus 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 CEO. 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. (TSR) (which No value will accrue to the Executive unless the Bank’s Total Shareholder Return is calculated by combining the reinvestment of dividends and the movement in the Bank’s share price) at least meets the 50th percentile of a peer comparator group of companies over a three to five year period. The percentage of shares vesting in the Executive rises with increased performance. 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 below provides a summary of the ERP grants from previous years that were in operation during the year ended 30 June 2005. that which applies generally Where market practice requires, the structure for some specialist (high revenue-generating) roles differs from to Executive management. For such 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. Short Term Incentive (STI) Arrangements Employees at all levels of the Bank participate in the Bank’s STI arrangements. Actual STI payments for Executives depend on the extent to which operating targets and behaviour standards set at the beginning of the financial year are met. Depending on the Executive’s level within the organisation, any actual STI payments received are based on a combination of Bankwide, business unit and individual performance. On an annual basis, after consideration of the Board performance against Key Result Areas, approves an overall performance rating for the Bank and each business unit. The Executive’s manager assesses individual performance based on the Bank’s Performance Feedback and Review system. Executives receive a limited (if any) performance payment if their individual performance is not ‘meeting expectations’. Such situations would be under active performance management. The aggregate of annual STI payments available for Executives across the Bank is subject to the approval of the People & Remuneration Committee. In the case of the CEO and Group Executives, individual payments are subject to the approval of the Board. For payments made in recognition of performance for the year ended 30 June 2005, where STI deferral applies, two the STI payments are delivered components - in 50 Directors’ Report – Remuneration Report (continued) Summary of performance hurdles for Employee Reward Plan (ERP) grants 2001 Grant 2002 Grant 2003 Grant 2004 Grant Performance measurement From To 3 Sept 2001 4 Sept 2004 2 Sept 2002 3 Sept 2005 1 Sept 2003 2 Sept 2006 23 Aug 2004 24 Aug 2007 Additional vesting opportunities Every month from Oct 2004 until Sept 2006 Every six months from 3 Sept 2005 until 2 Sept 2007 Every six months from 2 Sept 2006 until 1 Sept 2008 Every six months from 24 Aug 2007 until 23 Aug 2009 Expiry Date if Exercisable 3 Sept 2006 2 Sept 2007 1 Sept 2008 23 Aug 2009 Status as at 30 June 2005 Vesting Scale Performance Hurdle Vested on 3 Oct 04 < Weighted Average of Peers = 0% > Weighted Average of Peers = 100% TSR vs Peer Group. If the performance hurdle is not reached after three years, the options(1) may nevertheless be exercisable or the shares vest, where the hurdle is subsequently reached within five years from the grant date. 30th percentile 68th percentile 74th percentile < 50th percentile = NIL shares 50th – 67th percentile = 50% - 75% of shares 68th – 75th percentile = 76% - 100% of shares 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 half yearly windows, over the next two years. The vesting percentage will be the higher of the rating determined at the third anniversary of the grant and the rating determined at the half yearly measurement point at which the Executive nominates that the shares will vest. 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 at one of the half yearly measurement points prior to the fifth anniversary, but the maximum vesting will be 50%. (1) The Bank has not granted options to any Executives since 2001. More information can be found in Note 29 (Share Capital) to the Financial Statements. The use of a relative TSR based hurdle ensures an alignment between comparative shareholder return and reward for Executives. The peer group chosen for comparison reflects the Bank’s current business mix and currently(1) consists of: the Bank In assessing whether the performance hurdles for each grant have been met, receives 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. For grants made from 2002 onwards, each company in the peer group and the Bank is ranked in order of TSR growth from the commencement of each grant. A weighting for each company in the peer group is determined by dividing the market capitalisation of the total market capitalisation of the peer group. The Bank’s percentile ranking is determined by aggregating the calculated weighting of each company ranked below the Bank. relevant company by the (cid:131) Adelaide Bank Macquarie Bank AMP National Australia Bank Australia & New Zealand Banking Group QBE Insurance AXA St George Bank of Queensland Suncorp-Metway Bendigo Bank Westpac Banking Group IAG (1) GIO and BankWest were included prior to 19 January 2000 and 26 August 2003 respectively. Further details of the ERP may be found in Note 29 (Share Capital) to the Financial Statements. 51 Directors’ Report – Remuneration Report (continued) Bank Performance Short Term Performance – 2004/2005 The Bank’s Short Term is underpinned by a performance management system through which all staff are assessed on outcomes and framework Incentive behaviours. Staff have Key Result Areas in Customer Service, People Engagement, and Business Outcomes. Below is a description of the Bank’s performance in each of these areas. Summary of Bank performance Key Result Area Commentary Customer Service The Bank’s vision is ‘to excel in customer service’. There have been substantial service improvements driven from the Which new Bank service transformation program. This result is supported by enhanced customer satisfaction readings, significant customer turnaround time improvements, the implementation of CommSee (in progress and on schedule), an upgraded NetBank, service & sales management training and more branch refurbishments. The progress in customer service reflects that the Which new Bank program is on schedule. It is expected that the impact during 2005/2006 of service initiatives already completed and being implemented will add further to the Bank’s competitiveness, customer satisfaction levels and ultimately the Bank’s market share in profitable areas. People Engagement There have been substantial people engagement improvements driven from the Which new Bank program. This result is supported by enhanced employee satisfaction readings, key culture change measures, a continuing safety improvement focus and the implementation of enhanced leadership, performance management and talent management frameworks. This progress is reflective of the Bank’s commitment to its people and the success of the Which new Bank program assisting in the achievement of the vision through engaged people. Business Outcomes The Bank exceeded its net profit after tax (NPAT) targets for the year ended 30 June 2005. Cash NPAT and underlying NPAT increased by 31% and 13% respectively compared with the previous year. As part of this, the Which new Bank program has exceeded targets with net benefits in 2005 of $724 million. There were strong results in retail banking, funds management and insurance, tempered by moderate results in institutional and business banking. These results are supported by market share improvements in most products, productivity gains and return on equity increases. The Bank has improved market share in home lending (from 19.3% to 19.9%) and retail funds under administration (from 14.4% to 14.8%) in the past 12 months. The Bank has shown strong lending growth in the retail bank and stable net interest margins since 30 June 2004. It has achieved increases in average interest earning assets and home lending balances of 13.9% and 18.5% respectively. The following graphs illustrate the Bank’s NPAT and earnings per share (EPS) performance on an cash basis over the last five years. Cash NPAT performance 2001 to 2005 Cash EPS performance 2001 to 2005 n o i l l i M $ 3,600 3,200 2,800 2,400 2,000 1,600 1,200 CBA 30-Jun-01 2,262 30-Jun-02 2,501 30-Jun-03 2,579 30-Jun-04 2,695 30-Jun-05 3,538 52 s t n e C 280 260 240 220 200 180 160 140 120 100 30-Jun-01 30-Jun-02 30-Jun-03 CBA 178 197 202 30-Jun-04 206 30-Jun-05 267 Directors’ Report – Remuneration Report (continued) Longer Term Performance Dividends per Share Long term performance is measured on the Bank’s Total Shareholder Return (TSR) relative to its peers. TSR is calculated by combining the reinvestment of dividends and the movement in the Bank’s share price. The Bank’s dividend per share has increased each year over the last five years, with more significant increases since the introduction of the Which new Bank program. Dividends per Share s t n e C 200 190 180 170 160 150 140 130 120 110 100 30-Jun-01 CBA 136 30-Jun-02 150 30-Jun-03 154 30-Jun-04 30-Jun-05 183 197 2001 LTI Grant Performance The performance hurdle for the 2001 grant was reached the Bank having outperformed the peer group TSR index by 7.8% over the performance period. in October 2004 with 2002, 2003, 2004 LTI Grant Performance The Bank’s performance must reach at least the 50th percentile for 50% of the shares granted to vest. All of the shares granted will only vest if the Bank’s performance reaches the 75th percentile. As at 30 June 2005, the Bank’s performance was tracking under the 50th percentile for the 2002 grant and over the 50th percentile for the 2003 and 2004 grants. Share Price The Bank’s share price has trended upward over the last five years, with a steeper incline since the introduction of the Which new Bank program in September 2003. Which new Bank has improved the Bank’s long term sustainable competitive positioning by enhancing customer service, people engagement and productivity. Share Price s r a l l o D 40 38 36 34 32 30 28 26 24 22 20 Jul-00 O ct-00 Jan-0 1 A pr-01 Jul-01 O ct-01 Jan-0 2 A pr-02 Jul-02 O ct-02 Jan-0 3 A pr-03 Jul-03 O ct-03 Jan-0 4 A pr-04 Jul-04 O ct-04 Jan-0 5 A pr-05 Jul-05 53 Directors’ Report – Remuneration Report (continued) Directors’ Remuneration Mr David V Murray (Managing Director and CEO) Summary of Remuneration Arrangements fixed Mr Murray’s remuneration consists of fixed and variable (at risk) components. For the year ended 30 June 2005, remuneration, which comprises base remuneration (calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles) as well as employer contributions total remuneration. to superannuation, was 35% of The variable (at risk) remuneration consists of short and long-term incentives. Short Term Incentives (STIs) are delivered in two components: 50% made as an immediate cash payment and 50% in deferred cash. Performance is measured against Key Result Areas, with payment subject to the approval of the Board. The Board has assessed Mr Murray’s performance for the year and has approved a STI payment of $1,520,000. Long Term Incentives (LTIs) are delivered in the form of Reward Shares under the Bank’s Equity Reward Plan, and no value will accrue unless the Bank’s Total Shareholder Return (TSR) at least meets the 50th percentile of the comparator group of companies. The Bank obtained shareholder approval for all LTI grants for Mr Murray. The total variable remuneration for the year ended 30 June 2005 was 65% of total remuneration. The Board determines Mr Murray’s remuneration, 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 for a term of 5 years with remuneration subject to review annually by the Board. As announced on 22 December 2004, Mr Murray’s remuneration arrangements were altered during the year. As a result of an independent review of Executive remuneration, the Board changed the mix of Mr Murray’s remuneration by the proportion of his remuneration that is performance-based. increasing Mr Murray’s deferred STI arrangements changed with 50% of the STI payment being deferred in cash for one year. This is consistent with changes made that apply to executives who, in a reporting sense, are no more than two levels removed from the CEO. Mr Murray’s remuneration arrangements are detailed on page 57 (Remuneration of Directors) and follow the same principles as other Executives except in relation to the Bank seeking shareholder approval of LTI grants. At the 2004 Annual General Meeting (AGM), the the approval of Board sought and was granted shareholders (under ASX Listing Rule 10.14) for a maximum of 250,000 shares to be allocated to Mr Murray under the Equity Reward Plan in two tranches prior to the 2006 AGM. As communicated on 22 December 2004, 125,000 shares were granted to Mr Murray in 2004. Retirement of Mr Murray Mr Murray’s contract provides for a notice period of not less than six months and a pro-rata payment of the average of the previous three years’ short term incentive payments. His arrangements also provide for him to exercise all vested options and obtain vested shares as described below. On exit from the Bank, Mr Murray is entitled to receive his statutory entitlements of accrued annual and long service leave as well as accrued superannuation benefits. This arrangement is the same for all Bank Executives. As announced on 15 July 2005, Mr Murray will retire from the Bank on 22 September 2005 after 39 years 54 service, 13 of which have been as Managing Director and CEO. Upon his departure, Mr Murray will receive payments of approximately $17.5 million. This comprises the components set out below. Mr Murray’s payments on leaving the Bank Statutory Benefits Superannuation Benefit Accrued Statutory Annual and Long Service Leave Contractual Entitlements Deferred STI Payments Total Approximate Value ($M) 11.8 2.3 2.4 1.0 17.5 The Deferred STI Payments component is the total value of the deferred portions of payments determined in recognition of performance over the 2003/2004 and 2004/2005 financial years. of on Depending achievement prescribed performance hurdles, Mr Murray may also be entitled to receive LTI shares granted under the Equity Reward Plan during 2002, 2003 and 2004, totalling 268,000 shares over the next four years. He may receive all, some or none of these shares, depending on the performance of each grant over the relevant periods. The actual value of this benefit to Mr Murray is therefore contingent upon the number of shares he receives and the share price at the time (further details of the Bank’s LTI arrangements are at page 50). Applying the accounting principles adopted in the Bank’s audited financial disclosures, which assumes 50% of the shares are received, the value of these shares at the time of the announcement of Mr Murray’s retirement date was approximately $5.2 million. Appointment of Mr Norris The Bank has appointed Mr Ralph Norris as Managing Director and CEO effective 22 September 2005. Prior to taking up appointment as Managing Director and CEO, Mr Norris will spend a period in hand over with Mr Murray to ensure a smooth transition. Mr Norris’ remuneration will be structured in a similar manner to Mr Murray’s and will be reviewed by the Board on an annual basis. Initially, fixed remuneration (including employer contributions to superannuation) will be $1.9 million per annum. The variable component consists of both STI and LTI. The STI arrangements provide the opportunity to earn up to $1.9 million per annum, subject to performance against Key Result Areas as set by the Board. As was the case with Mr Murray’s arrangements, 50% of the STI is delivered as an immediate cash payment with the remaining 50% deferred in cash for one year. Subject to shareholder approval, the LTI component provides for Mr Norris to receive a grant of shares under the Bank’s Equity Reward Plan (ERP). No value will accrue to Mr Norris under the ERP unless the Bank’s Total Shareholder Return (TSR) at least meets the 50th percentile of a peer comparator group of companies over a three to five year period. The initial LTI allocation is to the approximate value of $3.8 million. Mr Norris’ contract provides for no end date, although he may resign at any time by giving six months notice. The Bank may terminate Mr Norris’ employment, Directors’ Report – Remuneration Report (continued) in cases other than misconduct, on twelve months notice in his first year of service and six months notice thereafter. In the latter case the Bank will pay all fixed remuneration and any outstanding statutory entitlements. Any unvested STI or LTI amounts will be payable at the discretion of the Board. account of the termination of the Directors’ Retirement Allowance Scheme. Non-Executive Directors have 20% of their annual fees applied to the mandatory on-market acquisition of shares in the Bank. They can also voluntarily participate in a plan to have up to an additional 50% of their annual fees applied to the on-market acquisition of shares in the Bank. The Bank’s Non-Executive Directors’ fee structure provides for a base fee for all Bank Directors of $160,000, and a base Chairman’s fee of $560,000. In addition, amounts are payable where Directors are members of, or chair a Committee. Details of the breakdown of each Non- Executive Director’s fees is provided on page 56. The Bank also contributes to compulsory superannuation on behalf of Non-Executive Directors. Retirement Benefits Under the Directors’ Retirement Allowance Scheme, which was approved by shareholders at the 1997 Annual General Meeting, Directors previously accumulated a retirement benefit on a pro rata basis to a maximum of four years’ total emoluments after twelve years’ service. No benefit accrued until the Director had 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 have not been entitled to participate in the scheme. The Board resolved with effect from 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 has resulted in remuneration arrangements being expressed in a more transparent manner. The only increment in the value of Directors’ retirement benefit entitlements shown in the tables on pages 56 and 57 for this year reflects the period up until 5 November 2004, being the date of the Annual General Meeting. There is also a provision allowing Mr Norris to terminate the agreement if a material change to his status occurs and to receive benefits as if the Bank had terminated his employment. Non Executive Directors Remuneration Arrangements Remuneration for Non-Executive Directors consists of base and committee fees within a maximum of $3,000,000 per annum as approved by shareholders at the Annual General Meeting held on 5 November 2004. No component of Non-Executive Director remuneration is contingent upon performance. On appointment the Board, Non-Executive Directors enter into a service agreement with the Bank in the form of a letter of appointment. The letter of appointment, a copy of which appears on the Bank's website, summarises the Board policies and terms, including remuneration, relevant to the office of Director. All current Non-Executive Directors have entered into a form of service agreement. to The policy of the Board is that the aggregate amount of fees 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. into account The Nominations Committee annually reviews the fees payable to individual Non-Executive Directors and takes factors and, where relevant appropriate, receives external advice on comparable remuneration. The in December 2004, at which time components of the Directors’ fees were increased to the current levels to reflect the increasing commitments and responsibilities on Directors regulatory requirements of their office. Those increases also took review was undertaken the statutory and in meeting last 55 Directors’ Report – Remuneration Report (continued) Details of components of Non-Executive Director fees(1) Director J M Schubert R J Clairs A B Daniels C R Galbraith S C H Kay W G Kent F D Ryan F J Swan B K Ward Total Committee Remuneration Board Remuneration $ People and Remuneration $ Audit $ Risk $ Total $ 560,000 160,000 160,000 160,000 160,000 160,000 160,000 160,000 160,000 20,000 35,000 20,000 20,000 20,000 600,000 20,000 215,000 20,000 200,000 25,000 20,000 205,000 20,000 200,000 25,000 20,000 205,000 45,000 20,000 225,000 35,000 195,000 25,000 20,000 205,000 1,840,000 95,000 120,000 195,000 2,250,000 (1) Non-Executive Directors sacrifice 20% of these fees on a mandatory basis under the Non-Executive Directors Share Plan (NEDSP). The entitlements of the Non-Executive Directors under the Directors’ Retirement Allowance Scheme are: Directors’ Retirement Allowance Scheme Non-Executive Directors Increase in Accrued Benefit in Year $ Entitlement as at 30 June 2005 $ J M Schubert R J Clairs A B Daniels C R Galbraith S C H Kay (1) W G Kent F D Ryan F J Swan B K Ward N R Adler (2) J T Ralph (2) 12,157 18,201 15,159 8,542 - 8,542 12,723 8,087 17,225 12,152 7,481 636,398 202,989 160,618 159,092 - 159,092 168,263 266,173 370,180 - - (1) Ms Kay was appointed a Director after the closure of the scheme. (2) Messrs Adler and Ralph both retired on 5 November 2004. On retirement, they were paid their accrued entitlements under the Scheme, being $431,211 for Mr Adler and $1,203,960 for Mr Ralph. 56 Directors’ Report – Remuneration Report (continued) Individual Remuneration Details for Directors Individual remuneration details for Directors are set out below. Remuneration of Directors Primary Benefits Post Employment Benefits Equity Benefits STI Deferred in Cash At Risk ($) - Cash (1) Cash STI Payment Super- annuation (2) Retirement Allowance (3) STI Deferred in Shares LTI Options LTI Reward Shares NEDSP (1) Fixed ($) J M Schubert At Risk ($) Chairman - 342,987 130,545 - - Fixed ($) Fixed ($) At Risk ($) At Risk ($) At Risk ($) Fixed ($) ($) ($) 30,869 11,749 12,157 - - - 46,981 - - - 85,747 32,636 - 471,760 - 221,911 Managing Director and CEO (see notes to the "Remuneration of Specified Executives" table for details of individual items) 1,757,500 760,000 760,000 1,680,000 450,000 - 142,500 - 431,250 81,284 136,080 - 365,000 431,666 1,563,504 1,363,362 - - 5,496,038 - - 4,426,108 Other Benefits Term- ination Benefits Total Remun- eration 139,075 86,424 131,831 86,424 - - - - - - - - 130,220 89,460 - - - - 12,517 7,778 11,865 7,778 11,720 8,051 18,201 - - - 38,988 - - - 15,159 - - - 41,663 - - - 8,542 - - - 46,418 - - - 165,976 97,482 - - 14,938 - - - - - - 8,773 - - - - 130,220 89,460 - - - - 145,398 90,435 - - - - 124,478 89,460 - - - - 135,831 90,435 - - - - 11,720 8,051 13,086 8,139 11,203 8,051 12,225 8,139 8,542 - - - 46,418 - - - 12,723 - - - 46,466 - - - 8,087 - - - 44,429 - - - 17,225 - - - 51,566 - - - - - 2,196 - - - - - - 8,318 23,717 - - - 34,769 21,606 32,958 21,606 32,555 22,365 41,494 24,370 32,555 22,365 36,350 22,609 31,119 22,365 33,958 22,609 9,083 22,609 - 204,562 - 154,796 - 191,813 - 157,471 - 183,037 - 166,294 - 222,408 - 130,625 - 183,037 - 166,294 - 207,557 - 167,649 - 174,887 - 164,305 - 199,239 - 172,749 431,211 478,823 - 145,079 Year ended 30 June 2005 2004 D V Murray (4) 2005 2004 R J Clairs 2005 2004 A B Daniels 2005 2004 C R Galbraith 2005 2004 S C H Kay 2005 2004 W G Kent 2005 2004 F D Ryan 2005 2004 F J Swan 2005 2004 B K Ward 2005 2004 N R Adler 2005 2004 (5) 36,333 90,435 J T Ralph (5)(6) 2005 2004 88,881 - 245,887 - - - - - - 36,479 - - - - - 1,315,061 - 61,472 - 343,838 22,220 1,203,960 Total Remuneration for Directors 2005 2004 3,328,730 760,000 760,000 274,839 100,636 431,250 81,284 1,563,504 392,808 1,635,171 9,328,222 2,866,447 450,000 - 6,417,119 1,363,362 296,612 - 365,000 220,907 423,125 431,666 (1) (2) (3) For Non-Executive Directors, this includes that portion of base fees and committee fees paid as cash. Non-Executive Directors also sacrifice 20% of their fees on a mandatory basis under the Non-Executive Directors Share Plan (NEDSP). Further detail on the NEDSP is contained in Note 29 (Share Capital) to the Financial Statements. The Bank is not currently contributing to its staff superannuation fund (the Officers’ Superannuation Fund) as the fund is currently in surplus. A notional cost of contribution has been determined on an individual basis for those Non-Executive Directors who are members 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 page 55 regarding discontinuance of the Scheme. (4) Refer to page 54 for details of Mr Murray’s termination payments. (5) Messrs Adler and Ralph both retired on 5 November 2004. (6) Mr Ralph turned 71 during the year ended 30 June 2004. The Bank’s compulsory superannuation obligations generally cease after a person attains age 70. 57 Directors’ Report – Remuneration Report (continued) Specified Executives’ Remuneration AASB 1046 defines a ‘Specified Executive’ as someone who is directly accountable and responsible for the strategic and operational management of an organisation. The Bank is required to disclose details of remuneration for the five employees, excluding Directors, Individual Remuneration Details for Specified Executives the view that all members of with the greatest authority in this area. The Bank has taken its Executive Committee have significant influence over the strategic direction of the Bank, and accordingly defines all nine of its Group Executives as a Specified Executive for disclosure purposes. The following table details the fixed and at risk remuneration for Specified Executives for the year ended 30 June 2005. Remuneration of Specified Executives Year ended 30 June Primary Benefits Cash (1) Fixed ($) Non Monetary (2) Fixed ($) Cash STI Payment(3) At Risk ($) STI Deferred in Cash (4) At Risk ($) Post Employment Benefits Super- annuation(5) Fixed ($) M A Cameron Group Executive, Financial and Risk Management Equity Benefits Other Benefits STI Deferred in Shares(6) At Risk ($) LTI Options(7) At Risk ($) LTI Reward Shares(7) At Risk ($) Total Remun- eration Term- ination Benefits(8) Other Benefits (9) ($) ($) ($) 718,300 600,000 10,260 13,000 327,250 170,000 327,250 - Group Executive, People Services 605,000 580,000 932,500 891,000 292,500 10,260 13,000 292,500 - 156,000 Group Executive, Wealth Management 425,000 425,000 - 10,260 13,000 280,000 Group Executive, Retail Banking Services 357,500 783,500 700,000 10,260 13,000 357,500 - 230,000 51,700 160,625 - 263,187 - - 1,858,572 243,200 99,375 - 150,325 - - 1,275,900 45,000 185,625 24,385 408,380 - - 1,863,650 115,200 156,875 118,642 415,022 - - 1,554,739 67,500 89,880 275,625 32,514 548,870 - - 2,717,269 196,875 130,054 498,873 - - 2,099,682 56,500 207,500 16,257 397,155 - - 2,186,172 101,500 130,000 75,578 321,078 - - 1,571,156 Group Executive, Premium Business Services 950,000 910,000 560,000 540,000 382,500 10,260 13,000 382,500 - 290,000 Group Executive, Technology Services 240,000 240,000 - 10,260 13,000 142,500 Group Executive, International Financial Services 68,400 277,500 40,642 674,563 - - 2,786,365 132,100 237,500 197,736 677,520 - - 2,457,856 40,000 38,880 138,750 12,193 279,410 - - 1,520,613 122,688 55,804 253,061 - - 1,165,933 2005 2004 L G Cupper 2005 2004 S I Grimshaw 2005 2004 H D Harley 2005 2004 M A Katz 2005 2004 R V McKinnon 2005 2004 G L Mackrell 2005 2004 628,000 600,000 10,260 13,000 315,000 202,500 315,000 - 84,985 80,500 198,125 - 403,559 - - 1,954,929 166,250 113,718 391,143 - - 1,567,111 J K O’Sullivan General Counsel (commenced in role on 17 October 2003) 2005 2004 728,000 493,443 10,260 9,164 295,000 140,984 295,000 - 52,000 150,000 - 253,359 - - 1,783,619 35,528 - - 105,232 - - 784,351 G A Petersen Group Executive, Strategic Development (commenced in role on 17 June 2004) 2005 2004 437,000 16,716 10,260 497 217,500 4,208 217,500 - Total Remuneration for Specified Executives (10) 72,200 2,762 103,227 2,960 - - 161,824 2,559 - - - - 1,219,511 29,702 2005 2004 6,342,300 92,340 2,852,250 2,852,250 538,285 1,696,977 125,991 3,390,307 - 17,890,700 6,661,528 119,700 2,010,454 - 1,003,282 1,502,195 966,952 3,787,051 845,000 332,848 17,229,010 - (1) (2) (3) (4) (5) (6) 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. 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 ‘Superannuation’. Represents the cost of car parking (including FBT). Cash STI payment represents the amount of cash immediately payable to an Executive in recognition of performance to the year ended 30 June. STI Deferred in Cash represents the mandatory deferral of 50% of STI payments for Executives in recognition of performance to the year ended 30 June 2005. These amounts are deferred until 1 July 2006. Generally, the Executive will need to be an employee of the Bank at the end of the deferral period to receive this portion. Previous years’ deferrals of STI payments were made in shares. Represents company contribution to superannuation and includes any allocations made by way of salary sacrifice by Executives. STI Deferred in Shares represents the cost of shares acquired under the mandatory component of the Equity Participation Plan (EPP). Shares vest in two equal tranches after one and two years respectively. For example, for STI payments for the year ended 30 June 2004, half the shares vest on 1 July 2005 and half vest on 1 July 2006. The amount included in remuneration each year has been amortised on a straight-line basis over the vesting period for each tranche of shares. See Note 29 (Share Capital) to the Financial Statements for further details on the operation of the EPP. 58 Directors’ Report – Remuneration Report (continued) (7) The value of LTIs disclosed above was calculated as follows – The ‘fair value’ of options has been calculated using the Black-Scholes valuation model that incorporates the assumptions below – Option valuation assumptions Assumptions Commencement Date Fair Value Exercise Price Risk Free Rate Term Dividend Yield Volatility 24 Aug 1999 24 Aug 1999 (CEOs Options) 13 Sept 2000 3 Sept 2001 $3.14 $3.48 $3.47 $4.01 $23.84 5.82% 37 mths 4.82% $23.84 5.82% 49 mths 4.82% $26.97 $30.12 6.00% 5.24% 37 mths 37 mths 4.41% 4.61% 20.0% 20.0% 17.9% 20.8% 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 September 2000, $29.50 for shares granted on 3 September 2001, $31.42 for shares granted on 2 September 2002, $27.48 for shares granted on 1 September 2003 and $29.69 for shares granted on 23 August 2004. 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 2005 based on the Bank’s performance against the relative hurdle. In respect of options and shares granted in 1999, 2000 and 2001, 100% of the number granted has vested. For shares granted in 2002, 2003 and 2004, the Bank currently anticipates that 50% of the number granted will vest. The annualised equivalent of the ‘fair value’ in respect of the number of options and shares for each grant 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 August 1999). Represents any severance payments made on termination of employment (excluding any payment in lieu of notice). 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. (8) (9) (10) Group totals in respect of the financial year ended 30 June 2004 do not necessarily equal the sum of amounts disclosed for individuals specified in 2005 as there are differences to the individuals specified in 2004. Deferred cash or shares from previous STI awards are usually forfeited where the Executive resigns or is dismissed. In circumstances of retrenchment, retirement or death any cash will generally be paid and unvested shares will generally vest immediately. 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. forfeited where Termination Arrangements The Bank’s Executive contracts generally provide for severance payments of up to six months in cases where termination of employment is initiated by the Bank, other for misconduct or unsatisfactory performance. than Exceptions to Messrs Grimshaw, Cupper and O’Sullivan whose contracts allow twelve months severance payment where for a termination is initiated by the Bank. There is also a four week notice period for either party to terminate the agreement. these arrangements apply to The contracts for Specified Executives do not have a fixed term. Upon 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 a 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. 