Determined to offer strength in uncertain times.
Annual Report 2008
Commonwealth Bank of Australia
ACN 123 123 124
Chairman’s Statement
Chief Executive Officer’s Statement
Highlights
Group Performance Analysis
Retail Banking Services
Premium Business Services
Wealth Management
International Financial Services
Other
Shareholder Investment Returns
Presentation of Financial Information
Integrated Risk Management
Capital Management
Description of Business Environment
Sustainability
Corporate Governance
Directors’ Report
Five Year Financial Summary
Financial Statements
Income Statements
Balance Sheets
Statements of Recognised Income and Expense
Statements of Cash Flows
Notes to the Financial Statements
Directors’ Declaration
Independent Audit Report
Shareholding Information
International Representation
Contact Us
Corporate Directory
Contents
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232
Chairman’s Statement
Introduction
The 2008 financial year has been a challenging one for the
global financial services sector. The continued fall-out from the
ongoing volatility in global credit markets and slowing economic
growth have combined to place significant pressure on the
financial performance and capital positions of a large number of
international banks and financial services organisations.
In this environment, the Commonwealth Bank of Australia (“the
Group”) has performed well, delivering solid profit growth and
another record dividend.
The Group remains in a strong financial position with a
continued focus on delivering on its vision of becoming
Australia’s
through
finest
excelling in customer service.
financial services organisation
Results
The Group’s statutory net profit after tax for the year ended 30
June 2008 was $4,791 million - an increase of 7% on the prior
year. Cash net profit after tax grew to $4,733 million, an increase
of 5% on the prior year while underlying net profit after tax,
which excludes shareholder investment returns, increased 7% to
$4,746 million.
This solid result was achieved in a difficult environment with the
Group incurring additional funding costs during the year caused
by ongoing volatility in global credit markets. In addition, loan
impairment expense increased $496 million on the prior year
driven by increased corporate sector provisioning.
Key financial performance highlights for the year included:
• A record final dividend of 153 cents per share taking the total
dividend for the year to 266 cents per share – an increase of
4%;
• Solid growth in Banking income of 8%, with average interest
earning assets up 16% to $386 billion and net interest margin
contraction of six basis points;
• Funds management income increased by 23%, reflecting
growth in average Funds Under Administration of 18% to
$194 billion and net gains from asset sales;
• Growth in average Inforce Premiums of 18% to $1,511
million supported by strong sales in both life and general
insurance businesses;
• Operating expense growth of 9% reflecting continued
investment in the business to support productivity and growth
initiatives as well as the effect of inflation on salary and
general expenses; and
• Substantially increased corporate loan provisioning levels to
ensure sufficient provision coverage is maintained, reflecting
market conditions.
Cash earnings per share increased 3% on the prior year to
356.9 cents per share. Return on Equity (“cash basis”) remained
strong at 20.4%.
The Group’s statutory net profit after tax includes the following
additional non-cash items:
• Gain on the Visa Initial Public Offering of $295 million after
tax; and
• Amounts have been
investment and
recognised
restructuring of $264 million after tax, relating to the cost of
implementation of Core Banking Modernisation and other
strategic initiatives.
for
2 Commonwealth Bank of Australia Annual Report 2008
Retail Banking Services maintained its solid performance over
the year with cash net profit after tax increasing by 8% to $1,904
million. This result was driven by strong volume growth in key
product lines, sound credit quality, tight expense management
and strategic business investment to promote profitable growth
and increased efficiency. These factors helped to offset the
negative impact of higher funding costs due to the continued
volatility in global credit markets.
Premium Business Services delivered double digit income
growth of 16% over the prior year, or 17% after adjusting for the
impact of the acquisition of IWL in the current year and the gain
on sale of the Group’s share in Greater Energy Alliance
Corporation Pty Ltd (“Loy Yang”) in the prior year. This result
was underpinned by a solid improvement in customer service
scores and strong gains in deposit market share. Again, this
strong underlying performance enabled the business to offset
the negative impacts of higher funding costs and a slowdown in
business credit growth in the second half of the year. Increased
strategic investment spend, together with higher loan impairment
provisioning, resulted in cash net profit after tax growth of 2%.
Underlying profit after tax for the Wealth Management business
increased by 38% on the prior year to $756 million. This result
was largely driven by strong revenue growth in the funds
management businesses and gains on asset sales, with second
half earnings impacted by a deterioration in trading conditions
and weakened investment markets.
Wealth Management Funds under Administration
(FUA)
increased 10% over the year to $185 billion, with positive net
flows offsetting falls in the value of Australian and global equity
portfolios.
Net funds flows for the year were strong at $28.6 billion, driven
by:
• Solid net flows into the First Choice and Avanteos platforms
and Global Equity Funds; and
• Short term cash mandates from institutional investors.
CommInsure Inforce Premiums increased by 22% on the prior
year to $1,250 million reflecting strong sales volumes and
continued progress of the Wealth Management cross-sell
initiative.
International Financial Services cash net profit after tax for the
year was $589 million - an increase of 23% on the prior year.
After excluding the impact of realised gains and losses
associated with the hedge of the New Zealand operations and
other foreign currency movements, the underlying growth was
17%.
ASB Bank cash net profit after tax for the year was $428 million.
Excluding the impact of realised gains on the hedge of New
Zealand operations, profit increased 11% on the prior year. In a
slowing economy, this was a good result where aggressive
competition continued to place downward pressure on margins.
Risk Management
Over the last several years, risk management activities have
deepened at CBA. This could not have come at a better time.
The actions of the Board and its Risk Committee helped
management guide the Group away from the global excesses
affecting many of the world’s major banks. The Group has
risk
appointed a new Group Executive
management, a person with deep international experience. He
has been asked to work with the Board, business leaders and
the team of risk professionals to increase the value from
measuring the Group and its activities on a risk-adjusted basis
and then optimising the returns on the risks taken.
in charge of
The Group is also proud to have these efforts recognised in a
different way; the Group has become one of the first banks in
the world to be accredited as Basel II compliant in credit and
operational risk measurement and capitalisation. It is believed
that the Group is one of the first institutions to report full year
financial results under Basel II regulatory capital requirements.
The way the Group measures and manages market risks
inherent in its banking book has also been deemed by APRA as
having a high standard, indeed Australia is now the only country
to require formal standards of regulatory capital attribution to this
important risk.
Dividends and Capital
The Board declared a record final dividend of 153 cents per
share, a 3% increase on the prior year’s final dividend. The final
dividend, which is fully franked, will be paid on 1 October 2008.
This will take total dividends for the year to 266 cents per share,
up 4% on last year. Over the last three years dividends have
grown at an annual compound rate of 11%.
The Group continues to issue new shares to satisfy the
requirements of its Dividend Reinvestment Plan (DRP).
During the year dividend and interest payments were also made
to the holders of the Group’s various capital securities: PERLS
II, PERLS III, PERLS IV, Trust Preferred Securities 2003, Trust
Preferred Securities 2006, ASB Capital Preference Shares and
ASB Capital No 2 Preference Shares.
The Group maintains a strong capital position with the advanced
Basel II accreditation resulting in an increase in both the Group’s
Tier One and Total Capital ratios, primarily driven by the
reduction in risk weighted assets.
As a result of Basel II advanced accreditation, the Total Capital
ratio increased from 9.82% to 12.08% at 31 December 2007
with the Tier One capital ratio increasing from 7.41% to 8.17%.
As at 30 June 2008 the Tier One and Total Capital ratio were
8.17% and 11.58% respectively.
The Group’s capital ratios throughout the period complied with
both APRA’s minimum capital adequacy requirements (Tier One
Capital 4% and Total Capital 8%) and the Board approved target
ranges of Tier One Capital from 6.5% to 7% and Total Capital in
the 10% to 12% range.
During the year the Group undertook the following initiatives to
actively manage its capital:
•
•
•
•
Issue of $1,465 million ($1,443 million net of issue costs) of
Perpetual Exchangeable Resaleable Listed Securities
(PERLS IV) in July 2007 which qualify as Non-Innovative
Residual Tier One Capital;
Issue of $709 million of shares in October 2007 to satisfy the
DRP in respect of the final dividend for the full year ended 30
June 2007;
Issue of $400 million of shares in April 2008 in order to satisfy
the DRP in respect of the interim dividend for the full year
ended 30 June 2008. A further $98 million in shares were
purchased on-market as part of the DRP;
In accordance with APRA guidelines, the estimated issue of
$609 million of shares to satisfy the DRP in respect of the
final dividend for the full year ended 30 June 2008. This
estimate is based on a 30% participation in the DRP in
respect of the final dividend; and
•
Issue of the equivalent of $664 million of Lower Tier Two
Capital during the first half of the financial year.
The strength of the Group’s capital position continues to be
reflected in its long-term credit ratings as illustrated on page 9.
Chairman’s Statement
Outlook
the Australian banking
The headwinds which
industry
experienced in the 2008 financial year are expected to dominate
the outlook for global banking. Uncertainty and volatility in global
credit markets will continue to place upward pressure on funding
costs.
While the domestic economy remains resilient, credit growth is
expected to moderate to slightly below the average of the past
decade as the slowing in the economy impacts both consumers
and business.
The outlook is cautious going into the new financial year and the
Group will continue with its conservative stance until signs of
improvement in economic conditions are evident. The Group’s
capital position is strong with capital levels well above target
ranges. A prudent approach has been taken to the management
of credit and market risk and we are well provisioned given the
economic outlook.
While it is clearly a time to be cautious, the Group’s robust
financial position enables it to maintain the momentum behind its
five strategic priorities and remains committed to further
strengthening core businesses should attractive, “on strategy”,
investment opportunities arise.
Corporate Governance and Board Performance
It has been another busy and successful year for the Board and
I would like to thank my fellow directors for their contribution and
dedication.
I would also like to welcome Andrew Mohl who joined the Board
as a Non-Executive Director on 1 July 2008. Andrew was
Managing Director and Chief Executive Officer of AMP Limited
from October 2002 until his retirement at the end of December
2007. He has over 30 years of financial services experience. I
am sure his broad business experience and knowledge will
complement and enhance the performance of the Board.
Conclusion
While the 2009 financial year is expected to be a difficult one for
the financial services sector the Board is optimistic about the
Group’s prospects. The performance in 2008 demonstrated the
resilience of our business model and the Group is well
positioned going into the new financial year with a strong
management team.
This strength enabled the Board and management to continue to
press ahead with the Group’s strategic agenda and we made
good progress in executing the Group’s strategic priorities.
Opportunities to further strengthen our business are becoming
increasingly evident as
the environment becomes more
challenging, which presents us with a range of organic growth
and acquisition opportunities. However, the Board recognises
that the future is uncertain and that in the current environment its
first priority is to ensure that the Group continues to maintain its
strong financial position.
Finally, I would like to recognise the hard work of all of our
people and thank our customers and shareholders for their
continuing support for the Commonwealth Bank of Australia.
John Schubert
Chairman
13 August 2008
Commonwealth Bank of Australia Annual Report 2008 3
Chief Executive Officer’s Statement
Introduction
• Technology and Operational Excellence;
The 2008 financial year has been one of the most challenging
that the global financial services industry has seen for some
time. While the Australian economy continued to perform well,
Australian banks and other financial institutions have not been
immune from the effects of ongoing volatility in global credit
markets and slowing economic conditions. In this environment,
banks which are well managed with strong levels of capital and
a sophisticated approach
the
Commonwealth Bank of Australia, have proven resilient.
to risk management,
like
At a time when many international banks have reported
substantial losses and have had to raise significant amounts of
new capital and cut dividends, the Group has performed well.
The Group reported a 7% rise in statutory net profit after tax to
$4,791 million. A record final dividend of 153 cents per share
was declared taking dividends for the year to 266 cents per
share - an increase of 4% on last year.
The Group remains in a strong financial position with all its
businesses performing well, a favourable funding position and
capital ratios above internal target levels. Continued investment
in the business has seen further progress made on achieving
the Group’s vision to be Australia’s finest financial services
organisation through excelling in customer service.
Operating Environment
The volatility in global credit markets, combined with the slowing
of the U.S. economy, has led to an environment of increased
uncertainty. As a result, we have seen many previously
successful business models come under pressure as domestic
interest rates have risen and liquidity has become increasingly
constrained. Like many of its peers, the Group sources some
funding from the wholesale money markets and while there has
been little difficulty meeting long term funding needs, funding
costs have increased as market credit spreads have widened.
The Group has endeavoured to balance the needs of both
shareholders and customers, and therefore additional funding
costs during the financial year have partly been absorbed by the
businesses and partly passed on to customers. The tightening of
liquidity and widening of credit spreads has also affected the
Group’s corporate clients, which has led to an increase in the
Group’s loan impairment expenses from the historically low
levels experienced in recent years.
The Group has weathered the recent events well and is
appropriately positioned going into the new financial year. The
Group believes that the current volatility in global financial
markets is likely to continue for some time yet. While the
Australian economy is expected to perform reasonably well,
credit growth is likely to moderate and credit quality may
become more of an issue. In this environment, the Group
recognises the need to be prudent, and the importance of
maintaining a strong capital base and high levels of liquidity.
Strategic Priorities
The Group is committed to achieving its vision of becoming
through
Australia’s
excelling in customer service, with our objective to be ranked
number one in customer service by June 2010.
financial services organisation
finest
This commitment is reflected in the Group’s new advertising
theme “Determined to be Different” which was unveiled during
2008. Simply put, this theme conveys our determination to be
better than we have ever been, by making real progress across
each of our five strategic priorities:
• Customer Service;
• Business Banking;
4 Commonwealth Bank of Australia Annual Report 2008
• Trust and Team Spirit; and
• Profitable Growth.
Customer service remains the Group’s top strategic priority, for
which further good progress was made during 2008, including:
• Embedding of sales and service culture with a particular
emphasis on training our front line people;
•
Investing in our front line and becoming more accessible to
our customers, in particular refurbishing retail branches and
opening new branches; increasing customer facing staff in
both the retail and business banking areas; opening new
business banking centres; and continuing training for wealth
management and insurance advisers to drive our cross-sell
initiatives;
• Continuously reviewing and refining our product portfolio and
introducing new and improved products; and
• Simplifying procedures to improve responsiveness and
speed up approval and processing times.
These initiatives are being noticed by our customers, who are
telling us that our service is getting better. Specific measures of
our successes in improving customer service include:
• Main Financial Institution (MFI) customer service scores
reaching 10 year highs during the year; (1)
• Winning the Money Magazine “Bank of the Year” award;
• 24 of the Group’s retail banking products receiving CANNEX
5-star ratings in 2008;
• Business Customer Satisfaction, as measured by TNS
Business Finance Monitor, recorded the strongest gains in
our peer group in the following three categories: businesses
with turnover of less than $5 million; businesses with turnover
between $5 to $100 million; and Agribusinesses.
• FirstChoice was rated the number one platform by financial
advisers as measured by Investment Trends; and
• ASB Bank again won The Banker’s “Bank of the Year Award
for New Zealand” and maintained its position as leader of the
major domestic banks in recent customer service surveys.
Improving our competitive position in Business Banking remains
a strategic priority, with key progress and outcomes during 2008
including:
•
Increases to the Business Banking “footprint” by employing
more business bankers, adding new business and private
banking centres and putting business bankers back into
selected retail branches;
• Continued migration of our business customers to CommBiz,
our internet based business banking offering which has now
been rolled out to over 90% of customers on outdated
platforms;
• Acquisition and successful integration of IWL providing
strategic entry into the online wholesale broking market;
• Launch of the new CommSec Banking Solutions “Better
Together” and iPhone share trading option;
• CommSec won the AFR Smart Investor’s “Highest Polling
Online Broker 2008” award and Trade Choice Awards “Best
Margin Lender 2008”;
• Strong business deposit market share gains with total
deposits up 143 basis points; and
• High ratings over a wide range of criteria in East & Partners’
Institutional Banking Markets Programme – April 2008.
(1) Roy Morgan Research, MFI, 14+, very or fairly satisfied, six month average
Chief Executive Officer’s Statement
Technology and Operational Excellence initiatives are designed
to deliver greater efficiency across the Group as well as
providing competitive leverage through innovative processes
and systems. Progress during the year included:
• The announcement of a $580 million, four year Core Banking
Modernisation project which will replace the Group’s legacy
systems and drive improvements in customer service and
productivity
the
introduction of real time straight through processing;
through process simplification and
• Continued efficiency gains in relation to IT costs, with the
Group’s IT efficiency ratio now standing at 13.7%, which is in
line with international best practice;
• Significant
improvements
in systems stability, security,
• Continued focus on improving Group-wide cross-sell and
referral rates, designed to better leverage the significant
opportunities in our existing customer base.
Sustainability
The Group is committed to a range of sustainability initiatives
which complement our strategic priorities and objectives.
Significant progress has been made during the year on an
integrated plan to both manage and track progress on these
initiatives, which embrace our people and our customers, as well
as the communities and the environment in which we operate. A
summary of the Group’s progress to date, future plans and key
sustainability metrics are contained in pages 40 to 42 of this
Annual Report.
controls and disaster recovery capabilities;
Conclusion
•
Introduction of a number of initiatives designed to improve
customer service, increase operational efficiency and provide
increased security to the Group and its customers. These
include NetBank online statements, simplification of home
loan processes, introduction of the Mediclear system, Global
Markets and CommSec growth initiatives, IWL systems
integration, motor
underwriting, Wealth
Management cross-sell, FirstChoice platform enhancements,
implementation and Anti Money Laundering
II
Basel
compliance; and
insurance
• Restructuring of relationships with IT providers through the
execution of new application sourcing agreements designed
to deliver greater contestability, flexibility and enhanced
delivery capability across the Group’s applications portfolio.
The commitment, engagement and enthusiasm of our people go
to the heart of our success as an organisation and our ability to
deliver on our strategies. Progress on Trust and Team Spirit
initiatives includes:
• Greater collaboration across the Group and better alignment
to the needs of our customers, which is reflected in
improvements in customer satisfaction scores, declining
customer complaints and increased customer compliments;
I am pleased with the financial performance of the Group during
the financial year in what has been a challenging period. We
have also continued to make good progress in delivering on our
five strategic priorities which are key components in achieving
our goal of becoming Australia’s finest financial services
organisation through excelling in customer service.
The headwinds which impacted our performance in 2008 have
continued into the new financial year. They will present us with
both challenges and opportunities. With the outlook for global
financial markets uncertain, and economic growth slowing, we
need to remain cautious and ensure that we remain well
capitalised and funded.
At the same time it is essential that we do not lose sight of our
strategic imperatives and balance these short term challenges
with the need to continue to invest in creating long term value for
our shareholders.
The ability to deliver the strong performance we have seen over
the past financial year across the Group would not have been
possible without the goodwill and commitment of our people. I
am very grateful for the high level of support I have received
across
to be enormously
the organisation and continue
impressed with the quality and skills of our people.
• A continued improvement in employee satisfaction scores,
with the Group now placed in the top quartile of companies
within Gallup’s worldwide database;
It is a great privilege to lead this organisation and I am confident
that we can continue to deliver for our people, our customers
and our shareholders.
• ASB Bank received the Gallup “Great Workplace Award
Thank you.
2008”;
Ralph Norris
Chief Executive Officer
13 August 2008
•
Improvements in workplace safety with the Group’s Lost
Time Injury Frequency Rate falling by a further 31%; and
• Continued support to the community including significant
commitments to a range of initiatives such as financial
literacy, environmental partnerships and one-off assistance
for communities in need of help.
The Profitable Growth priority was introduced to ensure that the
Group remains focused on identifying opportunities which will
ensure continued growth and value creation.
