CB002_CoverArt 2/9/05 6:28 PM Page 1
Commonwealth Bank of Australia
ACN 123 123 124
Annual Report 2005
2005
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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
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Commonwealth Bank of Australia
ACN 123 123 124