59 Directors’ Report – Remuneration Report (continued) STI Allocations to Directors and Specified Executives for the Year Ended 30 June 2005 Percentage Paid(1) Percentage Forfeited Percentage Deferred(2) Minimum Total Value ($) Maximum Total Value ($) D V Murray M A Cameron L G Cupper S I Grimshaw H D Harley M A Katz R V McKinnon G L Mackrell J K O’Sullivan G A Petersen 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% - - - - - - - - - - 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 760,000 327,250 292,500 425,000 357,500 382,500 240,000 315,000 295,000 217,500 1,520,000 654,500 585,000 850,000 715,000 765,000 480,000 630,000 590,000 435,000 (1) Will be paid on 1 September 2005. (2) Will vest on 1 July 2006 and be paid in July 2006, subject to not being forfeited due to resignation or misconduct including misrepresentation of performance outcomes. Will generally vest and be immediately payable in circumstances of retrenchment, retirement or death. See page 54 for treatment on Mr Murray’s retirement consistent with this policy. LTI Allocations to Directors and Specified Executives (under 2004 ERP Grant) in the Year Ended 30 June 2005 Percentage Paid(1) Percentage Forfeited Percentage Deferred(1) D V Murray M A Cameron L G Cupper S I Grimshaw H D Harley M A Katz R V McKinnon G L Mackrell J K O’Sullivan G A Petersen - - - - - - - - - - - - - - - - - - - - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Number of Reward Shares Allocated 125,000 28,130 25,000 37,500 35,000 43,130 18,750 28,130 25,940 19,500 Minimum Total Value ($) Maximum Total Value(2) ($) - - - - - - - - - - 3,711,250 835,179 742,250 1,113,375 1,039,150 1,280,529 556,687 835,179 770,158 578,955 (1) Will vest in 2007/2008, 2008/2009 or 2009/2010 subject to the service conditions and performance hurdle being met (see page 51). 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. See page 54 for treatment on Mr Murray’s retirement consistent with this policy. This equals the “Number of Reward Shares Allocated” multiplied by the Bank’s closing share price at the Commencement Date of the grant (23 August 2004), which was $29.69. (2) 60 Directors’ Report – Remuneration Report (continued) Equity Holdings of Directors and Specified Executives Option Holdings of Directors and Specified Executives Mr Murray is the only Director holding options in the Bank and he exercised 1,000,000 options during the year ended 30 June 2005. The Bank’s Non-Executive Directors do not hold any options. Option holdings of Directors and Specified Executives Name Directors D V Murray Total for Directors Specified Executives L G Cupper S I Grimshaw H D Harley M A Katz R V McKinnon G L Mackrell Balance 1 July 2004 Options Exercised Balance 30 June 2005 Vested and Exercisable at 30 June 2005(1) Number Exercise Price ($) 1,250,000 (1,000,000) 250,000 250,000 1,250,000 (1,000,000) 250,000 250,000 150,000 100,000 87,500 250,000 (75,000) 75,000 75,000 100,000 100,000 - - - 87,500 250,000 62,500 (25,000) 37,500 232,500 (232,500) - 50,000 37,500 125,000 125,000 37,500 - 387,500 162,500 30.12 30.12 30.12 30.12 30.12 26.97 30.12 26.97 30.12 - 30.12 26.97 Total for Specified Executives 882,500 (332,500) 550,000 (1) For most Executives, ‘Vested and Exercisable’ options represents those granted on 3 September 2001 with an exercise price of $30.12. Messrs Harley and Katz also hold vested but unexercised options granted on 13 September 2000 that have an exercise price of $26.97. Shareholdings of Directors and Specified Executives Shareholdings 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 exercised 1,000,000 options during the year, leaving his total holdings of options at 250,000 under the Equity Reward 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 125,000 shares under the Equity Reward Plan and 15,078 shares under the Equity Participation Plan during the year. He has a total holding of 325,000 shares under the Equity Reward Plan and 21,866 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 (Share Capital) to the Financial Statements. In addition, Mr Ralph holds an investment of $101,754 with Commonwealth Property Securities Fund and an investment of $619,753 in Colonial First State Diversified Hedge Fund. Both holdings are held beneficially. Dr Schubert holds an investment of $738,636 in Colonial First State Wholesale Diversified Fund. Mr Daniels beneficially holds an investment of $53,058 in Colonial First State Global Health and Biotech Fund. A related party of Mr Daniels holds an investment of $307,591 in Colonial First State Future Leaders Fund and $292,712 in Colonial First State Imputation Fund. 61 Directors’ Report – Remuneration Report (continued) Details of shareholdings of Directors and Specified Executives (or relatives or entities controlled or significantly influenced by them) are as follows: Shareholdings of Directors Name Class Balance 1 July 2004 Acquired/Granted as Remuneration(1) On Exercise of Options Net Change Other(2) Balance 30 June 2005 Directors J M Schubert D V Murray R J Clairs A B Daniels C R Galbraith S C H Kay W G Kent F D Ryan F J Swan B K Ward (3) N R Adler J T Ralph Ordinary Ordinary Deferred STI 16,268 280,833 19,427 Reward Shares 242,000 Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 12,631 16,392 7,689 2,980 14,522 6,671 4,996 4,914 9,490 23,861 401,247 19,427 242,000 1,658 - 582 - 1,000,000 (957,195) 15,078 125,000 726 695 672 689 672 759 645 719 203 496 - - - - - - - - - - - - (12,639) (42,000) - 582 463 - 92 - 304 133 97 345 7,934 1,000,000 (954,597) 15,078 125,000 - - (12,639) 18,508 323,638 21,866 325,000 13,357 17,669 8,824 3,669 15,286 7,430 5,945 5,766 9,790 24,702 454,584 21,866 (42,000) 325,000 Total For Directors Ordinary Deferred STI Reward Shares (1) (2) For Non-Executive Directors, represents shares acquired under NEDSP on 30 September 2004, 30 December 2004 and 22 April 2005 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 (Share Capital) to the Financial Statements for further details on the NEDSP. For Mr Murray, this represents: (cid:131) Deferred STI – acquired under the mandatory component of the Bank’s Equity Participation Plan (EPP). Shares were purchased on 31 October 2004 in two equal tranches, vesting on 1 July 2005 and 1 July 2006 respectively. See Note 29 (Share Capital) to the Financial Statements for further details on the EPP. Reward Shares – granted under the Equity Reward Plan (ERP) on and subject to a performance hurdle. The first possible date for meeting the performance hurdle is 23 August 2007 with the last possible date for vesting being 23 August 2009. See Note 29 (Share Capital) to the Financial Statements for further details on the ERP. (cid:131) ‘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 continued to hold 250 PERLS II securities at 30 June 2005. 62 Directors’ Report – Remuneration Report (continued) Shareholdings of Specified Executives Balance 30 June 2004 Acquired/Granted as Remuneration(1) On Exercise of Options Net Change Other (2) Balance 30 June 2005 Name Class Specified Executives M A Cameron Ordinary Deferred STI Reward Shares L G Cupper Ordinary Deferred STI Reward Shares S I Grimshaw Ordinary Deferred STI Reward Shares H D Harley Ordinary Deferred STI Reward Shares M A Katz (3) Ordinary Deferred STI - 4,797 32,300 27,206 8,409 70,000 256 9,503 90,300 13,711 6,816 57,700 407,386 12,706 Reward Shares 114,000 R V McKinnon Ordinary Deferred STI Reward Shares G L Mackrell Ordinary Deferred STI Reward Shares J K O’Sullivan Ordinary Deferred STI 9,292 6,507 45,500 21,088 8,619 66,100 5,565 - Reward Shares 33,500 G A Petersen Ordinary Deferred STI 2,756 4,086 Reward Shares 19,000 Ordinary Deferred STI 487,260 61,443 Reward Shares 528,400 Total for Specified Executives (1) Represents: - 5,696 28,130 - - - - - (2,399) 8,094 - 60,430 - 75,000 (57,666) 44,540 6,534 25,000 - 9,382 37,500 - 7,707 35,000 - 9,717 43,130 - - - - - - - - - - - (5,558) 9,385 (11,000) 84,000 16,109 16,365 (4,752) 14,133 (14,000) 113,800 12,141 25,852 (4,282) 10,241 (7,000) 85,700 (103,638) 303,748 (8,362) 14,061 (18,000) 139,130 - 25,000 9,699 43,991 4,775 18,750 - - (4,199) 7,083 (5,500) 58,750 - 232,500 (226,269) 27,319 6,785 28,130 - 6,702 25,940 - 3,701 19,500 - - - - - - - - (5,270) 10,134 (11,000) 83,230 - - - 5,816 (2,610) 5,565 6,702 59,440 8,572 5,177 (3,000) 35,500 - 332,500 (343,808) 475,952 60,999 261,080 - - (37,432) 85,010 (69,500) 719,980 (cid:131) (cid:131) Deferred STI - acquired under the mandatory component of the Bank’s Equity Participation Plan (EPP). Shares were purchased on 31 October 2004 in two equal tranches, vesting on 1 July 2005 and 1 July 2006 respectively. See Note 29 (Share Capital) to the Financial Statements for further details on the EPP. Reward Shares - granted under the Equity Reward Plan (ERP) and are subject to a performance hurdle. The first possible date for meeting the performance hurdle is 23 August 2007 with the last possible date for vesting being 23 August 2009. See Note 29 (Share Capital) to the Financial Statements for further details on the ERP. ‘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). (2) (3) Mr Katz continued to hold 250 PERLS II securities at 30 June 2005. 63 Directors’ Report – Remuneration Report (continued) Shares and Options Vested and Exercised During the Year Name Deferred STI Vested Reward Shares Vested Shares Granted on Exercise of Options Number Exercise Price ($) Value in Excess of Exercise Price(1) ($) Total Value of Options Exercised(2) ($) Directors D V Murray Total Directors Specified Executives M A Cameron L G Cupper S I Grimshaw H D Harley M A Katz R V McKinnon G L Mackrell 12,639 12,639 2,399 5,558 4,752 4,282 8,362 4,199 5,270 42,000 1,000,000 23.84 42,000 1,000,000 NA - - 75,000 26.97 - 11,000 14,000 7,000 18,000 - - - 5,500 25,000 11,000 100,000 57,500 75,000 - - - 26.97 23.84 26.97 30.12 - NA 6.61 NA - 8.92 - - - 4.28 7.61 4.85 5.77 - NA 6,610,000 6,610,000 - 669,000 - - - 107,000 761,000 278,875 432,750 - 2,248,625 G A Petersen 2,610 3,000 - Total Specified Executives 37,432 69,500 332,500 (1) (2) “Value in Excess of Exercise Price” represents the difference between the exercise price and closing market value of CBA shares on date of exercise. “Total Value of Options Exercised” represents the number of options exercised multiplied by the “Value in Excess of Exercise Price”. No options were granted or lapsed during the year. Accordingly, this value represents the total value of options that were granted, lapsed and exercised during the year. Loans to Directors and Specified Executives 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. 04/665), 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 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 to a bank, other than financial assets or services. influenced by The Class Order does not apply to a loan or financial instrument transaction which any Director, or a Specified Executive, of relevant entity should the reasonably be aware that if not disclosed would have the potential to adversely affect the decisions made by users of the financial statements about the allocation of scarce resources. the Australian Securities and the annual A condition of the Class Order is that the Bank must lodge a statutory declaration, signed by two Directors, with Investments report. The Commission accompanying declaration provides confirmation that the Bank has systems of internal control and procedures to provide assurance that any financial instrument transactions of a bank, which are not entered into on an arm’s length basis, are drawn to the attention of the Directors so that they may be disclosed. 64 Directors’ Report – Remuneration Report (continued) Individual Loans to Directors and Specified Executives Total loans to Directors and Specified Executives Year Ended 30 June Balance 1 July Interest Charged Interest Not Charged Write-off Balance 30 June $000s $000s $000s $000s $000s Number in Group at 30 June Directors 2005 2004 2 36 Specified Executives 2005 2004 8,706 4,633 Total Directors and Specified Executives 2005 2004 8,708 4,669 - 3 523 377 523 380 - - - - - - - - - - - - 3 22 8,803 8,829 8,806 8,851 1 2 6 6 7 8 Details of individuals with loans above $100,000 in the reporting period are as follows: Individual loans above $100,000 to Specified Executives Balance 1 July 2004 Interest Charged Interest Not Charged Write-off Balance 30 June 2005 Highest Balance in Period $000s $000s $000s $000s $000s $000s Directors Not Applicable Specified Executives S I Grimshaw H D Harley M A Katz G L Mackrell J K O’Sullivan G A Petersen 1,543 335 202 272 185 250 321 175 175 - 58 295 - 146 1,500 200 861 258 900 800 - - - - - - - - - - - - - - - - - - - - 1,485 332 - - - 243 347 175 175 500 - - 1,080 - 1,500 392 696 208 400 800 1,543 338 202 343 185 252 347 175 175 500 190 296 1,080 147 1,500 395 861 268 900 800 90 24 11 10 10 13 26 12 8 14 2 12 <1 4 97 13 53 15 40 52 - - - - - - - - - - - - - - - - - - - - 65 Directors’ Report – Remuneration Report (continued) Terms and Conditions of Loans All loans to 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). 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 entities not controlled by the bank. 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 $2,290,323. 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. Audit Certain disclosures required by AASB 1046 have been made in this Remuneration Report. Pages 54 to 66 of this report have been audited as required. 66 Director’s Report (continued) Non-Audit Services Amounts paid or payable to Ernst & Young for non- audit services provided during the year, as set out in the Annual Report in Note 35 to the Financial Statements are as follows: Regulatory audits, reviews, attestations and assurances for Group entities – Australia Regulatory audits, reviews, attestations and assurances for Group entities – Off-shore Financial and other audits, reviews, attestations and assurances for Group entities - Australia Financial and other audits, reviews, attestations and assurances for Group entities – Off-shore Assurance services relating to Sarbanes-Oxley legislation compliance Agreed upon procedures and comfort letters in respect of financing, debt raising and related activities Due diligence and transactional services Taxation services Other Total $’000 1,245 204 145 8 417 58 220 10 113 2,420(1) (1) An additional amount of $3,305,000 was paid to Ernst & Young by way of fees paid for Non-Audit Services provided to entities not consolidated into the Financial Statements. These relate predominately to audits, reviews, attestations and assurances for managed investment schemes and superannuation funds. Amounts paid or payable for audit services to Ernst & Young totalled $7,921,000 and to other auditors totalled $114,000. The Bank has in place an Independent Auditor Services Policy, details of which are set out in the Corporate Governance section of this Annual Report, to assist in ensuring the independence of the Bank’s external auditor. The Audit Committee has considered the provision, during the year, of non-audit services by Ernst & Young and has concluded that the provision of those services did not compromise the auditor independence requirements of the Corporations Act. The Audit Committee advised the Board accordingly and, after considering the Committee’s advice, the Board of Directors agreed that it was satisfied that the provision of the non-audit services by Ernst & Young during the year, was compatible with the general standard of independence imposed by the Corporations Act. Signed in accordance with a resolution of the Directors. The reasons for the Directors being satisfied that the provision of the non-audit services during the year did not compromise the auditor independence requirements of the Corporations Act are: − The operation of the Independent Auditor Services Policy during the year to restrict the nature of non- audit services engagements, to prohibit certain to require Audit Committee pre- services and approval for all such engagements; and The relative quantum of fees paid for non-audit services compared to the quantum of audit fees. − The above Directors’ statements are in accordance with the advice received from the Audit Committee. Auditor’s Declaration of Independence We have obtained the following independence declaration from our auditors, Ernst and Young. Auditor’s Independence Declaration to the Directors of Commonwealth Bank of Australia In relation to our audit of the financial report of Commonwealth Bank of Australia for the financial year ended 30 June 2005, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct, other than two employees of Ernst & Young held bank accounts with Commonwealth Bank of Australia with insignificant balances whilst engaged in the audit which constitute technical contraventions of the auditor independence requirements of the Act. In my opinion, due to the nature of these contraventions and the rectification steps which have been undertaken, these issues have not impaired our audit independence for the year ended 30 June 2005. Ernst & Young S J Ferguson Partner 10 August 2005 Liability limited by the Accountants Scheme, approved under the Professional Standards Act 1994 (NSW). 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). Incorporation of Additional Material This report incorporates the Chairman’s Statement, Highlights, Which new Bank Summary, Business Review, Corporate Governance and Shareholding Information sections of this Annual Report. J M Schubert Chairman 10 August 2005 D V Murray Managing Director Chief Executive Officer 67 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 Which new Bank Operating profit before goodwill amortisation, appraisal value uplift and income tax expense Income tax expense Outside equity interests Net profit after tax ("cash basis") 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 Which new Bank Profit on operations (“cash basis”) Goodwill amortisation Appraisal value uplift/(reduction) 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 2005 $M 2004 $M 2003 $M 2002 $M 2001 $M 5,966 5,388 11,354 322 5,697 150 5,847 5,185 (1,637) (10) 3,538 778 (325) 5,410 5,081 10,491 276 5,500 749 6,249 3,966 (1,262) (9) 2,695 201 (324) 5,026 4,373 9,399 305 4,710 4,358 9,068 449 5,312 239 5,551 5,201 - 5,201 3,543 (958) (6) 2,579 (245) (322) 3,418 (916) (1) 2,501 477 (323) 4,474 4,350 8,824 385 5,170 - 5,170 3,269 (993) (14) 2,262 474 (338) 3,991 2,572 2,012 2,655 2,398 2,959 351 156 3,466 177 (105) 3,538 (325) 778 3,991 2,675 274 129 3,078 152 (535) 2,695 (324) 201 2,572 2,376 233 65 2,674 73 (168) 2,579 (322) (245) 2,012 2,067 368 33 2,468 33 - 2,501 (323) 477 2,655 1,793 323 20 2,136 126 - 2,262 (338) 474 2,398 217,516 189,391 160,347 147,074 329,035 305,995 265,110 249,648 136,059 230,411 168,029 163,177 140,974 132,800 302,975 281,110 242,958 228,592 117,355 210,563 24,271 19,877 22,405 17,700 20,024 14,995 19,030 13,639 18,393 12,677 189,559 169,321 146,808 141,049 138,383 243,948 214,187 188,270 170,634 225,592 197,532 174,737 157,105 160,607 145,978 271,596 252,652 221,248 208,673 24,579 16,396 329,035 305,995 265,110 249,648 41,650 15,789 27,567 16,295 35,059 18,284 196,918 20,208 13,285 230,411 (1) “Underlying basis” excludes shareholder investment returns, initiatives including Which new Bank, goodwill amortisation and appraisal value uplift/(reduction) 68 Five Year Financial Summary (continued) 2005 2004 2003 2002 2001 Shareholder Summary Dividends per share (cents) - fully franked Dividend cover (times) - statutory Dividend cover (times) - cash Dividend cover (times) - underlying Earnings per share (cents) Basic Statutory Cash basis (1) Underlying basis (2) Fully Diluted Statutory Cash basis (1) Underlying basis (2) Dividend payout ratio (%) (3) Statutory Cash basis (1) Underlying basis (2) Net tangible assets per share ($) Weighted average number of shares (basic) (M) Weighted average number of shares (fully diluted) (M) Number of shareholders Share prices for the year ($) Trading high Trading low End (closing price) Performance Ratios (%) Return on average shareholders' equity (4) (5) (8) Statutory Cash basis (1) Underlying basis (2) Return on average total assets (4) Statutory Cash basis(1) Underlying basis(2) Capital adequacy - Tier 1 Capital adequacy - Tier 2 Deductions Capital adequacy - Total Net interest margin Other Information (numbers) Full time staff equivalent (6) Branches/service centres (Australia) Agencies (Australia) ATMs (Proprietary) EFTPOS terminals EzyBanking 197 1.5 1.4 1.3 303.1 267.6 261.9 303.0 267.5 261.8 65.2 73.9 75.5 13.8 1,273 1,274 704,906 38.52 28.79 37.95 18.3 16.0 15.6 1.3 1.1 1.1 7.46 3.21 (0.92) 9.75 2.45 183 1.1 1.1 1.3 196.9 206.6 237.1 196.8 206.5 237.0 93.5 89.1 77.6 12.2 1,256 1,257 714,901 33.54 27.00 32.58 12.5 12.7 14.6 0.9 0.9 1.1 7.43 3.93 (1.11) 10.25 2.53 154 0.9 1.3 1.4 157.4 202.6 210.2 157.3 202.5 210.0 150 1.4 1.3 1.3 209.6 197.3 194.6 209.3 197.0 194.3 136 1.4 1.3 1.2 189.6 178.8 168.8 189.3 178.6 168.5 97.7 75.9 73.3 11.4 1,253 1,254 746,073 71.7 76.2 77.2 10.3 1,250 1,252 722,612 71.2 75.5 80.2 9.6 1,260 1,262 709,647 32.75 23.05 29.55 34.94 24.75 32.93 34.15 26.18 34.15 10.5 13.1 13.6 0.8 1.0 1.0 6.96 4.21 (1.44) 9.73 2.67 14.7 12.9 12.8 1.1 1.0 1.0 6.78 4.28 (1.26) 9.80 2.76 13.5 12.1 11.3 1.1 1.0 1.0 6.51 4.18 (1.53) 9.16 2.78 35,313 1,006 3,864 3,154 137,240 841 36,296 1,012 3,866 3,109 126,049 815 35,845 1,014 3,893 3,116 129,959 760 37,245 1,020 3,936 3,049 126,613 730 37,460 1,066 3,928 2,931 122,074 659 Productivity Total Operating Income per full-time (equivalent) employee ($) Staff Expense/Total Operating Income (%) Total Operating Expenses (7) /Total Operating Income (%) 308,357 23.3 51.5 278,047 24.3 59.6 262,212 26.4 59.1 243,469 26.4 57.4 235,558 26.7 58.6 (1) (2) “Cash basis” for the purpose of these financial statements is defined as net profit after tax and before, 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, goodwill amortisation and life insurance and funds management appraisal value uplift. (3) Dividends paid divided by earnings less preference dividends. (4) Calculations based on operating profit after tax and outside equity interests applied to average shareholders’ equity/average total assets. (5) 2005, 2004 and 2003 shareholders’ equity includes retained earnings before provision for final dividend of $1,434 million, $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. (6) Staff numbers include all permanent full time staff, part time staff equivalents and external contractors employed by third party agencies. (7) (8) Prior period numbers have been restated to include preference share dividends as a deduction from operating profit. Total Operating Expenses excluding goodwill amortisation and charge for bad and doubtful debts. 69 Financial Statements Statements of Financial Performance ...................................................................................................................................71 Statements of Financial Position ...........................................................................................................................................72 Statements of Changes in Shareholders’ Equity .................................................................................................................73 Statements of Cash Flows ......................................................................................................................................................74 Notes to the Financial Statements .........................................................................................................................................75 1. Summary of Significant Accounting Policies......................................................................................................................75 2. Operating Profit ..................................................................................................................................................................88 3. Revenue from Ordinary Activities ......................................................................................................................................90 4. Average Balances and Related Interest ............................................................................................................................91 5. Income Tax Expense .........................................................................................................................................................96 6. Dividends............................................................................................................................................................................98 7. Earnings Per Share............................................................................................................................................................99 8. Cash and Liquid Assets .....................................................................................................................................................99 9. Receivables from Other Financial Institutions ...................................................................................................................99 10. Trading Securities ............................................................................................................................................................100 11. Investment Securities.......................................................................................................................................................101 12. Loans, Advances and Other Receivables........................................................................................................................104 13. Provisions for Impairment ................................................................................................................................................107 14. Credit Risk Management..................................................................................................................................................111 15. Asset Quality ....................................................................................................................................................................118 16. Insurance Investment Assets ...........................................................................................................................................123 17. Deposits with Regulatory Authorities ...............................................................................................................................123 18. Shares in and Loans to Controlled Entities......................................................................................................................123 19. Property, Plant and Equipment ........................................................................................................................................124 20. Intangible Assets ..............................................................................................................................................................126 21. Other Assets.....................................................................................................................................................................127 22. Deposits and Other Public Borrowings ............................................................................................................................128 23. Payables to Other Financial Institutions...........................................................................................................................129 24. Income Tax Liability .........................................................................................................................................................129 25. Other Provisions...............................................................................................................................................................130 26. Debt Issues ......................................................................................................................................................................131 27. Bills Payable and Other Liabilities....................................................................................................................................133 28. Loan Capital .....................................................................................................................................................................134 29. Share Capital....................................................................................................................................................................136 30. Outside Equity Interests ...................................................................................................................................................142 31. Capital Adequacy .............................................................................................................................................................143 32. Maturity Analysis of Monetary Assets and Liabilities .......................................................................................................147 33. Financial Reporting by Segments ....................................................................................................................................149 34. Life Insurance Business ...................................................................................................................................................153 35. Remuneration of Auditors ................................................................................................................................................159 36. Commitments for Capital Expenditures Not Provided for in the Accounts ......................................................................159 37. Lease Commitments - Property, Plant and Equipment....................................................................................................159 38. Contingent Liabilities and Assets .....................................................................................................................................160 39. Market Risk ......................................................................................................................................................................162 40. Superannuation Commitments.........................................................................................................................................171 41. Controlled Entities ............................................................................................................................................................172 42. Investments in Associated Entities and Joint Ventures ...................................................................................................175 43. Standby Arrangements and Unused Credit Facilities ......................................................................................................175 44. Director and Executive Disclosures .................................................................................................................................176 45. Related Party Disclosures................................................................................................................................................176 46. Statements of Cash Flows ...............................................................................................................................................177 47. Disclosures about Fair Value of Financial Instruments....................................................................................................179 Directors’ Declaration............................................................................................................................................................181 Independent Audit Report.....................................................................................................................................................182 Shareholding Information ....................................................................................................................................................183 International Representation ................................................................................................................................................186 70 Statements of Financial Performance for the year ended 30 June 2005 Interest income Interest expense Net interest income Other income: Revenue from sale of assets Written down value of assets sold Other Net banking operating income Funds management income including premiums Investment revenue Claims and policyholder liability expense Net funds management operating income Insurance premiums and related revenue Insurance 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 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") Shareholders investment returns 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 2005 BANK 2004 $M $M $M $M $M GROUP 2003 2005 2004 16,194 10,228 5,966 13,287 7,877 5,410 11,528 6,502 5,026 595 (604) 2,924 8,881 1,261 2,008 (1,871) 1,398 1,132 1,186 (1,243) 1,075 943 (874) 2,777 8,256 1,175 1,967 (1,809) 1,333 128 (106) 2,605 7,653 1,149 8 (91) 1,066 1,012 840 (950) 902 1,131 620 (1,071) 680 13,404 8,601 4,803 474 (439) 3,988 8,826 11,053 6,649 4,404 1,398 (1,823) 3,737 7,716 - - - - - - - - - - - - - - - - 11,354 10,491 9,399 8,826 7,716 2,13 322 276 305 292 263 2 2 34 5 7 7 6 6 5,697 150 5,847 778 (325) 5,638 1,637 4,001 (10) 3,991 (141) 33 (108) 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) 4,357 150 4,507 - (186) 3,841 920 2,921 - 2,921 (2) 33 31 4,226 725 4,951 - (186) 2,316 669 1,647 - 1,647 10 43 53 3,883 2,618 1,886 2,952 1,700 Cents per share 303.1 303.0 196.9 196.8 157.4 157.3 197 1,115 7,795 908 183 1,065 7,306 402 154 1,019 - - $M $M $M 3,466 177 (105) 3,538 778 (325) 3,991 3,078 152 (535) 2,695 201 (324) 2,572 2,674 73 (168) 2,579 (245) (322) 2,012 (1) June 2005 and 2004 results reflects the Which new Bank program, while prior year includes other strategic initiatives undertaken. 