Examples of progress during the year include:
• Our Indonesian and Chinese businesses, whilst still a
relatively small part of the Group, are all performing well;
• CFS GAM continues to review a wide range of opportunities
to grow its global footprint;
• Premium Business Services is seeking to build on its high
level of expertise in the Institutional Banking and Global
Markets Group by further developing its debt and equity
market capabilities and leveraging core competencies into
offshore markets; and
Commonwealth Bank of Australia Annual Report 2008 5
Highlights
Group Performance Highlights
Net Profit after
Income Tax
Statutory basis
Cash basis
Underlying basis
Full Year
Half Year
30/06/08
30/06/07
30/06/08
31/12/07
$M
4,791
4,733
4,746
$M
4,470
4,527
4,431
$M
2,420
2,348
2,389
$M
2,371
2,385
2,357
The Group’s net profit after tax (“statutory basis”) for the full year
ended 30 June 2008 was $4,791 million, an increase of 7% on
the prior year. The final dividend of $1.53 per share is another
record and the total dividend for the year is $2.66 per share.
Cash earnings per share increased 3% on the prior year to
356.9 cents per share.
The Group’s Return on Equity (“cash basis”) has remained
strong at 20.4%.
The Group’s net profit after tax (“cash basis”) for the full year
ended 30 June 2008 was $4,733 million, an increase of 5% on
the prior year. The Group’s net profit after tax (“underlying
basis”), which excludes Shareholder
returns,
increased 7% to $4,746 million.
investment
This solid result was achieved in a difficult environment with the
Group incurring additional funding costs during the year due to
ongoing volatility in global credit markets. In addition, loan
impairment expense increased $496 million on the prior year
due to increased provisioning in the corporate portfolio reflecting
a tougher economic climate.
Key financial performance highlights over the year were:
• Growth in Banking income of 8%, following an increase in
average interest earning assets of 16% to $386 billion and
net interest margin contraction of ten basis points on an
underlying basis (six basis points on a headline basis);
• Funds management income growth of 23%, reflecting
average funds under administration growth of 18% to $194
billion and net gains from asset sales;
• Growth in average inforce premiums of 18% to $1,511 million
supported by sales growth in both life and general insurance
businesses;
• Operating expense growth of 9%, reflecting continued
investment in the business to support productivity and growth
initiatives as well as the effect of inflation on salary and
general expenses; and
• Substantially increased corporate loan provisioning levels to
ensure sufficient provision coverage is maintained, reflecting
market conditions.
The Group’s net profit after tax (“statutory basis”) includes the
following additional non-cash items:
• Gain on the Visa Initial Public Offering of $295 million after
tax; and
The Group’s net profit after tax (“underlying basis”) for the half
year ended 30 June 2008 was $2,389 million, an increase of 1%
on the prior half. The second half was impacted by two fewer
days, a significantly higher loan impairment expense and lower
returns from investment markets.
Other performance highlights specifically relating to the Group’s
strategic priorities over the year included:
• Recognised as 2008 “Bank of the Year” by Money Magazine;
• The full suite of rated retail deposit and transaction products
receiving a five star rating from CANNEX;
• The launch of the Group’s new “Determined to be different”
brand marketing campaign;
•
Institutional Banking recognised as the industry leader,
receiving the highest customer satisfaction rating in the East
& Partners survey for the third year running;
• Launched Core Banking Modernisation, a project that will
deliver a world class technology platform and enhanced
customer service;
• Recognised as Australia’s best Mastertrust/Wrap provider in
the Wealth Insights 2008 Service Level Survey Reports
(Source: ASSIRT/Wealth Insights); and
• People Engagement Workplace survey results which place
the Group in the top quartile worldwide (source: Gallup).
Basel II Transition
II
In December 2007, APRA granted “advanced” Basel
accreditation status to the Group for the measurement of
regulatory capital, which was effective from 1 January 2008. The
Tier One and Total Capital ratios as at 30 June 2008 as
disclosed on page 5 have been calculated in accordance with
the Basel II methodology. Further details on the impact of the
Basel II transition are in Capital Management, page 30.
Dividends
The total dividend for the year is another record at $2.66 per
share.
The final dividend declared is $1.53 per share which takes the
full year dividend to $2.66, an increase of 10 cents or 4% on the
prior year. The dividend has been determined based on net
profit after tax (“cash basis”). On this basis the dividend payout
ratio for the year is 75.0%.
The dividend payment is fully franked and will be paid on 1
October 2008 to owners of ordinary shares at the close of
business on 22 August 2008 (“record date”). Shares will be
quoted ex-dividend on 18 August 2008.
The Group issued $400 million of shares to satisfy shareholder
participation in the Dividend Reinvestment Plan (“DRP”) in
respect of the interim dividend for the 2008 financial year.
• Amounts have been
investment and
recognised
restructuring of $264 million after tax, relating to the cost of
implementation of Core Banking Modernisation and other
strategic initiatives.
for
6 Commonwealth Bank of Australia Annual Report 2008
Highlights continued
Group Performance Summary
Net interest income
Other banking income
Total banking income
Funds management income
Insurance income
Total operating income
Shareholder investment returns
Total income
Operating expenses
Loan impairment expense
Net profit before income tax
Corporate tax expense (1)
Minority interests (2)
Net profit after income tax (“cash basis”)
Gain on Visa Initial Public Offering
Investment and restructuring
Defined benefit superannuation plan income/(expense)
Treasury shares valuation adjustment
Hedging and AIFRS volatility
Net profit after income tax (“statutory basis”)
Represented by: (3)
Retail Banking Services
Premium Business Services
Wealth Management (4)
International Financial Services
Other (4)
Net profit after income tax (“cash basis”)
Shareholder investment returns after tax
Net profit after income tax (“underlying basis”)
Full Year Ended
Half Year Ended
30/06/08
$M
7,907
3,312
11,219
2,307
832
14,358
(17)
14,341
7,021
930
6,390
1,626
31
4,733
295
(264)
9
60
(42)
4,791
1,904
1,480
740
589
20
4,733
13
4,746
30/06/07
$M
7,036
3,321
10,357
1,874
817
13,048
149
13,197
6,427
434
6,336
1,782
27
4,527
-
-
5
(75)
13
4,470
1,766
1,445
627
478
211
4,527
(96)
4,431
Jun 08 vs
Jun 07 %
12
-
8
23
2
10
large
9
9
large
1
(9)
15
5
-
-
80
large
large
7
8
2
18
23
(91)
5
large
7
30/06/08
$M
4,008
1,771
5,779
1,166
439
7,384
(59)
7,325
3,643
597
3,085
721
16
2,348
295
(264)
13
73
(45)
2,420
955
756
351
293
(7)
2,348
41
2,389
31/12/07
$M
3,899
1,541
5,440
1,141
393
6,974
42
7,016
3,378
333
3,305
905
15
2,385
-
-
(4)
(13)
3
2,371
949
724
389
296
27
2,385
(28)
2,357
Jun 08 vs
Dec 07 %
3
15
6
2
12
6
large
4
8
79
(7)
(20)
7
(2)
-
-
large
large
large
2
1
4
(10)
(1)
large
(2)
large
1
(1) For purposes of presentation, Policyholder tax benefit and Policyholder tax expense components of Corporate tax expense are shown on a net basis (full years ended
30 June 2008: $(115) million, 30 June 2007: $266 million and half years ended 30 June 2008 $(151) million, 31 December 2007: $36 million).
(2) Minority interests include preference dividends paid to holders of preference shares in ASB Capital.
(3) During the first half of the current financial year the presentation of the segments of the Group was changed. Prior periods have been restated on a consistent basis.
(4) During the year a change was made to the recognition of intra-segment income between the Wealth Management and Other segments. This resulted in the
recognition of an additional $9 million in after tax profit in the Wealth Management segment in the prior half.
Shareholder Summary
Dividend per share – fully franked (cents)
Dividend cover – cash (times)
Earnings per share (cents)
Statutory – basic
Cash basis – basic
Dividend payout ratio (%)
Statutory basis
Cash basis
Weighted avg no. of shares – statutory basic (M)
Weighted avg no. of shares – cash basic (M) (1)
Return on equity – cash (%)
Full Year Ended
30/06/08
30/06/07
266
1. 3
363. 0
356. 9
74. 1
75. 0
1,307
1,313
20. 4
256
1. 3
344. 7
347. 1
75. 2
74. 2
1,281
1,289
21. 7
Jun 08 vs
Jun 07 %
4
n/a
5
3
(110)bpts
80bpts
2
2
(130)bpts
Half Year Ended
30/06/08
31/12/07
153
1. 1
182. 6
176. 2
84. 6
87. 3
1,314
1,319
19. 9
113
1. 6
180. 4
180. 7
63. 4
63. 0
1,300
1,306
20. 8
Jun 08 vs
Dec 07%
35
n/a
1
(3)
large
large
1
1
(90)bpts
(1) Fully diluted EPS and weighted average number of shares (fully diluted) are disclosed in Note 7, Earnings per share.
Commonwealth Bank of Australia Annual Report 2008 7
Highlights continued
Balance Sheet Summary
Lending assets (1)
Total assets (2)
Total liabilities (2)
Shareholders’ Equity
Assets held and Funds Under Administration (FUA)
On Balance Sheet:
Banking assets (2)
Insurance Funds Under Administration
Other insurance and internal funds management assets
Off Balance Sheet:
Funds Under Administration
Total assets held and FUA
30/06/08
$M
369,597
487,572
461,435
26,137
461,944
17,345
8,283
487,572
173,960
661,532
31/12/07
$M
351,208
472,664
447,026
25,638
445,695
18,940
8,029
472,664
188,762
661,426
As at
30/06/07
$M
319,786
440,157
415,713
24,444
412,111
19,814
8,232
440,157
157,257
597,414
Jun 08 vs
Dec 07 %
5
3
3
2
Jun 08 vs
Jun 07 %
16
11
11
7
4
(8)
3
3
(8)
-
12
(12)
1
11
11
11
(1) Lending assets comprise Loans, advances, and other receivables (gross of provisions for impairment and excluding securitisation and unearned income) and Bank
acceptances of customers.
(2) During the year, a review of the accounting treatment of Group Limit Facilities and Mortgage Interest Saver Accounts led to an increase in lending and deposit balances
(30 June 2008: $20 billion, 31 December 2007: $19 billion, 30 June 2007: $16 billion).
8 Commonwealth Bank of Australia Annual Report 2008
Highlights continued
Key Performance Indicators
Group
Underlying profit after tax ($M) (1)
Net interest margin (%) (2) (3)
Average interest earning assets ($M) (2) (3)
Average interest bearing liabilities ($M) (2) (3)
Funds management income to average funds
under administration (%)
Average funds under administration ($M)
Insurance income to average inforce premiums (%)
Average inforce premiums ($M)
Operating expense to total operating income (%)
Effective corporate tax rate (%)
Retail Banking Services
Cash net profit after tax ($M)
Operating expense to total banking income (%)
Premium Business Services
Cash net profit after tax ($M)
Operating expense to total banking income (%)
Wealth Management
Underlying profit after tax ($M) (1)
Average funds under administration ($M)
Average inforce premiums ($M)
Funds management income to average funds
under administration (%)
Insurance income to average inforce premiums (%)
Operating expense to net operating income (%) (4)
International Financial Services
Underlying profit after tax ($M) (1)
Average funds under administration ($M)
Average inforce premiums ($M)
Funds management income to average funds
under administration (%)
Insurance income to average inforce premiums (%)
Operating expense to net operating income (%) (4)
Capital Adequacy Ratios – (Basel I) (5)
Tier One (%)
Total (%)
Adjusted Common Equity (%)
Capital Adequacy Ratios – (Basel II) (5)
Tier One (%)
Total (%)
Adjusted Common Equity (%)
Full Year Ended
30/06/08
30/06/07
Jun 08 vs
Jun 07 %
Half Year Ended
30/06/08
31/12/07
Jun 08 vs
Dec 07 %
4,746
2. 02
385,667
362,249
1. 19
194,156
55. 1
1,511
48. 9
25. 4
1,904
45. 5
1,480
45. 3
4,431
2. 08
332,492
311,236
1. 14
164,404
63. 9
1,278
49. 3
28. 1
1,766
46. 6
1,445
45. 7
756
186,696
1,136
548
157,338
938
1. 21
51. 1
55. 0
563
7,460
375
0. 64
67. 2
51. 6
-
-
-
8. 17
11. 58
6. 47
1. 16
61. 1
59. 8
461
7,066
340
0. 65
71. 8
55. 0
7. 14
9. 76
4. 79
-
-
-
7
(6)bpts
16
16
5bpts
18
(14)
18
(1)
(10)
8
(2)
2
(1)
38
19
21
4
(16)
(8)
22
6
10
(2)
(6)
(6)
2,389
1. 98
400,678
375,930
1. 18
198,801
56. 8
1,554
49. 3
23. 4
955
45. 3
756
47. 0
2,357
2. 06
370,819
348,716
1. 19
191,447
54. 1
1,444
48. 4
27. 4
949
45. 8
724
43. 4
384
191,721
1,172
372
183,548
1,058
1. 20
52. 7
55. 7
287
7,080
382
0. 74
69. 5
49. 8
-
-
-
1. 21
51. 3
54. 3
276
7,899
386
0. 55
61. 8
53. 6
7. 41
9. 82
4. 77
1
(8)bpts
8
8
(1)bpts
4
5
8
2
(15)
1
(1)
4
8
3
4
11
(1)
3
3
4
(10)
(1)
35
12
(7)
8. 17
11. 58
6. 47
8. 17
12. 08
6. 58
-
(50)bpts
(11)bpts
(1) Cash net profit after tax less Shareholder investment returns after tax.
(2) During the year, a review of the accounting treatment of Group Limit Facilities and Mortgage Interest Saver Accounts led to an increase in lending and deposit
balances (30 June 2008: $20 billion, 31 December 2007: $19 billion, 30 June 2007: $16 billion). Prior periods have been restated on a consistent basis.
(3) Average interest earning assets and average interest bearing liabilities have been adjusted to remove the impact of securitisation. Refer to Note 4, Average Balances
and Related Interest.
(4) Net operating income represents Total operating income less volume expenses.
(5) June 2008 regulatory capital is calculated in accordance with Basel II rules and methodology which was effective from 1 January 2008. The Basel II ratios make no
allowances for interest rate risk in the banking book, as this measure is not effective until 1 July 2008. The December 2007 and June 2007 regulatory capital is
reported in accordance with Basel I rules and methodology.
Credit Ratings
Fitch Ratings
Moody’s Investor Services
Standard & Poor's
Long–term
AA
Aa1
AA
Short–term
F1+
P-1
A-1+
Outlook
Stable
Stable
Stable
The Group continues to maintain a strong capital position which is reflected in its credit ratings. Additional information regarding the
Group’s capital is disclosed in Capital Management, page 30.
Commonwealth Bank of Australia Annual Report 2008 9
Group Performance Analysis
Financial Performance and Business Review
The full year underlying net profit after tax of $4,746 million for
the Group increased 7% on the prior year.
The performance during the year was underpinned by:
• Strong growth in lending balances, with business lending up
22% to $127 billion and housing lending up 12% to $216
billion;
• Domestic deposit volume growth of 23% since June 2007 to
$234 billion;
• Underlying net interest margin contraction of 10 basis points
since 30 June 2007, a solid result in a difficult environment;
• Average funds under administration growth of 18% to $194
billion, reflecting positive net funds flows partly offset by falls
in Australian and global equity markets;
• Operating expense growth of 9% on the prior year, reflecting
continued investment in the Group’s businesses as well as
the effect of inflation on salary and general expenses;
• Higher funding costs caused by volatility in global credit
markets; and
•
Increased corporate sector collective and
provisioning consistent with market conditions.
individual
The underlying net profit after tax for the second half of the year
increased by 1% on the prior half to $2,389 million. The second
half performance was impacted by two fewer days and a
significantly higher corporate loan impairment expense.
Net Interest Income
Net interest income increased by 12% on the prior year to
$7,907 million. Excluding the impact of the reclassification of net
swap costs under AIFRS, net interest income growth was 10%.
This result was achieved through strong volume growth in
average interest earning assets of 16%, partly offset by
underlying margin contraction of ten basis points.
During the current half net interest income increased by 3% over
the prior half. This represents 6% on an underlying basis after
adjusting for the dampening impact of two fewer days and
AIFRS net swap cost reclassification. The increase in net
interest income was driven by an 8% growth in average interest
earning assets partly offset by a seven basis point contraction in
underlying margin.
Average Interest Earning Assets (1)
+ 16 %
385,667
57,842
327,825
332,492
49,521
282,971
)
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
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
Jun 07
Jun 08
Non-Lending Interest Earning Assets (Excl Bank Accept)
Lending Interest Earning Assets
Average interest earning assets increased by $53 billion on the
prior year to $386 billion, reflecting a $45 billion increase in
average lending interest earnings assets and a $8 billion
increase in average non-lending interest earning assets.
Above market home lending growth was the largest contributor
to the increase in average interest earning assets. Average
10 Commonwealth Bank of Australia Annual Report 2008
home loan balances excluding the impact of securitisation
increased by 15% since 30 June 2007 and 9% since 31
December 2007.
Average balances for business and corporate lending benefited
from strong volume growth, particularly in Institutional Banking.
This resulted in growth of 18% since 30 June 2007 and 9%
since 31 December 2007.
Personal lending average balances grew by 12% since 30 June
2007 and 3% since 31 December 2007. This result continues to
be driven by growth in margin lending, which slowed in the
second half due to the downturn in investment markets.
Net Interest Margin
Underlying net interest margin decreased 10 basis points
compared to the prior year. This was partly offset by AIFRS
hedging volatility which resulted in a four basis point increase,
bringing headline margin contraction to six basis points. The key
drivers of the underlying margin contraction were:
Asset pricing and mix: Overall margin contraction of 10 basis
points, with home lending margins contributing to a seven basis
point decline during the year due to the impact of higher funding
costs together with the increased proportion of lower margin
fixed rate and packaged home lending products more than
offsetting the changes in pricing of standard variable rate home
loans. Business and personal lending margins contracted three
basis points due to higher funding costs and the strong growth in
lower margin Institutional loans and lower interest rate credit
cards.
Deposit pricing and mix: Retail deposit margins improved four
basis points due to benefits of increases in the official cash rate
offsetting the ongoing mix impact of strong growth in higher
interest rate deposit products.
Liquids and other: The Group increased holdings of liquid assets
by $8 billion during the year, resulting in four basis points of
margin compression.
NIM movement since June 2007 (1)
Underlying (10) bpts
2.10%
2.08%
(0.10%)
0.04%
(0.04%)
1.98%
0.04%
2.02%
1.90%
1.70%
1.50%
Jun 07
Asset
Pricing &
Mix
Deposit
Pricing &
Mix
Liquids &
other
AIFRS
volatility
Jun 08
The net interest margin has been protected from further
deterioration due
interest rate
exposures which led to incremental costs of approximately $50
million in Other banking income, largely in the first half.
to hedging of short-dated
During the second half, net interest margin decreased by eight
basis points (seven basis points on an underlying basis) due to
similar influences as described above.
Additional information, including the average balances, is set out
in Note 4, Average Balances and Related Interest.
(1) Headline net interest margin has been impacted by a change in the
accounting treatment of Group Limit Facilities and Mortgage Interest Saver
Accounts which led to an increase in lending and deposit balances. Prior
periods have been restated on a consistent basis.
Group Performance Analysis continued
Other Banking Income
Funds Management Income
Commissions
Lending fees
Trading income
Other income
Full Year Ended Half Year Ended
31/12/07
$M
908
469
200
128
1,705
30/06/07
$M
1,729
896
555
248
3,428
30/06/08
$M
919
507
346
100
1,872
30/06/08
$M
1,827
976
546
228
3,577
AIFRS reclassification of
net swap costs (1)
Other banking income
(265)
3,312
(107)
3,321
(101)
1,771
(164)
1,541
(1) Refer to Note 2, Profit for further details.