71 Statements of Financial Position as at 30 June 2005 Note 2005 $M GROUP 2004 $M 2005 $M 5,574 6,133 12,432 6,922 174,140 16,917 - 1 29,161 796 12 2,336 17,200 271,624 143,858 7,969 16,917 16,652 14 1,421 709 - 40,687 16,658 244,885 7,010 251,895 19,729 13,871 687 737 2,179 2,255 BANK 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 13,359 687 737 2,148 1,805 5,715 6,205 14,628 10,272 217,516 16,786 27,837 45 - 1,344 52 4,394 24,241 329,035 168,029 8,023 16,786 - 14 1,550 881 24,694 58,621 18,086 296,684 6,291 302,975 26,060 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 13,871 687 1,573 4,624 3,516 13,359 687 1,573 3,946 2,840 24,271 22,405 19,729 18,736 631 1,158 1,789 26,060 304 2,176 2,480 24,885 - - - 19,729 - - - 18,736 Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Life insurance investment assets Deposits with regulatory authorities Shares in and loans to controlled entities Property, plant and equipment Investment in associates Intangible assets Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Due to controlled entities Provision for dividend Income tax liability Other provisions Life insurance policyholder liabilities Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Net Assets Shareholders' Equity Share capital: Ordinary share capital Preference share capital Other equity instruments Reserves Retained profits Shareholders' equity attributable to members of the Bank Outside equity interests: Controlled entities Life insurance statutory funds and other funds Total outside equity interests Total Shareholders' Equity 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 72 Statements of Changes in Shareholders’ Equity for the year ended 30 June 2005 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 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 surplus / (deficit) on sale of property Closing balance Asset Revaluation Reserve Opening balance Revaluation of investments and properties Transfers on sale of properties Closing balance Foreign Currency Translation Reserve Opening balance Currency translation adjustments Transfer to retained profits Closing balance Total Reserves Shareholder’s Equity Attributable to Members of the Bank Note 29 29 29 2005 $M 2004 $M GROUP 2003 $M 13,359 - - 446 66 - 13,871 687 687 1,573 - 1,573 12,678 (213) - 389 38 467 13,359 687 687 - 1,573 1,573 12,665 - (361) 361 13 - 12,678 687 687 - - - 2005 $M 13,359 - - 446 66 - 13,871 687 687 737 - 737 BANK 2004 $M 12,678 (213) - 389 38 467 13,359 687 687 - 737 737 2,840 2,809 1,452 1,805 2,591 - - - 3,991 6,831 (786) (883) (200) (1,069) (246) (131) 3,516 3,810 786 - 4,596 280 2 282 61 33 (2) 92 (205) (141) - (346) - (319) 142 2,572 5,204 (201) (808) (188) (865) (201) (101) 2,840 3,751 201 (142) 3,810 289 (9) 280 7 45 9 61 (197) (8) - (205) 1,027 - 250 2,012 4,741 - (699) (166) (832) (195) (40) 2,809 3,998 - (247) 3,751 289 - 289 4 3 - 7 (65) (129) (3) (197) - - - 2,921 4,726 - (883) (200) (1,069) (246) (73) 2,255 570 - - 570 - (319) - 1,647 3,919 - (808) (188) (865) (201) (52) 1,805 570 - - 570 1,531 2 1,533 1,531 - 1,531 43 33 (2) 74 4 (2) - 2 - 43 - 43 (6) 10 - 4 . 2,148 4,624 3,946 3,850 2,179 24,271 22,405 20,024 19,729 18,736 73 Statements of Cash Flows for the year ended 30 June 2005 Note 2005 $M 2004 $M Cash Flows From Operating Activities Interest received Dividends received Interest paid Other operating income received Expenses paid Income taxes paid Net decrease/(increase) in trading securities Life insurance: Investment income Premiums received (1) Policy payments (1) Net Cash provided by / (used in) operating activities Cash Flows from Investing Activities Payments for shares in controlled entities, other companies and management rights Proceeds from disposal of controlled entities Proceeds from disposal of entities and businesses Redemption of capital from controlled entities Disposal of shares in other companies Net movement in investment securities: Purchases Proceeds from sale Proceeds at or close to maturity (Lodgement)/withdrawal 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 (excluding DRP) Net movements in other liabilities Net increase/(decrease) in payables due to other financial institutions not at call Net increase/(decrease) in securities sold under agreements to repurchase Issue of loan capital Redemptions of loan capital Other Net Cash provided by Financing Activities Net (decrease)/increase in Cash and Cash Equivalents Cash and Cash Equivalents at beginning of period Cash and Cash Equivalents at end of period GROUP 2003 $M 11,452 4 (6,455) 3,135 (5,438) (1,258) (2,484) 644 4,130 (5,855) 2005 $M 13,148 988 (8,515) 3,615 (4,475) (619) 505 - - - BANK 2004 $M 11,045 798 (6,351) 2,375 (4,459) (886) (4,672) - - - 16,205 3 (10,198) 4,649 (5,714) (985) 318 1,572 3,183 (4,664) 13,101 6 (7,543) 3,410 (5,529) (1,366) (4,324) 841 3,562 (4,529) 46 (c) 4,369 (2,371) (2,125) 4,647 (2,150) 46 (f) (82) - 173 - - - 63 - - 114 (173) 33 - - - (24) - 178 306 - - 885 - - 114 (22,608) 392 22,799 (25,587) 697 24,407 (18,055) 23 17,719 (20,254) 275 19,344 (15,157) 390 14,904 (7) (28,447) - 30 (286) (15) (29,328) - 69 (536) 66 (13,577) - 72 (143) 3 (20,293) (3,325) 30 (164) (2) (22,873) 1,412 7 (175) 933 292 991 1,056 (1,023) (1,461) 513 50 301 441 (344) 988 758 (1,039) (1,537) (14,165) 15,281 (23,940) (20,286) 21,500 (31,094) (13,091) 14,628 (11,634) - - (21,737) - - (23,415) - 66 (532) 505 323 - - 6,332 14,579 (2,083) (330) 1,573 21,997 13,413 (1,774) (242) - 13 182 - 66 - - 5,129 7,054 (1,933) (926) - 2,807 16,238 (2,024) (292) (532) 505 - 737 19,254 7,765 (1,726) 113 449 (929) (796) 449 (909) (1,480) 1,233 (1,392) (37) 17,660 (1,911) 2,846 935 206 985 (317) (2) 34,883 1,418 1,428 2,846 3,046 901 - 19 12,689 (1,070) 2,498 1,428 (1,418) 1,554 (1,621) 6 15,765 (1,325) 1,639 314 269 1,784 (317) (16) 26,927 1,362 277 1,639 46(a) (1) These were gross premiums and policy payments before splitting between policyholder liabilities and revenue and expense. It should be noted that the Group does not use this accounting Statement of Cash Flows in the internal management of its liquidity positions. 74 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies (a) Bases of accounting In this financial report Commonwealth Bank of Australia is referred to as the ‘Bank’ or ‘Company’, and the ‘Group’ or the ‘Consolidated Entity’ consists of the Bank and its controlled entities. The financial report is a general purpose the requirements of the Banking Act, Corporations Act 2001, applicable Accounting Standards and other mandatory reporting requirements so far as the requirements are considered appropriate to a banking corporation. report which complies with financial The accounting polices applied are consistent with those of the previous year. 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. (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 their present value unless not been discounted 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 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 foreign currency assets and liabilities of overseas branches and overseas controlled entities are converted to Australian currency at 30 June 2005 in accordance with the current rate method. Profit and loss items for overseas branches and overseas controlled entities are converted to Australian dollars progressively throughout the year at the spot exchange rate at the date of the transaction. Translation differences arising from conversion of opening balances of shareholders’ funds of overseas controlled entities at year end exchange rates are excluded from profit and loss and reflected in a Foreign Currency Translation Reserve. The Group maintains a substantially foreign matched position 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 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). this report and (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 are reflected trading securities is reported in net interest earnings. Trading securities are recorded on a trade date basis. Interest on Income’. ‘Other in (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 75 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued 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. Non Accrual Facilities interest reserved and unearned Non accrual facilities (primarily loans) are recorded income. Upon on a cash basis 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. to profit and 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. Restructured Facilities loss when a cash payment in accordance with 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. Assets Acquired Through Securities Enforcement (“AATSE”) the restructured terms. 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 is general provision. Any subsequent cash recovery credited to the general provision. 76 (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 underlying assets, 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 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. Specific provisions are established where full recovery of principal is considered doubtful. Specific provisions are made against individual facilities in the credit risk rated managed segment where exposure aggregates to $250,000 or more, and a loss of $10,000 or more is expected. A specific provision is also established against each statistically managed portfolio in the statistically managed segment to cover facilities which are not well secured and past due 180 days or more, against the credit risk rated managed segment for exposures aggregating to less than $250,000 and 90 days past due or more, and against emerging credit in specific segments in the credit risk rated managed portfolio. These provisions are funded primarily by reference to historical ratios of write offs to balances in default. identified risks 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. Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (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 life. at 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 in Asset income or expense. Realised amounts 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. The useful lives of major depreciable assets are as follows: Buildings - Shell - Integral plant and equipment - carpets - all other (air-conditioning, lifts) - Non integral plant and equipment - fixtures and fittings Leasehold improvements Equipment - Security surveillance systems - Furniture - Office machinery - EFTPOS machines Maximum 30 years 10 years 20 years 10 years Lesser of unexpired lease term or lives as above 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 fees, market revaluation of Other assets include all other financial assets and trading includes interest, 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 capitalises computer software costs. The criteria for capitalised computer software costs is that only computer software projects costing $10 million or more are capitalised and capitalisation is limited to those investments that will deliver identifiable and sustainable customer value and an increase in returns, in a significant line of business. The Group carries net unamortised capitalised computer software costs of $182 million as at 30 June 2005 (2004:$107 million). Such costs are amortised over the assessed useful life of the projects. An amortisation period of 2½ years is adopted for most software developments. Software 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. (w) Payables due to other financial institutions Payables due to other financial institutions includes deposits, vostro balances and settlement account balances due to other banks. They are brought to account at the gross value of the outstanding balance. Interest is charged to profit when incurred. (x) Income taxes for income tax and accounting purposes 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 is periods 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). 10 years 8 years 5 years 3 years 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. (y) Provisions for employee entitlements 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 77 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 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (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 program and results in the Bank incurring additional expenditure in the key areas of staff training and skilling, systems and process simplification, and technology. In the year to 30 June 2005 such expenses have totalled $150 million and principally comprised redundancies and process improvement costs. 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 2005 is $91 million. (aa) Provision for self insurance The provision for self insurance covers certain non insurance risks. lending 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. 78 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 $3,750 million, including the appraisal value uplift (2004: $2,964 million and 2003: $2,905 million). Capital reserve is derived from capital profits and is available for dividend. 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 that include financial The Group enters into a significant volume of derivative foreign instruments exchange contracts, forward rate agreements, futures, options and interest rate, currency, equity and credit swaps. Derivative financial instruments are used as part of the Group’s trading activities and to hedge certain assets and liabilities. Derivative financial instruments held or issued for trading purposes Traded derivative financial instruments are recorded at net fair value based on quoted market prices, broker or dealer price quotations. A positive revaluation amount of a contract is reported as an asset and a negative revaluation amount of a contract as a liability. Changes in net fair value are reflected in profit immediately as they occur. Derivative financial instruments held or issued for purposes other than trading The principal objective in holding or issuing derivative financial instruments for purposes other than trading is to manage balance sheet interest rate, exchange rate and credit risk associated with certain assets and liabilities such as loans, investment securities, deposits and debt issues. To be effective as hedges, the derivatives are identified and allocated against the underlying hedged item or class of items and generally modify the interest rate, exchange rate or credit characteristics of the hedged asset or liability. Such derivative financial instruments are purchased with the intent of being held to maturity. Derivatives that are designated and effective as hedges are accounted for on the same basis as the instruments they are hedging. Swaps Interest rate swap receipts and payments are accrued to profit as interest of the hedged item or class of items being hedged over the term for which the swap is effective as a hedge of that designated item. Premiums or discounts to market interest rates that are received or made in advance are deferred and amortised to profit over the term for which the swap is effective as a hedge of the underlying hedged item or class of items. Similarly with cross currency swaps, interest rate receipts and payments are brought to account on the same basis outlined in the previous paragraph. In addition, the initial principal flows are reported net and revalued to market at the current market exchange rate. Revaluation gains and losses are taken to profit against revaluation losses and gains of the underlying hedged item or class of items. Credit default swaps are utilised to manage credit risk in the asset portfolio. Premiums are accrued to profit and loss as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. Any principal cash flow on default is brought to account on the same basis as the designated item being hedged. Equity swaps are utilised 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 to manage Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued 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 forward 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. Options Where options are utilised in the management of balance sheet risk, premiums on options and any realised gains and losses on exercise are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flows are amortised to profit as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. Early termination Where a derivative instrument hedge is terminated prior to its ‘maturity date’, realised gains and losses are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flows are amortised to profit as interest of the hedged item or class of items being hedged over the period for which the hedge would have been effective. Where the underlying hedged item or class of items being hedged ceases to exist, the derivative instrument hedge is terminated and realised and unamortised gains or losses taken to profit and loss. Further information on derivative financial instruments is shown in Note 39. (gg) Commitments to extend credit, letters of credit, guarantees, warranties and indemnities issued These financial instruments generally relate to credit risk and attract fees in line with market prices for similar arrangements. They are not sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and the probability of default. They are recorded as contingent liabilities at their face value. Further information is shown in Note 38. reflects (hh) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The principal sources of revenue are interest income and fees and commissions. Interest income Interest income is reflected in profit when earned on an accrual basis. Further information is included in Notes 1(k) Investment securities, 1(m) Loans, advances and other receivables and 1(n) Leasing and leveraged leasing. Lending fees Material non refundable front end loan fees that are yield related and do not represent cost recovery, are taken to profit over the period of the loan. Associated costs incurred in these lending transactions are deferred and netted against yield related fees. Where non refundable front end loan fees are received that represent cost recovery or charges for services not directly related to the yield on a loan, they are taken to income in the period in which they are received. Where fees are received on an ongoing basis and represent the recoupment of the costs of maintaining and administering existing loans, these fees are taken to income on an accrual basis. loan 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 Trading instruments. Life insurance business income recognition is explained in Note 1(ii) below. 1(ff) Derivative securities and (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 to whether policyholders or to shareholders. they are designated as relating (ii) All assets are measured at net market values. (iii) All liabilities are measured at net present values. Policy liabilities are calculated in accordance with the principles of Margin on Services (MoS) profit reporting as set out in Actuarial Standard AS 1.03: 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. (vii) Participating benefits vested in relation to the financial year, other than transfers from unvested policyholder benefits liabilities, are recognised as expenses. (viii) Reinsurance contracts entered into are recognised on Insurance Holdings Limited 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. Premiums and Claims (i) 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. 79 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued (ii) Non-investment linked business (i) Emergence of planned profit margins: Premiums received for providing services and bearing risks are recognised as revenue. Premiums with a regular due date are recognised as revenue on an accruals basis. Non-investment linked claims are recognised as an expense when a liability has been established Market Value Accounting All assets are valued at net market value (“NMV”) and all liabilities at net present value at balance date. Consistent with the principles of market value accounting, movements in the net market value of assets and net present value of the period are 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: − 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 the value of profits 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 assessed periodically as part of the valuation of investments with changes in value taken to profit. This excess does not require amortisation in the financial statements. Life Insurance Policy Liabilities and Margin on Services Profit Policy liabilities are calculated in accordance with the principles of Margin on Services (“MoS”) profit reporting as set out in Actuarial Standard AS 1.03: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board. Policy liabilities are calculated in a way that allows for the systematic release of planned profit margins as services are provided to policyowners and the revenues relating to those services are received. Selected profit carriers including premiums and anticipated annuity payments are used to determine profit recognition. Profit Life insurance business operating under this profit recognition methodology can be analysed as follows: 80 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 actual planned margin replicates assumptions, the planned profit margin will be released over the life of the policy. experience (ii) Difference between actual and planned experience: to experience profits/(losses) Experience profits/(losses) are realised where actual experience differs from the expected performance used to determine planned margins. Circumstances giving rise 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. (iii) Loss recognition on groups of related products or (iv) immediately. reversals of previously recognised losses: Where future expenses for a group of related products exceeds future revenues, the anticipated loss is recognised 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. Policy Acquisition Costs Under Margin on Services profit 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 loan servicing, program receives 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 inherent Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued recognised in Other Income when receivable. Interest rate swaps are recognised in income on an accruals basis. (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 (2004) Software Capitalisation for The criteria technology software information capitalisation was amended effective 1 July 2003, such that only computer software projects costing $10 million or more are capitalised and capitalisation is limited to those investments that will deliver identifiable and sustainable customer value and an increase in returns, in a significant line of business. This change resulted in the expensing of $219 million of previously capitalised software at 1 July 2003. (pp) Subsequent Events Sale of Hong Kong Business On 7 July 2005 the Bank entered into an agreement to sell its life insurance and financial planning business in Hong Kong for approximately $600 million to Sun Life Financial. The business consisted of CMG Asia Limited, CommServe Financial Limited and Financial Solutions Limited, with a combined carrying value of $527 million under current Australian GAAP. The carrying value will be different under AIFRS, principally due to differences in discount the actuarial valuation of in policyholder liabilities and differences in treatment of rates used historic foreign exchange losses under AIFRS. The impact of conversion to AIFRS is included in Note 1 (qq). The transaction, targeted for completion within three months, and together with the determination of the final profit is subject to conditions precedent. (qq) International Financial Reporting Standards (IFRS) Transition Management On 1 July 2005 the Bank commenced application of the Australian equivalent of International Financial Reporting Standards (“AIFRS”) to the maintenance of all financial records. This is in line with the conversion deadline set out by the Financial Reporting Council of Australia. The Bank completed its review of the AIFRS and their impact during the planning stage of the project. Conversion issues were then identified and methodologies designed to resolve those issues. Implementation of these changes was completed during the financial year ended 30 June 2005, including the maintenance of a shadow set of AIFRS-compliant financial records for that year. Although all AIFRSs are applied by the Bank from 1 July 2005 some standards are not applicable to the comparative financial year (the financial year beginning 1 July 2004). As such, on release of AIFRS-compliant financial statements for the financial year beginning 1 July 2005, the financial results for the comparative financial year will only be restated to a limited extent. Descriptions of the key AIFRS issues are set out below and segregated between those issues which have an effective impact from 1 July 2004 and those which have an effective impact from 1 July 2005. Where the financial impact of conversion can be reasonably estimated, and where it is material, details are provided below, both within the narrative disclosures and in summary tabular form. It should be noted that the Bank cannot reliably estimate the prospective financial impact beyond 1 July 2005 of AIFRS issues, as the eventual impact of these issues depend upon uncertain future events and transactions. upon prevailing world-wide All amounts set out below are audited estimates based accounting interpretations and existing financial instrument valuation methodologies. To the extent that those interpretations or valuation methodologies change, the amounts quoted below may be subject to alteration prior to the release of the Bank’s AIFRS-compliant financial statements for the financial year ending 30 June 2006. All amounts are stated on an ‘after-tax’ basis. Key Accounting Issues Whilst the implementation of AIFRS has no impact on the Bank’s cash flows, underlying economic strength, nor risk management practices, the following key areas of difference between current accounting practice and the treatment under AIFRS have been identified: Issues with effective impact from 1 July 2004 (i) Employee Benefits – Defined Benefit Superannuation Plans that arise within With the introduction of AIFRS, the surpluses and/or deficits individual defined benefit superannuation plans must be recognised in the statement of financial position. There is a choice of three options for the recognition of actuarial gains and losses related to defined benefit superannuation plans within Profit or Retained Earnings. The options available include direct recognition in Profit of all of the actuarial gain or loss, direct recognition in Retained Earnings of all of the actuarial gain or loss, or the ‘corridor’ approach which progressively recognises a certain portion of the gain or loss within Profit over the expected average remaining working lives of employees within the plan. Under each of these options, the net surpluses or deficits of the defined benefit superannuation plans must be recognised within 81 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued the Statement of Financial Position. The Bank has selected direct recognition in Retained Earnings as the method of accounting for the defined benefit superannuation plans from 1 July 2004. 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 AIFRS, the comparative period beginning 1 July 2004 has recorded an opening Retained Earnings adjustment reflecting the value of this surplus. It should be noted that the value of the net surplus for financial reporting purposes does not reflect the actuarial valuation used when assessing funding requirements of the plans. The actuarial valuation is higher than the value used for financial reporting purposes principally due to the use of prescribed discount rates in the latter. This opening adjustment to Retained Earnings as at 1 July 2004 is a net increase of $389 million. This is comprised of both an increase in Retained Earnings of $443 million due to the recognition of the defined benefit plan currently in surplus, and a decrease in Retained Earnings of $54 million due to the recognition of the defined benefit plan currently in deficit. For the AIFRS comparative financial year ended 30 June 2005, the restatement of the statement of financial performance includes an additional, non-cash, expense item of $52 million, reflecting the accrual accounting charge to profit and loss associated with accounting for defined benefit plans. For the AIFRS comparative financial year ended 30 June 2005 there was an actuarial gain of $102 million and other movements totalling $8 million (principally foreign exchange movements) resulting in a total increase of $110 million to net assets and Retained Earnings. The total movement of $110 million comprised a $108 million increase in respect of the defined benefit plan currently in surplus, and a $2 million increase in respect of the defined benefit plan currently in deficit. The balance of the net accounting surplus remaining as at 1 July 2005 is $447 million after tax, being a plan surplus of $502 million less a plan deficit of $55 million. The above adjustments are summarised in the table below; 1 July 2004 net plan surplus Accounting expense Net actuarial gains and other movements - to Retained Earnings 30 June 2005 net plan surplus Group $M 389 (52) 110 447 (ii) Employee Benefits – Employee Share Schemes The Bank currently accrues all share based compensation on a cost basis and amortises it to expense over the vesting period where there are performance hurdles to be met. Shares in the Bank are purchased by a Trust when the shares are granted and held until they vest to the employee. conditions Under AIFRS the fair value of the share based compensation is calculated at grant date and amortised to expense over the vesting period, subject to service and performance Transitional arrangements are in place under AIFRS such that only those shares granted after 7 November 2002 and vesting after 1 January 2005 are accounted for in this manner. the Trust have been Shares consolidated, ‘Treasury Shares’ and accounted for as a deduction from Share Capital. the Bank held by reclassified as being met. in The opening adjustment as at 1 July 2004 includes a decrease of $126 million in Share Capital being the recognition of Treasury Shares at cost, an increase of $47 million in Equity Compensation Reserve reflecting the cumulative expense amortisation related to the purchase of Treasury Shares, and an increase of $141 million in Retained Earnings, comprising an adjustment to recognise the unamortised expense of $79 million together with the 82 reversal of the accrued payable previously recorded under Australian GAAP of $62 million. For the AIFRS comparative financial year ended 30 June 2005, there is an additional expense of $30 million being the difference in the amortisation expense for the year between Australian GAAP and AIFRS (which includes a one-off increase in expense of $32 million due to the discontinuance of the mandatory component of the Equity Participation Plan and the resulting recognition of cash incentives on an accruals basis). Within Shareholders Equity there has been a decrease in Share Capital of $6 million being the net movement in Treasury Shares for the year reflecting both purchases and vesting of shares, and a net decrease in Equity Compensation Reserve of $24 million reflecting both the vesting of Treasury Shares in the half year period prior to 1 January 2005 transition date and the amortisation during the year. The only share based compensation which remains after 1 July 2005 is in relation to the Long Term Incentive program. The Bank does not expect that the application of AIFRS to share based compensation from 1 July 2005 will have a material impact on net profit relative to current Australian GAAP. (iii) Consolidation of Special Purpose Vehicles AIFRS 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, will be consolidated under AIFRS. This has resulted in a gross up of the assets and liabilities recorded within the statement of financial position of $8,795 million as at 1 July 2004. A small number of special purpose vehicles in respect of structured transactions will also be consolidated, but this only results in reclassification between categories of assets within the statement of financial position. During the comparative AIFRS financial year ended 30 June 2005 there was a net increase in the carrying value of the assets and liabilities held by the securitisation vehicles of $3,435 million. This reflects the net impact of repayment and securitisation of new assets during the year. As these adjustments simply involve a grossing up of assets and liabilities on the Bank’s balance sheet, with no material impact on shareholders’ equity, they do not form part of the tabular presentation of summary financial impacts below. There is no net profit impact arising from the consolidation of these vehicles. (iv) Accounting for Life Insurance and Funds Management Business Appraisal Value Accounting On transition to AIFRS, 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 AIFRS, cease to recognise any movement in this asset in the statement of financial performance. The write off of the internally generated component will principally be reflected against the General Reserve and the acquired component will be reclassified as Goodwill within the statement of financial position and subject to an annual impairment test. The opening adjustments as at 1 July 2004 was a decrease to General Reserve of $2,836 million, being the reversal of internally generated appraisal value increases of $3,123 million less a $287 million transfer of historic writedowns of acquired goodwill to Retained Earnings. There is also a reversal of the asset representing the excess of the net market value over the net assets of the Bank’s life insurance controlled entities of $5,852 million and a net increase in goodwill of $2,729 million. During the AIFRS comparative financial year ended 30 June 2005, a further uplift in the appraisal value of $778 million was recognised under Australian GAAP. This Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued amount has been reversed in the AIFRS comparative statement of financial performance. Treasury Shares Under current Australian GAAP direct investments in Commonwealth Bank shares by the Bank’s life insurance statutory funds are recognised in the statement of financial position at net market value. On transition to AIFRS these assets will be reclassified as ‘Treasury Shares’ and accounted for as a deduction from Share Capital. These adjustments only occur at the consolidated Group level, and do not affect the financial statements of the underlying life insurance entities. The opening adjustment as at 1 July 2004 was a decrease of $300 million in Insurance Investment Assets; a decrease in Deferred Income Tax Liability of $9 million; a decrease of $245 million in Share Capital, being the cost of the investments; and a decrease of $46 million in Retained Earnings, being the reversal of the cumulative opening market value appreciation. During the AIFRS comparative financial year ended 30 June 2005, all realised and unrealised gains and dividend income on these shares of $39 million was recognised under current Australian GAAP. This amount has been reversed in the AIFRS comparative statement of financial performance, although an amount of $19 million representing realised gains and dividend income earned during the year has been transferred directly to Retained Earnings. As at 1 July 2005 a net decrease in Share Capital of $8 million has been recorded under AIFRS, being the net movement in the cost of Treasury Shares held during the AIFRS comparative financial year ended 30 June 2005. As the calculation of life insurance policyholder liabilities continues to include the fair values of policyholders’ interest in these Treasury Shares, the removal of movements in Treasury Share assets attributable to policyholders result in a mismatch within the consolidated financial statements. Income and Expense Recognition Initial entry fee income on investment style products issued by entities other than life insurers is currently immediately recognised as income in the statement of financial performance. The application of AIFRS to such investment contracts is currently being considered internationally with one possible interpretation requiring the deferral of all upfront fees over the life of the underlying investment contract. The Bank’s approach under AIFRS is to recognise upfront fees immediately as income where the Bank has provided financial advice. However, assuming the entire amount of this fee income was deferred, the adjustment to opening Retained Earnings as at 1 July 2004 would be a decrease of $69 million, and statutory profit for the year ended 30 June 2005 would be decreased by $9 million. Given the eventual the uncertainty around accounting interpretation this adjustment has been omitted from the tables below. (v) Accounting for Goodwill transition On is no to AIFRS Goodwill longer amortised but continues to be 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. No to opening Retained Earnings arises as at 1 July 2004 in respect of this issue. During the AIFRS comparative financial year ended 30 June 2005, goodwill amortisation of $325 million was recognised under Australian GAAP. This amount has been reversed in the AIFRS comparative statement of financial performance, net of amortisation totalling $4 million in respect of separately identifiable intangible assets. impairment adjustment (vi) Foreign Currency Translation Reserve On transition to AIFRS, an option exists to deem any amounts recorded within Foreign Currency Translation 83 Reserve (‘FCTR’) as zero. The Bank has adopted this transition option, resulting in a reduction of Retained Earnings of $205 million from FCTR as at 1 July 2004. (vii) Taxation performance” A “balance sheet” approach to tax-effect accounting is followed under AIFRS replacing the current “statement of approach financial recognises deferred is a difference between the carrying value of an asset or liability and its tax base. As at 1 July 2004 this change in approach did not result in any material adjustment to Shareholders’ Equity. approach. tax balances when there This Issues with effective impact from 1 July 2005 (viii) Derivative Financial Instruments including Hedge Accounting and Embedded Derivatives those used Under AIFRS all derivative financial instruments, including embedded derivatives and for balance sheet hedging purposes, are to be recognised on- balance sheet and measured at fair value. These amounts in particular, are audited estimates based upon prevailing world-wide accounting interpretations and existing financial instrument valuation methodologies. To the extent that those interpretations or valuation methodologies change, the amounts quoted below may be subject to alteration prior to the release of the Bank’s AIFRS-compliant financial statements for the financial year ending 30 June 2006. Hedge accounting can be applied, subject to certain rules, for fair value hedges, cash flow hedges, and hedges of investments in foreign operations. Cash flow hedges are the predominant form of hedging applied by the Bank. Embedded derivatives to certain structured relate transactions and potential changes in the future ownership structures of certain entities within the Bank. It is expected that these new rules on accounting for instruments and embedded derivatives will hedge introduce significant volatility within equity reserves, and the potential for some volatility within the statement of financial performance. As at 1 July 2005, the Bank recognised the following two amounts within Shareholders’ Equity in relation to the hedge accounting and embedded derivatives, being: − ineffectiveness an adjustment to Retained Earnings of $313 million to reflect both the initial recognition of embedded derivatives and non-hedged derivatives at fair value, and also the cumulative cash flow and fair value hedge the entire 1 July 2005 hedge accounting portfolio; and the recognition of a Cash Flow Hedge Reserve of $40 million representing the cumulative hedge effectiveness of all 1 July 2005 cash flow hedge relationships. inherent within − (ix) Provisions for Loan Impairment In line with market practice, the Bank’s current general provisioning for impairment covers non-identifiable probable losses and latent risks inherent in the overall portfolio of loans, advances and other credit transactions. Under AIFRS the Bank will at each reporting date first assess whether any objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. The Bank uses judgement to estimate the amount of any impairment loss. As a result of this change, there may be a reduction in the amount of the Bank’s general/collective provisioning for impairment. Due to current uncertainty around AIFRS accounting the development of Australian industry practice in this area, a loan impairment provision in accordance with AIFRS cannot be reliably estimated. interpretations and The practice of recording specific provisions for loan impairment will continue under AIFRS, however, such provisions – termed provisions for individually significant Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued Income and Expense Recognition A similar issue in respect of initial entry fee income on investment style products as described in section (iv) above for entities other than life insurers, will apply to life insurance entities from 1 July 2005. The Bank’s approach under AIFRS is to recognise upfront fees immediately where the Bank has provided financial advice. Where initial entry fee income has been deferred under AIFRS, this has resulted in a decrease to Retained Earnings of $75 million on 1 July 2005. However, assuming the entire amount of this fee income was deferred, as at 1 July 2005, this would result in a further reduction to Retained Earnings of $17 the eventual the uncertainty around million. Given accounting interpretation this adjustment has been omitted from the tables below. Outside Equity interests On transition to AIFRS, the outside equity interests in controlled unit trusts of the life companies no longer qualify as equity. As a result, the Bank has, on adoption of AIFRS, reclassified outside equity insurance statutory funds and other funds to liabilities. As at 1 July 2005, this will result in a reduction to Total Shareholders’ Equity of $1,158 million. interests life in (xiii) Financial Instruments Classification for Banking Business investments (measured at Certain of the Bank’s financial assets currently carried at amortised cost will be reclassified as Available- for-sale fair value with unrealised gains and losses carried in a reserve) and financial assets held at fair value with changes in value recognised in profit and loss. to AIFRS, transition instruments, principally being the reclassification of On financial investment securities, as Available-for-sale investments resulted in an increase in Total Assets and an Available-for-sale Asset Revaluation Reserve of $68 million. Additionally, those financial instruments designated as fair value through profit and loss resulted in a decrease in Total Assets and Retained Earnings of $3 million. Regulatory Capital Treatment in included items currently Several of the above accounting issues affect the assets and equity the calculation of the Bank’s regulatory capital and some of the regulated subsidiaries. Currently, accounting definitions for asset and equity measurement are central to the capital adequacy requirements set by prudential regulators. The Australian Prudential Regulation Authority (“APRA”) has released a discussion paper setting out some of its proposed prudential responses to the adoption of AIFRS by APRA regulated institutions. However, there are a number of specific AIFRS related changes where it is unclear whether the Bank’s current capital measurement methodologies will be maintained. APRA is consulting with regulated entities, including the Bank, prior to their finalisation of any amendments to the prudential regulations. impaired loans - 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. At 1 July 2005 there was no material change in the specific/individually significant impaired loan provision. (x) Classification of Hybrid Financial Instruments The Bank currently has on issue three types of hybrid financial instruments: Preferred Exchangeable Resettable (“PERLS”); Perpetual Exchangeable Listed Shares II”) and Trust Resettable Listed Securities (“PERLS Preferred Securities instruments are (“TPS”). These currently classified as equity instruments. in a Under AIFRS these instruments were reclassified as debt within the statement of financial position on 1 July 2005. Those foreign instruments denominated currency were re-translated at exchange rates prevailing on 30 June 2005, rather than the exchange rate prevailing at the date of issue. This resulted in a decrease to Shareholders’ Equity of $2,159 million. This adjustment is comprised of a decrease in Preference Share Capital and Other Equity Instruments of $2,260 million; an increase in Retained Earnings of $22 million; and an increase in the Foreign Currency Translation Reserve of $79 million. From 1 July 2005 onwards, distributions to the holders of these hybrid financial instruments will be treated as financial performance. the statement of interest expense in (xi) Revenue and Expense Recognition Under AIFRS, the Bank has changed the timing of the recognition of 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. As at 1 July 2005, a decrease in Retained Earnings of $61 million has been recognised, reflecting the deferral of previously recognised revenue and expense items. This adjustment comprises a net deferral of expense in relation to the retail banking portfolios and a, larger, net deferral of income in relation to the corporate banking portfolios. (xii) Accounting for Life Insurance Business Measurement differences Under AIFRS, measurement differences arise within the insurance products and investment-style products of the life insurance and funds management businesses. Specifically, the actuarial calculation of policyholder liabilities is affected by a change in the discount rates applied for some contracts, and certain acquisition costs related to investment-style products which were deferred under current Australian GAAP can no longer be deferred under AIFRS. On transition to AIFRS, this will have the effect of increasing the amount of Insurance Policyholder Liabilities and decreasing Retained Earnings by a total of $248 million. 84 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued Summary of Financial Impacts A summary of the material after-tax financial impacts of conversion to AIFRS is set out in the following three tables: Table 1 represents the reconciliation of Australian GAAP Shareholders’ Equity to AIFRS Shareholders’ Equity as at 1 July 2004, for those standards with an effective date of 1 July 2004. Table 2 sets out the expected adjustments to the result for the year ended 30 June 2005, for those standards with an effective impact from 1 July 2004. Table 3 sets out the additional adjustments to Shareholders Equity as at 1 July 2005 for those standards with an effective date of 1 July 2005, which deal with Financial Instruments and Insurance. References are provided within the tables to the detailed narrative disclosures in the section above. Table 1: Shareholders’ Equity Reconciliation as at 1 July 2004 Consolidated Group TOTAL SHAREHOLDERS' EQUITY Shareholders' Equity Reconciliation Reference Australian GAAP Total as at 1 July 2004 AIFRS 1 July 2004 After Tax Adjustments to Shareholders' Equity Retained Earnings Impacts: Initial recognition of defined benefit superannuation plan in surplus Initial recognition of defined benefit superannuation plan in deficit Net adjustment in respect of share based payment compensation Reversal of market value appreciation on treasury shares held within the Bank’s life insurance statutory funds Transfer of historic write-downs of acquired goodwill within the appraisal value of the life insurance and funds management businesses Transfer from Foreign Currency Translation Reserve Change in the revenue recognition pattern for 'net of tax' leveraged leases Share Capital Impacts: Initial recognition of treasury shares held within employee share scheme trust Initial recognition of treasury shares held within the Bank’s life insurance statutory funds General Reserve: Net write down of internally generated appraisal value of the life insurance and funds management businesses Other Reserves: (i) (i) (ii) (iv) (iv) (vi) (ii) (iv) (iv) Transfer from the Foreign Currency Translation Reserve to Retained Earnings (vi) Increase in Asset Revaluation Reserve following change in valuation methodology for owner-occupied property Initial recognition of Equity Compensation Reserve (ii) AIFRS restated Shareholders' Equity as at 1 July 2004 $M 24,885 443 (54) 141 (46) (287) (205) 17 (126) (245) (2,836) 205 32 47 21,971 85 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued Table 2: Restatement of After Tax Profit & Loss for year ended 30 June 2005 Australian GAAP Statutory Profit After Tax for year ended 30 June 2005 3,991 Reference Group Group $M $M Bank $M Bank $M 2,921 Recognition of non-cash pension expense related to defined benefit superannuation plans Recognition of amortisation expense related to treasury shares held within the employee share scheme trust (i) (ii) (52) (30) Reversal of realised and unrealised gains and dividend income accrued on treasury shares held within the Bank's life insurance statutory funds (iv) (39) Reversal of goodwill expense net of separately identifiable intangible asset amortisation (v) Change in the revenue recognition pattern for 'net of tax' leveraged leases Total AIFRS after tax adjustment to distributable earnings for the year ended 30 June 2005 321 (9) 191 Reversal of internally generated appraisal value uplift in the life insurance and funds management businesses (iv) (778) (52) (31) - 186 (9) 94 - Total AIFRS after tax adjustment to Statutory Profit for the year ended 30 June 2005 Restated AIFRS after tax Statutory Profit for the year ended 30 June 2005 (587) 3,404 94 3,015 86 Consolidated Group TOTAL SHAREHOLDERS' EQUITY $M 21,971 3,991 (587) (2,816)(1) 108 2 (248) 19 (75) (14) (313) (61) 22 (3) (6) (8) (4) (1,158) 40 (2,260) 79 68 (24) 18,723 Notes to the financial statements NOTE 1 Summary of Significant Accounting Policies continued Table 3: Shareholders’ Equity Reconciliation as at 1 July 2005 Shareholders’ Equity Reconciliation AIFRS restated Shareholders' Equity as at 1 July 2004 Reference Australian GAAP after tax Statutory Profit for the year ended 30 June 2005 Total AIFRS after tax adjustment to Statutory Profit for the year ended 30 June 2005 per Table 2 Other current Australian GAAP Reserve Movements for the year ended 30 June 2005 IFRS 1 July 2005 After Tax Adjustments to Shareholders' Equity Retained Earnings Impacts: Actuarial and other movements within the defined benefit superannuation plan in surplus Actuarial and other movements within the defined benefit superannuation plan in deficit Net movement in the calculation of life insurance policyholder liabilities due to actuarial methodology changes and the write off of deferred acquisition cost asset on products reclassified from insurance contracts to investment contracts Adjustment in respect of realised gains and dividend income on treasury shares held within the Bank’s life insurance statutory funds Deferral of initial entry fee income earned by life insurance entities Adjustment to fair value calculation for assets held by life insurance business Adjustment in respect of derivative financial instruments on initial application of hedge accounting and recognition of embedded derivatives Deferral of previously recognised net income and expenses within banking business Foreign exchange adjustment on the reclassification of hybrid financial instruments from equity to liabilities Adjustment to fair value calculation for trading assets within the banking portfolios and for other financial instruments designated as fair value through profit and loss Share Capital Impacts: Net movement in treasury shares held within employee share scheme trust Net movement in treasury shares held within the Bank's life insurance statutory funds Other Reserves and Capital Movements: Asset Revaluation Reserve adjustment for change in valuation methodology for owner- occupied property Reclassification of outside equity interest in the life insurance statutory funds and other funds as liabilities Initial recognition of Cash Flow Hedge Reserve on initial application of hedge accounting Reclassification of hybrid financial instruments from equity to liabilities Foreign currency translation reserve adjustment due to reclassification of hybrid financial instruments from equity to liabilities at exchange rates at 30 June 2005 Reclassification and revaluation of Australian GAAP investment securities at cost to available- for-sale financial assets at fair value Net movement in Equity Compensation Reserve AIFRS Restated Shareholders' Equity as at 1 July 2005 (1) Represents movements in Shareholders’ Equity other than profit for the year: (i) (i) (xii) (iv) (xii) (viii) (xi) (x) (xiii) (ii) (iv) (xii) (viii) (x) (x) (xiii) (ii) Change in Ordinary Shareholders’ Equity Change in Reserves Change in Outside Equity Interests: Controlled entities Insurance statutory funds Change in Retained Earnings Less: Net profit after tax (“statutory basis”) Net adjustment $M 512 678 327 (1,018) 676 (3,991) (2,816) 87 Notes to the financial statements 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 (loss) gain on investments and loans Net profit (loss) 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 (1) 2005 $M 2004 $M 14,244 229 198 785 723 15 - 16,194 7,063 257 2,557 - 351 10,228 5,966 753 1,595 167 193 80 - 3 (13) 4 1,398 1,075 133 5,388 11,675 182 198 600 607 25 - 13,287 5,949 160 1,505 - 263 7,877 5,410 724 1,503 228 165 106 - 6 80 (11) 1,333 902 45 5,081 GROUP 2003 $M 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 2005 $M 11,428 136 221 647 242 3 727 13,404 5,543 255 1,944 496 363 8,601 4,803 730 1,310 137 164 80 988 - (39) 4 - - 649 4,023 BANK 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 11,354 10,491 9,399 8,826 7,716 322 322 276 276 305 305 292 292 263 263 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. 88 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 Operating lease fixed assets 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 2005 $M 2004 $M GROUP 2003 $M 2005 $M 1,758 (18) 59 101 28 29 1,957 50 2,007 44 - 44 266 20 46 29 - 64 40 465 13 478 298 221 148 174 18 6 865 52 917 2,106 13 11 107 26 120 2,383 155 2,538 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 98 79 402 234 213 1,026 35 1,061 4,357 150 BANK 2004 $M 1,683 (14) 34 101 28 46 1,878 267 2,145 104 - 104 280 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 2,274 7 67 115 32 104 2,599 50 2,649 44(1) - 44 331 21 58 63 8 71 61 613 13 626 322 248 150 204 26 6 956 52 1,008 112 108 628 288 349 1,485 35 1,520 5,697 150 2,152 8 41 115 32 100 2,448 273 2,721 105 - 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 Total Operating Expenses before goodwill amortisation 5,847 6,249 5,551 4,507 4,951 Appraisal value uplift/(reduction) Goodwill amortisation Profit from ordinary activities before income tax 778 (325) 5,638 201 (324) 3,843 (245) (322) 2,976 - (186) 3,841 - (186) 2,316 (1) Reduction in share based compensation reflects the cessation of the mandatory component of the equity participation plan in February 2005, which is now paid in cash and included within salaries and wages (refer to Note 29). 89 Notes to the financial statements NOTE 3 Revenue from Ordinary Activities Banking Interest income Fees and commissions Trading income Dividends Proceeds from sale of property, plant and equipment Proceeds from sale of investments and loans Other income Funds Management and Insurance Funds management income including premiums Insurance premium and related income Investment income 2005 $M 2004 $M GROUP 2003 $M 2005 $M 16,194 2,348 440 3 30 565 133 19,713 13,287 2,227 499 6 69 874 45 17,007 11,528 2,046 502 4 72 56 53 14,261 13,404 2,040 380 988 26 448 580 17,866 1,261 1,132 3,194 5,587 1,175 1,012 2,807 4,994 1,149 1,131 628 2,908 - - - - BANK 2004 $M 11,053 1,958 437 798 9 1,398 535 16,188 - - - - Appraisal value uplift (1) Total revenue from ordinary activities 778 26,078 201 22,202 - 17,169 - 17,866 - 16,188 There were no sources of revenue from non-operating activities. (1) Appraisal value reduction of $245 million for year ended 30 June 2003. 90 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 2003, 30 June 2004 and 30 June 2005. Averages used are predominantly daily averages. The overseas component comprises overseas branches of the Bank and overseas domiciled controlled entities. Overseas intragroup borrowings have been adjusted in the interest spread and margin calculations to more appropriately funds. Non-accrual loans are included in Interest Earning Assets receivables. under the overseas cost of advances reflect loans, other and Full Year Ended Average Balance $M 2005 Interest Average Average Interest Average Average Interest Average Rate % Rate Balance $M Rate Balance $M 2004 2003 $M $M $M % % Average Interest Earning Asset and Income Cash and liquid assets Australia Overseas Receivables due from other financial institutions Australia Overseas Deposits with regulatory authorities Australia Overseas Trading securities Australia Overseas Investment securities Australia Overseas Loans, advances and other receivables Australia Overseas Other interest earning assets Intragroup loans Australia Overseas Average interest earning assets and interest income including intragroup Intragroup eliminations Total average interest earning assets and interest income 3,716 1,077 2,228 3,748 - 43 11,532 3,850 3,802 8,538 178 20 61 168 - - 603 182 296 427 4.8 1.9 4,027 868 181 17 2.7 4.5 3,382 3,776 32 150 - - 5.2 4.7 7.8 5.0 - 62 9,682 3,445 4,411 8,440 - - 444 156 298 310 171,231 34,183 11,832 2,427 6.9 149,487 7.1 26,607 9,927 1,772 - - 5,793 - - 92 - - 1.6 - - 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 - - 31 249,741 (5,793) 16,286 (92) 6.5 218,289 1.6 (4,102) 13,304 (17) 6.1 0.4 191,874 (3,604) 11,559 (31) 4.0 2.1 1.5 4.1 - - 4.4 3.8 6.2 3.8 6.5 7.0 - - 0.9 6.0 0.9 243,948 16,194 6.6 214,187 13,287 6.2 188,270 11,528 6.1 91 Note 4 Average Balance Sheet and Related Interest continued Full Year Ended Average Non-interest Earning Assets Bank acceptances Australia Overseas Life insurance investment assets Australia Overseas Property, plant and equipment Australia Overseas Other assets Australia Overseas Provisions for impairment Australia Overseas Total average non-interest earning assets Total Average Assets Percentage of total average assets applicable to overseas operations 2005 Average Balance $M 2004 Average Balance $M 16,263 - 23,263 4,542 1,108 144 26,150 3,303 (1,430) (142) 13,877 1 24,430 4,120 792 161 29,452 2,264 (1,411) (150) 73,201 317,149 73,536 287,723 2003 Average Balance $M 13,144 53 26,333 4,070 627 197 24,046 3,303 (1,497) (150) 70,126 258,396 20.5% 18.7% 19.5% 92 NOTE 4 Average Balances and Related Interest continued Average Liabilities and Interest Expense Full Year Ended 2005 2004 2003 Average Interest Average Average Interest Balance $M Rate Balance % $M Average Average Interest Average Rate Rate $M % $M % Balance $M $M Average Interest Bearing Liabilities and Loan Capital and Interest Expense Time deposits Australia Overseas Savings deposits Australia Overseas Other demand deposits Australia Overseas Payables due to other financial institutions Australia Overseas Debt issues Australia Overseas Loan capital Australia Overseas Other interest bearing liabilities Intragroup borrowings Australia Overseas Average interest bearing liabilities and loan capital and interest expense including intragroup Intragroup eliminations Total average interest bearing liabilities and loan capital and interest expense 61,821 17,716 31,304 2,927 41,235 4,859 3,183 1,356 586 119 1,653 166 1,707 6,292 50 207 34,853 16,540 2,095 462 5,566 772 - 5,793 - 321 30 - 92 - 5.1 7.7 1.9 4.1 4.0 3.4 2.9 3.3 6.0 2.8 5.8 3.9 - 1.6 - 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 - 231,385 (5,793) 10,320 (92) 4.5 1.6 201,634 (4,102) 7,894 (17) 3.9 0.4 178,341 (3,604) 6,533 (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 - 3.7 0.9 225,592 10,228 4.5 197,532 7,877 4.0 174,737 6,502 3.7 Non-Interest Bearing Liabilities Deposits not bearing interest Australia Overseas Liability on bank acceptances Australia Overseas Life insurance policy liabilities Australia Overseas Other liabilities Australia Overseas Total average non-interest bearing liabilities Total average liabilities and loan capital Shareholders' equity Total average liabilities, loan capital and shareholders' equity Percentage of total average liabilities applicable to overseas operations 5,512 1,121 16,263 - 20,732 3,900 14,630 3,927 66,085 291,677 25,472 317,149 19.9% 4,784 871 13,146 53 20,828 3,596 16,034 2,739 62,051 236,788 21,608 258,396 18.9% 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% 93 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 30/06/05 vs 30/06/04 Changes due to 30/06/04 vs 30/06/03 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 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 (14) 4 (21) (1) 91 19 (44) 4 1,473 521 - - 17 1,984 (17) 1,911 228 125 2 (4) 86 42 (5) 36 773 82 (12) 22 - 17 - 11 (1) 50 19 68 7 42 113 432 134 - - 58 998 (58) 996 272 169 70 18 68 38 20 46 30 167 78 - - 58 - (3) 3 29 18 159 26 (2) 117 1,905 655 - - 75 2,982 (75) 2,907 500 294 72 14 154 80 15 82 803 249 66 22 - 75 - 1,246 (17) 1,196 740 1,180 (58) 1,155 (184) 2,426 (75) 2,351 556 94 31 1 12 2 105 2 11 14 1,164 239 - - 3 1,615 (3) 1,597 517 109 (25) 8 186 14 3 (41) 251 48 24 - - 3 - 877 (3) 879 673 17 (1) (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) 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 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 2005 $M GROUP 2003 $M 2004 $M 5,966 243,948 5,410 214,187 5,026 188,270 Interest spread represents the difference between the average interest rate earned and the average interest rate paid on funds. Interest margin represents net interest income as a percentage of average interest earning assets. The calculations for Australia and Overseas include intragroup cross border loans/borrowings and associated interest. Australia Interest Spread (1) Benefit of net free liabilities, provisions and equity (2) Australia Interest Margin (3) Overseas Interest Spread (1) Benefit of net free liabilities, provisions and equity (2) Overseas Interest Margin (3) Group Interest Spread (1) Benefit of net free liabilities, provisions and equity (2) Group Interest Margin (3) 2005 % 2004 % 2003 % 2.36 0.23 2.59 1.03 0.68 1.71 2.11 0.34 2.45 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 (1) Difference between the average interest rate earned and the average interest rate paid on funds. (2) 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. (3) Net interest income divided by average interest earning assets for the year. 95 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. 