Excluding the impact of AIFRS non-trading derivative volatility,
Other banking income increased 4% over the year.
$M
3,600
2,700
1,800
900
0
3,428
248
555
896
1,729
3,577
228
546
976
1,827
CFS GAM
Colonial First State
CommInsure & Other
Sovereign & Other
Funds management
income
Full Year Ended Half Year Ended
30/06/08
$M
1,068
909
282
48
30/06/07
$M
759
844
225
46
30/06/08
$M
567
421
152
26
31/12/07
$M
501
488
130
22
2,307
1,874
1,166
1,141
Funds management income increased by 23% on the prior year
to $2,307 million. This growth was driven by an increase in
average funds under administration (FUA) of 18% on the prior
year to $194 billion and a $108 million pre-tax gain on sale of
assets.
Funds management income in the current half increased 2% on
the prior half to $1,166 million, reflecting the impact of a $40
million higher pre-tax gain on the sale of assets and a $16 billion
decline in funds under administration due to the investment
market downturn in the second half.
Insurance Income
Full Year Ended Half Year Ended
31/12/07
$M
273
120
393
30/06/07
$M
573
244
817
30/06/08
$M
307
132
439
30/06/08
$M
580
252
832
Jun 07
Jun 08
Commissions
Lending Fees
Trading Income Other
CommInsure & Other
Sovereign & Other
Insurance income
Factors impacting Other banking income were:
• Commissions: increased by 6% on the prior year to $1,827
million, principally driven by strong brokerage commissions
within CommSec and
in
international transactions;
volume-driven
increases
• Lending fees: increased by 9% on the prior year to $976
million. The growth is principally due to retail and corporate
customer fees, increasing in line with lending volumes
together with higher syndication structured transaction fee
income;
• Trading income: decreased 2% on the prior year to $546
million due to additional costs in the prior half on derivatives
used to hedge short-dated interest rate exposures; and
• Other income: decreased 8% on the prior year to $228
million. The prior year included $79 million due to the sale of
the Group’s share in Greater Energy Alliance Corporation Pty
Limited (“Loy Yang”) and $58 million in relation to the sale of
MasterCard shares. The impact of these items was partly
offset in the current year due to realised gains on hedges of
the New Zealand operations of $31 million compared to a
loss of $23 million in the prior year, accrued income of $24
million relating to a prior period tax refund, the receipt of
dividend income on Group investments of $36 million,
together with several other offsetting non-recurring gains and
losses.
The current half increased 10% on the prior half excluding the
impact of AIFRS reclassification. This was the result of a strong
increase in trading income in the Global Markets business due
to market volatility in the current half providing a good trading
environment.
Insurance income increased by 2% on the prior year to $832
million. This result is a combination of strong growth in average
inforce premiums of 18% offset by adverse claims experience
associated with weather events concentrated on the east coast
of Australia.
Insurance income in the current half increased 12% on the prior
half due to an 8% increase in inforce premiums and the impact
of weather events in the first half.
Commonwealth Bank of Australia Annual Report 2008 11
Group Performance Analysis continued
Operating Expenses
Loan Impairment
Group operating expenses increased by 9% on the prior year to
$7,021 million. Operating expenses were impacted by:
• Average salary increases reflecting the tight domestic labour
market together with the effect of inflation on general
expenses;
• Continued
investment
in staff
in support of strategic
initiatives, with staff numbers rising 5% on the prior year;
• Further investment in strategic growth initiatives, including
the Business Banking Growth Strategy;
• Higher occupancy expenses resulting from market rent
increases, relocation of the Business Continuity Centre to
Sydney Olympic Park and increases in other property costs;
• Continued productivity
improvements achieved
through
process re-engineering and simplification initiatives; and
• Higher volume related expenses resulting from strong growth
in funds under administration, the IWL acquisition and an
increase in underlying retail equities trading volumes.
During the second half of the year operating expenses increased
8% to $3,643 million. As previously disclosed, the first half
included a one-off GST refund ($64 million) and the Group has
continued to invest in staff and projects to support its strategic
priorities.
Group Expense to Income Ratio
in
to 48.9%
The expense to income ratio improved from 49.3% in the prior
the current year, representing a 1%
year
improvement in productivity. The improvement in productivity is
a reflection of solid income growth, disciplined underlying
expense management and continued
the
business.
investment
in
Productivity
50.5%
The total charge for loan impairment for the year was $930
million, which represents 26 basis points of average gross loans
and acceptances. This expense is $496 million higher than the
prior year, reflecting increased levels of collective and individual
provisioning in the corporate portfolio. The current half loan
impairment expense increased by 79% to $597 million for the
same reason.
Gross impaired assets were $683 million as at 30 June 2008,
compared with $421 million at 30 June 2007.
The Group remains well provisioned, with total provisions for
impairment losses as at 30 June 2008 of $1,745 million. The
current level of provisioning reflects:
• The large proportion of high quality, low risk home loans
within the consumer portfolio;
• No direct exposure to US sub-prime or non-recourse
mortgages;
• No participation in the zero rate credit card balance transfer
market;
•
Increased collective and
in
corporate portfolio consistent with market conditions; and
individual provisioning
the
• No material exposure to Collateralised Debt Obligations
(“CDOs”).
Loan Impairment Expense to Average Gross Loans and
Acceptances (1)
0.30%
0.25%
0.20%
0.26%
49.3%
48.9%
0.15%
0.14%
0.14%
0.10%
Jun 06
Jun 07
Jun 08
(1) During the current year a review of the netting of certain assets and liabilities
led to an increase in both lending and deposit balances (30 June 2008: $20
billion, 31 December 2007: $19 billion, 30 June 2007: $16 billion). Prior
periods have been restated on a consistent basis.
Jun 06
Jun 07
Jun 08
Taxation Expense
The corporate tax charge for the year was $1,626 million,
representing an effective tax rate of 25.4%.
The effective tax rate is lower in the current half primarily due to
satisfactory resolution of long outstanding issues with tax
authorities.
Reductions in the corporate tax rate in offshore jurisdictions
including New Zealand, Hong Kong and the United Kingdom will
lead to a lower underlying tax rate than in prior years. The long
term underlying effective tax rate is therefore expected to range
between 27% and 28%.
12 Commonwealth Bank of Australia Annual Report 2008
Total Group Assets & Liabilities
Interest earning assets
Home loans including securitisation
Less: securitisation
Home loans excluding securitisation
Personal
Business and corporate
Loans, advances and other receivables (1)
Provisions for loan impairment
Net loans, advances and other receivables
Non-lending interest earning assets
Total interest earning assets
Other assets (2)
Total assets (3)
Interest bearing liabilities
Transaction deposits
Savings deposits
Investment deposits
Other demand deposits
Total interest bearing deposits
Deposits not bearing interest
Deposits and other public borrowings
Debt issues
Other interest bearing liabilities
Total interest bearing liabilities
Securitisation debt issues
Non-interest bearing liabilities (4)
Total liabilities (3)
Provisions for loan impairment
Collective provision
Individually assessed provisions
Total provisions for loan impairment
Other credit provisions (5)
Total provisions for impairment losses
Group Performance Analysis continued
30/06/08
$M
31/12/07
$M
As at
30/06/07
$M
Jun 08 vs
Dec 07 %
Jun 08 vs
Jun 07 %
215,743
(11,676)
204,067
20,265
126,987
351,319
(1,713)
349,606
49,385
400,704
86,868
487,572
59,917
53,420
98,745
44,014
256,096
7,610
263,706
73,785
44,756
374,637
12,032
74,766
461,435
1,346
367
1,713
32
1,745
203,885
(13,177)
190,708
20,838
119,857
331,403
(1,352)
330,051
51,065
382,468
90,196
472,664
60,210
54,659
84,328
45,889
245,086
8,021
253,107
65,699
49,597
360,382
13,673
72,971
447,026
1,084
268
1,352
28
1,380
192,770
(15,633)
177,137
20,074
103,854
301,065
(1,233)
299,832
49,553
350,618
89,539
440,157
55,168
52,408
76,856
26,156
210,588
8,480
219,068
69,753
43,719
324,060
15,737
75,916
415,713
1,034
199
1,233
23
1,256
6
(11)
7
(3)
6
6
27
6
(3)
5
(4)
3
-
(2)
17
(4)
4
(5)
4
12
(10)
4
(12)
2
3
24
37
27
14
26
12
(25)
15
1
22
17
39
17
-
14
(3)
11
9
2
28
68
22
(10)
20
6
2
16
(24)
(2)
11
30
84
39
39
39
Asset Quality
Gross loans and acceptances ($M)
Risk weighted assets (“RWA”) – Basel I ($M)
Risk weighted assets – Basel II ($M) (6)
Gross impaired assets ($M)
Net impaired assets ($M)
Collective provision as a % of RWA – Basel I
Collective provision as a % of RWA – Basel II
Collective provision as a % of credit risk weighted
assets – Basel II
Collective provision as a % of gross loans and
acceptances
Individually assessed provisions for impairment as
a % of gross impaired assets (7)
Loan impairment expense as a % of average risk
weighted assets annualised – Basel I (8)
Loan impairment expense as a % of average risk
weighted assets annualised – Basel II (9)
Loan impairment expense as a % of average gross
loans and acceptances annualised (8)
Full Year Ended
Half Year Ended
30/06/08
$M
383,502
-
205,501
683
316
-
0. 65
0. 72
0. 35
40. 8
-
0. 46
0. 26
30/06/07
$M
337,339
245,347
-
421
222
0. 42
-
Jun 08 vs
Jun 07 %
14
n/a
n/a
62
42
n/a
n/a
-
0. 31
23. 8
0. 19
-
0. 14
n/a
13
71
n/a
-
86
30/06/08
$M
383,502
-
205,501
683
316
-
0. 65
0. 72
0. 35
40. 8
-
0. 59
0. 32
31/12/07
$M
366,313
272,609
198,228
562
294
0. 40
0. 55
Jun 08 vs
Dec 07 %
5
n/a
4
22
7
n/a
18
0. 60
0. 30
33. 6
0. 26
-
0. 19
20
17
21
n/a
-
68
(1) Gross of provisions for impairment which are included in other assets.
(2) Other assets include Bank acceptances of customers, derivative assets, provisions for loan impairment, securitisation assets, insurance assets and intangibles.
(3) During the current year a review of the netting of certain assets and liabilities led to an increase in both lending and deposit balances (30 June 2008: $20 billion, 31
December 2007: $19 billion, 30 June 2007: $16 billion). Prior periods have been restated on a consistent basis.
(4) Non-interest bearing liabilities include derivative liabilities and insurance policy liabilities.
(5) Included in Other provisions.
(6) Basel II RWA and associated ratios for 31 December 2007 are on a pro-forma basis. RWA for Interest Rate Risk in the Banking Book is excluded from the above
tables as it is effective from 1 July 2008 only.
(7) Bulk portfolio provisions of $88 million at 30 June 2008 ($79 million at 31 December 2007 and $99 million at 30 June 2007) to cover unsecured personal loans and
credit card lending have been deducted from individually assessed provisions to calculate this ratio. These provisions are deducted due to the exclusion of the
related assets from gross impaired assets. The related asset amounts are instead included in the 90 days or more past due disclosure.
(8) Average of opening and closing balances.
(9) This ratio uses a simple average pro-forma Basel II RWA at 31 December 2007 and Basel II RWA at 30 June 2008.
Commonwealth Bank of Australia Annual Report 2008 13
Retail Banking Services
Financial Performance and Business Review
Retail Banking Services has maintained its solid performance
over the year ended 30 June 2008 with cash net profit after tax
increasing by 8%, despite the impact of increased funding costs
from continuing volatility in global credit markets. This has been
achieved by strong volume growth in key product lines, sound
credit quality, tight expense management and strategic business
investment to drive profitable growth and efficiency.
Over the year, the business has made good progress towards
the Group’s vision to be Australia’s finest financial services
organisation through excelling in customer service. Highlights
included:
• Winning the ‘Best Branch Strategy’ award at the International
Retail Banking Awards in April 2008. The award recognises
the success of the new branch network operating model in
enabling increased lending capabilities in every branch and
providing convenient options for customers through extended
trading hours and weekend branch openings in selected
locations;
• Further roll-out of the modernised branch design with 70
branches completed or under refurbishment by June 2008;
• Market leading product development with the full suite of
rated personal deposit and transaction products receiving a
five star rating from CANNEX;
• Enabling more environmentally sustainable banking with the
launch of online statements in January 2008, which has
already resulted in almost 400,000 customer accounts
electing to opt out of receiving paper statements;
• Successful implementation of the Simple Home Loans
program which has driven significant
in
customer service by providing customers with faster access
to funds and creating a better home buying experience;
improvement
• A new telephony platform implemented for the NetBank
Helpdesk, Third Party and General Enquiry contact centres
to improve efficiency and service; and
• Needs analysis sales and service training programs continue
to be rolled out to staff, with over 7,650 “Masters” being
accredited so far.
The success of these initiatives is reflected in:
• Encouraging customer satisfaction
levels, only down
marginally on June 2007, despite the higher interest rate
environment(1) (Source: Roy Morgan Research); and
•
Improvement in staff engagement scores as independently
measured by the Gallup organisation, with Retail Banking
Services now ranking well inside the international top
quartile.
Home Loans
Home loan revenue decreased 5% on the prior year and 17%
on the prior half. This result was impacted by higher funding
costs following continued volatility in global credit markets.
Balance growth of 15% on the prior year and 8% on the prior
half was underpinned by strong performances in both the branch
and broker channels resulting in 15 consecutive months of
market share gains. Fee revenue growth was strong, up 20% on
the prior year underpinned by package fee income and strong
volume growth.
Consumer Finance
Consumer Finance revenue growth was 2% on the prior year
(excluding the profit on the sale of shares in MasterCard) and
8% on the prior half. This was achieved despite increased
funding costs and highlights the success of the focus on
14 Commonwealth Bank of Australia Annual Report 2008
profitably growing this portfolio in a sustainable manner. Credit
card balances have grown steadily, up 5% on June 2007. This
growth has been driven by targeted customer campaigns and a
focus on cross-sell initiatives and resulted in a significant
increase in new accounts opened. Personal loans continued to
perform well with steady volume growth and risk based pricing
initiatives.
Retail Deposits
Deposit revenue increased 12% on the prior year, driven by a
combination of strong volume growth of 18% and focused
margin management in a competitive environment.
Despite the highly competitive environment for retail deposits,
Retail Banking Services maintained a dominant position and
further grew market share by capturing 30% of market balance
growth over the year (Source: APRA). The success of products
such as NetBank Saver and Business Online Saver and
targeted Term Deposits campaigns resulted in a stable market
share of 29.1% in June 2008.
Distribution
Commissions received from the distribution of both business
banking and wealth management products through the retail
distribution network remained in line with prior year. This was a
robust performance in a difficult environment and benefited from
improved insurance sales capabilities in the branch network and
an increased focus on cross-sell activities.
Operating Expenses
Expense growth on the prior year was contained to 2% despite
wage inflation pressures in a tight labour market, higher
occupancy costs and continued strategic business investment.
Sound management of these cost pressures together with the
continued realisation of IT savings and productivity gains have
contributed to further improvements in the expense to income
ratio from 46.6% in the prior year to 45.5%.
Loan Impairment Expense
Loan impairment expense fell by 5% on the prior year to $331
million, despite average interest earning asset growth of 13%
over the same period. This result reflects careful portfolio
management and responsible lending practices over a period of
intense competition. Loan impairment expense increased in the
second half due to portfolio growth and seasonal factors.
Despite the uncertain environment, arrears rates across the
portfolios have not significantly deteriorated in the current year
and in most cases are still running at a lower rate than in prior
years.
Market Share Percentage (1)
Home loans
Credit cards (1)
Personal lending (APRA and
other households) (2)
Household deposits (3)
Retail deposits(3)
(1) As at 30 May 2008.
30/06/08 31/12/07 30/06/07
18. 5
18. 8
19. 3
18. 2
18. 8
18. 5
15. 8
29. 1
22. 3
16. 7
28. 9
22. 0
16. 4
29. 0
21. 6
(2) Personal lending market share includes personal loans and margin loans.
(3) In accordance with APRA guidelines, these measures include some products
relating to both the Retail and Corporate Segment.
Retail Banking Services continued
Full Year Ended 30 June 2008
(1)
Consumer
Finance
$M
780
347
1,127
Retail
Deposits
$M
2,386
673
3,059
Distribution
$M
-
103
103
Home Loans
$M
1,174
134
1,308
Full Year Ended 30 June 2007
(1)
Consumer
Finance
$M
742
419
1,161
Retail
Deposits
$M
2,071
656
2,727
Distribution
$M
-
104
104
Home Loans
$M
1,268
112
1,380
Half Year Ended 30 June 2008
(1)
Consumer
Finance
$M
406
180
586
Retail
Deposits
$M
1,262
345
1,607
Distribution
$M
-
50
50
Home Loans
$M
529
65
594
Total
$M
4,340
1,257
5,597
2,549
331
2,717
813
1,904
Total
$M
4,081
1,291
5,372
2,501
349
2,522
756
1,766
Total
$M
2,197
640
2,837
1,286
190
1,361
406
955
Net interest income
Other banking income
Total banking income
Operating expenses
Loan impairment expense
Net profit before tax
Corporate tax expense
Cash net profit after tax
Net interest income
Other banking income
Total banking income
Operating expenses
Loan impairment expense
Net profit before tax
Corporate tax expense
Cash net profit after tax
Net interest income
Other banking income
Total banking income
Operating expenses
Loan impairment expense
Net profit before tax
Corporate tax expense
Cash net profit after tax
(1) During the current period there has been a re-alignment of internal charges between consumer finance and retail deposits segments. Prior periods have been restated
on a consistent basis.
Major Balance Sheet Items (gross of impairment)
Home loans (including securitisation) (1)
Consumer finance (2)
Total assets – Retail Banking Services products
Home loans (net of securitisation)
Transaction deposits
Savings deposits
Investment and other deposits
Deposits not bearing interest
Total liabilities - Retail Banking Services products
30/06/08
$M
186,942
11,428
198,370
175,266
18,267
44,261
55,388
2,305
120,221
31/12/07
$M
173,784
11,027
184,811
160,607
19,470
44,906
44,230
2,543
111,149
As at
30/06/07
$M
162,751
10,810
173,561
147,118
18,980
41,782
38,779
2,599
102,140
Jun 08 vs
Dec 07 %
8
4
7
9
Jun 08 vs
Jun 07 %
15
6
14
19
(6)
(1)
25
(9)
8
(4)
6
43
(11)
18
(1) During the year, a review of the accounting treatment of Mortgage Interest Saver Accounts led to an increase in lending and deposit balances (30 June 2008: $3,234
million, 31 December 2007: $2,431 million, 30 June 2007: $2,433 million).
(2) Consumer Finance includes personal loans and credit cards.
Commonwealth Bank of Australia Annual Report 2008 15
customers with tailored commodity and interest rate risk
management solutions. 'AgriLine', the purpose built service
centre based in Wagga Wagga, has continued to exceed
expectations with over 30,000 client calls having been recorded
since April 2007.
Local Business Banking
Investment in Local Business Banking, as part of the Group’s
strategic priority in Business Banking, has enabled the business
to maintain the strong turnaround in performance highlighted at
the half year. The progressive roll out of Business Bankers
across more than 700 branches, the implementation of the new
24 hour, 7 day customer service centre and the implementation
of a new business model have resulted in a 65% uplift in lending
activity and 12% growth in income over the prior year.
Operating Expenses
Operating expenses of $1,915 million represent an increase of
15% over the prior year. This reflects expansion of the front line
sales force, the opening of new Business Banking Centres,
additional Business Bankers in Branches as well as costs
associated with the IWL acquisition. In addition, client demand
for operating leases through the Structured Asset Finance
business has resulted in increased depreciation costs for the
Group.