2005 $M 2004 $M GROUP 2003 $M 2005 $M BANK 2004 $M 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 4,103 560 522 778 (325) 5,638 1,231 168 157 233 (98) 1,691 Add (or 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 Other 4 (48) 160 (30) (233) 98 - (9) 4 (54) 3,091 504 371 201 (324) 3,843 927 151 111 60 (97) 1,152 3 (47) 142 (30) (60) 97 - - 17 122 Prior Periods Other Total income tax expense Income tax attributable to operating profit 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 - 1,637 (12) 1,262 1,220 100 89 1,409 228 1,637 1,611 139 (125) 8 4 1,637 1,438 175 1,613 (5) 29 24 914 79 66 1,059 203 1,262 1,128 138 (24) 23 (3) 1,262 977 156 1,133 99 30 129 96 3,165 217 161 (245) (322) 2,976 950 65 48 (73) (97) 893 13 (36) (41) (18) 73 97 - (18) (5) 65 - 958 931 57 28 1,016 (58) 958 917 (24) 45 22 (2) 958 853 112 965 (1) (6) (7) 4,028 - - - (186) 3,842 1,208 - - - (56) 1,152 - (309) - - - 56 - (2) 23 (232) - 920 920 - - 920 - 920 2,502 - - - (186) 2,316 751 - - - (56) 695 (2) (224) - - - 56 136 1 5 (28) 2 669 669 - - 669 - 669 1,068 (30) (121) 2 1 920 1,059 9 1,068 (148) - (148) 639 (32) 57 5 - 669 633 12 645 20 4 24 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) 2005 $M GROUP 2003 $M 2004 $M BANK 2004 $M 2005 $M 442 208 650 - 193 103 421 717 - 369 195 564 - 232 100 52 384 - 353 172 525 - 302 96 16 414 - 399 178 577 549 193 99 365 657 60 274 149 423 317 232 100 - 332 153 3 5 36 - - 170 (33) (9) 31 159 142 (6) (6) 40 170 168 (34) (18) 26 142 94 (33) (2) 20 79 62 (3) (5) 40 94 Tax Consolidation New Zealand Subsidiaries 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. for Australian Certain subsidiaries of the Bank in New Zealand are 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. 97 Notes to the financial statements NOTE 6 Dividends Ordinary Shares Interim ordinary dividend (fully franked) (2005: 85 cents, 2004: 79 cents, 2003: 69 cents) Interim ordinary dividend paid - cash component only Interim ordinary dividend paid - dividend reinvestment plan Preference Shares Preference dividends paid (fully franked) (2005: 1,115 cents, 2004: 1,065 cents, 2003: 1,019 cents) Provision for preference dividend Other Equity Instruments Dividends paid Other dividends – ASB preference shares Total Dividends Provided or Paid Other provision carried Dividends proposed and not recognised as a liability (fully franked) (2005: 112 cents , 2004: 104 cents, 2003: 85 cents) 2005 $M 2004 $M GROUP 2003 $M BANK 2004 $M 2005 $M 883 200 29 10 76 16 1,214 4 808 188 28 9 55 8 1,096 5 699 166 28 8 - 4 905 4 883 200 808 188 29 10 28 9 34 - 1,156 4 15 - 1,048 4 1,434 1,315 1,066 1,434 1,315 Dividend Franking Account After fully franking the final dividend to be paid for the year ended 30 June 2005 the amount of credits available as at 30 June 2005 to frank dividends for subsequent financial years is $194 million (2004: $75 million). This figure is based on the combined franking accounts of the Bank at 30 June 2005, 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 2005, 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 2005 will be franked at the 30% tax rate. These calculations have been based on the taxation law as at 30 June 2005. frank fully to Dividend History Half Year Ended 31 December 2002 30 June 2003 31 December 2003 30 June 2004 31 December 2004 30 June 2005 Cents Per Share Half-year Payout Ratio (1) Full Year Full Year Payout Payout Ratio Ratio (1) Cash Basis (2) 69 85 79 104 85 112 143.2% 77.7% 82.7% 103.8% 71.8% 69.5% - 97.7% - 93.5% - 65.2% - 75.9% - 73.9%(4) - 73.9% DRP Price $ 24.75 28.03 31.61 30.14 35.90 DRP Participation Rate (3) 19.2% 18.9% 18.8% 18.7% 18.6% (1) Dividend Payout Ratio: dividends divided by earnings. (2) Payout ratio based on net profit after tax before goodwill amortisation and appraisal value uplift/(reduction). (3) DRP Participation Rate: the percentage of total issued share capital participating in the Dividend Reinvestment Plan. (4) Adjusted for Which new Bank costs. 98 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: Other dividends – ASB preference shares 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 Securities purchased under agreements to resell Bills receivable and remittances in transit Total Overseas Total Cash and Liquid Assets NOTE 9 Receivables from Other Financial Institutions Australia Overseas Total Receivables from Other Financial Institutions 99 2005 c 2004 c GROUP 2003 c 303.1 303.0 196.9 196.8 157.4 157.3 $M $M $M 4,001 (39) (76) (16) (10) 3,860 2,581 (37) (55) (8) (9) 2,472 2,018 (36) - (4) (6) 1,972 Number of Shares 2005 M 1,273 1 2004 M 1,256 1 2003 M 1,253 1 1,274 1,257 1,254 c 261.9 261.8 c 237.1 237.0 c 210.2 210.2 GROUP 2004 $M 2005 $M 2005 $M BANK 2004 $M 1,491 3 2,598 372 4,464 1,488 3 4,091 158 5,740 1,312 - 2,598 371 4,281 1,423 - 4,091 156 5,670 68 307 876 - 1,251 5,715 60 261 374 18 713 6,453 5 45 1,243 - 1,293 5,574 - 77 738 - 815 6,485 2005 $M 3,691 2,514 6,205 GROUP 2004 $M BANK 2005 2004 $M $M 4,914 3,455 8,369 4,161 1,972 6,133 4,910 2,158 7,068 Notes to the financial statements NOTE 10 Trading Securities Australia Listed: Australian Public Securities Commonwealth and States Local and semi-government Bills of exchange Certificates of deposit Medium term notes Other securities Unlisted: Commercial paper 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 2005 $M GROUP 2004 $M 2005 $M BANK 2004 $M 283 505 1,346 5,977 1,949 196 767 - - 11,023 358 502 1,559 563 367 6 250 3,605 14,628 621 1,114 1,576 5,088 1,410 273 885 268 75 11,310 826 524 772 836 403 17 208 3,586 14,896 283 505 1,346 5,977 1,949 181 621 1,114 1,576 5,088 1,410 267 878 - - 11,119 889 268 - 11,233 248 502 - 563 - - - 1,313 12,432 284 524 - 836 - - - 1,644 12,877 100 Notes to the financial statements NOTE 11 Investment Securities 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 Mortgage backed securities 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 Preference shares Other securities and equity investments Total Overseas Total Investment Securities 2005 $M 2004 $M GROUP 2003 $M 2005 $M BANK 2004 $M 2,201 - 343 80 220 1,055 672 4,571 79 - 1,376 636 378 619 165 224 477 254 452 744 297 5,701 10,272 2,209 30 444 80 448 - 611 3,822 758 - 1,242 792 425 732 377 137 155 1,200 709 744 354 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 2,201 - 336 - 220 1,055 71 3,883 63 - 1,341 600 122 177 76 - 76 221 286 - 77 3,039 6,922 2,209 - 433 - 58 - 69 2,769 715 - 1,228 655 142 121 279 - 155 189 273 - 100 3,857 6,626 101 Notes to the financial statements NOTE 11 Investment Securities continued Australia Australian Public Securities Commonwealth and States Bills of exchange Medium term notes Mortgage backed securities Other securities and equity investments Total Australia Overseas Government securities Treasury notes Certificates of deposit Eurobonds Medium term notes Floating rate notes Preference shares Other securities and equity investments Total Overseas Total Investment Securities Net Unrealised Surplus 2005 $M 2,334 - 224 1,055 1,079 4,692 306 - 1,376 1,133 637 1,075 744 470 5,741 10,433 161 GROUP Market Value at 30 June 2003 2004 $M $M 2,328 30 449 - 1,034 3,841 897 - 1,223 983 1,622 1,442 744 738 7,649 11,490 43 2,118 - 935 - 1,400 4,453 593 5 1,357 1,260 816 1,215 - 1,488 6,734 11,187 151 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 2005 Amortised Cost $M Gross Unrealised Losses Gains $M $M Fair Amortised Gross Unrealised Losses $M Cost Gains $M Value $M $M At 30 June 2004 Fair Value $M Australia Australian Public Securities Commonwealth and States Bills of exchange Medium term notes Mortgage backed securities Other securities and equity investments (1) Total Australia Overseas Government securities Certificates of deposit Eurobonds Medium term notes Floating rate notes Preference shares Other securities and equity investments Total Overseas Total Investment Securities 2,281 - 220 1,055 1,015 4,571 303 1,376 1,113 632 1,071 744 462 5,701 10,272 54 - 4 - 64 122 3 - 21 6 4 - 8 42 164 1 - - - - 1 - - 1 1 - - - 2 3 2,334 - 224 1,055 2,289 30 448 - 1,079 4,692 1,055 3,822 306 1,376 1,133 637 1,075 744 895 1,242 947 1,625 1,441 744 46 - 1 - 11 58 3 - 36 - 1 - 470 5,741 10,433 731 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 1,442 744 738 7,649 11,490 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 $42 million of net deferred losses on these contracts (2004: $31 million net deferred gains) which offset the above unrealised gains and these are disclosed within Note 39. At the end of the financial year there were no net deferred gains or losses included in the amortised cost value. 102 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 1 to 5 years 5 to 10 years $M % $M % $M Group Maturity Period at 30 June 2005 Total $M 10 years or more % $M % Australia Australian Public Securities Commonwealth and States Medium term notes Mortgage backed Other securities, commercial paper and equity investments Total Australia i i Overseas Government securities Certificates of deposit Eurobonds Medium term notes Floating rate notes Preference shares Other securities, commercial paper and equity investments Total Overseas Total Investment Securities Maturities at Fair Value 253 3 - 5.23 8.00 - 1,418 202 - 6.01 6.23 - 544 15 - 5.47 8.00 - 66 - 1,055 6.14 - 5.36 2,281 220 1,055 325 581 5.68 683 2,303 5.78 - 559 - 7 1,128 3.64 1,015 4,571 7.02 3.68 3 68 3.26 3 26 6.20 6 20 2.23 2 23 - 7.27 175 1,338 209 111 124 - 109 2,066 2,647 2,692 69 38 849 521 881 - 7.59 3.14 3 145 0 5.06 3.10 3 10 6.23 6 23 - 59 - 55 - 38 744 1.40 - 5.20 - 3.68 6.33 - - - - - - - - 28 - 1.72 - 303 1,376 1,113 632 1,071 744 353 2,711 5,014 5,066 3.97 - 896 1,455 1,497 - - 28 - 462 5,701 1,156 1,178 10,272 10,433 Additional Disclosure Proceeds at or close to maturity of investment securities were $22,799 million (2004: $24,407 million; 2003: $17,719 million). Proceeds from sale of investment securities were $392 million (2004: $697 million; 2003: $23 million). Realised capital gains were $9 million and realised capital losses were $1 million (2004: realised capital gains $6 million and realised capital losses $4 million; 2003: realised capital gains $7 million and realised capital losses $5 million). 103 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 2005 $M 2,564 119,094 6,682 4,313 3,399 46,451 9 742 390 183,644 2,660 20,765 406 195 12,804 - 192 37,022 220,666 (1,390) (157) (889) (589) (84) (19) (22) (3,150) 217,516 GROUP 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 2005 $M 2,564 115,667 6,682 1,348 3,399 41,447 9 376 750 172,242 - 54 - 127 3,686 - - 3,867 176,109 (1,218) (134) (426) (154) (18) (19) - (1,969) 174,140 BANK 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 1,179 2,740 3,919 1,072 2,405 3,477 542 779 1,321 592 617 1,209 Leasing Arrangements Retail Banking Services provides vehicle and equipment lease finance to a broad range of industries including transport, service, earthmoving, construction, finance manufacturing and mining. Most arrangements are for terms 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. 104 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 Leverage Leasing 2005 $M 1,417 2,379 712 4,508 185 505 52 742 GROUP 2004 $M 1,189 1,861 968 4,018 421 546 153 1,120 2005 $M 595 836 44 1,475 227 133 16 376 BANK 2004 $M 640 570 150 1,360 217 97 119 433 105 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 2005. GROUP Maturity Period at 30 June 2005 Australia Government and public authorities Agriculture, forestry and fishing Financial, investment and insurance Real estate Mortgage (1) Construction (2) Personal Lease financing Other commercial and industrial Total Australia Overseas Government and public authorities Agriculture, forestry and fishing Financial, investment and insurance Real estate Mortgage (1) Construction (2) Personal Lease financing Other commercial and industrial Total Overseas Gross Loans, Advances and Other Receivables Interest Rate Sensitivity of Lending Australia Overseas Total Variable Interest Rates Australia Overseas Total Fixed Interest Rates Gross Loans, Advances and Other Receivables Maturing One Year or Less $M Maturing Between One & Five Years $M Maturing After Five Years $M 871 1,120 3,688 15,588 637 5,606 1,505 18,825 47,840 96 698 2,263 1,987 91 399 97 3,218 8,849 56,689 29,003 3,321 32,324 18,837 5,528 24,365 56,689 679 937 1,664 16,201 777 8,286 2,796 7,725 39,065 82 1,404 2,295 7,131 91 151 88 885 12,127 51,192 23,794 3,368 27,162 15,271 8,759 24,030 51,192 1,450 1,156 530 87,306 280 612 754 4,651 96,739 38 1,270 2,469 11,647 89 2 10 521 16,046 112,785 65,425 3,722 69,147 31,314 12,324 43,638 112,785 Total $M 3,000 3,213 5,882 119,095 1,694 14,504 5,055 31,201 183,644 216 3,372 7,027 20,765 271 552 195 4,624 37,022 220,666 118,222 10,411 128,633 65,422 26,611 92,033 220,666 (1) Principally owner occupied housing. While most of these loans would have a contractual term of 20 years or more, the actual average (2) term of the portfolio is less than five years. Financing real estate and land development projects. 106 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 2005 $M 2004 $M 2003 $M 2002 $M GROUP 2001 $M 2005 $M BANK 2004 $M 1,393 322 - (352) 81 2 1,446 (56) 1,390 143 - - 408 (56) 352 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 1,242 292 - (326) 60 (1) 1,267 (49) 1,218 121 - - 378 (52) 326 1,152 263 - (189) 66 19 1,311 (69) 1,242 157 - - 243 (54) 189 (3) 492 (335) 157 1,547 3 410 (267) 143 1,536 (11) 609 (404) 205 1,530 (11) 718 (448) 270 1,626 (17) 832 (598) 234 1,633 - 447 (313) 134 1,352 2 348 (227) 121 1,363 157 - 157 143 - 143 205 - 205 270 - 270 233 1 234 134 - 134 121 - 121 % % % % % % % 41.76 42.06 32.08 30.54 36.06 37.81 36.00 411.44 451.76 239.44 183.94 251.62 381.49 403.55 0.73 0.82 0.90 0.96 1.01 0.68 0.79 $M $M $M $M $M $M $M 322 - 322 276 - 276 305 - 305 449 - 449 385 - 385 292 - 292 263 - 263 0.16% 0.16% 0.19% 0.31% 0.28% 0.18% 0.18% 107 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 2005 $M GROUP 2004 $M 2005 $M BANK 2004 $M 322 276 292 263 408 (56) 352 (352) - 264 (62) 202 (202) - 378 (52) 326 (326) - 243 (54) 189 (189) - 56 (81) (5) 352 322 322 87 (79) 66 202 276 276 49 (60) (23) 326 292 292 69 (66) 71 189 263 263 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 2001, 2002, 2003, 2004 and 2005. 2005 $M 2004 $M 2003 $M GROUP At 30 June 2001 $M 2002 $M - 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 Australia Government and public authorities Agriculture, forestry and fishing Financial, investment and insurance Real estate Mortgage (1) Construction (2) Personal Lease financing Other commercial and industrial Total Australia Overseas Government and public authorities Agriculture, forestry and fishing Financial, investment and insurance Real estate Mortgage (1) Construction (2) Personal Lease financing Other commercial and industrial Total Overseas Total Specific Provisions (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. - 16 1 3 7 63 5 49 144 - - 1 11 - 1 - - 13 157 108 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 2001, 2002, 2003, 2004 and 2005. 2005 $M 2004 $M 2003 $M GROUP Year Ended 30 June 2001 2002 $M $M 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 - 1 4 8 4 280 4 83 384 - - - 6 - - - 1 7 - 2 6 5 1 228 8 75 325 6 - 1 1 - 7 - 14 29 Gross Bad Debts Written Off 391 354 Bad Debts Recovered Australia Overseas Bad Debts Recovered Net Bad Debts Written Off 76 5 81 310 73 6 79 275 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. - 4 26 8 - 209 11 171 429 - - 16 2 - 7 - 1 26 455 57 17 74 381 - 6 6 11 4 177 18 178 400 1 - 58 2 - 6 - 35 102 502 49 7 56 446 - 10 1 10 14 142 16 301 494 - - 6 1 - 38 - 102 147 641 59 29 88 553 109 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 2001, 2002, 2003, 2004 and 2005. 2005 $M 2004 $M 2003 $M GROUP Year Ended 30 June 2001 2002 $M $M Bad Debts Recovered 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 - 2 3 1 1 60 1 8 76 - - - - - 4 - 1 5 - 5 1 1 - 50 3 13 73 - - 1 - - 4 - 1 6 Bad Debts Recovered 81 79 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. - 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 88 110 Risk rated portfolios are reviewed on a risk prioritised basis, usually within a period of eighteen months, by the Portfolio Quality Assurance 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 Portfolio Quality Assurance 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 Portfolio Quality Assurance unit, which is independent of the business units and which reports quarterly on its findings to the Board Risk Committee. 111 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 2001, 2002, 2003, 2004 and 2005. The industry profile of the loans, advances and other receivables content for the five financial years to 30 June 2005 is shown on page 117. 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) 2005 $M 2004 $M 2003 $M 2002 $M GROUP At 30 June 2001 $M 6,012 6,308 22,490 73,800 4,547 10,979 6,628 42,893 173,657 385 1,564 11,897 8,085 198 449 146 10,359 33,083 206,740 (1,343) 205,397 5,672 5,616 26,301 110,209 3,619(4) 13,839(4) 4,963 56,537(4) 226,756 2,307 3,277 22,098 17,722 258(4) 420 175 5,894(4) 52,151 278,907 (1,410) 277,497 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) 219,822 276 0.10% 305 0.13% 449 0.20% 385 0.19% 7,122 5,029 38,704 124,095 2,211 14,970 5,055 54,273 251,459 1,385 3,392 18,295 21,747 346 581 195 10,667 56,608 308,067 (1,562) 306,505 322 0.11% (1) Principally owner occupied housing. (2) Primarily financing real estate and land development projects. (3) The loss rate is the charge as a percentage of the credit risk. (4) Certain of these loans have been reclassified consistent with prior years. The Group has a good quality and well diversified credit portfolio in Australia, with 47.6% of the exposure in mortgage loans and a further 18.6% in finance, investment and insurance (primarily banks). 18.5% of exposure is overseas, of which 38.4% is in mortgage loans. Overall, over 65% of individually risk rated exposures in the commercial portfolio (including government and finance) are of investment grade or equivalent quality. 112 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 2005. Loans Advances and Other Acceptances Contingent Investment Securities Receivables of Customers Liabilities Derivatives $M Bank $M $M $M $M Trading Securities $M Total $M 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 788 2,278 - 7,324 - - - - - 837 - - - - 2,911 11,023 1,456 4,571 558 - 303 - 1,798 2,122 - - - - - - - - 1,249 3,605 14,628 3,276 5,701 10,272 3,000 3,213 5,882 119,095 1,694 14,504 5,055 31,201 183,644 216 3,372 7,027 20,765 271 552 195 4,624 37,022 220,666 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. 10 1,741 819 40 227 7,122 35 5,029 1,167 4,563 15,240 35,013 - 274 380 - 5,000 216 84 - - 27 2 - 124,095 2,211 14,970 5,055 13,214 16,786 3,341 14,063 2,150 17,681 54,273 247,768 - - - - - - - 259 13 49 7 1,385 3,392 1,512 3,277 15,736 982 69 27 - - 6 2 - 21,747 346 581 195 - - 16,786 1,057 3,919 17,982 461 3,802 21,483 10,667 54,049 301,817 6,205 45 308,067 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. 113 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 2004. Trading Investment Loans Advances Bank and Other Acceptances Contingent 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 Securities Securities Receivables of Customers $M $M $M $M Liabilities Derivatives $M $M Total $M 1,735 - 6,664 - - - - 2,911 11,310 2,289 - - - - - - 1,533 3,822 1,050 - 902 - 2,058 5,592 - - - - 478 3,586 - - - - 1,131 7,625 1,132 3,925 3,693 104,883 2,626 13,389 4,963 27,167 161,778 182 3,277 5,857 16,967 257 415 175 3,487 30,617 11 1,517 437 65 68 109 5,672 5,616 684 1,186 9,160 - 302 333 - 12,172 15,019 5,326 642 116 - 5,956 13,728 - 49 1 - 6,798 16,185 21,387 - 110,209 3,619 13,839 4,963 56,537 221,842 - - - - - - - - - 98 - 37 - 2,269 3,277 1,733 3,403 18,643 755 1 2 - 551 3,140 - - 3 - 247 3,690 17,722 258 420 175 5,894 48,658 Gross Balances 14,896 11,447 192,395 15,019 16,868 19,875 270,500 Other Risk Concentrations Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 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. 114 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 2005. 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 Risk $M 7,122 5,029 35,013 124,095 2,211 14,970 5,055 54,273 247,768 1,385 3,392 15,736 21,747 346 581 195 10,667 54,049 Impaired Provisions for Net Assets Impairment Write-offs Recoveries Write-offs $M $M $M $M $M - 76 6 - 2 46 8 243 381 - 1 - 7 - 4 - 2 14 - 16 1 - 1 4 - (2) (3) - (1) 1 3 7 63 5 49 144 8 4 280 4 83 384 (1) (1) (60) (1) (8) (76) - - 1 - - - 11 - 1 - - 13 6 - - - 1 7 - - - - - (4) - (1) (5) 7 3 220 3 75 308 - - - 6 - (4) - - 2 310 Gross Balances 301,817 391 157 391 (81) Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 6,205 45 308,067 (1) (2) Principally owner occupied housing. Primarily financing real estate and land development projects. 115 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 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 Total Risk $M Impaired Assets $M Provisions for Impairment $M Write-offs Recoveries $M $M Net Write-offs $M 5,672 5,616 21,387 110,209 3,619 13,839 4,963 56,537 221,842 2,269 3,277 18,643 17,722 258 420 175 5,894 48,658 - 19 6 - 15 6 5 294 345 - - 5 11 - 1 - 1 18 - 2 1 6 4 38 3 74 128 - - - 6 - 8 - 1 15 - 2 6 5 1 228 8 75 325 6 - 1 1 - 7 - 14 29 - (5) (1) (1) - (50) (3) (13) (73) - - (1) - - (4) - (1) (6) - (3) 5 4 1 178 5 62 252 6 - - 1 - 3 - 13 23 Gross Balances 270,500 363 143 354 (79) 275 Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 8,369 38 278,907 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. 10% to less than 15% of Group's capital resources 5% to less than 10% of Group's capital resources The following table shows the aggregate number of the Bank’s counterparty Corporate and Industrial exposures (including direct and contingent exposure) which individually were greater than 5% of the Group’s capital resources (Tier One and Tier Two capital): 2005 Number - 1 2004 Number - 1 2003 Number - - 2002 Number - 1 2001 Number - 2 116 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 2001, 2002, 2003, 2004 and 2005. Industry Australia Government and public authorities Agriculture, forestry and fishing Financial, investment and insurance Real estate Mortgage (1) Construction (2), (3) Personal (3) 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 2005 $M 3,000 3,213 5,882 119,095 1,694 14,504 5,055 31,201 183,644 216 3,372 7,027 20,765 271 552 195 4,624 37,022 2004 $M 1,132 3,925 3,693 104,883 2,626 13,389 4,963 27,167 161,778 182 3,277 5,857 16,967 257 415 175 3,487 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 At 30 June 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 17,136 220,666 192,395 163,261 150,046 139,195 (3,150) (3,004) (2,914) (2,972) (3,136) 217,516 189,391 160,347 147,074 136,059 (1) Principally owner occupied housing. Primarily financing real estate and land development projects. (2) (3) Certain of these loans for the 2004 year have been reclassified consistent with prior years. 117 Notes to the financial statements NOTE 15 Asset Quality Impaired Assets The Group for the Australian disclosure requirements in AASB 1032: Specific Disclosures by Financial Institutions. contained impaired follows assets There are three classifications of impaired assets: (a) Non accruals, comprising: • • • Any credit risk facility against which a specific provision for impairment has been raised; Any credit risk facility maintained on a cash basis because of significant deterioration in the financial position of the borrower; and Any credit risk facility where 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 • • (AATSE), comprising: Other Real Estate Owned (OREO), comprising real estate where the Group has assumed ownership or foreclosed in settlement of a debt; and Other Security Enforcement (OAATSE), comprising assets other than real estate where the Group has assumed ownership or foreclosed in settlement of a debt. Acquired Through Assets Impaired Asset Ratios Gross impaired assets net of interest reserved as % of risk weighted assets Net impaired assets as % of: Risk weighted assets Total shareholders' equity 2005 % 2004 % GROUP 2003 % 0.20 0.12 0.82 0.20 0.44 0.12 0.79 0.30 1.96 Colonial State Bank Indemnified Loan Book loan losses Pursuant to the Sale Agreement between Colonial and the New South Wales Government, Colonial State Bank’s loan book as at 31 December 1994 and any further interest) arising are (including indemnified by the NSW Government. This indemnity is to the extent of 90% of the losses after an initial $60 million (which was provided for by Colonial State Bank as at 31 December 1994). All loans (other than impaired loans) were covered for a period of three years from 31 December 1994 and for the duration of the loan in the case of impaired loans so classified as at 31 December 1997. The sale agreement also allows for loans to be withdrawn from the indemnity provided the withdrawal is approved by Colonial State Bank and the NSW Government and the due processes are followed. Pursuant to the sale agreement, the costs of funding and managing non-performing loans that are covered by the NSW indemnities are reimbursed by the Government on a quarterly basis. loan 118 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 2001, 2002, 2003, 2004 and 2005. 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) Less provisions for impairment Net AATSE Net overseas impaired assets Total Net Impaired Assets 2005 $M 2004 $M 2003 $M 2002 $M GROUP At 30 June 2001 $M 381 (19) 362 (144) 218 345 (23) 322 (128) 194 545 (25) 520 (163) 357 732 (54) 678 (221) 457 518 (63) 455 (154) 301 - - - - - - - - 194 18 - 18 (15) 3 - - - - - - - - 3 197 - - - - - - - - 357 120 (1) 119 (42) 77 - - - - - - - - 77 434 - - - - - - - - 457 211 (5) 206 (49) 157 - - - - - - - - 157 614 1 - 1 - 1 - - - 302 197 (5) 192 (79) 113 - - - - - 1 (1) - 113 415 - - - - - - - - 218 14 - 14 (13) 1 - - - - - - - - 1 219 119 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 2001, 2002, 2003, 2004 and 2005. Gross Impaired Assets Gross impaired assets at period beginning New and increased Balances written off Returned to performing or repaid Gross Impaired Assets at Period End 2005 $M 2004 $M 363 769 (350) (387) 395 665 532 (278) (556) 363 GROUP Year Ended 30 June 2001 $M 2002 $M 717 1,069 (481) (362) 943 1,135 707 (666) (459) 717 2003 $M 943 617 (456) (439) 665 Loans Accruing But Past Due 90 Days or More 2005 $M 2004 $M 2003 $M 2002 $M GROUP At 30 June 2001 $M Accruing loans past due 90 days or more Housing loans Other loans Total 183 119 302 168 78 246 157 91 248 176 73 249 218 90 308 Net Interest Foregone on Impaired Assets Interest income forgone Australia non accrual facilities Overseas non accrual facilities Total 2005 $M 2004 $M 2003 $M GROUP Year Ended 30 June 2001 $M 2002 $M 13 - 13 10 - 10 15 3 18 21 7 28 8 8 16 Interest Taken to Profit on Impaired Assets 2005 $M 2004 $M 2003 $M GROUP Year Ended 30 June 2001 $M 2002 $M Australia Non accrual facilities Restructured facilities Overseas Non accrual facilities OREO Total Interest Taken to Profit 9 - - - 9 11 - 3 - 14 26 - 4 - 30 27 - 3 - 30 37 - 14 - 51 120 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 2005 $M 2005 $M GROUP Total 2005 $M Australia Overseas 2004 $M 2004 $M GROUP Total 2004 $M 235 146 381 (19) 362 (144) 218 14 - 14 - 14 (13) 1 249 146 395 (19) 376 (157) 219 193 152 345 (23) 322 (128) 194 13 5 18 - 18 (15) 3 206 157 363 (23) 340 (143) 197 - - - - - - - - - - - - - - - - - - - - - - - - 381 (19) 362 (144) 218 14 - 14 (13) 1 119 116 146 381 13 1 - 14 - - - - - - - - - - - - 395 (19) 376 (157) 219 132 117 146 395 - - - - - - - - - - - - - - - - - - - - - - - 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 Accruing Loans 90 days past due or more (1) 267 35 302 224 22 246 (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. 121 Notes to the financial statements NOTE 15 Asset Quality continued Selected Regional Exposures Asia Over 66% of total exposures relate to financial institutions. Exposures to Indonesia, Thailand and Korea represent approximately 16% of the Group’s Asian credit risk. The Group’s credit risk exposure to Asian countries as at 30 June 2005 is set out below. The exposures exclude Group equity investments. Asian Exposures Country Finance Corporate/ Multinational $M $M China Hong Kong Japan Malaysia Singapore Phillipines Taiwan Other Indonesia South Korea Thailand Total 335 492 827 710 65 584 328 621 6 2,314 23 359 229 611 3,752 6 984 990 78 67 127 2 1 35 310 5 102 26 133 1,433 Other Regional Exposures Region Finance Corporate/ Multinational $M $M CUSTOMER TYPE Government Project Finance(1) $M - - - - - - - - - - 23 - - 23 23 APL/NZPL 2005 Total Exposure(2) $M $M - 217 217 6 1 33 - - - 40 6 - - 6 263 341 1,693 2,034 824 182 753 330 622 41 2,652 80 573 256 909 5,695 $M - - - 30 49 9 - - - 88 23 112 1 136 224 CUSTOMER TYPE Government Project Finance(1) $M $M APL/NZPL 2005 Total Exposure(2) $M $M GROUP 2004 Total Exposure $M 177 1,492 1,669 546 380 880 641 314 3 2,764 246 985 220 1,451 5,884 GROUP 2004 Total Exposure $M Eastern Europe Latin America Middle East 1 - 398 1 - 8 - - - - - - - - - 2 - 406 1 - 73 (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. 122  2005 $M 3,144 6,467 9,611 3,918 8,116 12,034 3 2,442 2,445 3,747 27,837 GROUP 2004 $M 4,433 8,025 12,458 3,518 7,710 11,228 80 2,330 2,410 2,846 28,942 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. 2005 $M 45 45 GROUP 2004 $M 38 38 2005 $M GROUP 2004 $M - - - - - - 2005 $M 1 1 2005 $M 17,634 11,527 29,161 BANK 2004 $M 4 4 BANK 2004 $M 12,156 11,521 23,677 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 Life 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 Shares in controlled entities Loans to controlled entities Total Shares in and Loans to Controlled Entities 123 Notes to the financial statements NOTE 19 Property, Plant and Equipment (a) Land and Buildings Land At 30 June 2005 valuation At 30 June 2004 valuation Closing balance Buildings At 30 June 2005 valuation At 30 June 2004 valuation Closing balance Total Land and Buildings 2005 $M GROUP 2004 $M 2005 $M BANK 2004 $M 170 - 170 262 - 262 432 - 160 160 - 253 253 413 155 - 155 - 148 148 243 - 243 398 - 231 231 379 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 702 (409) 293 723 (486) 237 138 (8) 130 657 (376) 281 639 (448) 191 582 (337) 245 406 (253) 153 545 (310) 235 333 (225) 108 67 - - - - - 67 - - 252 252 - - Total Property, Plant and Equipment 1,344 1,204 796 722 (1) This investment represents a 50% interest in a long term freehold lease over property. 124 Notes to the financial statements NOTE 19 Property, Plant and Equipment continued Reconciliation 2005 $M GROUP 2004 $M 2005 $M BANK 2004 $M Reconciliation of the carrying amount of property, plant and equipment at the beginning and end of the 2005 and 2004 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 160 (6) 16 170 253 22 (9) 17 (21) 262 281 78 (8) (58) 293 191 115 - (69) 237 141 (8) 27 160 302 2 (57) 27 (21) 253 228 119 (11) (55) 281 150 96 (4) (51) 191 148 (6) 13 155 231 22 (10) 20 (20) 243 235 62 (6) (46) 245 108 80 - (35) 153 129 (3) 22 148 233 - (5) 21 (18) 231 175 117 (12) (45) 235 71 58 - (21) 108 67 71 (8) 130 - 67 - 67 - - - - - - - - 252 - 252 - 252 252 - - - - - - 125 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 GROUP 2004 $M 2005 $M 5,591 1,169 (332) 5,591 1,155 (332) 2005 $M 2,671 835 - (2,034) (1,709) (1,170) 4,394 4,705 2,336 BANK 2004 $M 2,671 835 - (984) 2,522 In recognition of the disclosure requirements of US SFAS 141: Business Combinations and the Australian Accounting Standard AASB 138: Intangible Assets (effective 1 July 2004), the Group’s carrying amount of goodwill is disclosed for each segment of business. Segment Banking(1) Funds Management(2) Insurance(2) Total 2005 $M 4,090 236 68 4,394 2004 $M 4,379 253 73 4,705 (1) (2) The allocation to banking includes goodwill related to the acquisitions of Colonial, State Bank of Victoria and 25% of ASB Bank. The allocation to funds management and insurance principally relates to the goodwill on acquisition of Colonial. Additional to the Colonial goodwill acquired, $2,548 million in excess of net market value over net assets of life insurance controlled entities was booked at acquisition of the Colonial funds management and life insurance businesses in June 2000. 126 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 Total Other Assets 2005 $M 1,197 267 641 907 650 GROUP 2004 $M 1,208 223 600 1,540 564 2005 $M 1,503 133 507 625 577 BANK 2004 $M 1,247 80 602 1,347 423 6,549 5,741 - - 111 111 - - 12,144 12,827 12,043 12,798 - - - - 1,775 24,241 2,478 25,292 55 549 1,208 17,200 104 317 1,931 18,849 (1) 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. 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, have not been recognised as assets because recovery is not virtually certain. These benefits could amount to: (cid:131) (cid:131) $44 million (2004: $34 million) in capital losses; and $115 million (2004: $136 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 the conditions for claiming capital losses and deductions imposed by tax legislation; and to comply with (cid:131) (cid:131) No changes in tax legislation adversely affect the Company in realising the benefit from the 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 2005 Excess of Market Value Over Net Assets $M 5,840 709 6,549 GROUP At 30 June 2004 Excess of Market Value Over Net Assets $M 5,178 563 5,741 Net Assets $M 2,104 409 2,513 Net Assets $M 2,246 415 2,661 Market Value $M 7,944 1,118 9,062 Market Value $M 7,424 978 8,402 127 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 2005 $M GROUP 2004 $M 2005 $M BANK 2004 $M 16,041 41,582 75,410 5,823 2,258 141,114 3,105 13,617 8,633 1,155 405 26,915 168,029 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 16,041 39,993 75,806 5,853 2,258 20,516 36,714 71,289 5,431 3,648 139,951 137,598 386 2,998 113 5 405 3,907 1,906 2,448 73 11 433 4,871 143,858 142,469 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 2005. GROUP At 30 June 2005 Maturing Three Months or Less $M Maturing Between Three & Six Months $M Maturing Between Six & Twelve Months $M Maturing After Twelve Months $M Total $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 7,912 20,075 27,987 2,355 9,632 11,987 39,974 5,078 14,527 19,605 373 2,795 3,168 22,773 1,427 4,665 6,092 321 772 1,093 7,185 1,624 2,315 3,939 16,041 41,582 57,623 56 418 474 4,413 3,105 13,617 16,722 74,345 (1) All certificates of deposit issued by the Bank are for amounts greater than $100,000. 128 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 2005 $M 2,708 5,315 8,023 2005 $M 808 657 1,465 25 60 85 1,550 GROUP 2004 $M 2,383 4,258 6,641 GROUP 2004 $M 402 355 757 25 29 54 811 2005 $M 2,712 5,257 7,969 2005 $M 757 657 1,414 BANK 2004 $M 2,383 4,228 6,611 BANK 2004 $M 352 332 684 7 - 7 1,421 6 - 6 690 129 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 Transfers 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 2005 $M GROUP 2004 $M 2005 $M BANK 2004 $M 296 146 82 91 18 100 66 82 881 300 130 98 208 - 79 60 122 997 285 126 82 91 18 - 66 41 709 293 112 98 208 - - 59 49 819 2005 $M GROUP 2004 $M 2005 $M BANK 2004 $M 208 - (20) (97) 91 - 22 (4) 18 79 61 (40) 100 60 34 (28) 66 122 29 (69) - 82 - 208 - - 208 30 - (30) - 66 44 (31) 79 56 13 (9) 60 107 70 (54) (1) 122 208 - (20) (97) 91 - 22 (4) 18 - - - - 59 34 (27) 66 49 24 (32) - 41 - 208 - - 208 29 - (29) - - - - - 55 13 (9) 59 63 6 (20) - 49 130 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 USD35 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 2005, the Bank has issued: USD medium term notes: between 1 and 5 years – USD100 million (AUD130.80 million); Greater than 5 years – USD143.44 million (AUD187.62 million); USD extendible notes: between 1 and 5 years – USD2,100 million (AUD2,746.78 million); JPY medium term notes: between 1 and 5 years – JPY4 billion (AUD47.49 million); Greater than 5 years – JPY6 billion (AUD71.23 million); 2005 $M 26,344 32,277 58,621 1,214 624 10,141 4,976 9,389 26,344 15,358 4,850 868 4,401 6,596 - 204 32,277 11,055 15,288 22,312 9,966 58,621 GROUP 2004 $M 20,401 23,641 44,042 1,450 490 9,381 3,638 5,442 20,401 8,790 4,453 734 3,837 5,583 40 204 23,641 6,949 13,452 17,542 6,099 44,042 2005 $M 9,500 31,187 40,687 - - - 3,065 6,435 9,500 15,680 6,272 692 2,736 5,807 - - 31,187 6,006 3,493 21,320 9,868 40,687 BANK 2004 $M 6,127 18,322 24,449 - - - 2,498 3,629 6,127 8,146 2,813 520 1,981 4,822 40 - 18,322 1,925 4,202 12,224 6,098 24,449 (cid:131) (cid:131) (cid:131) CHF medium term notes: between 1 and 5 years – CHF300 million (AUD306.67 million); CAD medium term notes: between 1 and 5 years – CAD25 million (AUD26.6 million); and HKD medium term notes: between 1 and 5 years – HKD400 million (AUD67.33 million); Greater than 5 years – HKD207 million (AUD34.9 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. 131 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 2003, 2004 and 2005. 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) Maximum amount outstanding at any month end (2) Approximate average amount outstanding (2) Approximate weighted average rate on: Average amount outstanding 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 2005 2003 2004 (AUD Millions, except where indicated) 10,141 10,178 9,839 1.2% 1.5% 4,976 6,146 3,800 2.2% 2.8% - - - 1,838 2,110 1,790 5.8% 5.7% 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% (1) (2) 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. (3) Commercial bills sold under non recourse arrangements. Exchange Rates Utilised As at AUD 1.00 = USD GBP JPY NZD HKD DEM CHF IDR THB FJD PHP EUR 30 June 2005 0.7643 0.4223 84.165 1.090 5.940 1.235 0.978 7,425 31.531 1.301 42.946 0.6316 30 June 2004 0.6894 0.3823 74.914 1.097 5.378 1.116 0.8720 6,487 28.229 1.239 38.731 0.5706 132 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: • • All demand deposits and term deposits were guaranteed for a period of three years from 19 July 1996, with term deposits outstanding at the end of three year period being guaranteed until that maturity; and All other amounts payable under a contract that was entered into, or under an instrument executed, issued, endorsed or accepted by the Bank at 19 July 1996 will be guaranteed until their maturity. Accordingly, demand deposits are no longer guaranteed. Term deposits outstanding at 19 July 1999 remain guaranteed until maturity. The run-off of the Government guarantee has no effect on the Bank’s access to deposit markets. Commonwealth Development Bank On 24 July 1996, the Commonwealth of Australia sold the Commonwealth its 8.1% shareholding Development Bank Limited (CDBL) to the Bank for $12.5 million. in Under the arrangements relating to the purchase by the Commonwealth of Australia’s the Bank of shareholding in the CDBL: • All lending assets as at 30 June 1996 have been quarantined in CDBL, consistent with the charter terms on which they were written; • • The CDBL’s liabilities continue to remain guaranteed by the Commonwealth; and CDBL ceased to write new business or incur additional liabilities from 1 July 1996. From that date, new business that would have previously been written by CDBL is being written by the rural arm of the Bank. The due payment of all monies payable by CDBL is guaranteed by the Commonwealth of Australia under Section 117 of the Commonwealth Banks Act 1959 (as amended). This guarantee will continue to be provided by the Commonwealth whilst quarantined assets are held. The value of the liabilities under the guarantee will diminish as quarantined assets reach maturity and are repaid. State Bank of NSW (known as Colonial State Bank) The enabling legislation for the sale of the State Bank of New South Wales Limited (SBNSW), the State Bank (Privatisation) Act 1994 – Section 12 and the State Bank (Corporatisation) Act 1989 – Section 12 (as amended), provides in general terms for a guarantee by the NSW Government in respect of all funding liabilities and off balance sheet products (other than demand deposits) incurred or issued prior to 31 December 1997 by SBNSW until maturity and a guarantee for demand deposits accepted by SBNSW up to 31 December 1997. Other obligations incurred before 31 December 1994 are also guaranteed to their maturity. On 4 June 2001 Commonwealth Bank of Australia became the successor in law to SBNSW pursuant to the Financial Sector Transfers of Business Act 1999. The NSW Government guarantee of the liabilities and products as described above continues unchanged by the succession. Note 27 Bills Payable and Other Liabilities Bills payable Accrued interest payable Accrued fees and other items payable Securities purchased not delivered Unrealised losses on trading derivatives (Note 39) Intergroup deferred tax payable Other liabilities Total Bills Payable and Other Liabilities 2005 $M GROUP 2004 $M 928 1,355 1,255 1,065 11,914 - 1,569 18,086 980 1,325 1,151 1,649 12,188 - 1,847 19,140 2005 $M 863 1,226 860 796 11,854 60 999 16,658 BANK 2004 $M 950 1,140 829 1,458 12,156 153 1,202 17,888 133 Notes to the financial statements NOTE 28 Loan Capital Currency Amount (M) Footnotes 2005 $M 2004 $M GROUP 2003 $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 Subordinated Subordinated Subordinated Subordinated FRN FRN FRN TPS USD38 USD95 USD100 USD550 AUD25 AUD275 AUD185 AUD115 AUD25 AUD200 AUD50 FRN FRN MTN FRN FRN MTN FRN Notes USD300 USD450 FRN EMTN JPY20,000 EMTN USD200 EMTN USD75 EMTN USD100 EMTN USD400 EMTN GBP200 EMTN Loan FRN FRN Notes Other Notes USD350 EMTN GBP150 AUD300 MTN AUD200 FRN EMTN JPY10,000 EMTN USD500 FRN AUD300 EMTN EUR300 EMTN USD100 Notes NZD350 JPY30,000 NZD100 AUD210 AUD38 AUD130 AUD21 (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) (27) (28) (29) (30) 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 2005 were: Due July 2006 Undated : USD32.5 million : USD5 million (2) USD 400 million undated FRNs issued 22 February 1989 exchangeable into dated FRNs. Outstanding notes at 30 June 2005 were: : USD24 million Due February 2006 : USD7 million Due February 2008 : USD64 million Undated (3) USD 100 million undated capital notes issued on 15 October 1986. The Bank has entered into separate agreements with theCommonwealth 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 the either Commonwealth of Australia or (with the consent of to all the Commonwealth of Australia) rights fully paid ordinary shares to 2005 $M 49 124 131 719 1,023 - 275 - - 25 - - 549 - 216 - - - 501 408 387 - - - 130 - 536 373 300 200 127 711 300 501 126 322 5,987 7,010 BANK 2003 $M 2004 $M 55 138 145 799 1,137 25 275 - - 25 200 50 549 650 240 313 115 152 501 408 429 - 210 38 130 21 512 373 300 200 127 358 - - - - 6,201 7,338 59 142 150 - 351 25 275 185 115 25 199 50 549 672 248 313 115 152 501 408 444 - 210 38 130 35 524 373 - - - - - - - - 5,586 5,937 49 124 131 - 304 - 275 - - 25 - - 549 - 216 - - - 501 408 387 - - - 130 - 536 373 300 200 127 711 300 501 126 322 5,987 6,291 55 138 145 - 338 25 275 - - 25 200 50 549 650 240 313 115 152 501 408 429 92 210 38 130 21 512 373 300 200 127 358 - - - - 6,293 6,631 59 142 150 - 351 25 275 185 115 25 199 50 549 672 248 313 115 152 501 408 444 88 210 38 130 35 524 373 - - - - - - - - 5,674 6,025 shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the relevant note issue or issues plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price of such shares will be determined by reference to the prevailing market price for the Bank’s shares. Any one or more of the following events may trigger the issue of shares to the Commonwealth of Australia or a rights issue: 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. • • • • • 134 Notes to the financial statements NOTE 28 Loan Capital continued Any payment made by the Commonwealth of Australia pursuant to its guarantee in respect of the relevant notes will trigger the issue of shares to the Commonwealth of Australia to the value of such payment. The relevant events of default differ depending on the relevant Agreement. In summary, they cover events such as failure of the Bank to meet its monetary obligation in respect of the relevant notes; the insolvency of the Bank; any law being passed to dissolve the Bank or the Bank ceasing to carry on general banking business in Australia; and the Commonwealth of Australia ceasing to guarantee the relevant notes. In relation to Dated FRNs which the have matured Commonwealth agreed 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. the Bank and to amend to date, (4) USD550 million convertible notes issued August (5) 2003. AUD275 million extendible floating rate note issued December 1989, due December 2014; 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. to shares fully paid ordinary The agreement provides for the Bank to issue either the Commonwealth of Australia or (with the consent of the Commonwealth of Australia) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the 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. • • • (6) (7) (8) the trigger Any one or more of the following events will trigger the issue of shares to the Commonwealth of Australia or a rights issue: A relevant event of default occurs in respect of the note issue and, where applicable, the Trustee of the notes gives notice of such to the Bank; 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 Any payment made by the Commonwealth of Australia pursuant to its guarantee in respect of the issue will the Commonwealth of Australia to the value of such payment. issued AUD300 million 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 November 1999, due November 2009; split into AUD200 million fixed rate notes and AUD50 million floating rate notes. Called and redeemed November 2004. subordinated notes, subordinated notes, issue of shares to (9) USD750 million subordinated notes, issued June 2000, due June 2010; split into USD300 million fixed rate notes and USD450 million floating rate notes. The floating rate notes were called and redeemed in June 2005. (10) JPY20 billion perpetual subordinated EMTN, issued February 1999. (11) USD200 million issued November 1999, due November 2009. Called and redeemed November 2004. subordinated EMTN, (12) USD75 million subordinated EMTN, issued January 2000, due January 2010. Called and redeemed January 2005. (13) USD100 million subordinated EMTN, issued January 2000, due January 2010. Called and redeemed January 2005. (14) USD400 million subordinated EMTN issued June 1996 due July 2006. (15) GBP200 million subordinated EMTN issued March 1996 due December 2006. (16) JPY30 billion subordinated EMTN issued October 1995 due October 2015. (17) NZD100 million subordinated loan matures 15 December 2009. Called and repaid December 2004. (18) AUD210 million Euro FRN issued September 1996, matured September 2004. (19) AUD38 million FRN issued December 1997, matured December 2004. (20) AUD130 million subordinated notes comprised as follows: AUD10 million fixed rate notes issued 12 December 1995, maturing 12 December 2005. AUD110 million issued 12 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. All called and redeemed between August 2004 and October 2004. (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. (25) JPY10 billion subordinated EMTN, issued May 2004, due May 2034. (26) USD500 million subordinated EMTN issued in June 2004 (USD250 million) and August 2004 (USD250 million), due August 2014. (27) AUD300 million subordinated floating rate notes, issued February 2005, due February 2015. (28) EUR300 million subordinated EMTN issued March 2005, due March 2015. (29) USD100 million subordinated EMTN issued March 2005, due March 2025. (30) NZD350 million subordinated notes issued May 2005, due April 2015. 135 Notes to the financial statements NOTE 29 Share Capital Issued and Paid Up Ordinary Capital Ordinary Share Capital Opening balance Dividend Reinvestment Plan: Final Dividend prior year Dividend Reinvestment Plan: Interim Dividend Share buy back Share purchase plan Exercise of Executive Options Issue costs Closing balance Shares on Issue Opening balance Dividend reinvestment plan issues: 2003/2004 Final Dividend fully paid ordinary shares at $30.14 2004/2005 Interim Dividend fully paid ordinary shares at $35.90 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 Exercise under Executive Option Plan Closing balance Terms and Conditions of Ordinary Share Capital 2005 $M BANK 2004 $M 13,359 246 200 - - 67 (1) 13,871 12,678 201 188 (213) 467 38 - 13,359 Number 1,264,006,062 Number 1,253,581,363 8,172,546 5,581,364 - - - - 2,516,200 1,280,276,172 - - 7,165,289 5,916,319 (19,360,759) 14,891,250 1,812,600 1,264,006,062 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 2005 $M 687 BANK 2004 $M 687 Number 3,500,000 Number 3,500,000 Commonwealth Bank PERLS (“PERLS”) are perpetual preference shares that offer a quarterly, floating rate dividend. PERLS represent a less expensive form of equity funding than ordinary shares and increase the diversity and flexibility of the Bank’s capital base. A holder of PERLS on the relevant record date is entitled to receive on each relevant dividend payment date, if determined by the Directors to be payable, a dividend. If a dividend is not paid the Bank will not be permitted to pay dividends on any of its ordinary shares until four consecutive dividends are paid on the PERLS. Holders of Commonwealth Bank PERLS will rank ahead of holders of ordinary shares in a winding up to the extent of the issue price of the Commonwealth Bank PERLS. PERLS are listed and traded on the Australian Stock Exchange. Holders of PERLS are entitled to vote at a general meeting of the issuer in limited circumstances. Other Equity Instruments Other equity instruments issued and paid up 2005 $M 1,573 GROUP 2004 $M 1,573 Number 4,300,000 Number 4,300,000 2005 $M 737 Number 550,000 BANK 2004 $M 737 Number 550,000 136 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 an 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 ATO Class Ruling CR2004/65, the "market value" of the shares bought back for tax purposes was $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 exceeded 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 was $13.92 ($11.00 + $2.92). Share Purchase Plan In 2004 the Bank introduced a Share Purchase Plan (SPP). 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 112 cents per share amounting to $1,434 million. The dividend will be payable on 23 September 2005 to shareholders on the register at 5pm on 19 August 2005. Dividends paid by the end of the previous financial year: • through As declared in last year’s report, a fully franked final dividend of 104 cents per share amounting to $1,315 million was paid on 24 September 2004. The payment comprised cash disbursements of $1,069 million with $246 million being reinvested by participants the Dividend Reinvestment Plan; In respect of the current year, a fully franked interim dividend of 85 cents per share amounting to $1,083 million was paid on 31 March 2005. The payment comprised cash disbursements of $883 million with $200 million being reinvested by participants through the Dividend Reinvestment Plan; and • • Additionally, quarterly dividends totalling $39 million for the year were paid on the PERLS; $34 million on the PERLS II; $42 million on the Trust Preferred Securities; $9 million on the ASB Capital preference shares; and $7 million on the ASB Capital No.2 preference shares. Dividend Reinvestment Plan The Bank expects to issue around $272 million of shares in respect of the Dividend Reinvestment Plan for the final dividend for 2004/05. 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 19 August 2005 at ASX Perpetual Registrars Limited, Locked Bag A14, Sydney South, 1235. in Ex Dividend Date The ex dividend date is 15 August 2005. 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 the consumer price index (CPI change) 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 through the profit and loss. In the current year, 699,918 shares were granted to eligible employees in respect of the 2004 grant. The Bank has determined to allocate each eligible employee shares up to a value of $1,000 in respect of the 2005 grant. As a result, an amount of $27 million has been accrued in respect of the year ended 30 June 2005. The shares will be purchased on-market at the then market price. 137 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 were: Purchase Date Ordinary Shares Purchased No. of Participants Shares allocated to Each Participant Allocation Price(3) 31 Oct 2002 22 Jan 2003 31 Oct 2003 29 Oct 2004 830,874 1,584 683,617 699,918 25,178 48 23,573 22,578 33 33 29 31 $29.71 $29.71 $27.53 $31.52 (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 five 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 and 2004 Offers 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 (STI) to be applied in the acquisition of shares. The plan previously also facilitated the mandatory sacrifice of 50% of STI payments for some employees. However the mandatory component of EPP ceased for the year ending 30 June 2005 and was replaced with a separate cash STI deferral arrangement for eligible employees. Shares previously granted under the mandatory component of the EPP remain subject to their vesting conditions. All shares acquired by employees under this plan are purchased on-market at the current market price. A total number of 7,952,277 shares have been acquired under the EPP since the plan commenced in 2001. Details of purchases under the EPP from 1 July 2004 to 30 June 2005 were as follows: Allotment Date 24 Sept 2004 30 Sept 2004 30 Dec 2004 22 Apr 2005 Participants 1,449 756 80 57 Shares Purchased 1,858,984 259,890 12,274 8,704 Average Purchase Price $29.85 $30.05 $32.11 $35.97 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 the voluntary component of the EPP carry full dividend entitlements, voting rights and there are no forfeiture or vesting conditions attached to the shares. is earlier. Shares purchased under Under the mandatory component of the EPP, fully paid ordinary shares were purchased and held in trust until such time as the vesting conditions were 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 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 July 04 – June 05 2,790,353 2,067,281 (2,016,790) (224,073) 2,616,771 July 03 - June 04 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 through the profit and loss. In the current year, $2.5 million was expensed through the profit and loss to reflect the cost of allocations under the plan. The expense through the profit and loss for the current year is lower than previous years due to the discontinuation of the mandatory component of the EPP. 138 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 2001/2002, no options have been issued under the ERP. From 2002/2003, Reward Shares only have 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 2002/2003 which has now been met was: (cid:131) in the ASX 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 2001/2002 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 five years from the grant date. Index’ excluding (cid:131) For Reward Shares granted from 2002/2003 onwards, a tiered vesting scale was introduced so that 50% of the allocated shares vest if the Bank’s TSR is equal to the 50th percentile 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 half yearly windows, over the next two years. The vesting percentage will be the higher of the rating determined at the third year anniversary of the grant and the rating determined at the half yearly measurement point at which the executive nominates that the shares will vest. 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 at one of the half yearly measurement points prior to the fifth anniversary, but the maximum vesting will be 50%. the Reward Shares acquired under share component of the ERP are purchased on-market at the current market price. The cost of shares acquired is expensed through the profit and loss over a three year period, reflecting the minimum vesting period. In the current year, $12 million has been expensed through the profit and loss. Executive options issued up to September 2001 have not been recorded as an expense by the Group. 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 01 577,500 247,500 13 Sep 2000 31 Oct 01 12,500 - 2001 3 Sep 2001 31 Oct 01 2,882,000 1,689,100 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(2) $30.12(2) $30.12(2) Exercise Period 14 Sep 2003 to 13 Sep 2010(3) 14 Sep 2003 to 13 Sep 2010(3) 4 Sep 2004 to 3 Sep 2011(4) 4 Sep 2004 to 3 Sep 2011(4) 4 Sep 2004 to 3 Sep 2011(4) (1) (2) Options outstanding as at the date of the report. The premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil. (3) (4) Performance hurdle was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010. Performance hurdle was satisfied on 3 October 2004 and options may be exercised up to 3 September 2011. 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 the date of report Exercised from 30 June to date of report Lapsed from 30 June to the date of report Outstanding as at the date of report July 2003 - June 2004 2001 2000 July 2004 – June 2005 2001 2000 427,500 - - - 427,500 - 25,000 - 402,500 2,336,400 - - 101,200 2,235,200 - - - 2,235,200 402,500 - 155,000 - 247,500 - - - 247,500 2,235,200 - 403,900 29,700 1,801,600 - 50,000 - 1,751,600 139 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 2004 20 Feb 2001 31 Oct 2001 31 Oct 2001 22 Nov 2002 12 Nov 2003 11 Nov 2004 361,100 2,000 652,100 357,500 285,531 225,934 361,100 2,000 661,500(1) 545,500(2) 595,600(3) 522,290(4) 61 1 241 195 255 259 14 Sept 2003 to 13 Sept 2005(5) 14 Sept 2003 to 13 Sept 2005(5) 4 Sept 2004 to 3 Sept 2006(6) 3 Sept 2005 to 2 Sept 2007(7) 2 Sept 2006 to 1 Sept 2008(7) 23 Aug 2007 to 23 Aug 2009(7) Average Purchase Price $29.72 $29.25 $29.25 $28.26 $28.33 $29.87 (1) (2) (3) (4) 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 term of the grant and (if required) shortly after the time of vesting. 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. In November 2004, 296,356 shares were re-allocated to participants receiving the 2004 grant as a result of shares forfeited from previous grants. The total number of Reward Shares allocated in 2004 represents fifty percent of the maximum entitlement that participants may receive – refer to footnote 2 above for further information. (5) Performance hurdle was satisfied on 31 March 2004 and as a result 195,700 shares vested to participants of the 2000 grant. (6) Performance hurdle was satisfied on 3 October 2004 and as a result 423,500 shares vested to participants of the 2001 grant. (7) Performance hurdle must be satisfied within the vesting period, otherwise shares will be forfeited. Reward Shares - Details of Movements Year of Grant 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 Lapsed from 30 June to date of report Outstanding as at the date of report July 03 - June 04 July 04 - June 05 2000 2001 2002 2003 2001 2002 2003 2004 217,100 - 195,700 21,400 518,500 - - 59,000 515,300 - - 43,225 - 597,100 - 10,725 437,000 - 423,500 13,500 445,825 - - 68,975 557,500 - - 94,650 - 597,975 - 53,075 - - - 459,500 472,075 586,375 22,500 26,250 28,875 437,000 445,825 557,500 - - - 376,850 462,850 544,900 11,400 8,950 8,750 365,450 453,900 536,150 limited number of executives 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 including overseas based staff and those approved by the Chief Executive Officer and ratified by the 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 $3.1 million has been expensed through the profit and loss in respect of the year ended 30 June 2005 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 2000/2001. Under the EOP, the Bank granted options to purchase ordinary shares to those key executives who, being able by virtue of their responsibility, experience and skill to influence the generation of Shareholder wealth, were declared by the Board of Directors to be eligible to participate in the plan. Non-Executive Directors were not eligible to participate in the plan. Options cannot be exercised before each respective exercise period and the ability to exercise is conditional on the Bank achieving a prescribed performance hurdle. The option plan did not grant rights to the option holders to participate in a share issue of any other body corporate. the same TSR comparator hurdle as outlined above for the Equity Reward Plan grants prior to 2002/2003. The performance hurdle is 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. 140 Notes to the financial statements NOTE 29 Share Capital continued Details of issues made under EOP as well as movements for 2003/2004 and 2004/2005 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 Participants - - 450,000 637,300 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 - 1 July 2003 to 30 June 2004(1) 2000 1999 1998 1 July 2004 to 30 June 2005 (1) 2000 1999 Held by participants at the start of year 312,500 3,221,000 1,336,200 1,875,000 1,144,600 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 312,500 1,271,000 129,100 1,425,000 507,300 - - - - - 25,000 12,500 - - 1,925,000 1,194,600 450,000 637,300 50,000 50,000 - - - - 75,400 - 1,875,000 1,144,600 450,000 561,900 (1) The EOP was discontinued in 2000/2001 and no options have been granted under the plan during the last four reporting periods. Summary of shares issued during the period 1 July 2004 to the date of the report as a result of options being exercised are: Option Issue Date 24 Sep 1999 13 Oct 2000 7 Feb 2001 3 Sep 2001 Shares Issued 1,475,000 632,700 180,000 453,900 Price paid per Share $23.84 $26.97 $26.97 $30.12 Total Consideration Paid $35,164,000 $17,063,919 $4,854,600 $13,671,468 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. 141 Notes to the financial statements NOTE 29 Share Capital continued Non-Executive Directors Share Plan (“NEDSP”) through The NEDSP provides for the acquisition of shares by non-executive directors the mandatory sacrifice of 20% of their annual fees. Shares purchased are restricted for sale for 10 years or when the Director leaves the Board, whichever is earlier. In addition, Non- Executive Directors can voluntarily elect to sacrifice up to a further 50% of their annual fees for the acquisition of shares. 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 41,943 shares have been purchased under the NEDSP since the plan commenced in 2001. Since March 2005, shares are now acquired under the plan on a six monthly basis. Details of grants under the NEDSP from 1 July 2004 to 30 June 2005 were as follows: Quarter Ending 30 Sep 2004 31 Dec 2004 31 Mar 2005 Total Fees Sacrificed $74,406 $76,218 $110,958 Participants Shares Purchased Average Purchase Price 11 9 9 2,475 2,373 3,086 $30.05 $32.11 $35.97 The trading restrictions on shares were lifted for two Non-Executive Directors as they ceased to be Non-Executive Directors during the period 1 July 2004 to the date of this report. For the current year, $262,000 was expensed through the profit and loss reflecting shares purchased and allocated under the NEDSP. NOTE 30 Outside Equity Interests Controlled Entities: Share Capital (1) Retained profits and reserves Life Insurance Statutory funds Total Outside Equity Interests (1) ASB Perpetual Preference Shares - $505 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. On 22 December 2004, ASB Capital No.2 Ltd, a New Zealand subsidiary, issued NZD350 million (AUD323 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 2005 $M 623 8 1,158 1,789 GROUP 2004 $M 300 4 2,176 2,480 (“CFT”), established. Both of these entities are owned 60% by the CBA Group and 40% by outside equity interests. On 30 September 2002, unit holders of the Colonial First State Property Trust Group 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. 