Loan Impairment Expense
Loan impairment expense has increased significantly to $426
million from the historically low levels of recent years. This was
the combined result of additional provisioning related to the
changed global economic conditions, increases in individual
assessments and balance growth across the portfolio.
Market Share
Business deposit market share of non-financial corporations, as
measured by APRA, has increased by 143 basis points since 30
June 2007 to 14.4%.
Business lending market share to non-financial corporations, as
measured by APRA, decreased 26 basis points since 30 June
2007 to 12.2% while business lending market share as
measured by the RBA has decreased 10 basis points since 30
June 2007 to 12.5%. The reduction in lending market share was
driven by a direct strategy to actively manage exposure to
certain sectors of the market within the institutional banking
business.
Market Share Percentage
Business lending – APRA
Business lending – RBA (1)
Business deposits – APRA
Equities trading (CommSec) (1)
30/06/08 31/12/07 30/06/07
12. 4
12. 6
13. 0
4. 3
12. 2
12. 5
14. 4
5. 9
12. 5
12. 8
13. 7
5. 0
(1) Prior comparative period has been restated.
Premium Business Services
Financial Performance and Business Review
Premium Business Services delivered income growth of 16% on
the prior year, or 17% after adjusting for the impact of the
acquisition of IWL in the current year and the gain on sale of the
Group’s share in the Greater Energy Alliance Corporation Pty
Ltd (”Loy Yang”) in the prior year. This result was underpinned
by a solid improvement in customer service scores and strong
gains in deposit market share.
The strong performance was impacted by higher funding costs,
increased investment spend (including the cost of integrating the
IWL business), a tax refund on the satisfactory resolution of an
outstanding issue and additional loan impairment provisioning,
resulting in cash net profit after tax growth of 2% on the prior
year.
to
The core businesses of Premium Business Services continued
to perform well due
the customer centred strategy
implemented in February 2007. The ongoing focus on this
strategy enabled the business to build upon the momentum of
the first half and post strong income growth across all
businesses, despite the challenging environment.
Institutional Banking
Institutional Banking income increased by 14% (19% excluding
Loy Yang) on the prior year driven by a significant increase in
Financial Markets income, strong balance growth and stable
margins. The syndication business recorded strong growth and
was joint lead arranger of a $3.4 billion syndication deal for
Singapore Power. Despite strong lending growth over the year,
balance growth slowed during the second half as the Group
actively managed the debt portfolio to sell-down its exposure to
certain sectors of the market.
Private Client Services
Despite weaker financial markets during the second half, Private
Client Services income increased by 25% on the prior year. This
growth was the result of strong income growth during the first
half as well as the impact of the IWL acquisition in November
2007.
The integration of IWL is tracking well against the planned
integration schedule with all retail clients transitioned onto the
CommSec platform.
In June, CommSec successfully launched an integrated cash
management solution as part of its trading platform under the
theme ‘Better Together’. In addition, during the year the
business received a number of awards including “Best Feature-
Packed Online Broker 2008” and “Best Margin Lender 2008”.
Corporate Financial Services
Corporate Financial Services income increased by 14% on the
prior year. Corporate Financial Services continued to invest in
additional front line staff, adding 90 full-time equivalents during
the year, as well as opening eight new Business Banking
Centres across New South Wales, South Australia and Victoria
adding to the eight Centres opened during the prior year. In
addition, new specialist teams have been created to service the
Healthcare and Financial Planning client segments which,
together with the strong focus on client cross-sell activity, has
driven balance growth and a significant lift in customer service
scores as measured by TNS Business Finance Monitor.
Agribusiness
Agribusiness performed strongly during the period with income
growth of 20% on the prior year. This was underpinned by
significant balance growth resulting from a continued focus on
corporate agriculture and large scale family farming enterprises.
Market share gains were achieved during the year by providing
16 Commonwealth Bank of Australia Annual Report 2008
Premium Business Services continued
Institutional
Banking
$M
996
886
1,882
Private Client
Services
$M
240
386
626
Full Year Ended 30 June 2008
Corporate
Financial
Services
$M
516
416
932
Agri
business
$M
156
97
253
Local
Business
Banking
$M
358
210
568
Eliminations
$M
-
(30)
(30)
Institutional
Banking
$M
820
837
1,657
Private Client
Services
$M
189
313
502
Full Year Ended 30 June 2007
(1)
Corporate
Financial
Services
$M
441
377
818
Agri
business
$M
132
79
211
Local
Business
Banking
$M
328
178
506
Eliminations
$M
-
(40)
(40)
Institutional
Banking
$M
511
464
975
Private Client
Services
$M
119
192
311
Half Year Ended 30 June 2008
(1)
Corporate
Financial
Services
$M
271
211
482
Agri
business
$M
85
49
134
Local
Business
Banking
$M
184
120
304
Eliminations
$M
-
(8)
(8)
Total
$M
2,266
1,965
4,231
1,915
426
1,890
410
1,480
Total
$M
1,910
1,744
3,654
1,669
75
1,910
465
1,445
Total
$M
1,170
1,028
2,198
1,032
251
915
159
756
Net interest income
Other banking income
Total banking income
Operating expenses
Loan impairment expense
Net profit before tax
Corporate tax expense
Cash net profit after tax
Net interest income
Other banking income
Total banking income
Operating expenses
Loan impairment expense
Net profit before tax
Corporate tax expense
Cash net profit after tax
Net interest income
Other banking income
Total banking income
Operating expenses
Loan impairment expense
Net profit before tax
Corporate tax expense
Cash net profit after tax
(1) During the current period the lines of business have been re-segmented due to refinements in allocation methodology. Prior periods have been restated on a consistent
basis.
Major Balance Sheet Items (gross of impairment)
Interest earning lending assets (1)
Bank acceptances of customers
Non-lending interest earning assets
Margin loans
Other assets (2)
Total assets
Transaction deposits (1)
Other demand deposits
Deposits not bearing interest
Certificates of deposits and other
Due to other financial institutions
Liabilities at fair value through Income Statement
Debt issues
Loan Capital
Other non-interest bearing liabilities (2)
Total liabilities
30/06/08
$M
113,828
18,278
18,705
7,817
14,742
173,370
39,791
5,602
3,839
33,922
16,659
1,914
25,438
581
38,639
166,385
31/12/07
$M
110,386
19,805
21,917
8,721
17,306
178,135
38,843
7,634
3,785
29,741
16,971
2,555
25,011
714
45,349
170,603
As at
30/06/07
$M
95,519
18,721
25,245
8,070
11,869
159,424
34,831
4,658
4,244
28,522
13,837
3,965
37,861
344
44,582
172,844
Jun 08 vs
Dec 07 %
3
(8)
(15)
(10)
(15)
(3)
Jun 08 vs
Jun 07 %
19
(2)
(26)
(3)
24
9
2
(27)
1
14
(2)
(25)
2
(19)
(15)
(2)
14
20
(10)
19
20
(52)
(33)
69
(13)
(4)
(1) During the year, a review of the accounting treatment of Group Limit Facilities led to an increase in lending and deposit balances (30 June 2008: $17,134 million, 31
December 2007: $16,200 million, 30 June 2007: $13,253 million).
(2) Other assets include intangible assets and derivative assets, and other non-interest bearing liabilities include derivative liabilities.
Commonwealth Bank of Australia Annual Report 2008 17
Wealth Management
Financial Performance and Business Review
Cash net profit after tax for the Wealth Management business
increased by 18% on the prior year to $740 million. The result
was driven by strong revenue growth in the funds management
lower
businesses and gains on asset sales, offset by
Shareholder investment returns.
Cash net profit after tax in the second half fell 10% to $351
million impacted by significant falls in investment markets.
Funds Under Administration increased 10% to $185 billion as at
30 June 2008. The growth in funds under administration was
driven by positive net flows offset by significant market falls in
Australian and global equities in the second half.
Net funds flows for the year ended 30 June 2008 were $28.6
billion, driven by:
• Solid net flows into the FirstChoice and Avanteos platforms
and Global Equity Funds; and
• Short-term cash mandates from institutional investors.
Investment markets have been volatile, with some negative
returns experienced in the second half. Despite this, investment
performance has been good relative to the market with 63% of
funds outperforming benchmark on a three year basis.
CFS Global Asset Management (CFS GAM)
CFS Global Asset Management provides asset management
services to wholesale and institutional investors. Cash net profit
after tax was $409 million, an increase of 59% on the prior year,
reflecting revenue growth from the global expansion and
diversification of the business. Included in operating income is a
pre-tax gain of $108 million from the sell-down of seed assets.
Funds under Management increased 9% on the prior year to
$153 billion. The growth in funds under management was driven
by strong flows into Global Equity Funds and short-term cash
mandates from institutional investors.
Key developments include:
• Managed property funds are well positioned in this market
environment with quality assets and strong balance sheets;
• Launched over 14 funds during the year. A number of funds
have grown out of the GAM Seeding Trust, which is the
foundation for many new product development initiatives
within the business;
• CFS Property Management has entered into a joint venture
partnership with Jones Lang LaSalle for the establishment of
Sandalwood Pte Ltd, one of Asia’s largest third-party retail
property asset management and development businesses;
• First State Investments won “Specialist Group of the Year” at
the Investment Week Fund Manager of the Year Awards in
the UK and the Global Emerging Markets team earned the
top six positions in Professional Adviser magazine’s Hot 100
fund manager rankings; and
• The progressive sell-down of the Group’s interest in AWG
continues, with the remaining 16% holding expected to be
sold in the next financial year.
Colonial First State
Colonial First State provides product packaging, administration,
distribution and advice to retail customers. Cash net profit after
tax was $206 million, an increase of 45% on the prior year.
Underlying profit, which excludes Shareholder
investment
returns, increased by 10% to $193 million.
Net revenue benefited from strong inflows, as investors took
advantage of superannuation legislation changes in June 2007,
and tight expense control also contributed to the result.
18 Commonwealth Bank of Australia Annual Report 2008
FirstChoice flows remained strong in the market with $4.9 billion
in net flows for the year to 30 June 2008. FirstChoice captured
18% of master fund net flows in the year to March 2008.
Key developments include:
• Recognition as Australia’s Best Mastertrust/Wrap provider in
the Wealth Insights 2008 Service Level Survey Reports and
led all other platforms in the categories of service, value for
money and planner usage
(Source: ASSIRT/Wealth
Insights);
• Ranking number one in terms of cash flows in Money
Management’s 2008 Top 50 Platforms Survey;
• Rated by advisers as the best platform and recorded the
highest average satisfaction in the Investment Trends 2007
Planner Technology Report; and
• The addition of eight new investment options following the
launch of the Generation Global Sustainability Fund earlier in
the year. The new options include Australian and Global
infrastructure funds, providing a total of 100 options.
CommInsure
CommInsure is a domestic provider of life and general
insurance. Cash net profit after tax was $253 million, a decline of
25% on the prior year, impacted by significant fall in investment
markets in the second half and the unrealised mark to market
losses of $37 million from widening credit spreads on the
valuation of assets backing the Guaranteed Annuities portfolio.
The life insurance business attracted strong new business
volumes in both retail and wholesale lines driving a 22% growth
in inforce premiums to $1,250 million and a 12% increase in
planned profit margins.
Life experience variations were positive at $12 million albeit at
lower levels than the prior year following a reversion to normal
life claims experience on wholesale life following exceptional
experience in the prior year.
The general insurance business experienced strong new
business growth primarily through cross-sell into the Bank
network. General Insurance operating margins were significantly
impacted by claims associated with major weather events
resulting in a net loss for the year. Key developments include:
• Strong Retail Life sales up 22% on the prior year;
• CommInsure was awarded the Life Insurance Company of
the Year and Annuity provider of the year for 2007 at the
Association of Financial Advisers / Plan For Life awards; and
• General Insurance new business sales increased by 102%
on the prior year through a significant improvement in cross-
sell rates, the launch of a new motor insurance product in the
first half of the year, and the deployment of Branch Insurance
Representatives into the remaining regions of the Group’s
retail branch network.
Operating Expenses
Total operating expenses increased by 7% on the prior year to
$1,262 million, driven by:
•
Investment
Management businesses;
in
the expansion of
the Global Asset
• Growth in employee profit share allocations, commensurate
with profit growth and investment performance; and
• Establishment of motor underwriting and expansion of the
insurance distribution footprint.
Taxation
The effective corporate tax rate on underlying profit for the full
year was 26.7% compared with 30.6% for the prior year.
Wealth Management continued
Funds management income
Insurance income
Total operating income
Volume expense
Net operating income
Operating expenses
Net profit before tax
Corporate tax expense
Underlying profit after tax
Shareholder investment returns after tax
Cash net profit after tax
Funds management income
Insurance income
Total operating income
Volume expense
Net operating income
Operating expenses
Net profit before tax
Corporate tax expense
Underlying profit after tax
Shareholder investment returns after tax
Cash net profit after tax
Funds management income
Insurance income
Total operating income
Volume expense
Net operating income
Operating expenses
Net profit before tax
Corporate tax expense
Underlying profit after tax
Shareholder investment returns after tax
Cash net profit after tax
CFS GAM
$M
1,068
-
1,068
153
915
369
546
136
410
(1)
409
CFS GAM
$M
759
-
759
98
661
310
351
108
243
15
258
CFS GAM
$M
567
-
567
83
484
178
306
68
238
3
241
(1)
Full Year Ended 30 June 2008
Colonial
First State
$M
909
-
909
215
694
416
278
85
193
13
206
CommInsure
$M
280
580
860
177
683
331
352
103
249
4
253
Other
$M
2
-
2
-
2
146
(144)
(48)
(96)
(32)
(128)
Full Year Ended 30 June 2007
Colonial
First State
$M
844
-
844
184
660
407
253
78
175
(33)
142
CommInsure
$M
229
573
802
155
647
316
331
96
235
103
338
Other
$M
(4)
-
(4)
-
(4)
141
(145)
(40)
(105)
(6)
(111)
Half Year Ended 30 June 2008
Colonial
First State
$M
421
-
421
105
316
205
111
35
76
7
83
CommInsure
$M
148
305
453
91
362
175
187
54
133
(28)
105
Other
$M
4
2
6
-
6
93
(87)
(24)
(63)
(15)
(78)
Total
$M
2,259
580
2,839
545
2,294
1,262
1,032
276
756
(16)
740
Total
$M
1,828
573
2,401
437
1,964
1,174
790
242
548
79
627
Total
$M
1,140
307
1,447
279
1,168
651
517
133
384
(33)
351
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
Funds management operating margins
General insurance operating margins
Operating margins
Shareholder investment returns after tax
Cash net profit after tax
Full Year Ended
Half Year Ended
30/06/08
$M
30/06/07
$M
Jun 08 vs
Jun 07 %
30/06/08
$M
31/12/07
$M
Jun 08 vs
Dec 07 %
145
12
117
(25)
249
4
253
130
39
55
11
235
103
338
12
(69)
large
large
6
(96)
(25)
74
11
61
(13)
133
(28)
105
71
1
56
(12)
116
32
148
4
large
9
8
15
large
(29)
(1) Additional information has been provided for this segment in line with the historic level of market disclosure.
Commonwealth Bank of Australia Annual Report 2008 19
Wealth Management continued
Funds Under Management (FUM) (1)
Australian equities
Global equities
Cash and fixed interest
Property and alternative investments
Total
Full Year Ended
Half Year Ended
30/06/08
$M
23,502
35,589
66,729
27,120
152,940
30/06/07
$M
31,199
33,709
48,927
25,850
139,685
Jun 08 vs
Jun 07 %
(25)
6
36
5
9
30/06/08
$M
23,502
35,589
66,729
27,120
152,940
31/12/07
$M
29,618
40,945
66,694
27,102
164,359
Jun 08 vs
Dec 07 %
(21)
(13)
-
-
(7)
(1) FUM does not include the Group’s interests in the China Joint Venture, AWG plc or ENW Limited.
Funds Under Administration (FUA)
Funds under administration – average
Funds under administration – spot
Funds under management – average
Funds under management – spot
Retail Net funds flows (Australian Retail)
Full Year Ended
Half Year Ended
30/06/08
$M
186,696
184,970
152,328
152,940
1,888
30/06/07
$M
157,338
168,810
128,893
139,685
(1,366)
Jun 08 vs
Jun 07 %
19
10
18
9
large
30/06/08
$M
191,721
184,970
158,650
152,940
279
31/12/07
$M
183,548
199,834
152,022
164,359
1,609
Jun 08 vs
Dec 07 %
4
(7)
4
(7)
(83)
Market Share
In the latest Plan for Life market share statistics, the Group remained 1st in total Australian retail market share at 14.2% while FirstChoice
Platform remained flat at 9.6%. Market share for Individual Life Insurance increased to 13.1% in a growing market and CommInsure
continues to maintain the No.1 ranking for Total Life Insurance with 14.3% of the market.
Market Share Percentage
Australian Retail Funds – administrator view (1) (2)
FirstChoice Platform (1) (2)
Australia (Total Life Insurance Risk) (1) (2)
Australia (Individual Life Insurance Risk) (1) (2)
(1) Prior period comparatives have been restated.
(2) As at 31 March 2008.
Annual Inforce Premiums (1)
General insurance
Retail life
Wholesale life
Total
Annual Inforce Premiums (1)
General insurance
Retail life
Wholesale life
Total
Annual Inforce Premiums (1)
General insurance
Retail life
Wholesale life
Total
30/06/08
%
14. 2
9. 6
14. 3
13. 1
As at
31/12/07
%
14. 3
9. 6
14. 1
13. 0
30/06/07
%
14. 1
9. 0
14. 3
12. 9
Opening
Balance
30/06/07
$M
184
530
308
1,022
Opening
Balance
30/06/06
$M
169
486
199
854
Opening
Balance
31/12/07
$M
203
568
323
1,094
Full Year Ended 30 June 2008
Sales/New
Balances
$M
113
156
91
360
Lapses
$M
(39)
(81)
(33)
(153)
(2)
Other
Movements
$M
21
-
-
21
Full Year Ended 30 June 2007
Sales/New
Balances
$M
56
128
176
360
Lapses
$M
(41)
(84)
(64)
(189)
(2)
Other
Movements
$M
-
-
(3)
(3)
Half Year Ended 30 June 2008
Sales/New
Balances
$M
74
83
60
217
Lapses
$M
(19)
(46)
(17)
(82)
(2)
Other
Movements
$M
21
-
-
21
Closing
Balance
30/06/08
$M
279
605
366
1,250
Closing
Balance
30/06/07
$M
184
530
308
1,022
Closing
Balance
30/06/08
$M
279
605
366
1,250
(1) Inforce premium relates to risk business. Savings products are disclosed within Funds Management.
(2) Other movements represent prior year renewals not previously included in comparatives.
20 Commonwealth Bank of Australia Annual Report 2008
Wealth Management continued
Full Year Ended 30 June 2008
Inflows
$M
17,537
2,365
1,767
2,477
24,146
209
24,355
37,097
3,481
159
65,092
17,481
82,573
Outflows
$M
(12,610)
(1,079)
(2,411)
(6,110)
(22,210)
(257)
(22,467)
(17,470)
(1,713)
(267)
(41,917)
(12,042)
(53,959)
Investment
Income &
Other (5)
$M
(5,765)
(904)
90
(2,928)
(9,507)
(163)
(9,670)
(1,720)
3,599
(279)
(8,070)
(4,384)
(12,454)
Net flows
$M
4,927
1,286
(644)
(3,633)
1,936
(48)
1,888
19,627
1,768
(108)
23,175
5,439
28,614
Full Year Ended 30 June 2007
Inflows
$M
17,191
2,603
2,066
2,757
24,617
412
25,029
12,902
1,014
136
39,081
12,704
51,785
Outflows
$M
(7,995)
(7,966)
(2,751)
(7,426)
(26,138)
(257)
(26,395)
(10,037)
(2,411)
(608)
(39,451)
(11,874)
(51,325)
Investment
Income &
Other (5)
$M
4,172
2,040
125
4,061
10,398
536
10,934
1,789
2,331
399
15,453
7,249
22,702
Net flows
$M
9,196
(5,363)
(685)
(4,669)
(1,521)
155
(1,366)
2,865
(1,397)
(472)
(370)
830
460
Half Year Ended 30 June 2008
Inflows
$M
6,613
1,281
751
1,155
9,800
75
9,875
9,827
1,575
95
21,372
7,610
28,982
Outflows
$M
(5,208)
(497)
(1,200)
(2,571)
(9,476)
(120)
(9,596)
(9,776)
(690)
(97)
(20,159)
(5,380)
(25,539)
Investment
Income &
Other (5)
$M
(5,512)
(805)
78
(3,217)
(9,456)
71
(9,385)
(2,421)
774
(278)
(11,310)
(6,997)
(18,307)
Net flows
$M
1,405
784
(449)
(1,416)
324
(45)
279
51
885
(2)
1,213
2,230
3,443
Closing
Balance
30/06/08
$M
38,707
6,257
2,576
27,500
75,040
1,366
76,406
52,376
20,210
3,248
152,240
32,730
184,970
Closing
Balance
30/06/07
$M
39,545
5,875
3,130
34,061
82,611
1,577
84,188
34,469
14,843
3,635
137,135
31,675
168,810
Closing
Balance
30/06/08
$M
38,707
6,257
2,576
27,500
75,040
1,366
76,406
52,376
20,210
3,248
152,240
32,730
184,970
Opening
Balance
30/06/07
$M
39,545
5,875
3,130
34,061
82,611
1,577
84,188
34,469
14,843
3,635
137,135
31,675
168,810
Opening
Balance
30/06/06
$M
26,177
9,198
3,690
34,669
73,734
886
74,620
29,815
13,909
3,708
122,052
23,596
145,648
Opening
Balance
31/12/07
$M
42,814
6,278
2,947
32,133
84,172
1,340
85,512
54,746
18,551
3,528
162,337
37,497
199,834
Funds Under Administration
FirstChoice
Avanteos
Cash management
Legacy products (1)
Retail Products (Plan for Life) (2)
Other retail (3)
Australian retail
Wholesale
Property
Other (4)
Domestically sourced
Internationally sourced
Total Wealth Management
Funds Under Administration
FirstChoice
Avanteos
Cash management
Legacy products (1)
Retail Products (Plan for Life) (2)
Other retail (3)
Australian retail
Wholesale
Property
Other (4)
Domestically sourced
Internationally sourced
Total Wealth Management
Funds Under Administration
FirstChoice
Avanteos
Cash management
Legacy products (1)
Retail Products (Plan for Life) (2)
Other retail (3)
Australian retail
Wholesale
Property
Other (4)
Domestically sourced
Internationally sourced
Total Wealth Management
(1) Includes stand-alone retail and legacy retail products.
(2) Retail products aligned to Plan for Life market release.
(3) Includes listed equity trusts and regular premium plans. These retail products are not reported in market share data.
(4) Includes life company assets sourced from retail investors but not attributable to a funds management product (e.g. premiums from risk products). These amounts
do not appear in retail market share data.
(5) Includes foreign exchange gains and losses from translation of international sourced business.
Commonwealth Bank of Australia Annual Report 2008 21
International Financial Services
Financial Performance and Business Review
Other Asia Pacific Business
incorporates
International Financial Services
the Group’s
banking operations in New Zealand, Fiji, Indonesia, China,
Japan, India and Vietnam. It also includes life insurance and
funds distribution activities in several of these countries.
Cash net profit after tax for the year was $589(1) million, an
increase of 23% on the prior year. After removing the impact of
realised gains and losses associated with the hedge of the New
Zealand operations and other foreign exchange movements the
underlying growth was 17%. This strong profit growth was
attributable to sustained growth in the Group’s New Zealand
businesses, complemented by the growing contribution from
Asian businesses, particularly the China banking investments.
ASB Bank
ASB Bank cash net profit after tax for the year was $428 million.
Excluding the impact of realised gains on the hedge of New
Zealand operations, profit increased 11% on the prior year. This
was a very positive result in a challenging market with
aggressive competition continuing to place downward pressure
on margins and a general slowing in economic activity. The
major drivers of growth were:
• Home loan balances increased by 9% over the year, with
market share increasing to 23.3%. Business banking market
share increased to 8.8% at 30 June 2008, following 17%
growth in balances for the year. Rural lending also showed
strong growth for the year. Retail deposits grew by 13% to
NZD 27.8 billion at 30 June 2008. Market share for retail
deposits was also stable at 21.2%;
• Net interest margin declined by six basis points with the
impact of competition and the increased costs of wholesale
funding partially offset by the higher mix of retail deposits;
•
in 2007. Although
Impairment expenses increased to $34 million from $16
million
loan arrears remain within
acceptable limits, early indications are that the slowing in the
New Zealand economy is starting to impact arrears; and
• ASB continued to focus on service capability, maintaining its
position as leader of the major banks based on recent
customer service surveys and expanding the branch network
with the addition of 10 new branches during the year.
Sovereign Insurance
life
The
predominantly under the Sovereign brand.
insurance operations
in New Zealand operate
Sovereign’s cash net profit after tax for the year was $96 million,
an increase of 3% on the prior year. This result included the
impact of a deterioration in the New Zealand dollar exchange
rate. The main drivers of this result were:
• Positive claims experience particularly in the Death and
Living Assurance/TPD classes;
• Growth in inforce premiums of 11% whilst market share
declined marginally to 31.7% at 31 March 2008, from 31.8%
at 30 June 2007;
• Market leading growth in new business sales with Sovereign
capturing 34.4% of new business sales market share to
March 2008 on a rolling 12 month basis; and
• Positive impact on Shareholder investment returns due to the
fall in corporate bond rates.
(1) Represents Group Management view for the product segment rather than
statutory view.
22 Commonwealth Bank of Australia Annual Report 2008
International Financial Services has grown its presence in the
Asia Pacific region during the year with a number of business
initiatives:
•
•
Indonesia: Following the completion of the acquisition of
Bank Arta Niaga Kencana (ANK) on 26 July 2007 and the
legal merger of Bank ANK with PT Bank Commonwealth
(PTBC) in December 2007, PTBC has continued to focus on
expansion with the addition of eight new branches during the
year which now total 51;
Indonesia: Acquisition of an additional 30% interest held by
the Group’s joint venture partner in PT Astra Life Insurance
business bringing the Group’s shareholding to 80%. The
business provides unit linked investment, traditional life and
disability
its 51 branches
operating in 16 Indonesian cities;
insurance products
through
• Vietnam: Following the granting of a licence to operate a
branch in Ho Chi Minh City in January 2008, the branch will
open in August 2008;
• China: Continued strong growth in profits of the Jinan City
Commercial Bank (11% holding) and Bank of Hangzhou
(formerly Hangzhou City Commercial Bank - 19.9% holding).
The Group also continued to implement its Capability
Transfer Program at both Jinan City Commercial Bank and
the Bank of Hangzhou; and
• The Fiji business performed strongly in 2008 following the
disruptions which arose during the political crisis last year.
There are signs of increasing arrears as the economic
uncertainty continues.
Operating Expense
Operating expenses for the year increased by 11% to $825
million. The increase was due to:
•
Increases in staff costs associated with branch expansion
programs in ASB and PT Bank Commonwealth;
• Acquisitions and start up costs for new operations, including
a branch in Vietnam, full year expenses for Bank ANK in
Indonesia and the acquisition of PT Commonwealth Life;
• Wage inflation averaging 6% in New Zealand reflecting a
the
combination of competitive
introduction of a mandatory employer sponsored savings
scheme (Kiwisaver);
labour markets and
• Wage inflation in China and Indonesia in excess of 10% for
the year; partly offset by
•
Impact of the weaker New Zealand Dollar and Indonesian
Rupiah against the Australian Dollar.
Market Share
Housing market share in New Zealand improved over the year
to 23.3%.
Retail deposit market share in New Zealand was 21.2%, in line
with June 2007.
The market share of inforce premiums at 30 June 2008 was
31.7%, down marginally from June 2007.
Market Share Percentage
NZ lending for housing (1)
NZ retail deposits (1)
NZ retail FUM (1)
NZ annual inforce premium
30/06/08 31/12/07 30/06/07
23. 1
21. 2
15. 8
31. 8
23. 1
21. 3
16. 1
31. 8
23. 3
21. 2
16. 4
31. 7
(1) The prior period comparative has been restated.
International Financial Services continued
Full Year Ended 30 June 2008
(1)
ASB
$M
814
316
1,130
-
-
1,130
484
34
612
184
-
428
-
428
ASB
$M
708
266
974
-
-
974
456
16
502
145
357
-
357
ASB
$M
414
160
574
-
-
574
232
28
314
102
-
212
-
212
Sovereign
$M
-
-
-
48
210
258
194
-
64
(7)
-
71
25
96
Other
$M
101
67
168
-
42
210
147
9
54
(12)
2
64
1
65
Full Year Ended 30 June 2007
Sovereign
$M
-
-
-
46
220
266
180
-
86
10
76
17
93
Other
$M
41
41
82
-
24
106
104
4
(2)
(30)
28
-
28
Half Year Ended 30 June 2008
Sovereign
$M
-
-
-
24
104
128
97
-
31
(5)
-
36
17
53
Other
$M
59
40
99
2
28
129
85
3
41
1
1
39
(11)
28
Total
$M
915
383
1,298
48
252
1,598
825
43
730
165
2
563
26
589
Total
$M
749
307
1,056
46
244
1,346
740
20
586
125
461
17
478
Total
$M
473
200
673
26
132
831
414
31
386
98
1
287
6
293
Net interest income
Other banking income
Total banking income
Funds management income
Insurance income
Total operating income
Operating expenses
Loan impairment expense
Net profit before tax
Corporate tax expense
Minority interests
Underlying profit after tax
Shareholder investment returns after tax
Cash net profit after tax
Net interest income
Other banking income
Total banking income
Funds management income
Insurance income
Total operating income
Operating expenses
Loan impairment expense
Net profit before tax
Corporate tax expense
Underlying profit after tax
Shareholder investment returns after tax
Cash net profit after tax
Net interest income
Other banking income
Total banking income
Funds management income
Insurance income
Total operating income
Operating expenses
Loan impairment expense
Net profit before tax
Corporate tax expense
Minority interests
Underlying profit after tax
Shareholder investment returns after tax
Cash net profit after tax
(1) Additional information has been provided for this segment in line with the historic level of market disclosure.
Commonwealth Bank of Australia Annual Report 2008 23
International Financial Services continued
Major Balance Sheet Items (gross of
impairment)
Home lending
Assets at fair value through Income Statement
Other lending assets
Non-lending interest earning assets
Other assets
Total assets
Debt issues
Deposits (1)
Liabilities at fair value through Income Statement
Other liabilities
Total liabilities
Balance Sheet
Assets
ASB Bank
Other
Total assets
Liabilities
ASB Bank
Other
Total liabilities
30/06/08
$M
28,347
5,186
12,328
1,654
4,119
51,634
3,556
22,810
12,592
3,792
42,750
46,958
4,676
51,634
39,231
3,519
42,750
31/12/07
$M
29,723
7,333
11,088
1,803
4,428
54,375
2,473
23,971
18,724
4,340
49,508
49,434
4,941
54,375
45,542
3,966
49,508
As at
30/06/07
$M
28,581
4,921
11,333
3,102
4,654
52,591
3,970
23,094
12,168
4,569
43,801
47,688
4,903
52,591
39,112
4,689
43,801
Jun 08 vs
Dec 07 %
(5)
(29)
11
(8)
(7)
(5)
Jun 08 vs
Jun 07 %
(1)
5
9
(47)
(11)
(2)
44
(5)
(33)
(13)
(14)
(5)
(5)
(5)
(14)
(11)
(14)
(10)
(1)
3
(17)
(2)
(2)
(5)
(2)
-
(25)
(2)
(1) International Financial Services exclude deposits held in other overseas countries (30 June 2008: $7 billion, 31 December 2007: $8 billion and 30 June 2007: $5 billion).
These deposits are reported within the Premium Business Services segment.
Sources of Profit from Insurance Activities
30/06/08
$M
30/06/07
$M
Jun 08 vs
Jun 07 %
30/06/08
$M
31/12/07
$M
Jun 08 vs
Dec 07 %
Full Year Ended
Half Year Ended
The Margin on Service profit from ordinary
activities after income tax is represented by:
Planned profit margin
Experience variations
Operating margins
Shareholder investment returns after tax
Cash net profit after tax
New Zealand – Funds Under
Administration
Opening balance
Inflows
Outflows
Net Flows
Investment income and Other
Closing balance
New Zealand – Annual Inforce
Premiums
Opening balance
Sales/New Business
Lapses
Other movements
Closing balance
76
11
87
41
128
75
18
93
24
117
1
(39)
(6)
71
9
38
10
48
9
57
38
1
39
32
71
-
large
23
(72)
(20)
30/06/08
$M
8,261
2,382
(2,905)
(523)
(1,403)
6,335
30/06/08
$M
379
54
(14)
(48)
371
Full Year Ended
Half Year Ended
30/06/07
$M
5,865
2,921
(1,618)
1,303
1,093
8,261
Jun 08 vs
Jun 07 %
41
(18)
80
large
large
(23)
30/06/08
$M
7,868
1,332
(1,837)
(505)
(1,028)
6,335
31/12/07
$M
8,261
1,050
(1,068)
(18)
(375)
7,868
Jun 08 vs
Dec 07 %
(5)
27
72
large
large
(19)
Full Year Ended
Half Year Ended
30/06/07
$M
302
55
(14)
36
379
Jun 08 vs
Jun 07 %
25
(2)
-
large
(2)
30/06/08
$M
392
25
(9)
(37)
371
31/12/07
$M
379
29
(5)
(11)
392
Jun 08 vs
Dec 07 %
3
(14)
80
large
(5)
24 Commonwealth Bank of Australia Annual Report 2008
Net interest income (1)
Other banking income (1)
Total operating income
Operating expenses
Loan impairment expense
Underlying profit before tax
Corporate tax expense
Minority interests
Underlying profit after tax
Shareholder investment returns
Cash net profit after tax
Net interest income (1)
Other banking income (1)
Total operating income
Operating expenses
Loan impairment expense
Underlying profit before tax
Corporate tax expense
Minority interests
Underlying profit after tax
Shareholder investment returns
Cash net profit after tax
Net interest income (1)
Other banking income (1)
Total operating income
Operating expenses
Loan impairment expense
Underlying profit before tax
Corporate tax expense
Minority interests
Underlying profit after tax
Shareholder investment returns
Cash net profit after tax
Other
Full Year Ended 30 June 2008
Corporate
Centre
$M
302
(12)
290
(75)
-
365
110
-
255
-
255
Eliminations/
Unallocated
$M
(181)
(16)
(197)
-
130
(327)
(144)
29
(212)
(23)
(235)
Full Year Ended 30 June 2007
Corporate
Centre
$M
277
99
376
(94)
-
470
168
-
302
-
302
Eliminations/
Unallocated
$M
(88)
(13)
(101)
-
(10)
(91)
(27)
27
(91)
-
(91)
Half Year Ended 30 June 2008
Corporate
Centre
$M
160
36
196
(19)
-
215
64
-
151
-
151
Eliminations/
Unallocated
$M
(93)
(32)
(125)
-
125
(250)
(121)
15
(144)
(14)
(158)
Total
$M
121
(28)
93
(75)
130
38
(34)
29
43
(23)
20
Total
$M
189
86
275
(94)
(10)
379
141
27
211
-
211
Total
$M
67
4
71
(19)
125
(35)
(57)
15
7
(14)
(7)
(1) Excludes the impact of reclassification of net swap costs from Net interest income to Other banking income related to certain economic hedges which do not qualify
for AIFRS hedge accounting (30 June 2008: $265 million, 31 December 2007: $164 million and 30 June 2007: $107 million).
Financial Performance
Corporate Centre includes the results of unallocated group
support functions such as Investor Relations, Group Strategy,
Secretariat and Treasury, together with centralised project
spend. Cash net profit after tax has decreased $47 million on the
prior year due largely to the impact of $100 million of additional
funding costs which were absorbed within Treasury income
during the first half of the current year.
Corporate Centre cash net profit after tax increased by $47
million over the prior half due to passing on of additional funding
costs from Treasury to the revenue-generating businesses.
Eliminations/Unallocated includes intra-group elimination entries
arising on consolidation, centrally raised provisions and other
unallocated intra-group revenue and expenses. Cash net profit
after tax has decreased $144 million on the prior year due to a
lending
reduction
interest accrued on
in
balances, a change
the
to
apportionment of deferred tax assets across the Group, a
significant strengthening of the centralised portion of the
collective loan impairment provision, the reversal of a prior
period tax provision and other unallocated intra-group expenses.
intra-group
the methodology relating
the
in
Commonwealth Bank of Australia Annual Report 2008 25
Shareholder Investment Returns
Shareholder Investment Returns
Wealth Management
International Financial Services
Eliminations
Shareholder investment returns before tax
Corporate tax expense
Shareholder investment returns after tax
Full Year Ended
30/06/08
$M
(19)
25
(23)
(17)
(4)
(13)
30/06/07
$M
129
20
-
149
53
96
Jun 08 vs
Jun 07 %
large
25
-
large
large
large
30/06/08
$M
(46)
1
(14)
(59)
(18)
(41)
Half Year Ended
31/12/07
$M
27
24
(9)
42
14
28
Jun 08 vs
Dec 07 %
large
(96)
56
large
large
large
Shareholder investment returns of $17 million before tax was impacted by market volatility, primarily in the property sector.
Shareholder Investment Asset Mix (%)
Local equities
International equities
Property
Sub-total
Fixed interest
Cash
Sub-total
Total
Shareholder Investment Asset Mix ($M)
Local equities
International equities
Property
Sub-total
Fixed interest
Cash
Sub-total
Total
Australia
%
1
-
21
22
26
52
78
100
Australia
$M
10
-
310
320
373
748
1,121
1,441
As at 30 June 2008
New Zealand
%
-
1
-
1
55
44
99
100
As at 30 June 2008
New Zealand
$M
1
4
1
6
246
194
440
446
Asia
%
-
12
32
44
55
1
56
100
Asia
$M
-
11
28
39
49
1
50
89
Total
%
-
1
17
18
34
48
82
100
Total
$M
11
15
339
365
668
943
1,611
1,976
26 Commonwealth Bank of Australia Annual Report 2008
Presentation of Financial Information
Definitions
In this Annual Report, the Group presents its profit from ordinary
activities after tax on a “statutory basis”, which is calculated in
accordance with the Australian equivalents to International
Financial Reporting Standards (“AIFRS”).
The Group also presents its results on a “cash basis”. "Cash
basis" is defined by management as net profit after tax and
minority interests, before the gain on Visa Initial Public Offering,
Provisions for investment and restructuring, defined benefit
superannuation plan income/expense, treasury shares valuation
adjustment and unrealised gains and losses related to hedging
and AIFRS volatility. Management believes "cash basis" is a
meaningful measure of the Group’s performance and it provides
the basis for the determination of the Bank’s dividends.
The Group also presents its Earnings per share on a statutory
basis and on a cash basis. Earnings per share on a statutory
basis is affected by the impact of the gain on the Visa Initial
Public Offering, Provisions for investment and restructuring,
defined benefit superannuation plan income/expense, changes
in the treasury shares valuation adjustment, and unrealised
gains and losses related to hedging and AIFRS volatility.