142 Notes to the financial statements NOTE 31 Capital Adequacy Commonwealth Bank of Australia (“the Bank”) is subject to regulation by 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 Basel Accord. These requirements define what is 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 as “Level 1”) and for the Bank and its banking subsidiaries (known 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 is deducted from the sum of Tier One and Tier Two capital to arrive at the Capital Base. funds management businesses In accordance with APRA’s methodology, measuring risk requires one of a number of risk weights to be applied to each asset on the balance sheet and to off-balance sheet obligations. The 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 145. An analysis of the movement in the capital ratios is shown on page 144. Dividends Banks may not pay dividends if immediately after payment, they are unable to meet the minimum capital from requirements. Banks cannot pay dividends 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 2005 ASB Bank Limited Group had a Tier One ratio of 9.7% and a Total Capital ratio of 10.3%. The Group’s insurance businesses Regulatory Capital Requirements for Life Insurance and Funds Management Business life in Australia are regulated by APRA. The Life Insurance Act 1995 includes a framework for the calculation of the regulatory capital requirements for life insurance companies. There are two tiers to the regulatory capital ‘capital adequacy’. The capital adequacy test is always equal to or greater than the solvency test. At 30 June 2005, for Australian life insurance companies, the estimated requirements – ‘solvency’ and 143 excess over capital adequacy within life insurance statutory funds amounted to $102 million in aggregate. The Group owns two life insurance companies in Australia: Commonwealth Insurance Holdings Limited (“CIHL”), and The Colonial Mutual Life Assurance Society Limited (“CMLA”). There are no regulatory capital requirements for life insurance companies in New Zealand, though the directors of any company must certify its solvency under the Companies Act 1993. The Group determines the minimum capital requirements for its New Zealand life insurance business according to the Prudential Reserving Guidance Note of the New Zealand Society of Actuaries. The life insurance business in Hong Kong is regulated by the Insurance Authority of Hong Kong. The minimum regulatory requirement comprises a solvency test as defined in local regulations and ordinances. Fund managers in Australia are subject to the Australian regulation by responsible entity Securities and Investment Commission (“ASIC”). The regulatory capital requirements vary for 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. APRA approved supervises of superannuation funds and requires them to also maintain net tangible assets of at least $5 million. These requirements are not cumulative where an entity is both an approved trustee for superannuation purposes and a responsible entity. trustees The total Group’s life and funds management companies held an estimated $580 million excess over regulatory capital requirements at 30 June 2005 in aggregate. Regulatory Changes Basel II In June 2004, the Basel Committee on Banking the (“the Basel Committee”) Supervision Revised Framework for the calculation of capital adequacy for banks, commonly known as Basel II. The objective of the Basel II Framework is to develop capital adequacy guidelines that are more accurately aligned with the individual risk profile of banks. issued is a modified version of 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 risk under the Basel II Framework. These are Standardised and two internal ratings-based (“IRB”) approaches. The Standardised Approach the current approach, but with risk weights aligned with the credit ratings of borrowers and 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 used by the bank in its internal models. The Commonwealth Bank is intending to implement the Advanced IRB approach. The Basel II Framework introduces a capital requirement for operational risk. As with credit risk, there are multiple approaches. The Bank is intending Active Capital Management The Bank maintains a strong capital position. The Tier One capital ratio increased from 7.43% to 7.46% and the Total Capital ratio decreased from 10.25% to 9.75% during the year to 30 June 2005. The Bank’s credit ratings remained unchanged. During the year, the Bank’s risk-weighted assets grew from $169 billion to $190 billion. The changes in the regulatory capital ratios are attributed to the following movements and significant initiatives undertaken to actively manage the Bank’s capital: Tier One capital (cid:131) Issue of NZ$350 million (AUD$323 million) of Perpetual Preference Shares in December 2004; Issue of $200 million of shares in March 2005 to satisfy the DRP in respect of the interim dividend for 2004/05; and In accordance with APRA guidelines, the estimated issue of $272 million of shares to satisfy the DRP in respect of the final dividend for 2004/05. Further details of these transactions are provided in Note 29. (cid:131) From 1 July 2004, APRA requires banks to deduct certain capitalised expenses from Tier One capital. This change regulatory requirements resulted in a $107 million decrease in Tier One capital. in Tier Two capital (cid:131) in with Issue of the equivalent of AUD$1,554 million Lower Tier Two capital; Call of the equivalent of AUD$1,866 million notes. However, as some of the notes had been amortised APRA accordance requirements, the impact was to reduce Tier Two to 30 June 2005 by capital AUD$1,592 million; and Reduction in Tier Two note and bond issues of AUD$319 million resulting in foreign exchange rates (whilst these notes are hedged, the unhedged value is included in the calculation of regulatory capital in accordance with APRA regulations). from changes the year in Deductions from Total Capital The following movements in deductions have occurred during the year: (cid:131) Dividends paid life insurance and funds management businesses in excess of the dividend paid in respect of the after-tax profits of these businesses (refer to Note 34). the Bank from the to (cid:131) (cid:131) (cid:131) (cid:131) Notes to the financial statements NOTE 31 Capital Adequacy continued to implement the Advanced Measurement Approach (“AMA”). The current capital requirements for market risk are not expected to change significantly under the Basel II Framework. The Bank is on track to lodge its Accreditation application for Advanced IRB and AMA approaches with APRA by 30 September 2005. The implementation of Basel II in Australia is expected to take place on 1 January 2008. International Financial Reporting Standards The Bank will be required to report under the Australian equivalent of International Financial Reporting Standards (“AIFRS”) for the financial year commencing 1 July 2005. APRA has stated that it intends to amend its prudential regulations in response to the implementation of AIFRS and that these changes will take effect on 1 July 2006. Many of the AIFRS changes will have an affect upon the reporting of the Bank’s assets and equity. Currently, accounting definitions for asset and equity measurement are central to the capital adequacy requirements set by prudential regulators. In February 2005 APRA released a discussion paper on its proposed changes to fair value and other issues. However, APRA are yet to clarify the full extent of its proposed changes to regulatory capital requirements. As such, it is currently unclear what impact that these changes will have on the Bank’s capital adequacy position. Refer to Note 1 (qq) for further discussion of AIFRS. 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 falls within APRA’s Commonwealth Bank Group 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 that it is strongly capitalised (as evidenced by its credit ratings), no assurance can be given that our models will meet APRA’s requirements or that the Bank meets the Level 3 capital requirements. 144 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 Capitalised expenses(4) Other Total Tier One capital Tier Two capital Asset revaluation reserve General provision for bad and doubtful debts (5) FITB related to general provision Upper Tier Two note and bond issues Lower Tier Two note and bond issues (6) (7) Total Tier Two capital 2005 Actual % 7.46 3.21 (0.92) 9.75 4.91 2005 $M 26,060 304 272 211 (92) (4,394) (1,434) (5,397) (111) (1,158) (107) (13) 14,141 92 1,389 (414) 237 4,783 6,087 GROUP 2004 Actual % 7.43 3.93 (1.11) 10.25 4.75 GROUP 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 Total capital Deduct: Investment in non-consolidated subsidiaries (net of intangible component deducted from Tier One capital)(3) Other deductions Capital Base 20,228 19,246 (1,721) (28) 18,479 (1,886) (5) 17,355 (1) (2) (3) (4) (5) (6) (7) 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. 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. Effective 1 July 2004, APRA requires banks to deduct certain capitalised expenses from Tier One capital. 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. 145 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 2005 $M 14,141 GROUP 2004 $M 12,588 (304) (687) (1,573) (338) (687) (1,573) (520) (190) (1,721) (28) - 9,308 (1,886) (5) 139 8,048 (1) (2) 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. 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 Face Value 2005 $M 2004 $M Risk Weights % GROUP Risk-Weighted Balance 2004 $M 2005 $M 27,447 14,754 143,746 92,510 27,554 15,020 125,026 83,256 0% 20% 50% 100% - 2,951 71,873 92,510 - 3,004 62,513 83,256 Total On Balance Sheet Assets - Credit Risk (2) (3) 278,457 250,856 167,334 148,773 Face Value 2005 $M 2004 $M Credit Equivalent 2004 $M 2005 $M GROUP Risk-Weighted Balance 2004 $M 2005 $M Off-Balance Sheet Exposures Direct credit substitutes Trade and performance related items Commitments Foreign exchange, interest rate and other market related transactions Total Off Balance Sheet Exposures - Credit Risk (4) Total Risk-Weighted Assets - Credit Risk Risk-Weighted Assets - Market Risk Total Risk-Weighted Assets 3,308 1,280 76,581 3,293 1,069 65,097 3,308 584 13,839 3,293 483 12,745 2,622 540 10,328 2,836 453 9,238 885,700 966,869 769,742 839,201 20,814 38,545 20,069 36,590 5,881 19,371 186,705 2,854 189,559 5,614 18,141 166,914 2,407 169,321 (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 residential property account for $6.2 billion of off balance sheet credit equivalent assets ($3.1 billion of off balance sheet risk-weighted assets). 146 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 2005 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 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 916 378 - - 4,837 - 181 1 6,313 93,684 809 - - - 8 94,501 - - - - 5,225 - - - 5,225 4,799 - - - 5,039 14,628 1,390 21,044 16,387 4,181 15,505 82,973 416 - 1,256 28,195 399 483 20 30,769 51 - 5,003 49,434 - 3,516 1 58,005 321 - 2,623 110,171 - 3,170 17 116,302 - - - - (1,390) - 16,306 115 15,031 Total $M 5,715 6,205 14,628 10,272 217,516 16,786 27,837 15,659 314,618 - - - - - - - 39,974 29,958 4,274 139 - 168,029 6,054 16,387 - 11,071 17,421 90,907 1,160 399 - 15,664 30 47,211 - - - 24,750 9 29,033 - - - 13,427 7 13,573 - - 24,694 - 174 24,868 8,023 16,786 24,694 64,912 17,649 300,093 (1) (2) (3) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months. $116 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. 147 Notes to the financial statements NOTE 32 Maturity Analysis of Monetary Assets and Liabilities continued GROUP Maturity Period At 30 June 2004 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 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 888 774 - - 2,646 - 51 390 4,749 88,691 536 - - - 9 89,236 Total $M 6,453 8,369 14,896 11,447 - - - - 5,565 - - - 7,126 14,896 1,952 80 - 1,646 70 - 5,145 319 - 2,704 - - - - 4,904 27,597 19,883 39,957 95,797 (1,393) 189,391 - - - 4,904 8,643 2,948 17,963 86,690 6,376 554 5 28,544 - 3,924 - - 3,466 - 49,096 102,286 - 17,999 174 16,780 15,019 28,942 18,532 293,049 - - - - - - - 48,863 21,191 3,594 838 - 163,177 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 three 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 Interest Rate Risk Sensitivity table in Note 39. 148 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 Total Revenue Funds Banking Management $M - - 3,269 301 3,570 $M 16,194 - 3,519 - 19,713 GROUP Year Ended 30 June 2005 Insurance $M - 1,132 1,186 477 2,795 Total $M 16,194 1,132 7,974 778 26,078 Interest expense 10,228 - - 10,228 Segment result before tax, goodwill amortisation and appraisal value uplift Income tax expense Segment result after 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 4,103 (1,220) 560 (204) 522 (213) 5,185 (1,637) 2,883 (3) 2,880 (303) - 2,577 303 322 135 84 356 (7) 309 - 3,548 (10) 349 (17) 301 633 17 - 8 27 309 (5) 477 781 5 - 13 - 3,538 (325) 778 3,991 325 322 156 111 292,026 19,306 17,703 329,035 303 19 275,751 8 1 16,844 39 32 10,380 350 52 302,975 149 Notes to the financial statements NOTE 33 Financial Reporting by Segments continued Primary Segment Business Segments Financial Performance Interest income Premium and related revenue Other income Appraisal value (reduction)/uplift Total Revenue GROUP Year Ended 30 June 2004 Funds Banking Management $M - - 3,142 (95) 3,047 $M 13,287 - 3,720 - 17,007 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 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 (reduction)/uplift 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 3,091 (914) 2,177 (1) 2,176 (302) - 1,874 302 276 110 427 30 504 (228) 276 (8) 268 (17) (95) 156 17 - 8 - 50 371 (120) 3,966 (1,262) 251 - 251 (5) 296 542 5 - 9 - 14 2,704 (9) 2,695 (324) 201 2,572 324 276 127 427 94 269,066(1) 19,878 17,051(1) 305,995 518 194 254,284 6 1 17,439 9 44 9,387 533 239 281,110 (1) Restated to reflect a restructure and subsequent realignment in business segments. 150 Notes to the financial statements NOTE 33 Financial Reporting by Segments continued Primary Segment Business Segments Financial Performance Interest income Premium and related revenue Other income Total Revenue GROUP Year Ended 30 June 2003 Funds Banking Management $M - - 1,157 1,157 $M 11,528 - 2,733 14,261 Insurance $M - 1,131 620 1,751 Total $M 11,528 1,131 4,510 17,169 Interest expense 6,502 - - 6,502 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/(reduction) 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 3,165 (931) 2,234 - 2,234 (300) - 1,934 300 305 109 - 112 217 5 222 (6) 216 (18) (291) (93) 18 - 8 291 1 161 (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 8,975 120 287 242,958 151 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) 2005 $M 20,790 3,507 1,781 26,078 3,223 509 259 3,991 271,596 41,650 15,789 % 79.7 13.5 6.8 2004 $M % 2003 $M % 17,911 2,728 1,563 80.7 12.3 7.0 14,008 2,025 1,136 81.6 11.8 6.6 100.0 22,202 100.0 17,169 100.0 80.7 12.8 6.5 2,091 309 172 81.3 12.0 6.7 1,659 265 88 82.4 13.2 4.4 100.0 2,572 100.0 2,012 100.0 82.5 12.7 4.8 252,652 35,059 18,284 82.6 11.4 6.0 221,248 27,567 16,295 83.5 10.4 6.1 329,035 100.0 305,995 100.0 265,110 100.0 303 37 10 350 86.6 10.6 2.8 100.0 495 29 9 533 92.9 5.4 1.7 100.0 98 6 16 120 81.7 5.0 13.3 100.0 (1) Other Countries are: United Kingdom, United States of America, Japan, Singapore, Hong Kong, Grand Cayman, Malta, Fiji, Indonesia, China and Vietnam. The geographical segments represent the location in which the transaction was booked. 152 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 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 2005 $M 1,500 (231) (422) 122 1,635 795 353 411 (2,686) 1,477 778 2,255 (787) 1,468 (314) 1,154 (5) 1,149 206 (2) 778 - 167 1,149 3,112 4,632 GROUP 2004 $M 1,362 (194) (501) 139 1,582 558 238 399 (1,972) 1,611 201 1,812 (790)(1) 1,022 (300) 722 (8) 714 186 6 201 10 311 714 3,688 4,356 (1) In 2004 volume expenses were netted against margin on services operating income. For 2005 these expenses have been shown gross and the comparatives restated for consistency. 153 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 were reviewed by independent actuaries Trowbridge Deloitte. Life Insurance Analysis of Movement since 30 June 2004 Profits Net capital movements (2) Dividends paid Acquisitions (3) Foreign exchange movements Change in Shareholders net tangible assets Acquired excess(3) Net appraisal value uplift/(reduction) Increase/(Decrease) to 30 June 2005 Shareholders’ Net Tangible Assets 30 June 2004 balance Profits Net capital movements (2) Dividends paid Acquisitions (3) Foreign exchange movements 30 June 2005 balance Value In Force Business 30 June 2004 balance Uplift 30 June 2005 balance Value Future New Business 30 June 2004 balance Acquisitions (3) Uplift/(reduction) 30 June 2005 balance Funds Management Australia New Zealand $M 71 (79) - - 2 (6) - 146 140 $M 349 (121) (213) (30) - (15) 30 301 316 $M 176 195 (485) - - (114) - 333 219 515 349 (121) (213) (30) - 500 1,850 9 1,859 2,774 30 292 3,096 1,131 176 195 (485) - - 1,017 295 238 533 235 - 95 330 415 71 (79) - - 2 409 286 73 359 277 - 73 350 Asia(1) $M 50 1 (4) - (60) (13) - (2) (15) 600 50 1 (4) - (60) 587 - - - Total $M 646 (4) (702) (30) (58) (148) 30 778 660 2,661 646 (4) (702) (30) (58) 2,513 2,431 320 2,751 24 - (2) 22 3,310 30 458 3,798 (1) (2) (3) 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. Subject to regulatory approval, the disposal of the Hong Kong life insurance operations will occur subsequent to 30 June 2005. Refer to Note 1 (pp) to the Financial Statements for further information. Includes capital injections, transfers and movements in intergroup loans. Represents the purchase of Symmetry Limited. The goodwill on acquisition is reclassified as aquired excess, representing the difference between appraisal value and net assets at the time of acquisition. 154 Notes to the financial statements NOTE 34 Life Insurance Business continued Carrying Value at 30 June 2005 Shareholders’ net tangible assets Value in force business Embedded value Value future new business Carrying Value Life Insurance Funds Management $M 500 1,859 2,359 3,096 5,455 Australia New Zealand $M 409 359 768 350 1,118 $M 1,017 533 1,550 330 1,880 Asia(1) $M 587 - 587 22 609 Total $M 2,513 2,751 5,264 3,798 9,062 (1) 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. Subject to regulatory approval, the disposal of the Hong Kong life insurance operations will occur subsequent to 30 June 2005. Refer to Note 1 (pp) to the Financial Statements for further information. Change in Valuations The valuations adopted have resulted in a total positive change in value of $660 million since 30 June 2004. The main components comprised: (cid:131) An appraisal value uplift of $778 million, reflecting growth in Funds under Administration and improved fund flows, while persistency levels and claims ratios improved across each of the insurance businesses. The uplift also includes the negative impact of continued uncertainty of investment markets and industry funds flows; Decrease due to dividends in excess of profits of $56 million; and A $62 million decrease in net tangible assets due to net capital and foreign exchange movements. (cid:131) (cid:131) 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 in force 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 in force business Less non-recourse debt 2005 $M 3,798 1,599 - 5,397 2,513 348 1,152 (2,292) 1,721 2004 $M 3,310 1,279 85 4,674 2,661 351 1,152 (2,278) 1,886 (1) Relates to revised APRT 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 2005 Life insurance entities Australia New Zealand Asia - Hong Kong(1) - Other Funds management entities Australia New Business Multiplier 8 9 n/a various Risk Discount Rate % 10.1 9.8 n/a various Value of Franking Credits % 70 - - - n/a 11.7 70 (1) Refer Note 1 (pp) for comments relating to the sale of the Hong Kong life insurance entities. 155 Notes to the financial statements NOTE 34 Life Insurance Business continued As at 30 June 2004 Life insurance entities Australia New Zealand Asia - Hong Kong - Other Funds management entities Australia New Business Multiplier 8 9 8 various n/a Risk Discount Rate % 10.9 10.3 12 various 12.5 Value of Franking Credits % 70 - - - 70 The movement in the risk discount rate is based on the change in the underlying risk free rate using a capital asset pricing model framework. This framework utilises the local 10-year government bond yield as the proxy for the risk free rate. The movement in risk discount rates have been accompanied by broadly equivalent movements in assumed future investment returns on the Australian funds management business. The assumptions for 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 an increase in the future sales volume assumption for Australian funds management and life insurance businesses. 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 were 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. 2005 $M 27,790 1,385 1,829 1,795 (540) (7,660) 95 24,694 2004 $M 27,779 1,346 1,762 1,472 (527) (7,266) 72 24,638 Taxation Actuarial Methods and Assumptions Taxation has been allowed for in the determination the relevant in accordance with of policy legislation applicable in each territory. liabilities Policy liabilities have been calculated in accordance with the Margin on Services (MoS) methodology as set out in Actuarial Standard 1.03 – Valuation Standard Insurance Actuarial (‘AS1.03’) Standards Board (‘LIASB’). The principal methods and profit carriers used for particular product groups were 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/expected claim payments Expected claim payments Annuity payments Bonuses or funds under management Not applicable Not applicable Expected claim payments 156 Actuarial Assumptions Set out below the material assumptions used in the calculation of policy liabilities. These assumptions were 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 2005 Rate Range % 5.52 – 6.26 6.74 – 7.67 4.37 – 6.49 3.58 – 4.36 3.58 – 3.85 5.11 – 5.70 4.98 – 6.10 6.50 – 6.71 7.38 – 7.61 3.74 4.55 5.31 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 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 been broadly in line with assumptions. There have been no significant changes to these assumptions. 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 were based on standard mortality tables applicable to each territory e.g. IA95-97 in Australia for risk, IM/IF80 for annuities, adjusted for recent company and industry experience where appropriate. Mortality and morbidity assumptions have been reduced on some products. 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. Bonuses were amounts added, at the discretion of the life insurer, to the benefits currently payable under Participating Business. Under the Life Act, bonuses are a distribution to policyholders of profits and may take a number of 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 now vary by asset classes and are based on the recently negotiated in Fund Management Agreements. There has been no significant change to overall investment fees. fees as set out investment Inflation The inflation assumption investment earning assumptions. Benefit Indexation is consistent with the The indexation rates were based on an analysis of past experience and estimated long term inflation and vary by business and product type. There have been no significant changes to these assumptions. 157 Managed Assets and Fiduciary Activities Arrangements were in place to ensure that asset management and other fiduciary activities of controlled entities were 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 are distinguished from each other and from the shareholders’ funds. The financial statements of Australian in accordance with AASB 1038 (and which will be lodged with the regulators) show all major components of the financial statements disaggregated between the various insurance statutory funds and their shareholder funds. relevant Australian insurers prepared life Notes to the financial statements NOTE 34 Life Insurance Business continued Solvency Australian Life Insurers required Australian life insurers are required to hold prudential reserves in excess of the amount of policy liabilities. These reserves are 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 insurance fund. All controlled Australian insurance entities complied with the solvency requirements of AS2.03. Further information is available from the individual statutory returns of subsidiary life insurers. Overseas life insurers - 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. 158 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 2005 $'000 GROUP 2004 $'000 7,921 114 8,035 2,077 16 - - 327 2,420(1) 6,969 134 7,103 1,858 222 203 13 569 2,865 2005 $'000 4,084 - 4,084 1,664 8 - - 11 1,683 BANK 2004 $'000 2,664 - 2,664 1,022 136 203 13 284 1,658 Total Remuneration of Auditors 10,455 9,968 5,767 4,322 (1) An additional amount of $3,305,000 was paid to Ernst & Young by way of fees paid for Non-Audit Services provided to entities not consolidated into the Financial Statements. These relate predominately to audits, reviews, attestations and assurances for managed investment schemes and superannuation funds. 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. Audit related fees principally include audit of the Group’s US Forms 20-F and 6k, services in relation to regulatory requirements and other services that only the external auditor can provide, as well as investigations and reviews 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 regarding implementation of revised compliance and regulatory requirements. transactions advice and 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 Total Lease Commitments - Property, Plant and Equipment Lease Arrangements 2005 $M 13 - GROUP 2004 $M 44 2 2005 $M 13 - BANK 2004 $M 42 - 13 46 13 42 GROUP 2004 $M 2005 $M 2005 $M BANK 2004 $M 297 635 214 1,146 295 646 207 1,148 263 540 165 968 241 522 150 913 - - - 12 16 28 Leases entered into by the Group are for the purpose of accommodating the business needs. Leases may be over retail, commercial, industrial and residential premises and reflect the needs of the occupying business and market conditions. All leases are negotiated using either internal or external professional property resources acting for the Group. Rental payments are determined in terms of relevant lease requirements, usually reflecting market rentals. 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. 159 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 Guarantees represent unconditional undertakings by the Bank (or Group entity) to support the obligations of its customers to third parties. Standby letters of credit are undertakings by the Bank (or Group entity) 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 Bank (or Group entity) and represent liabilities in the event of default by the acceptor and the drawer of the bill. 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. letters of credit Performance involve undertakings by the Bank (or Group entity) to pay third parties if a customer fails to fulfil a contractual non- monetary obligation. contingents related Commitments to provide credit include all obligations on the part of the Bank (or Group entity) to provide credit facilities. Other commitments include the Bank’s (or Group entity) obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities. The transactions are categorised and credit equivalents calculated under APRA guidelines for the risk based measurement of capital adequacy. The credit equivalent amounts are a measure of the potential loss to the Group the event of non performance by counterparty. in 2005 $M 2,438 321 276 185 1,095 76,162 8,279 88,756 Face Value 2004 $M 2,230 362 308 171 898 64,651 7,158 75,778 GROUP Credit Equivalent 2005 2004 $M $M 2,438 321 276 37 547 13,421 942 17,982 2,230 362 308 34 449 12,329 1,156 16,868 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. 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 $88,756 (2004: $75,778 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. 160 Notes to the financial statements NOTE 38 Contingent Liabilities and Assets continued Fiduciary Activities The Group and its associated entities conduct investment management and other fiduciary activities as responsible entity, trustee, or manager for numerous Funds under administration Australia United Kingdom New Zealand Asia 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 2005. 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. investment funds and trusts, 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: 2005 $M 77,208 11,914 8,579 2,404 100,105 2004 $M 67,393 10,721 7,614 1,203 86,931 Long Term Contracts In 1997, the Bank entered into a ten year contract with EDS (Australia) Pty Ltd, relating to the provision of information technology services. In 2000, the Bank entered into a five year agreement with TCNZ Australia Pty Ltd the provision of telecommunications services. During 2004/05 the majority of the services under this agreement were extended to August 2008. for Failure to Settle Risk In accordance with the regulations and procedures governing clearing arrangements contained within the Australian Paper Clearing System (“Clearing 1”), the Bulk Electronic Clearing System (“Clearing 2”), the Consumer Electronic Clearing System ("Clearing 3") and the High Value Clearing System (“Clearing Stream 4”, only if operating in ‘bypass mode’) of the Australian Payments Clearing Association Limited, the Bank is subject to a credit risk exposure in the event that another financial institution fails to settle for its payments clearing activities. This credit risk exposure is unquantifiable in advance. Service Agreements The maximum contingent liability for termination benefits in respect of service agreements with the Chief Executive Officer and Specified Executives of the Company and its controlled entities at 30 June 2005 was $7 million (2004: $8 million). 161 Notes to the financial statements NOTE 39 Market Risk The Bank in its daily operations is exposed to a number of market risks. Market risk relates to the risk that market rates and prices will change and that this will have an adverse affect on the profitability and/or net worth of the Bank, e.g. an adverse interest rate movement. Market risk also includes operational risks of market access for funding and liquidity. Under the authority of the Board of Directors, the Risk Committee of the Board ensures the risk tolerance of the Group is consistent with the business strategy and that all the market risk exposure is managed within their mandated tolerance. Regular market risk reports are tabled before the Risk Committee of the Board. Within the Group, market risk is greatest in the management of the balance sheets of the banking and insurance businesses. Market risk also arises in the course of its intermediation activities in financial services and in financial markets trading. Market Risk in Balance Sheet Management The Risk Committee of the Board approves the Bank’s balance sheet market risk policies and limits. Implementation of the policy is through the Asset and Liability Committee, which the Chief Executive Officer, and with operational management delegated to the Group Executives of the associated business units. is chaired by 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 liquidity requirements by currency and by manages geographical location of all its operations. Liquidity policy 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 and short sales Other Total Australia Overseas Deposits and interbank Commercial paper Life Insurance policy liabilities Other debt issues Loan capital Total Overseas Total Funding Sources Provisions and other liabilities Total Liabilities 162 and management strategies are in place to manage liquidity in a day-to-day sense, and also under crisis scenarios. APRA Prudential Standards require each bank 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 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. (cid:131) 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 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 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. Funding diversification 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 constraints on the relative mix of offshore sources of funds. The following table outlines the range of financial instruments used by the Group to raise deposits and borrowings, both within Australia and overseas. Funds are raised from well-diversified sources and there are no material concentrations in these categories. 2005 $M 27,455 31,947 41,582 21,831 40,240 16,786 16,041 20,636 6,291 2,258 2,708 227,775 32,230 12,266 4,058 6,115 - 54,669 282,444 20,531 302,975 GROUP 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 (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 2005 $M 2004 $M 7 24 78 5 19 40 92 19 Notes to the financial statements NOTE 39 Market Risk continued Interest rate risk (Banking) Interest rate risk in the Banking 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) 2005 % 2004 % Average monthly exposure High month exposure Low month exposure 1.1 1.5 0.5 0.9 1.3 0.5 163 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 2005 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 6 to 12 1 to 3 Total month months months months $M $M 3 to 6 0 to 1 $M $M $M Repricing Period at 30 June 2005 Not Weighted Average Rate % Interest years Bearing $M 1 to 5 Over 5 years $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 Life insurance investment assets Property, plant and equipment Intangible assets Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Provision for dividend Income tax liability Other provisions Life insurance policy liabilities Debt issues Bills payable and other liabilities Loan capital Total Liabilities Shareholders’ Equity Share capital Outside equity interests Total Shareholders' Equity Off Balance Sheet Items Swaps Options Futures Net Mismatch Cumulative Mismatch 4,464 3,181 - - - - - 1,283 4.95 3,691 11,023 4,571 2,946 11,012 1,152 559 - 121 86 - 289 - - 147 - - 2,240 - - 620 100 11 2 180,641 113,110 11,792 8,633 13,169 33,107 2,097 (1,267) 16,786 - - 23,124 3,145 896 - 77 - - - 16,786 364 2,505 2,156 13,981 1,190 3,987 22,421 - - - 271,898 134,546 - - - 13,368 - - - 9,085 - - - 13,680 - - - 37,852 - - - 4,873 1,190 3,987 22,421 58,494 3.61 4.77 6.01 7.25 - 4.67 - - - 5.65 141,114 93,701 21,222 12,435 4,479 3,288 136 5,853 4.27 2,708 16,786 14 1,465 840 20,636 40,240 2,086 - - - - - 6,751 544 - - - - 56 - - - - 9 - - - - 13 - - - - - - - - - - 16,786 14 1,465 840 - 18,299 - 2,385 - 1,458 - 10,847 - 20,636(1) - 500 17,311 6,291 - 608 247,405 103,146 - 2,202 - 146 42,267 15,022 - - 5,946 - 1,939 16,087 - 1,396 2,032 17,311 - 62,905 3.45 - - - - - 5.80 - 7.13 3.60 18,846 1,270 20,116 - - - - - - - - - - - - - - - - - - 18,846 1,270 20,116 (2) (2) (2) (2) (2) 3,296 - - 34,696 34,696 (17,956) 84 3,420 (43,351) (8,655) 4,543 (15) 3,196 1,787 (6,868) 3,322 - (3,890) 7,166 298 6,726 69 (69) - (2,208) (518) 2,392 26,214 26,512 28,904 - - - (24,527) 4,377 (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. 164 Notes to the financial statements NOTE 39 Market Risk continued Balance Sheet 6 to 12 1 to 3 Total month months months months $M $M 0 to 1 3 to 6 $M $M $M Repricing Period at 30 June 2005 Not Weighted Average Rate % Interest Bearing $M Over 5 years $M 1 to 5 years $M Overseas Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Life insurance investment assets Deposits with regulatory authorities Property, plant and equipment Intangible assets Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Income tax liability Other provisions Life insurance policy liabilities Debt issues Bills payable and other liabilities Total Liabilities Shareholders’ Equity Share capital Outside equity interests Total Shareholders' Equity Off Balance Sheet Items Swaps FRAs Futures Net Mismatch Cumulative Mismatch 1,251 1,094 82 - 1 - - 74 2.77 2,514 3,605 5,701 1,017 291 500 1,143 2,335 3,406 351 152 573 - 97 151 - 492 713 - 233 357 3 5 1 3.60 5.81 4.37 36,875 11,633 3,633 3,027 6,449 12,158 98 (123) 7.49 4,713 1,005 45 - 64 - 154 407 1,872 57,137 - - - 15,540 - - - 10,663 9 - - - - 4,112 25 - - - - 6,723 433 831 2,346 2.32 - - 45 - - - - 13,796 - - - 1,519 154 407 1,872 4,784 - - - 6.04 26,915 16,866 4,995 3,220 1,102 542 186 4 5.44 5,315 85 41 4,058 18,381 3,538 - - - 3,378 774 55,569 - 23,782 670 - - - 4,059 - 9,724 870 - - - 9,389 237 - - - 387 - 13,479 - 1,726 - - - - 1,122 - 1,664 - - - - 85 41 - 46 4,058(1) - - 232 774 4,962 4.23 - - - 2.28 - 3.80 5,425 519 5,944 - - - - - - - - - - - - - - - - - - 5,425 519 5,944 (2) (2) (2) (2) (2) 3,942 (459) - (4,759) (4,759) 9,056 463 1,167 11,625 6,866 (1,039) (551) (592) (11,549) (4,683) (3,254) 547 (575) 1,715 (2,968) (8,832) - - 3,300 332 87 - - 1,374 1,706 39 - - (6,083) (4,377) (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. 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. 165 Notes to the financial statements NOTE 39 Market Risk continued Balance Sheet Total $M 1 to 3 0 to 1 6 to 12 month months months months $M 3 to 6 $M $M $M Repricing Period at 30 June 2004 Not Weighted Average Rate % Interest Bearing $M 1 to 5 Over 5 years years $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 Life insurance investment assets Property, plant and equipment Goodwill Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Provision for dividend Income tax liability Other provisions Life insurance policy liabilities Debt issues Bills payable and other liabilities Loan capital Total Liabilities 5,740 4,802 - - 4 - - 934 3.27 4,914 11,310 3,822 3,657 11,310 81 1,076 - 180 78 - 792 2 - 17 - - 1,966 - - 782 101 - 4 158,915 96,547 10,283 8,776 14,148 28,444 1,989 (1,272) 15,019 - - - - - - 15,019 24,673 761 2,090 203 247 2,934 2,514 15,924 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 59,269 139,153 90,121 20,032 14,160 3,418 3,133 826 7,463 2,383 15,019 14 757 954 20,834 27,688 2,147 - - - - - 1,428 58 - - - - 153 - - - - 4 - - - - 20 - - - - - - - - - 1 15,019 14 757 954 - 2,258 - 1,834 - 2,022 - 14,370 - 20,834(1) - 5,776 15,802 6,539 229,143 - 331 94,027 - 221 22,569 - 613 16,760 - 999 6,443 - 1,825 19,348 - 2,550 9,152 15,802 - 60,844 2.88 3.53 6.09 6.89 - 4.62 - - - 5.16 3.89 1.19 - - - - - 5.27 - 4.57 3.14 Shareholders’ Equity Share capital Outside equity interests Total Shareholders' Equity 21,079 2,288 23,367 Off Balance Sheet Items Swaps Options Futures Net Mismatch Cumulative Mismatch (2) (2) (2) (2) (2) - - - - - - - - - - - - - - - - - - 21,079 2,288 23,367 (10,161) (426) - 12,544 (12,663) - 5,171 (16,432) 8,173 176 (10,311) (8,873) 954 - 6,264 15,193 8,150 75 (902) 21,319 5,547 175 (222) 1,633 - - - (24,942) 12,544 (3,888) (12,761) 2,432 23,751 25,384 442 (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. 166 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 2004 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 Life insurance investment assets Deposits with regulatory authorities Property, plant and equipment Goodwill Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Income tax liability Other provisions Life insurance policy liabilities Debt issues Bills payable and other liabilities Loan capital Total Liabilities Shareholders’ Equity Share capital Outside equity interests Total Shareholders' Equity Off Balance Sheet Items Options Swaps FRAs Futures Net Mismatch Cumulative Mismatch 713 493 116 - 30 - - 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 74 12 - - 30,476 10,868 2,671 2,616 4,233 9,509 700 (121) 4,269 38 151 435 2,295 53,043 67 - - - - 16,281 54 - - - - 7,694 32 - - - - 3,506 71 - - - - 4,768 990 955 2,100 - - 38 - - - 12,367 - - - 3,443 151 435 2,295 4,984 2.23 3.20 4.29 4.00 6.87 2.11 - - - - 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 1,326 192 1,518 2,844 - - - 2,919 - - 20,460 - - - 928 - - - 2,411 - - 7,975 - - - 485 - - - 8,504 - 92 11,686 - - - 1 - - - 328 - - 1,424 - - - - - - - 1,664 - - 2,179 - - - - 481 - - 495 - 54 43 3,804(1) 47 3,338 - 7,748 2.80 - - - 1.72 - 8.22 2.74 - - - - - - 1,326 192 1,518 (2) (2) (2) (2) (2) (2) 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) (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. 167 Notes to the financial statements NOTE 39 Market Risk continued As at 30 June Exchange Rate Related Contracts 2005 2004 $M $M Interest Rate Related Contracts 2005 2004 $M $M 99 4 (21) 59 7 148 (cid:131) (cid:131) 2005 $M (59) 10 9 (174) (22) (236) Total 2004 $M 65 (9) (5) (131) (691) (771) (51) 17 (20) (208) (87) (349) (34) (13) 16 (190) (698) (919) Efficiently assist in managing the Group’s own market risks; and Conduct profitable framework, presence and expertise. trading within a controlled the Bank’s market leveraging off The Group maintains access to markets by quoting bid and offer prices with other market makers and carries an inventory of treasury and capital market instruments, including a broad range of securities and derivatives. is a major participant In foreign exchange, the Group is a participant in all major currencies and the 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 outright market risk. All trading positions are valued daily 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 focusing trading activity in highly liquid markets. Note 2 to the financial statements details Financial Markets Trading Income contribution to the income of the Group. In addition, this contribution provides important diversification benefits to the Group. 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). Within 6 months Within 6 months - 1 year Within 1 - 2 years Within 2 - 5 years After 5 years Net deferred gain/(loss) (8) (7) 29 34 65 113 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 $42 million of net deferred losses on derivatives (2004: $31 million net deferred gains) used to hedge equity risk on investments disclosed within Note 11. Market Risk in the provision of 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 2005, shareholders’ funds in the life insurance business are invested 75% in income assets (cash and fixed interest) and 25% in growth assets (shares and property) with the asset mix varying from company to company. Policyholder to meet policyholders’ reasonable expectations without putting the shareholder at undue risk. funds are invested 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. Market Risk in Financial Markets Trading 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) Provide risk management products and services to customers; 168 Notes to the financial statements NOTE 39 Market Risk continued Derivatives Exchange rate related contracts Forwards Trading Other than trading Total Forwards Swaps Trading (1) Other than trading Total Swaps Futures Trading Other than trading Total Futures Options purchased and sold Trading Other than trading Total Options Purchased and Sold Total Exchange Rate Related Contracts Interest rate related contracts Forwards Trading Other than trading Total Forwards Swaps Trading (1) Other than trading Total Swaps Futures Trading Other than trading Total Futures Options purchased and sold Trading Other than trading Total Options Purchased and Sold Total Interest Rate Related Contracts Credit risk related contracts Swaps Trading Other than trading Total Swaps Total Credit Risk Related Contracts Equity risk related contracts Swaps Other than trading Futures Other than trading Options purchased and sold Trading Other than trading Total Options Purchased and Sold Total Equity Risk Related Contracts Total Derivatives Exposures 2005 $M Face Value 2004 $M GROUP Credit Equivalent 2004 $M 2005 $M 164,491 31,776 196,267 85,978 46,969 132,947 25 - 25 21,523 141 21,664 350,903 25,312 120 25,432 273,456 146,799 420,255 44,362 14,558 58,920 26,659 4,098 30,757 535,364 3,002 3,972 6,974 6,974 276 115 395 29 424 815 894,056 151,595 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 2,870 3,490 6,360 6,360 340 - 313 25 338 678 800,209 3,542 786 4,328 7,439 2,165 9,604 - - - 304 5 309 14,241 6 2 8 3,185 2,843 6,028 - 249 249 185 43 228 6,513 250 290 540 540 44 115 27 3 30 189 21,483 3,083 1,504 4,587 5,242 2,855 8,097 - - - 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 33 - 33 1 34 67 19,875 (1) Derivative book restructured to meet AIFRS hedging guidelines. 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 total credit equivalent of $5 million (2004: each has a face value of $252 million and a credit equivalent of $1 million.) 169 Notes to the financial statements NOTE 39 Market Risk continued The fair or market value of trading derivative contracts, disaggregated into gross unrealised gains and gross unrealised losses, are shown below. In line with the Group’s accounting policy, these unrealised gains and losses are recognised immediately in profit and loss, and together with net realised gains on trading derivatives and realised and unrealised gains and losses on trading securities are reported within trading income under foreign exchange earnings, trading securities or other financial instruments (refer to Note 2). In aggregate, derivatives trading was profitable for the Group during the year. Fair Value 2004 $M 2005 $M Average Fair Value 2004 $M 2005 $M 1,532 (1,686) (154) 6,602 (6,177) 425 1 - 1 146 (191) (45) 228 2,417 (2,742) (325) 5,718 (4,335) 1,383 - (3) (3) 482 (634) (152) 903 2,147 (2,306) (159) 6,409 (5,382) 1,027 1 (1) - 262 (351) (89) 779 2,673 (2,975) (302) 5,370 (4,145) 1,225 1 (3) (2) 822 (1,167) (345) 576 2 (2) - 4 (4) - 6 (5) 1 6 (5) 1 3,727 (3,761) (34) 4,084 (4,362) (278) 3,538 (3,792) (254) 4,833 (5,209) (376) 10 (28) (18) 108 (50) 58 6 4 (8) (4) 13 (13) - 230 24 (25) (1) 66 (57) 9 (270) 17 (11) 6 15 (15) - 639 14 (15) (1) 74 (48) 26 (228) 7 (12) (5) 13 (13) - 546 41 (50) (9) 155 (123) 32 (352) 16 (13) 3 12 (12) - 227 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 170 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 Note 40 Superannuation Commitments Fair Value 2004 $M 2005 $M 12,144 11,914 230 12,827 12,188 639 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 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) CBA (UK)(2) SBS $M 311 384 (73) 23% 284 OSF(1) $M 5,761 4,073 1,688 29% 4,073 Total $M 6,072 4,457 1,615 27% 4,357 (1) (2) (3) (4) The values for the OSF are the fund actuary’s estimates as at 31 March 2005 (which are unaudited). The values for the CBA(UK)SBS are the fund actuary’s estimates as at 31 March 2005 (which are unaudited). 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 AAS 25 Financial Reporting for 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. 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. In line with the actuarial advice contained in the assessment, the Bank does not intend to make contributions to the OSF until after consideration of the next actuarial assessment of the OSF as at 30 June 2006. An actuarial assessment of the CBA(UK)SBS at 1 August 2003 revealed a deficit of GBP30 million (AUD72 million at 30 June 2005 exchange rate). Following from this assessment, the Bank agreed to contribute the recommended contributions to finance future accruals of defined benefits (dollar contributions estimated at AUD5 million per annum at 30 June 2005 exchange rate) and to make additional contributions of GBP3 million per annum (AUD7 million per annum at 30 June 2005 exchange rate) payable over 15 years to finance the fund deficit. An actuarial assessment of the CBA(UK)SBS at 1 July 2005 is currently in progress. 171 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.1) 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 Reliance Achiever Partnership Lily Pty Ltd Pavillion Limited Leaseway Transportation Pty Limited Medallion 2003-2G Broadcasting Infrastructure Asset Partnership Greenwood Lending Pty Ltd 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 172 Notes to the financial statements NOTE 41 Controlled Entities continued Entity Name (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 State Property Retail Pty Limited Colonial First State Property Retail Trust Colonial First Statutory Funds Management Limited CFS Managed Property Limited Colonial Holding Company Pty Limited Colonial Holding Company (No.2) Pty Limited Colonial Financial Management Limited Colonial International Holdings Pty Limited Colonial Investments Holding Pty Limited Colonial Investment Services Limited Colonial LGA Holdings Limited The Colonial Mutual Life Assurance Society Limited Colonial Portfolio Services Limited Colonial Services Pty Limited Jacques Martin Pty Limited PIF Managed Property Pty Limited Colonial Protection Insurance Pty Ltd 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 ASB Capital No.2 (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 173 Extent of Beneficial Interest if not 100% Incorporated in 60 60 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 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 New Zealand Notes to the financial statements NOTE 41 Controlled Entities continued Entity Name 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 Pontoon Quay (Funding) PLC Burdekin Investments (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 First State (HK) LLC FS Invest Hldgs (Singapore) Ltd Extent of Beneficial Interest if not 100% Incorporated in 51 Singapore United Kingdom USA Hong Kong United Kingdom Japan Fiji Indonesia USA USA USA United Kingdom Malta Malta United Kingdom United Kingdom Cayman Islands Bermuda Bermuda Hong Kong Hong Kong Singapore Fiji United Kingdom Fiji United Kingdom Fiji Fiji United Kingdom United Kingdom Cayman Islands United States Singapore Non-operating and minor operating controlled entities and investment vehicles holding policyholder assets are excluded from the above list. (1) Wholly owned subsidiary of Newport Limited 174 Notes to the financial statements NOTE 42 Investments in Associated Entities and Joint Ventures Extent of GROUP Ownership Interest % 2004 $M 2005 $M Principal Activities Balance Date EDS (Australia) Pty Limited (1) PT Astra CMG Life Allday Enterprises Ltd China Life CMG Life Assurance Company Limited (2) Bao Minh CMG Life Insurance Company CMG CH China Funds Management Limited BAC Airports Pty Ltd Total - 10 1 10 12 1 18 52 193 12 1 20 12 1 - 239 35 50 30 49 50 50 33 Information Technology Services Life insurance - Indonesia Financial Services Life insurance - China Life insurance - Vietnam Investment Management Airport Services 31 December 31 December 31 December 31 December 31 December 31 March 30 June (1) (2) Investment sold in May 2005. Equity accounted loss of $10 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 Share of associates' profits/(losses) Closing Balance NOTE 43 Standby Arrangements and Unused Credit Facilities (of controlled entities that are borrowing corporations) Financing arrangements accessible Bank overdraft 2005 $M 7 (2) 5 GROUP 2004 $M (44) 12 (32) 239 20 (203) (10) 5 52 287 - - (16) (32) 239 Available 2005 $M Unused 2005 $M Available 2004 $M GROUP Unused 2004 $M 70 51 70 58 175 Notes to the financial statements NOTE 44 Director and Executive Disclosures Details of the Directors’ and Specified Executives’ remuneration, interests in long-term incentive plans, shares, options and loans are included in the Remuneration Report of the Directors’ Report. The Bank’s aggregate investment in and loans to controlled entities are disclosed in Note 18. Amounts due to controlled entities are disclosed in the statement of financial position 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 $492 million (2004: $548 million) was transactions and services in incurred by provided by other related entities. the Group NOTE 45 Related Party Disclosures Ultimate Parent Commonwealth Bank of Australia is the ultimate Australian parent company in the Group. 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. 176 Notes to the financial statements NOTE 46 Statements of Cash Flows 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. GROUP 2005 $M 2004 $M 2003 $M 2005 $M BANK 2004 $M Note (a) Reconciliation of Cash 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 1,559 682 2,893 (4,199) 935 1,548 440 4,124 (3,266) 2,846 1,492 641 2,528 (3,233) 1,428 1,318 415 2,737 (4,156) 314 1,421 233 3,230 (3,245) 1,639 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; (cid:131) (cid:131) Sales and purchases of trading securities; and Proceeds from and repayment of short term debt issues. Note (c) Reconciliation of Operating Profit After Income Tax to Net Cash Provided by Operating Activities 2005 $M 2004 $M Net profit after income tax Decrease/(increase) in interest receivable Increase/(decrease) in interest payable Net decrease /(increase) in trading securities Net (gain)/loss on sale of investment securities (Gain)/loss on sale of property, plant and equipment Net loss/(gain) on sale of controlled entities and associates 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 loss/(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 provided by/(used in) Operating Activities 4,001 11 30 318 (8) (4) 13 322 475 (116) 406 332 (86) (41) 104 (4) 408 (778) 56 (665) (592) 187 4,369 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 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) 2005 $M 2,921 (256) 86 505 (4) (4) 35 292 281 (110) 406 232 (337) 94 31 (4) 454 - - - - 25 4,647 BANK 2004 $M 1,647 (8) 298 (4,672) (2) 10 453 263 271 143 (7) 323 (532) (334) 262 11 (264) - - - - (12) (2,150) 177 Notes to the financial statements NOTE 46 Statements of Cash Flows continued Note (d) Non Cash Financing and Investing Activities Shares issued under the Dividend Reinvestment Plan for 2005 were $446 million (2004: $389 million). Note (e) Acquisition of Controlled Entities Consideration Cash paid on acquisitions Pre-acquisition dividend received Fair value of net tangible assets acquired Cash & liquid assets Other assets Other provisions Bills payable and other liabilities Excess market value over net assets of life insurance subsidiary Goodwill Outflow/(inflows) of cash on acquisitions Cash payments 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. 2005 $M 2004 $M 2003 $M 44 - 44 4 4 (2) (6) - 30 14 44 44 (4) 40 - - - - - - - - - - - - - 71 2 73 29 29 (8) (33) 17 26 30 73 71 (29) 42 2005 $M 2004 $M 2003 $M - - - - - - - 63 63 20 43 63 63 63 33 33 65 (32) 33 33 33 178 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 5,715 6,205 14,628 10,272 217,516 16,786 27,837 45 23,452 168,029 8,023 16,786 24,694 58,621 18,086 6,291 - 2005 Net Fair Value $M 5,715 6,205 14,628 10,433 218,037 16,786 27,837 45 23,470 Carrying Value $M 6,453 8,369 14,896 11,447 189,391 15,019 28,942 38 24,721 168,565 8,023 16,786 24,694 57,655 18,083 6,113 (277) 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) 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. 179 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, discounted cashflow models or option pricing models as appropriate. 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 the broader customer credit process and 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 $52 million (2004: $239 million), and excess of net market value over net assets of life insurance controlled entities of $6,549 million (2004: $5,741 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. 180 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 2005 and of their performance for the year ended on that date; 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; and (d) the directors have been given the declarations required under Section 295A of the Corporations Act 2001 for the financial year ended 30 June 2005. Signed in accordance with a resolution of the Directors. J M Schubert Chairman 10 August 2005 D V Murray Managing Director and Chief Executive Officer 181 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 2005 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 2005. 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 and the additional disclosures in accordance with AASB 1046 “Director and Executive Disclosures by Disclosing Entities” on pages 54 to 66, included in the directors’ report designated as audited 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 and the additional disclosures 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 and the additional disclosures are 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 and additional disclosures present 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. (cid:131) (cid:131) We formed our audit opinion on the basis of these procedures, which included: examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report and the additional disclosures, and assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report and the additional disclosures. 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. We have given to the directors of the Bank a written Auditor’s Independence declaration, a copy of which is included in the directors’ report. 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, and the additional disclosures included in the directors’ report designated as audited, of Commonwealth Bank of Australia are 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 2005 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 10 August 2005 S J Ferguson Partner 182 Shareholding Information Top 20 Holders of Fully Paid Ordinary Shares as at 9 August 2005 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 J P Morgan Nominees Australia Limited National Nominees Limited Westpac Custodian Nominees Ltd Citigroup Nominees Pty Limited RBC Global Services Australia Nominees Pty Limited ANZ Nominees Limited Cogent Nominees Pty Limited Queensland Investment Corporation AMP Life Limited Australian Foundation Investment Company Limited HSBC Custody Nominees (Australia) Limited Invia Custodian Pty Limited Bond Street Custodians Limited Westpac Financial Services Ltd UBS Private Clients Australian Nominees Pty Ltd IAG Nominees Pty Limited Suncorp Custodian Services Pty Ltd CSS Board & PSS Board Government Superannuation Office UBS Nominees Pty Ltd 111,408,316 96,687,608 85,384,118 60,755,582 30,800,038 27,532,803 25,691,489 17,830,341 14,110,370 7,895,245 6,807,983 6,525,391 5,753,504 5,235,203 4,724,440 4,232,183 4,002,039 3,790,789 3,722,681 3,613,551 % 8.70 7.55 6.67 4.75 2.41 2.15 2.01 1.39 1.10 0.62 0.53 0.51 0.45 0.41 0.37 0.33 0.31 0.30 0.29 0.28 The 20 largest shareholders hold 526,503,674 shares which is equal to 41.12% 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. Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 9 August 2005 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 530,269 153,710 13,769 5,750 266 703,764 12,393 75.35% 21.84% 1.96% 0.82% 0.04% 100.00% 183,322,997 310,410,482 94,537,305 110,537,543 581,593,245 1,280,401,572 63,195 14.33% 24.24% 7.38% 8.63% 45.42% 100.00% Voting Rights Under the Bank’s Constitution, each person who is a voting member and who is present at a general meeting of the Bank in person or by proxy, attorney or official representative is entitled: (cid:131) (cid:131) on a show of hands – to one vote; and on a poll – to one vote for each share held or represented. If a person present at a general meeting represents personally or by proxy, attorney or official representative more than one member, on a show of hands the person is entitled to one vote even though he or she represents more than one member. If a member is present in person and votes on a resolution, 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) none of them is entitled to vote on a show of hands; and (cid:131) (cid:131) (cid:131) (cid:131) on a 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: if the appointment does not specify the proportion or number of the member’s votes each proxy may exercise, then on a poll each proxy may exercise one half of the member’s votes; neither proxy shall be entitled to vote on a show of hands; and on a poll each proxy may only exercise votes in respect of those shares or voting rights the proxy represents. 183 Shareholding Information Top 20 Holders of Preferred Exchangeable Resettable Listed Shares (PERLS) as at 9 August 2005 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 UBS Nominees Pty Ltd Bond Street Custodians Limited RBC Global Services Australia Nominees Pty Ltd UBS Private Clients Australia Nominees Pty Ltd J P Morgan Nominees Australia Limited Invia Custodian Pty Limited The Australian National University National Nominees Limited ANZ Executors & Trustee Company Limited Australian Executor Trustees Limited Boxall Marine Pty Ltd Questor Financial Services Limited National Superannuation Trusts P/L Livingstone Investments (NSW) Pty Limited BT Portfolio Services Limited (WA) Ms Thelma Jones Martin-Weber Albert Investments Pty Limited Felden Pty Ltd Marbear Holdings Pty Limited Mrs Fay Cleo Martin-Weber Swinburne University of Technology Perpetual Trustee Co Ltd (Hunter) E G Superannuation Pty Ltd 79,068 47,639 47,077 44,377 39,000 34,823 33,532 33,527 30,617 28,467 25,000 24,277 19,769 15,500 12,690 12,500 10,000 10,000 10,000 10,000 10,000 8,863 7,500 % 2.25 1.36 1.35 1.27 1.11 0.99 0.96 0.96 0.87 0.81 0.71 0.69 0.56 0.44 0.36 0.36 0.29 0.29 0.29 0.29 0.29 0.25 0.21 The 23 largest PERLS shareholders hold 594,226 shares which is equal to 16.96% of the total shares on issue. 23 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): 9 August 2005 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 21,082 292 18 12 - 21,404 8 98.5% 1.36% 0.08% 0.06% - 100.00% 2,393,283 566,022 134,714 405,981 - 3,500,000 11 68.38% 16.17% 3.85% 11.60% - 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 following the Bank except the in If at the time of the meeting, a dividend has been declared but has not been paid in full by the relevant payment date; On a proposal to reduce the Bank’s share capital; On a resolution to approve the terms of a buy-back agreement; On a proposal that affects rights attached to Commonwealth Bank PERLS; (cid:131) (cid:131) (cid:131) meeting of circumstances: (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) On a proposal to wind up the Bank; On a proposal for the disposal of the whole of the Bank’s property, business and undertaking; During the winding up of the Bank; or As otherwise required under the Listing Rules from time to time, in which case the holders will have the same rights as to manner of attendance and as to voting in respect of each Commonwealth Bank PERLS as those conferred on ordinary shareholders in respect of each ordinary share. At a general meeting of the Bank, holders are entitled: (cid: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) 184 Shareholding Information Top 20 Holders of Perpetual Exchangeable Resettable Listed Securities II (“PERLS II”) as at 9 August 2005 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 J P Morgan Nominees Australia Limited National Nominees Limited RBC Global Services Australia Nominees Pty Limited UBS Warburg Private Clients Nominees Pty Ltd Bond Street Custodians Limited Westpac Custodian Nominees Limited Citigroup Nominees Pty Limited Invia Custodian Pty Limited Cogent Nominees Pty Limited Questor Financial Services Limited Perpetual Trustee Company Limited AMP Life Limited Pan Australian Nominees Pty Limited ANZ Executors and Trustee Company Limited Cryton Investments No 9 Pty Ltd J Neave Investments Pty Limited Gordon Merchant No 2 Pty Ltd ANZ Nominees Limited Tynong Pastoral Co Pty Ltd Israelite House of David 474,545 231,000 141,532 86,409 76,921 69,157 61,673 55,505 51,878 46,704 43,337 40,149 30,237 28,201 25,000 24,942 24,440 20,319 19,950 15,000 % 12.65 6.16 3.77 2.30 2.05 1.84 1.64 1.48 1.38 1.25 1.16 1.07 0.81 0.75 0.67 0.67 0.65 0.54 0.53 0.40 The 20 largest PERLS II shareholders hold 1,566,899 shares which is equal to 41.77% of the total shares on issue. Stock Exchange Listing Commonwealth Bank PERLS II are listed on the trade symbol Australian Stock Exchange under the PCBPA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers. Range of Shares (PERLS II): 9 August 2005 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 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 183 and 184 respectively for the Bank’s ordinary shares and PERLS preference shares. Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 8,429 296 35 24 2 8,786 2 95.94% 3.37% 0.40% 0.27% 0.02% 100.00% 1,356,589 653,313 274,601 759,952 705,545 3,750,000 3 36.18% 17.42% 7.32% 20.27% 18.81% 100.00% 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 183 and 184 respectively for the Bank’s ordinary shares and PERLS preference shares. 185 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 B Chapman 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 Tower 1 China World Trade Centre 1 Jian Guo Men Wai Avenue Beijing 100004 Telephone: (86 10) 6505 5350 Facsimile: (86 10) 6505 5354 Group 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 Group 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 Shanghai CBA – IFS Room 3805-3806 Kwah Centre 1010 Huaihai Mid Road Shanghai 200031 Telephone: (86 21) 6103 6500 Facsimile: (86 21) 6103 6598 General Manager Business Development Richard Williamson Hong Kong CBA – IFS 1501-1505, Chater House 8 Connaught Road, Central, Hong Kong Telephone: (852) 2844 7575 Facsimile: (852) 2805 0169 General Manager Business Development Richard Williamson Hong Kong CBA - PBS 1501-05, 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 Level 2, 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 Malakai Naiyaga 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 - Japan L Xia Singapore CBA Branch Office 3 Temasek Avenue #20-01 Centennial Tower Singapore 039190 Telephone: (65) 6349 7000 Facsimile: (65) 6224 5812 General Manager Rob Buchan 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 – L Mann Vietnam CBA Representative Office Suite 202-203A The Central Building 31 Hai Ba Trung, Hanoi Telephone: (84 4) 826 9899 Facsimile: (84 4) 824 3961 Chief Representative SRJ Holden Bao Minh CMG Life Insurance Co Ltd Level 3, Saigon Riverside Office Center 2A-4A Ton Duc Thang District 1, Ho Chi Minh City Telephone: (84 4) 829 1919 Facsimile: (84 4) 829 3131 General Director R Carkeet Americas United States of America CBA Branch Office Level 17, 599 Lexington Avenue New York NY 10022 Telephone: (1 212) 848 9200 Facsimile: (1 212) 336 7725 Executive Vice President, Head of North America Laurie C Tuzo 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 Paul Orchart 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 186 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 8.30am to 6pm (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. 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, at www.commsec.com.au Internet phone by or 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. 1800 011 217 Lost or Stolen Cards To report a lost or stolen card 24 hours a day, 365 days a year. 187 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/shareholder 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 Australian Stock Exchange Listing CBA Annual Report To request a copy of the annual report please call 1800 022 440 188 CB002_CoverArt 2/9/05 6:28 PM Page 1 Commonwealth Bank of Australia ACN 123 123 124 Annual Report 2005 2005 C o m m o n w e a l t h B a n k o f A u s t r a l i a A n n u a l R e p o r t 2 0 0 5 Commonwealth Bank of Australia ACN 123 123 124 

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