"Earnings per share (cash basis)" is defined by management as
“cash basis” net profit after tax as described above, divided by
the weighted average of the Bank’s ordinary shares outstanding
over the relevant period.
"Underlying net profit after tax" refers to net profit after tax, “cash
basis”, before shareholder investment returns. "Underlying net
profit after tax" is referred to across all businesses. The
underlying profit is the result of 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.
"Underlying" productivity ratios:
• Exclude Shareholder
investment
returns
from
funds
management and life insurance income;
• Exclude policyholder tax from the funds management income
and life insurance income lines; and
• Exclude the impacts of transition to AIFRS on unwinding
structured transactions.
"Underlying" productivity ratios have been presented to provide
what management believes to be a more relevant presentation
of productivity
these
adjustments enable comparison of productivity ratios from period
to period to be more meaningful as it reflects the Group’s core
operating performance.
ratios. Management believes
that
Commonwealth Bank of Australia Annual Report 2008 27
Integrated Risk Management
Risk Management
Market Risk
The Risk Committee of the Board oversees credit, market
Market risk is the potential of loss arising from adverse changes
(traded and non-traded), funding and liquidity, operational and
in interest rates, foreign exchange prices, commodity and equity
strategic business, business continuity, compliance and security
prices, credit spreads, and implied volatility levels for all assets
risks assumed by the Group in the course of carrying on its
and liabilities where options are transacted. Market risk also
business. Further information of the role and function of the Risk
includes risks associated with funding and liquidity management.
Committee is discussed in the Corporate Governance section of
this report.
APRA has specifically requested Australian banks implementing
the Basel II framework to incorporate regulatory capital for
The Group has in place an integrated risk management
interest rate risk in the banking book in their assessment of total
framework to identify, assess, manage and report risks and risk
regulatory capital from 1 July 2008. The Group’s capital
adjusted returns on a consistent and reliable basis. This
calculation
framework has been updated
to
include an
framework requires each business to manage the outcome of its
appropriate allowance for IRRBB capital in its 2009 financial
risk-taking activities, and enjoy the resulting risk adjusted
year regulatory capital calculation.
returns. Risk management professionals employed in each
Business Unit measure risks and provide advice on what risks
might be taken for better returns. These risk professionals report
to the Group Chief Risk Officer, who in turn reports to the CEO
and has direct reporting requirements to the Risk Committee of
the Board.
Independent review of the risk management framework is
carried out through Group Audit.
Basel II
The Basel Committee on Banking Supervision introduced a new
risk based capital framework (Basel II) in June 2004. The new
framework reflects advances in the management of risk since
the introduction of the original Basel Accord in 1988.
The Group initiated its Basel II project in 2004, implementing the
new framework’s principles in order to elevate the Group’s risk
management culture. The Group’s approach to Basel II was to
obtain advanced accreditation (cost effectively) by using and
enhancing existing risk rating
tools and data gathering
capabilities. In June 2006, the Group commenced calculating its
Risk Weighted Assets in accordance with Basel II rules as part
of its accreditation application.
On 10 December 2007, the Group was one of the first major
banks in Australia to gain approval
from the Australian
Prudential Regulation Authority (APRA) to use the advanced
internal ratings-based (AIRB) approach for credit risk and the
advanced measurement approach (AMA) for operational risk for
the purposes of assessing risk weighted assets and regulatory
capital. These approvals took effect from 1 January 2008.
APRA has requested the Group defer the release of its Pillar 3
disclosures until the last quarter of 2008, when the other major
Australian banks release their disclosures, to aid in comparative
analysis.
Further detail on the Group’s assessment of regulatory capital
required under the new Basel II framework is discussed in the
section on Capital Management.
Credit Risk
Credit risk is the potential of loss arising from failure of a debtor
or counterparty to meet their contractual obligations. The
measurement of credit risk is based on an internal credit risk
rating system, which uses analytical tools to estimate expected
and unexpected loss for the credit portfolio.
The introduction of the Basel II framework has enabled the
Group to manage loan portfolios and improve the ability to price
for risk.
Further information on credit risk management is included in
Notes 15 and 42 to the Financial Statements.
28 Commonwealth Bank of Australia Annual Report
The measurement of market risk for traded assets remains
unchanged from the original Basel I approach.
Further information on market risk is included in Note 42 to the
Financial Statements.
Liquidity and Funding Risk
Balance Sheet liquidity risk is the risk of being unable to meet
financial obligations as they fall due. 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.
Further information on liquidity and funding risk is included in
Note 42 to the Financial Statements.
Operational and Strategic Business Risk
risk
The Group’s operational and strategic business
management
its
financial and business goals. Framework objectives approved by
the Risk Committee are:
the achievement of
framework supports
• Maintenance of an effective internal control environment and
system of internal control;
• Demonstration of effective governance,
including a
consistent approach to operational risk management across
the Group;
• Transparency, escalation and resolution of risk and control
incidents and issues;
• Making decisions based upon an
informed risk-return
analysis and appropriate standards of professional practice;
and
• Achieving business growth and enhancing
financial
through efficient and effective operational
performance
processes.
Operational Risk is defined as the risk of economic gain or loss
resulting from:
Inadequate or failed internal processes and methodologies;
•
• People;
• Systems and models used in making business decisions; 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
Strategic business risk is taken into account when defining
business strategy and objectives. The Risk Committee receives
reports on business plans, major projects and change initiatives
(including the Group’s current relocation program NOVA and the
Core System Modernisation Project). The Risk committee
monitors progress and reviews successes compared to plans.
Each business manager is responsible for the identification and
assessment of these risks, and for maintaining appropriate
internal controls. Skilled operational
risk professionals
embedded in the business lead the Group’s operational risk
framework and governance structures to support business
managers through a suite of risk mitigating policies, the reporting
of internal loss incidents and key risk indicators, and qualitative
and quantitative assessment of
risk exposures. Further
governance and control oversight is provided by Group Audit for
this and other risk types.
The Group’s operational
risk measurement methodology
combines expert assessment of individual risk exposures with
internal loss data to calculate operational risk economic capital
and determine potential loss.
As a result of the implementation of the Basel II framework the
Group developed a sophisticated Operational Risk loss incident
database. This has increased awareness of controls and
processes which is contributing to lower operational losses,
including loan frauds.
The Group continues to benchmark and monitor its insurance
risk transfer program for efficiency and effectiveness. This is
primarily achieved through a methodology that optimises total
shareholder returns and determines the most appropriate blend
of economic capital coverage and insurance risk transfer.
Business Continuity Management
Business Continuity Management (“BCM”) within the Group
involves the development, maintenance and testing of advance
action plans to respond to threats that have the potential to
impact business operations. BCM ensures
that business
processes continue with minimal adverse impact on customers,
staff, products, services and brands.
BCM constitutes an essential component of the Group’s risk
management process by providing a controlled response to
business disruption events that could have a significant impact
on the Group’s critical processes and revenue streams. It
includes both cost-effective responses to mitigate the impact of
risk events or disasters and crisis management plans to respond
to crisis events.
A comprehensive BCM program including plan development,
testing and education continues to be implemented across all
business units.
Integrated Risk Management
Compliance Risk Management
Compliance risk is the risk of legal or regulatory sanctions,
material financial loss, or loss of reputation that the Group may
suffer as a result of its failure to comply with the requirements of
relevant laws, regulatory bodies, industry standards and codes.
to meet
the Group’s obligations under
The Group’s Compliance Risk Management Framework
(CRMF) is a key element of the Group’s integrated risk
management framework. The CRMF is consistent with the
Australian Standard on Compliance Programs; as such it is
the
designed
Corporations Act 2001 and the Bank’s Australian Financial
Services Licence. The CRMF
incorporates a number of
components
including Group Standards, a Compliance
Obligations Register and Guidance Notes that detail specific
requirements and accountabilities. These are complemented by
business unit compliance frameworks including obligations
registers, standards and procedures.
The CRMF provides for the assessment of compliance risks,
implementation of controls, monitoring and testing of framework
effectiveness, the escalation, remediation and reporting of
compliance incidents and control weaknesses.
The Group's compliance strategy is based on two fundamental
principles:
• Line Management
in each Business Unit have
the
responsibility to ensure their business is and remains
compliant with legislative, regulatory, industry code and
organisational requirements; and
• Group and Business Unit Regulatory Risk and Compliance
teams work together to monitor, overview and report on
compliance to management, compliance committees and the
Board.
Security Risk
Security risk is defined as threats associated with theft and
fraud, information and IT security, protective security and crisis
management.
The Group’s security risk management framework forms part of
the operational risk framework and sets out the key roles,
responsibilities and processes for security risk management
across the Group.
Commonwealth Bank of Australia Annual Report 2008 29
Capital Management
Capital Management
The Bank is an Authorised Deposit-taking Institution (“ADI”) and
is subject to regulation by APRA under the authority of the
Banking Act 1959. APRA has set minimum regulatory capital
requirements for banks that are consistent with the International
Convergence of Capital Measurement and Capital Standards: A
Revised Framework (“Basel II”) issued by the Basel Committee
on Banking Supervision. These requirements define what is
acceptable as capital and provide for methods of measuring the
risks incurred by the Bank.
The regulatory capital requirements are measured for the
Extended Licence Entity Group (known as “Level One”
comprising the Bank and APRA approved subsidiaries) and for
the Bank and all of its banking subsidiaries (known as “Level
Two” or the “Group).
All entities which are consolidated for accounting purposes are
included within the Group capital adequacy calculations except
for:
• The insurance and funds management operations; and
• The entities through which securitisation of Bank assets are
conducted.
Regulatory capital is divided into Tier One and Tier Two Capital.
Tier One Capital primarily consists of Shareholders’ Equity plus
other capital instruments acceptable to APRA, less goodwill and
other prescribed deductions. Tier Two Capital is comprised
primarily of hybrid and debt instruments acceptable to APRA
less any prescribed deductions. Total Capital is the aggregate of
Tier One and Tier Two Capital. A detailed breakdown of the
components of capital is detailed on pages 32 to 36.
The tangible component of the investment in the insurance and
funds management operations are deducted from capital, 50%
from Tier One and 50% from Tier Two.
Capital adequacy is measured by means of a risk based capital
ratio. The capital ratios reflect capital (Tier One, Tier Two or
Total Capital) as a percentage of total Risk Weighted Assets
(“RWA”). RWA represents an allocation of risks associated with
the Group’s assets and other related exposures.
its capital
the
The Group actively manages
requirements of various stakeholders
rating
agencies and shareholders). This is achieved by optimising the
mix of capital while maintaining adequate capital ratios
throughout the financial year.
to balance
(regulators,
The Group has a range of instruments and methodologies
available to effectively manage capital including share issues
and buybacks, dividend and dividend reinvestment plan policies,
hybrid capital raising and dated and undated subordinated debt
issues. All major capital related initiatives require approval of the
Board.
The Group’s capital position is monitored on a continuous basis
and reported monthly to the Asset and Liability Committee of the
Bank. Three year capital forecasts are conducted on a quarterly
basis and a detailed capital and strategy plan is presented to the
Board annually.
The Group’s capital ratios throughout the 2007 and 2008
Financial Years were in compliance with both APRA minimum
capital adequacy requirements (Tier One Capital 4% and Total
Capital 8%) and the Board Approved Target Ranges of Tier One
Capital 6.5 to 7% and Total Capital 10 to 12%).
30 Commonwealth Bank of Australia Annual Report 2008
The Total Capital target range was amended in 2008 from a
range of 9 to 11% to a range of 10 to 12% in order to align with
the Group’s strategy to apply for U.S. Financial Holding
Company (FHC) status. FHC status requires the Group to
maintain minimum Tier One Capital of 6% and Total Capital at
10% at all times.
The Bank is required to inform APRA immediately of any breach
or potential breach of
its minimum capital adequacy
requirements, including details of remedial action taken or
planned to be taken.
Dividends
Banks may not pay dividends if immediately after payment, they
are unable to meet the minimum capital requirements. Banks
cannot pay dividends from Retained Profits without APRA’s prior
approval. Under APRA guidelines, the expected dividend must
be deducted from Tier One Capital.
Regulatory Changes
Basel II
The Basel Committee on Banking Supervision introduced a new
risk based capital framework (Basel II) in June 2004. The new
framework reflects advances in the management of risk since
the introduction of the original Basel Accord in 1988.
The aim of Basel II is to improve the stability and soundness of
the financial system by more closely linking capital requirements
to risks. This is achieved by allowing banks with sophisticated
risk management systems and techniques to use internal
models to align the assessment of risk with the assessment of
regulatory capital required.
The Basel II framework consists of three pillars:
• Pillar 1 – defines the rules for calculating the minimum
for credit, market and
regulatory capital requirements
operational risk;
• Pillar 2 – addresses the Group’s internal capital adequacy
assessment process (ICAAP); and
• Pillar 3 – specifies public disclosure requirements to enable
market participants to assess key pieces of information on
risk exposures and processes of a banking group.
In June 2006, the Group commenced calculating its RWA in
accordance with Basel II rules as part of its accreditation
application. On 10 December 2007, the Group became one of
the first major banks in Australia to be granted “advanced” Basel
II accreditation by APRA.
As a result of receiving advanced Basel II accreditation, the
advanced internal ratings based approach (AIRB) for credit risk
and
for
the advanced measurement approaches (AMA)
operational risk have been adopted in the calculation of RWA.
There is an agreed methodology for measuring market risk for
traded assets, which remains unchanged from Basel I.
APRA has specifically requested Australian banks to incorporate
regulatory capital for interest rate risk in the banking book in their
assessment of total regulatory capital from 1 July 2008. This is
not a requirement under Basel II Pillar 1. The Group’s capital
calculation
include an
appropriate allowance for IRRBB capital in its 2009 financial
year regulatory capital calculation.
framework has been updated
to
The work undertaken to achieve the advanced accreditation has
in risk
provided
the Group with
measurement and management,
the
flexibility with which the Group manages its decision making and
capital management.
increased sophistication
thereby
increasing
Adoption of the methodology prescribed under the advanced
approach was effective from 1 January 2008.
•
Regulatory capital as at 30 June 2008 has been calculated in
accordance with the Basel II advanced methodology.
The prudential calculations for the prior financial year are in
accordance with the previous Basel I methodology.
APRA made several changes to the definition of capital effective
from 1 January 2008. The material changes applicable to the
Group include:
• Limits on the amount of Residual (25%) and Innovative
Capital (15%) that qualifies as Tier One capital, with any
excess transferred to upper Tier Two Capital. APRA has
granted the Group $974 million transitional relief on the
innovative capital limits until 1 January 2010;
• Regulatory Expected Loss (pre-tax) using stressed loss
given default assumptions associated with the loan portfolio
in excess of eligible credit provisions (net of tax) are
deducted 50% from both Tier One and Tier Two capital;
• The prudential general reserve for credit losses (mostly
comprising the collective provision for impairment losses) is
excluded from Upper Tier Two Capital;
• Total Capital deductions revert to 50% Tier One and 50%
Tier Two Capital deductions;
• Capital floor based on 90% of the capital required under
Basel II, which as at 30 June 2008 has no impact on the
Group’s capital levels; and
• The loss of AIFRS Transitional Relief from Tier One and Two
Capital.
Active Capital Management
The Group maintains a strong capital position with the advanced
Basel II accreditation resulting in an increase in both the Group’s
Tier One and Total Capital ratios, primarily driven by the
reduction in risk weighted assets.
As a result of Basel II advanced accreditation, the Total Capital
Ratio was restated from 9.82% to 12.08% at 31 December
2007. The Tier One capital ratio was restated from 7.41% to
8.17% at 31 December 2007.
As at 30 June 2008 the Tier One and Total Capital ratio are
8.17% and 11.58% respectively.
RWA are $206 billion at 30 June 2008. This represents an $8
billion increase from the restated Basel II 31 December 2007
level of $198 billion.
Adjusted Common Equity
The Group’s Basel II ACE capital ratio as at 30 June 2008 is
6.47% and compares with 6.58% as at 31 December 2007.
Significant Initiatives
The following significant initiatives were undertaken during the
financial year to actively manage the Bank’s capital:
Tier One Capital
•
•
•
Issue of $1,465 million ($1,443 million net of issue costs)
Perpetual Exchangeable Resaleable Listed Securities
(PERLS IV) in July 2007 which qualify as Non-Innovative
Residual Tier One Capital;
Issue of $709 million shares in October 2007 to satisfy the
Dividend Reinvestment Plan (“DRP”) in respect of the final
dividend for 2006/07;
Issue of $400 million of shares in April 2008 in order to satisfy
the DRP in respect of the interim dividend for 2007/08. A
further $98 million of shares were purchased as part of the
DRP; and
Capital Management
In accordance with APRA guidelines, the estimated issue of
$609 million of shares to satisfy the DRP in respect of the
final dividend for 2007/08. This estimate represents a 30%
participation in the DRP in respect of the final dividend.
Tier Two Capital
•
Issue of the equivalent of $664 million of Lower Tier Two
Capital was raised during the financial year, all of which was
raised in the first half of the financial year.
Regulatory Capital Requirements for Other Major ADIs
in the Group
ASB Bank Limited
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 2008 ASB Bank Limited had a Tier One ratio of 9.4% and
a Total Capital ratio of 11.8%
ASB Bank was
requirements at all times throughout the current financial year.
in compliance with
regulatory capital
In December 2007 ASB Bank Limited received advanced Basel
II accreditation from the Reserve Bank of New Zealand.
Regulatory Capital Requirements for Life Insurance and
Funds Management Business
The Group’s life insurance business in Australia is regulated by
APRA. The Life Insurance Act 1995 includes a two tiered
framework for the calculation of regulatory capital requirements
“capital
for
adequacy”. The capital adequacy test for statutory funds is
always equal to or greater than the solvency test. (1)
insurance companies –
“solvency” and
life
The Group owns Colonial Mutual Life Assurance Society Limited
(“CMLA”), a life insurance company operating in Australia. Life
insurance business previously written by Commonwealth
Insurance Holdings Limited (“CIHL”) was transferred into CMLA
effective 30 June 2007.
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
professional standard “Solvency Reserving for Life Insurers”,
issued by the New Zealand Society of Actuaries.
the Australian Securities and
Fund managers in Australia are subject to ‘Responsible Entity’
regulation by
Investment
Commission (“ASIC”). The regulatory capital requirements vary
depending on the type of Australian Financial Services licence
or Authorised Representatives’ Licence held, but a requirement
of up to $5 million of net tangible assets applies.
APRA supervises approved trustees 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.
The Group’s life insurance and funds management companies
held assets in excess of regulatory capital requirements at 30
June 2008. The Group’s Australian and New Zealand life
insurance and funds management businesses held $949 million
of assets in excess of regulatory solvency requirements at 30
June 2008 (2007: $1,168 million).
(1) The Shareholders’ fund is subject to a separate capital requirement.
Commonwealth Bank of Australia Annual Report 2008 31
Capital Management
Capital Adequacy
Risk-Weighted Capital Ratios (1)
Tier One
Tier Two
Less Deductions
Capital Base
Adjusted Common Equity (2)
Regulatory Capital
Tier One Capital
Fundamental Tier One Capital
Total shareholders’ equity (3)
Adjustments to total shareholders’ equity:
Expected dividend (4)
Estimated reinvestment under Dividend Reinvestment Plan (5)
Treasury shares
Cash flow hedge reserve
General reserve for credit losses (after tax) (6)
Employee compensation reserve
Asset revaluation reserve
Available-for-sale investments reserve
Foreign currency translation reserve related to non-consolidated subsidiaries
Deferred fees
Retained earnings (7)
Trust Preferred Securities 2006 (8)
Minority Interests (9)
Other
Total Fundamental Tier One Capital
Residual Tier One Capital
Innovative Tier One Capital
Irredeemable non-cumulative preference shares (10)
Minority Interests (9)
Eligible loan capital
Total Innovative Capital
Non-Innovative Residual Tier One Capital (11)
Less residual capital in excess of prescribed limits transferred to Upper Tier Two
Capital (12)
Total Residual Tier One Capital
Basel II
30/06/08
%
8. 17
3. 41
-
11. 58
6. 47
Basel II
31/12/07
%
8. 17
3. 91
-
12. 08
6. 58
Basel I
31/12/07
%
7. 41
3. 19
(0. 78)
9. 82
4. 77
30/06/08
$M
31/12/07
$M
31/12/07
$M
Group
Basel I
30/06/07
%
7. 14
3. 41
(0. 79)
9. 76
4. 79
Group
30/06/07
$M
26,137
25,638
25,638
24,444
(2,029)
609
264
(341)
-
39
(195)
41
39
2
752
(939)
(505)
(67)
23,807
3,396
505
209
4,110
1,443
(1,359)
4,194
(1,487)
400
235
(477)
-
81
(181)
72
(13)
54
752
(939)
(505)
(40)
23,590
3,451
505
236
4,192
1,443
(1,592)
4,043
(1,487)
400
235
(477)
-
81
(181)
72
(13)
54
752
(939)
-
(40)
24,095
3,451
-
236
3,687
1,443
-
5,130
(1,939)
485
255
(440)
(350)
51
(185)
35
(8)
97
752
(939)
-
(34)
22,224
3,474
-
245
3,719
-
-
3,719
(1) June 2008 regulatory capital is calculated in accordance with Basel II rules and methodology which was effective from 1 January 2008. The Basel II ratios quoted in the
table above do not make allowance for interest rate risk in the banking book, which is not effective until 1 July 2008. The December 2007 and June 2007 regulatory
capital is reported in accordance with Basel I rules and methodology.
(2) Adjusted Common Equity ("ACE") is one measure considered by Standard & Poor's in evaluating the Bank's credit rating. The ACE ratio for June 2008 has been
calculated using the ACE numerator as a percentage of Basel II RWA with a comparison for December 2007.
(3) Represents total shareholders’ equity as disclosed in the Group's Consolidated Balance Sheet.
(4) Represents expected dividends required to be deducted from current period earnings.
(5) Based on reinvestment experience related to the Bank's Dividend Reinvestment Plan (DRP) as approved by APRA. The DRP in respect of the December 2007 interim
dividend was satisfied by the issue of $400 million of ordinary shares and has been reflected in the December 2007 numbers as detailed in the table above. The shares
to be issued under the DRP in respect of the final 2007 dividend were estimated at 25% as approved by APRA, actual take up was 36.6%.
(6) General reserve for credit loss of $350 million (after tax) transferred to retained earnings December 2007.
(7) Represents the write-down in retained earnings upon adoption of AIFRS within the non-consolidated subsidiaries.
(8) Trust Preferred Securities 2006 issued 15th March 2006 USD 700 million. These instruments qualify as Tier One Innovative Capital of the Bank.
(9) Minority interest classified as Tier One Innovative Capital under Basel II regulations. Comprised predominately of ASB Perpetual Preference Shares of NZD550 million
issued by New Zealand subsidiary entities. These shares are non-redeemable and carry limited voting rights.
(10) APRA approved Innovative Tier One Capital instruments (PERLS II and III and Trust Preferred Securities 2003 and 2006).
(11) Perpetual Exchangeable Resaleable Listed Securities (PERLS IV) of $1,465 million (less costs) issued by the Bank in July 2007 and approved by APRA as Tier One
Non-Innovative Capital instruments.
(12) Residual Capital eligible for inclusion as Tier One Capital is subject to an APRA prescribed limit of 25% of Tier One capital with any excess transferred to Upper Tier
Two Capital. The Bank was granted transitional relief to 1 January 2010 with respect to the Innovative Capital limit of 15% of Tier One Capital of $974 million.
32 Commonwealth Bank of Australia Annual Report 2008
Capital Adequacy (continued)
Tier One Capital Deductions – 100%
Goodwill (1)
Capitalised expenses
Capitalised computer software costs
Defined benefit superannuation plan surplus (2)
Deferred tax
Tier One Capital Deductions – 50% (3)
Equity investments in other companies and trusts(4)
Equity investments in non-consolidated subsidiaries (net on intangibles)
Expected impairment loss (before tax) in excess of eligible credit provisions (net
of deferred tax) (5)
Other deductions
Transitional Tier One Capital relief on adoption of AIFRS (6)
Total Tier One Deductions
Total Tier One Capital
Capital Management
Basel II
30/06/08
$M
Basel II
31/12/07
$M
Basel I
31/12/07
$M
(8,010)
(110)
(353)
(1,075)
(38)
(9,586)
(561)
(376)
(587)
(100)
(1,624)
-
(11,210)
16,791
(8,030)
(100)
(316)
(1,314)
(27)
(9,787)
(723)
(296)
(536)
(95)
(1,650)
-
(11,437)
16,196
(8,030)
(100)
(316)
(1,314)
(27)
(9,787)
(870)
-
-
-
(870)
1,641
(9,016)
20,209
Group
Basel I
30/06/07
$M
(7,632)
(136)
(297)
(1,270)
(37)
(9,372)
(700)
-
-
-
(700)
1,641
(8,431)
17,512
(1) Represents total Goodwill and other intangibles (excluding capitalised computer software costs) which is required to be deducted from Tier One Capital.
(2) In accordance with APRA regulations, the surplus (net of tax) in the Bank's defined benefit superannuation fund which is included in shareholders' equity, must be
deducted from Tier One Capital.
(3) Represents 50% Tier One and 50% Tier Two Capital deductions under Basel II rules.
(4) Represents the Group’s non-controlling interest in major infrastructure assets and unit trusts.
(5) Regulatory Expected Loss (pre-tax) using stressed loss given default assumptions associated with the loan portfolio in excess of eligible credit provisions (net of tax) are
deducted 50% from both Tier One and Tier Two capital.
(6) APRA granted transitional relief for Tier One and Tier Two Capital on adoption of AIFRS, which expired 1 January 2008.
Commonwealth Bank of Australia Annual Report 2008 33
Capital Management
Capital Adequacy (continued)
Regulatory Capital
Tier Two Capital
Upper Tier Two Capital
Residual capital in excess of prescribed limits transferred from Tier One Capital (1)
Collective provision for impairment losses
Other credit provisions
Fair value credit adjustments
General reserve for credit losses (pre-tax equivalent)
Prudential general reserve for credit losses (2)
Future income tax benefit related to prudential general reserve for credit losses
Asset revaluation reserve (3)
Upper Tier Two note and bond issues
Other
Total Upper Tier Two Capital
Lower Tier Two Capital
Lower Tier Two note and bond issues (4) (5)
Holding of own Lower Tier Two Capital
Transitional Tier Two capital relief on adoption of AIFRS (6)
Total Lower Tier Two capital
Tier Two Capital Deductions
50% Deductions from Tier Two Capital (7)
Total Tier Two Capital
Total Tier One and Tier Two Capital
Basel II
30/06/08
$M
Basel II
31/12/07
$M
Basel I
31/12/07
$M
Group
Basel I
30/06/07
$M
1,359
1,592
-
-
-
-
-
-
-
-
88
196
57
1,700
6,977
(40)
-
6,937
-
-
-
-
-
-
81
203
45
1,921
7,532
(45)
-
7,487
1,084
28
22
-
1,134
(340)
81
203
45
1,123
7,532
(45)
74
7,561
1,034
23
24
500
1,581
(474)
83
191
34
1,415
6,922
(46)
74
6,950
(1,624)
7,013
23,804
(1,650)
7,758
23,954
-
8,684
28,893
-
8,365
25,877
Total Capital Deductions (8)
Investment in non–consolidated subsidiaries (net of intangible component deducted
from Tier One Capital):
Value of acquired inforce business (9)
Other deductions
Total Capital
-
-
(592)
(409)
-
-
23,804
-
-
23,954
(1,339)
(189)
26,773
(1,339)
(178)
23,951
(1) Residual Capital eligible for inclusion as Tier One Capital is subject to an APRA prescribed limit of 25% of Tier One Capital with any excess transferred to Upper Tier
Two Capital.
(2) Prudential General Reserve for Credit Losses is not eligible for inclusion in Upper Tier Two Capital under Basel II.
(3) APRA allows only 45% of the asset revaluation reserve to be included in Tier Two Capital.
(4) APRA requires these Lower Tier Two note and bond issues to be included as if they were unhedged.
(5) 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.
(6) APRA has granted transitional relief for Tier One and Two Capital on adoption of AIFRS, which expired 1 January 2008.
(7) Represents 50% Tier One and 50% Tier Two Capital deductions under Basel II rules.
(8) Total Capital deductions revert to a 50% Tier One and 50% Tier Two deduction under Basel II regulations.
(9) Value of acquired inforce business transferred to goodwill upon adoption of AIFRS. The deduction as at 30 June 2008 is now reflected in the goodwill deduction in Tier
One Capital.
34 Commonwealth Bank of Australia Annual Report 2008
Capital Adequacy (continued)
Risk Weighted Assets (1)
Credit Risk
Sovereign
Banks
Corporate (2)
SME Corporate (3)
Residential Mortgages (4)
Qualifying Revolving Retail
SME Retail (5)
Other Retail
Equity Portfolio
Trading book repos and other derivatives (6)
Specialised lending subject to the slotting approach (7)
Securitisation (8)
Other Assets (9)
Portfolios subject to Standardised Approach
Impact of regulatory scaling factor (10)
Total Credit Risk
Market Risk - Traded
Operational Risk
Total risk weighted assets (11)
Capital Management
Basel II
30/06/08
$M
Basel II
31/12/07
$M
Basel I
31/12/07
$M
Group
Basel I
30/06/07
$M
1,802
5,292
45,635
31,478
39,128
6,070
4,318
5,274
293
-
21,053
3,536
9,229
5,992
8,340
187,440
4,501
13,560
205,501
1,380
3,780
40,855
31,529
34,693
5,587
5,920
4,623
204
4,851
22,760
2,554
5,968
7,605
9,527
181,836
4,374
12,018
198,228
268,235
4,374
241,224
4,123
272,609
245,347
(1) Risk Weighted Assets for 30 June 2008 are calculated in accordance with the Group's advanced accreditation under Basel II. Risk Weighted Assets under Basel II are
disclosed for 31 December 2007 for the purposes of comparison and align to the "Parallel Run" return provided to APRA at that date. Risk Weighted Assets calculated
under Basel I methodology for 31 December 2007 and 30 June 2007 are shown for information purposes.
(2) Corporate includes commercial credit risk where annual revenues exceed $50 million.
(3) SME Corporate includes small and medium enterprise commercial credit risk where annual revenues are less than $50 million and exposures are greater than $1
million.
(4) Residential Mortgages include retail and small and medium enterprise exposures up to $1 million that are secured by residential mortgage property.
(5) SME Retail includes small and medium enterprise exposures up to $1 million that are not secured by residential mortgage property.
(6) Trading Book repos and derivatives were separately identified in the calculation of RWA during the Basel II "Parallel Run" period. From, 1 January 2008, these
exposures are now reported in asset classes including Sovereign, Banks and Corporate.
(7) Specialised lending subject to the slotting approach includes Income Producing Real Estate and Project Finance.
(8) Securitisation includes Bank-originated securitised exposures and the provision of facilities to customers in relation to securitisation activities.
(9) Other Assets includes Cash, Investments in Related Entities, Fixed Assets and Margin Lending.
(10) Risk Weighted Assets which are calculated in accordance with APRA's approval for advanced accreditation under Basel II, are required to apply a scaling factor of
1.06 to assets that are not subject to specific risk weights. The 31 December 2007 comparative includes scaling impact of $1,531 million applied to Specialised Lending,
Securitisation and Equity Portfolio that was included in the "Parallel Run" calculations of RWA provided to APRA at that date for those credit risk types. This is no longer
applicable to these asset classes.
(11) The transitional capital floors prescribed in APRA Prudential Standard APS 150 "Capital Adequacy: Basel II Transition" did not impact on the Group's Risk Weighted
Assets as at 30 June 2008 or 31 December 2007. Risk Weighted Assets equivalent for Interest Rate Risk in the Banking Book is not included in this table as it is not
effective until 1 July 2008.
Commonwealth Bank of Australia Annual Report 2008 35
Capital Management
Capital Adequacy (continued)
Adjusted Common Equity (1)
Total Fundamental Tier One capital
Deduct:
Goodwill
Capitalised expenses
Capitalised computer software costs
Defined benefit superannuation plan surplus
Investment in non-consolidated subsidiaries (net of intangible component
deducted from Tier One Capital) (2)
Other deductions (3)
Minority interest (4)
Total Adjusted Common Equity
Total risk-weighted assets(5)
Basel II
30/06/2008
$M
Basel II
31/12/2007
$M
Basel I
31/12/2007
$M
23,807
(8,010)
(110)
(353)
(1,075)
(752)
(200)
(13)
13,294
205,501
23,590
(8,030)
(100)
(316)
(1,314)
(592)
(189)
(6)
13,043
198,228
24,095
(8,030)
(100)
(316)
(1,314)
(592)
(189)
(511)
13,043
273,478
Group
Basel I
30/06/2007
$M
22,224
(7,632)
(136)
(297)
(1,270)
(409)
(178)
(512)
11,790
246,047
(1) Adjusted Common Equity ("ACE") is one measure considered by Standard & Poor's in evaluating the Bank's credit rating. The ACE ratio for June 2008 has been
calculated using the ACE numerator as a percentage of Basel II RWA with a comparison for December 2007.
(2) Investment in non-consolidated subsidiaries of $752 million comprises $376 million deduction from both Tier One and Tier Two Capital.
(3) Other deductions of $200 million comprises $100 million deduction from both Tier One and Tier Two Capital.
(4) Represents minority interest balance net of preference shares transferred to innovative capital of $505 million.
(5) In calculating Basel I risk weighted assets in accordance with Standard and Poor's agreed methodology, the equity investment in other companies (December 2007:
$0.9 billion and June 2007: $0.7 billion) was required to be added to risk weighted assets as this amount is not deducted from ACE Capital.
36 Commonwealth Bank of Australia Annual Report 2008
Description of Business Environment
Australia
Financial Services
Financial services providers in Australia offer a wide range of
products and services to consumer and business customers,
encompassing retail, business and institutional banking, funds
management, superannuation,
investment and
stockbroking services. The domestic competitive landscape
includes the four major banks, regional banks, building societies
and credit unions, foreign entrants to the Australian market, local
and global investment banks and fund managers, private equity
firms, insurance companies and third party distributors.
insurance,
Banking
The Australian banking sector performed strongly in the 1990s
and early this millennium, largely driven by strong growth in
lending. More recently, however, there has been some slowing
of credit growth and more active management of credit by
consumers. Together with an increase in the activities of new
entrants, this has led to intensifying competition and to
downward pressure on margins. Over the last six months, the
volatility in global credit markets has impacted all institutions
negatively.
The major banks, which offer a full range of financial products
and services through branch networks, call centres, the internet,
ATMs and third party intermediaries across Australia, have
responded to the increased competition by improving efficiency
and by an increased focus on customer service. This has
resulted in increased customer satisfaction scores across the
industry.
The regional banks, whilst smaller than the majors, mostly now
operate across state borders. They have experienced strong
growth in targeted product segments (especially mortgages)
facilitated by an increased acceptance by customers of third
party brokers. At the present time it is unclear how this will
develop given the higher funding costs incurred and current
uncertainties in financial markets.
Funds Management
Substantial growth continues in funds management, especially
within the superannuation (pension funds) segment although the
downturn in equity markets will impact returns and probably also
inflows. The simplification of superannuation legislation including
the removal of taxes on end benefits for over sixties is expected
to support continuing growth in superannuation investment and
self managed superannuation.
The search for above market return investments has seen an
increased allocation of funds to boutiques, hedge funds, private
equity players and alternative asset classes. The recent
uncertainties have slowed this movement with investors showing
some flight from risk to quality.
Over the last decade, 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.
Insurance
Solid growth in the sector is expected to continue given the
current levels of underinsurance and beneficial treatment of life
insurance
levels of
inside superannuation. Growing debt
households will increase the importance of life insurance and
other wealth protection products.
The general insurance market is mature, diversified and highly
competitive. Margin pressure and other competitive activity will
necessitate targeted growth strategies.
New Zealand
The Group’s activities in New Zealand are conducted through
ASB Group. Through its wholly owned subsidiaries, Sovereign
Group and ASB Group Investments, ASB Group also competes
in the New Zealand insurance and investment market.
in Australia,
the New Zealand banking system
As
is
characterised by strong competition. New Zealand banking
activities are led by four financial services groups, owned by the
big four Australian major banks. In addition, there are several
financial institutions operating largely in the wholesale banking
sector. As in Australia, there is strong competition with non-bank
financial institutions in the areas of funds management and the
provision of insurance. Major trends in the New Zealand market
include continued margin pressure, a slowing housing market,
declining net migration and the commoditisation of retail lending.
Long-term trends that impact Financial Services
Long-term trends that impact financial services providers in
Australia and New Zealand include: increasing consumer power
industry
as a
result of electronic delivery channels;
consolidation; an ageing population
retirement
savings and the provision of retirement solutions placing
pressure on labour supply.
impacting
Financial System Regulation in Australia
Australia has by international standards a high quality financial
system which
financial products and services
consistently regardless of the type of financial institutions
providing them.
regulates
Since July 1998, the main financial services regulators in
Australia have comprised five separate agencies: The Reserve
Bank of Australia, the Australian Prudential Regulation Authority,
the Australian Securities and Investments Commission, the
Australian Transaction Reports and Analysis Centre and the
Australian Competition and Consumer Commission. Each
agency has system-wide responsibilities
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.
for
Reserve Bank of Australia (“RBA”) is responsible for monetary
policy, financial system stability and regulation of the payments
system.
The Australian Prudential Regulation Authority (“APRA”) has
responsibility for the prudential supervision of banks, building
insurance
societies and credit unions,
funds
companies,
(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.
friendly societies and superannuation
life and general
The Australian Securities and Investments Commission (“ASIC”)
has responsibility for regulating and enforcing Company and
financial services laws to protect consumers, investors and
creditors, including the Corporations Act 2001. The Corporations
Act 2001 provides for a single licensing regime for sales, advice
and dealings in financial products and services, consistent and
comparable
financial product disclosure and a single
authorisation procedure for financial exchanges and clearing
and settlement facilities. The current financial services regulatory
framework is intended to facilitate innovation and promote
business while at the same time ensuring consumer protection
and market integrity.
Commonwealth Bank of Australia Annual Report 2008 37
Description of Business Environment
(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 unrelated 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 15 to the Financial Statements.
(iv) Ownership and Control
In pursuit of transparency and risk minimisation, the Financial
Sector (Shareholding) Act 1998 embodies the principle that
regulated financial institutions should maintain widespread
ownership. The Act applies a common 15% shareholding limit
for ADIs, 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
financial
delegate approval powers
institution seeks to acquire another.
to APRA where one
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
in the financial industry, particularly in respect of small business
lending, has increased sufficiently.
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) Fit & Proper and Governance
ADIs are subject to APRA’s “Fit and Proper” and “Governance”
prudential standards. ADIs are required to implement a Board
approved Fit and Proper policy covering minimum requirements
for the fitness and proprietary of their responsible persons
(directors and designated members of senior management etc).
ADIs also have to comply with APRA’s Governance prudential
standard which sets out requirements for Board size and
composition,
independence of directors and other APRA
governance matters.
The Australian Transaction Reports and Analysis Centre
(“AUSTRAC”) has responsibility for overseeing compliance with
the Anti-Money Laundering and Counter Terrorism Financing
Act (being phased in between December 2006 and December
2008) and the Financial Transaction Reports Act 1998. As a
provider of financial services in Australia and internationally, the
Group is committed to the principles of the Financial Action Task
Force as the international standard setter for anti-money
laundering and counter-terrorism financing efforts.
The Australian Competition and Consumer Commission
(“ACCC”) promotes competition and fair trade to benefit
consumers, business and
the
the community
administration of The Trade Practices Act 1974.
through
Supervisory Arrangements
The Bank is an Authorised Deposit-taking Institution (“ADI”)
under the Banking Act and is subject to prudential regulation by
APRA.
In carrying out its prudential responsibilities, APRA closely
monitors the operations of banks to ensure that they operate
within the prudential framework and that sound management
practices are followed.
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 is embodied in a
series of prudential standards and other requirements including:
(i) Capital Adequacy
APRA approved the Group’s application to use the advanced
internal ratings-based approach to credit risk and the advanced
measurement approach to operational risk for the purposes of
calculating capital requirements under the Basel II Framework in
December 2007.
(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 high quality liquid
assets to meet liquidity requirements.
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 Deposit/Bills of other banks and AUD overnight
interbank loans) and other highly liquid market securities. More
detailed comments on the Group’s liquidity and funding risks are
provided in Note 42 to the Financial Statements.
38 Commonwealth Bank of Australia Annual Report 2008
Description of Business Environment
(vii) Supervision of Non-Bank Group Entities
The Australian life insurance company subsidiaries, general
insurance company subsidiaries and
the superannuation
trustees of the Group also come within the supervisory review 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 required to hold a
Registrable Superannuation Entity (“RSE”) licence from APRA.
insurance companies are subject
General
to prudential
standards including capital adequacy, liability valuation, risk
management and reinsurance 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.
financial reporting,
The financial condition of life insurance companies is monitored
through regular
lodgement of audited
accounts, the preparation of a financial conditions report
(prepared by the company’s approved actuary) and supervisory
inspections.
Life and general insurance companies are also subject to similar
Fit and Proper and Governance requirements as those applying
to ADIs.
Critical Accounting Policies and Estimates
The Group’s accounting policies are set out in Note 1 to the
Financial Statements.
Critical accounting policies and estimates are set out in Note 1
(mm) to the Financial Statements.
Commonwealth Bank of Australia Annual Report 2008 39
Sustainability
Sustainability Initiatives
Sustainability initiatives are an integral part of delivering the
Group’s strategic priorities and creating value for shareholders.
During the 2008 financial year the Group implemented and
further developed a number of initiatives designed to:
• Deliver cost savings through eco-efficiency;
• Create an organisational culture that supports customer
service excellence;
• Manage risks and identify new commercial opportunities
associated with climate change and carbon trading;
• Build stronger relationships with the community; and
• Create a workplace that attracts and retains the best people.
These activities are part of being a well-managed organisation
that delivers long-term shareholder value.
is committed
to consistently
The Group
reporting a
comprehensive set of sustainability metrics to Shareholders.
Measuring and publicly reporting these indicators is an important
part of driving performance improvement, and we are continually
working to improve our sustainability data and processes.
More information about the Group’s sustainability objectives and
achievements can be found at
www.commbank.com.au/sustainability
Environment
Reporting and disclosure
The Group has been measuring and voluntarily disclosing its
energy use and greenhouse emissions since 2001, as part of
the Greenhouse Challenge Plus program. Participation in this
program has driven a range of energy efficiency initiatives
across the Group.
The Group is subject to the Federal Government’s Energy
Efficiency Opportunity Act as its operations exceed the minimum
energy consumption threshold set by the Act. The Group
currently undertakes energy assessments for its offices and
branches. A report on the Group’s progress in complying with
the Act will be available on
Internet site
www.commbank.com.au in December 2008.
the Group’s
The Group is also subject to the National Greenhouse and
Energy Reporting Scheme (NGERS). As a result of a long
history of voluntary reporting, the Group is well placed to meet
the NGERS’ mandatory requirements, and is currently revising
its data capture and reporting systems to comply with the new
legislation.
During 2008 the Group voluntarily reported its greenhouse gas
emissions to the Carbon Disclosure Project, an independent
not-for-profit organisation that seeks climate-related information
from the world’s largest companies on behalf of institutional
investors.
This was an opportunity to examine more closely the risks and
opportunities associated with climate change and to contribute
to the international dialogue on disclosure of greenhouse gas
emissions.
Managing greenhouse gas emissions
The Group occupies over 750,000 square metres of office and
retail space across Australia, and is committed to reducing the
environmental impact of these properties.
the period. During
The Group’s gross greenhouse gas emissions have increased
since 2004 due to the size of the Group’s property portfolio
increasing over
the Group
commenced a major restructuring of its commercial property
portfolio, with new premises being opened at Sydney Olympic
Park and major refurbishments at Parramatta. Energy use is
higher during this transition period as both old and new
properties are being run concurrently and fuel use has
increased due to growth in the business.
the year
To address greenhouse gas emissions, the Group has an
ongoing program of refurbishing and upgrading its retail branch
network to deliver significant improvements to lighting and air-
conditioning energy efficiency.
The Group is progressively upgrading its office accommodation
which includes new modern office premises at Sydney Olympic
Park, the Sydney CBD and Parramatta. These new and
upgraded premises will accommodate up to 15,000 people.
Environmental performance has been a key consideration for
these new buildings.
The ongoing nature of the Group’s energy efficiency measures
is demonstrated by the fact that greenhouse gas emissions fell
by 16 percent per square metre of floor space between 2002
and 2007 (1).
Financial Year
Greenhouse gas emissions
Total equivalent tonnes of carbon dioxide (CO2-e) (3) (4) (5)
CO2-e emissions per Full Time Equivalent staff (tonnes) (6)
Energy use
Total (GJ) (7)
Total per FTE (GJ) (6)
2008 (2)
2007
2006
2005
2004
171,738
5. 6
734,386
23. 87
163,509
5. 5
687,839
22. 94
165,935
5. 6
675,307
22. 79
149,781
5. 2
608,661
21. 28
159,823
n/a
638,819
n/a
(1) This figure varies slightly from that reported in the Group’s April 2008 Sustainability Update due to improved accuracy in calculation methodology.
(2) Due to the electricity billing cycle, 18% of 2007-2008 electricity data was estimated to meet publication deadlines. Final data will be provided on the Group’s Internet
site when available.
(3) Total CO2-e emissions consist of emissions relating to consumption of electricity, gas and transport fuel (gasoline and diesel) for domestic retail and commercial
properties and waste (i.e. general waste, which is collected from a number of Group occupied properties).
(4) For all years CO2-e calculations used the Australian Greenhouse Office (AGO) Workbook conversion factors.
(5) CO2-e figures previously reported under Greenhouse Challenge Plus have been restated to reflect full fuel cycle emissions for transport fuels.
(6) Full Time Equivalent (FTE) includes only domestic permanent and contractor employees. Offshore employees are excluded.
(7) Total energy use consists of consumption of electricity, gas and transport fuel (gasoline and diesel). Gas and electricity consumption includes all domestic retail and
commercial occupied properties, both owned and leased, excluding residential and properties where electricity is on-sold. Transport fuel includes gasoline and diesel
fuel purchased for both Group fleet and novated leased vehicles.
40 Commonwealth Bank of Australia Annual Report 2008
Sustainability
People
Trust and team spirit is one of the Group’s key strategic
priorities. The Group recognises the importance of attracting,
retaining and developing good quality people in achieving its
vision of becoming Australia’s
financial services
organisation through excelling in customer service.
finest
The Group has recorded a continual improvement in the
workplace survey results over the last five years and is now
ranked in the top quartile worldwide (source: Gallup).
The Group has put in place many initiatives to address the
turnover and absenteeism rates amongst its staff, which have
increased during the year, as a result of the tightening labour
market. One key initiative is an increased focus on leadership
and talent management. In 2008 the Group launched its
Leadership Capabilities framework that defines the skills,
knowledge and behaviours that leaders need for the Group to
achieve its vision and objectives. The Group is supporting the
development of these capabilities in its people through the
programs offered in its Leadership Curriculum.
Financial Year
Employee satisfaction
Gallup Survey GrandMean (1)
Employee turnover (voluntary) % (2)
Absenteeism
Average days per FTE (3)
Safety
Lost Time Injury Frequency Rate (LTIFR) (5)
2008
2007
2006
2005
2004
4. 28
18. 45
6. 5 (4)
2. 5
4. 13
14. 94
6. 2
3. 6
4. 15
15. 94
6. 0
4. 5
4. 08
n/a
n/a
5. 8
3. 94
n/a
n/a
5. 6
(1) The Gallup Survey GrandMean measures employee engagement out of a possible score of 5.
(2) Employee turnover refers to all voluntary exits of domestic permanent employees.
(3) Absenteeism refers to sick leave of domestic, permanent employees only (since January 2005).
(4) 2007-2008 figure is annualised figure as at 31 May 2008.
(5) LTIFR refers to domestic, permanent employees only. Data is correct as of 30 June 2008; however it may be adjusted in future due to post-publication reporting of
incidents or acceptance/decline of claims for the reporting period. This measure represents the number of working hours lost per million hours worked.
Diversity
Safety
The Group is strongly committed to the health, safety and well-
being of its people.
This commitment is demonstrated through a range of safety
awareness and management activities, which has contributed to
a steady improvement in the Group’s Lost Time Injury
Frequency Rate (LTIFR) over recent years.
Central to the Group’s activities is the continued development
and improvement of its Occupational Health and Safety (OHS)
Management System. A major change during the year was
consolidation of most of the Group’s OHS and Workers
Compensation arrangements from State based jurisdictions to
the Federal Comcare scheme. This has allowed the Group to
simplify OHS compliance documentation and processes, in
order to focus on continuously improving the OHS Management
System and performance.
The Group regularly undertakes both internal and external
audits of its OHS Management System to measure its
performance and ensure that the Group complies with all
relevant legislation in the jurisdictions that it operates.
The Group is committed to creating and maintaining a diverse
workforce. Through diversity the Group recognises and values
the varied perspectives, skills and approaches its people bring to
work.
In 2006 the Group established a Diversity Council, chaired by
the CEO. The Council has adopted five areas of focus:
• Leveraging the skills and talents of the female workforce to
build a leadership pipeline that increases the number of
women in senior leadership positions;
• Creating a framework and culture that enables employees to
better balance their work and personal circumstances
through flexible work arrangements;
• Attracting and retaining mature-age employees;
• Enhancing understanding and acceptance of employees and
customers from culturally diverse backgrounds; and
•
Improving the work environment and opportunities for current
and future employees with disabilities.
Over 20 per cent of employees work part-time with many more
taking advantage of other flexible work arrangements such as
working from home or adjusting their work hours.
The Group is recognised as an Employer of Choice for Women
by the Federal Government’s Equal Opportunity for Women in
the Workplace Agency, a status it has maintained since the
award's inception in 2001. Almost 65 per cent of the domestic
workforce is female. The Group holds women's forums where
senior female managers can develop career skills and network
with one another in an informal environment.
One key diversity initiative is the Group’s partnership with the
Aboriginal Employment Strategy. In the year to June 2008 the
Group provided 60 Year 11 and 12 Indigenous students with
valuable experience in the Group’s retail banking network. This
program is credited towards their Higher School Certificate
qualifications and can help them gain permanent employment
with the Group.
Commonwealth Bank of Australia Annual Report 2008 41
Sustainability
Customers
Contributing to the community
The Group’s Main Financial Institution (MFI) retail customer
satisfaction levels reached a 10-year(1) high during the year and
business customer satisfaction levels also showed significant
improvements. All major banks have experienced a decline in
MFI customer satisfaction, as measured by Roy Morgan
Research, during the six months to June 2008, reflecting a
weakening overall in customer sentiment towards the sector.
CBA experienced the smallest such decline of all the major
banks over this period.
Colonial First State’s FirstChoice product platform achieved the
number one ranking for advisers’ overall satisfaction in the
Wealth Insights MasterTrust survey.
The Group’s focus on sales and service is reflected in the
achievement of a number of awards,
including Money
Magazine’s Bank of the Year for 2008 and the Group’s retail
branch strategy being awarded “Best Branch Strategy” at the
2008 International Retail Banking awards.
More information about customer service initiatives is available
on page 62.
Customer Satisfaction Rating
2008
2007
2006
2005
2004
Retail (1) Business (2)
73. 9%
60. 7%
56. 5%
55. 5%
54. 0%
70. 1%
70. 5%
64. 9%
65. 4%
63. 2%
Wealth (3)
7. 70
7. 96
7. 51
7. 85
7. 86
(1) Roy Morgan Research MFI Customer Satisfaction is based on Australians
aged 14+, Very or Fairly Satisfied, a 6 month moving average. The period
reported is for 1 January to 30 June for each year.
(2) TNS Business Finance Monitor. All businesses with annual turnover to $100
million (excluding agribusinesses). Very or Fairly Satisfied a 12 month
moving average. The period reported is for 1 July to 30 June for each year.
(3) Source: Colonial FirstChoice rated by advisors in Wealth Insights Master
Trust/Wrap survey.
Responsible investment
As part of the Group’s Wealth Management business, Colonial
First State Global Asset Management became a signatory to the
UN Principles for Responsible Investment (PRI) on 1 March
2007, to better align investment practices with the interests of
the Group’s institutional investors globally.
has
established
comprehensive
Since becoming a signatory, Colonial First State Global Asset
internal
Management
governance structures to assist with the implementation of the
PRI across all investment teams and to drive the continuous
improvement of responsible investment practices. Ultimately, the
business believes this will lead to the delivery of improved risk-
adjusted returns for clients.
This governance structure
includes an executive-driven
Responsible Investment Steering Committee, with underlying
investment committees for listed investments and direct assets.
As a result, the risk assessment of environmental, social and
governance
fundamental part of
investment processes across all asset classes and regions.
factors has become a
Colonial First State Global Asset Management has also updated
its corporate governance policy to include environmental and
social engagement factors.
42 Commonwealth Bank of Australia Annual Report 2008
The Group has been an active part of Australian communities
for almost 100 years. This long-term commitment is reflected in
a number of ongoing community partnerships and sponsorship
programs in the areas of health, the arts, sport, social welfare
and financial literacy. Financial literacy is one of the Group’s
major areas of
the
importance of financial literacy education in ensuring a secure
and financially stable Australia.
the community, reflecting
focus
in
The Commonwealth Bank Foundation financial literacy program
involved over 30,000 teenagers and teachers in 2007 through
StartSmart education forums and workshops.
The Group encourages its people to engage with their local
communities and participate in volunteering activities including
St Vincent de Paul Night Patrol and Midnight Basketball. Staff
make regular contributions to the Staff Community Fund and
undertake fundraising activities. In 2008 over $750,000 was
raised for the Fund, to support the health and wellbeing of
Australian children through the Local Grants Program, the
Humour Foundation and Midnight Basketball.
The Group is currently developing the capability to capture and
report on all community contributions and staff volunteering
hours.
Reconciliation Action Plan
The Group launched its Reconciliation Action Plan on 24 July
2008, in partnership with Reconciliation Australia. The Group
recognises that a comprehensive reconciliation program is an
important part of its investment in the community. In the
Reconciliation Action Plan (RAP), the Group has formalised its
commitment to Indigenous Australians and identified how
reconciliation can advance the Group’s objectives and vision.
The implementation of the RAP will enhance the involvement,
inclusion and progression of Indigenous Australians within the
Group and build capability in meeting the needs of Indigenous
customers and staff. The Group will also investigate ways to
support Indigenous Enterprise and the Commonwealth Bank
Foundation will continue to provide financial literacy education
to both Indigenous adults and young people.
Future Developments
The Group has identified five priority areas for sustainability that
it plans to focus on in the coming year:
• Embedding sustainability into business processes, which
includes an increased incorporation of environmental and
into management and decision making
social
processes;
issues
• Supporting diversity and
financial wellbeing
the
community by continuing the focus on financial literacy, and
focus on educational and employment
an
opportunities for Indigenous Australians as part of the
Reconciliation Action Plan;
increased
in
• Helping customers to meet their sustainability goals by
developing products and services to meet their evolving
needs;
• Creating greener workplaces by setting a greenhouse gas
reduction target, as well as addressing measurement and
reporting of water and waste data; and
• Continuing to build a culture of customer service excellence,
with a focus on leadership, recruitment and reward to
ensure culture is aligned with the Group’s goal of being
Australia’s finest financial services organisation.
Introduction
This statement reflects the key aspects of the Commonwealth
Bank’s corporate governance
framework. The Board has
consistently placed great importance on the governance of the
Group, which it believes is vital to the well-being of the
corporation. The Board has adopted a comprehensive framework
of Corporate Governance Guidelines which are designed to
properly balance performance and conformance and thereby
allow the Group 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 Group comply with the revised
‘Corporate Governance Principles and Recommendations’
published in August 2007 by the Australian Securities Exchange
(ASX) Limited’s Corporate Governance Council.
Charter
The role and responsibilities of the Board of Directors are set out
in the Board Charter. The responsibilities include:
Corporate Governance
• Approving documents (including reports and statements to
shareholders) required by the Bank’s Constitution and
relevant regulation;
• Employment of the Chief Executive Officer; and
• Approval of the Group’s major HR policies and overseeing
the development strategies for senior and high performing
executives.
The Board carries out the legal duties of its role in accordance
with the Group’s values of trust, honesty and integrity and having
the Group’s customers, staff,
regard
shareholders and the broader community in which the Group
operates.
interests of
the
to
The Board delegates to the Chief Executive Officer the authority
to achieve the Group’s objective of creating long term value for
its shareholders through providing financial services to its
customers and providing sustained best-in-industry performance
in safety, community reputation and environmental impact.
• The corporate governance of the Group, including the
Composition
There are currently 11 Directors of the Bank and details of their
experience,
and
attendance at meetings are set out in the Directors’ Report.
responsibilities
qualifications,
special
Membership of the Board and Committees is set out below:
establishment of Committees;
• Oversight of the business and affairs of the Group by:
− Establishing, with management, and approving
the
strategies and financial objectives;
− Approving major corporate and capital initiatives and
approving capital expenditure in excess of limits delegated
to management;
− Establishing appropriate systems of risk management
including defining
risk appetite and
the Group’s
establishing appropriate financial policies such as target
capital and liquidity ratios; and
− Monitoring the performance of management and the
environment in which the Group operates;
Board Membership Position Title
Committee Membership
Chairman
Chief Executive
Officer
Director
J M Schubert
R J Norris
J A Anderson
R J Clairs
C R Galbraith
Non-Executive,
independent
Executive
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Board Performance
& Renewal
Chairman
People
& Remuneration
Member
Audit
Risk
Member
Member
Chairman
Member
Member
J S Hemstritch Non-Executive,
Member
Member
S C H Kay
F D Ryan
D Turner
H H Young
A M Mohl (1)
W G Kent (2)
F J Swan (2)
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Member
Member
Chairman
Member
Member
Member
Member
Chairman
Member
(1) Mr Mohl was appointed to the Board with effect from 1 July 2008. In accordance with the Bank’s constitution and the ASX Listing Rules, he will stand for election at the
Annual General meeting to be held on 13 November 2008.
(2) Mr Kent and Mr Swan retired at the Annual General Meeting on 7 November 2007.
Commonwealth Bank of Australia Annual Report 2008 43
Corporate Governance
Constitution
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 nine nor more
than 13 (or such lower number as the Board may from time
to time determine). The Board has determined that the
number of directors shall be 11; 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 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).
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.
themselves
to conduct
to being required
In addition
in
accordance with the ethical policies of the Group, 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 Group’s policies.
• 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 Group
which is material under accounting standards; and
• That no Non-Executive Director personally carries on any
role for the Group other than as a Director of the Bank.
The Group 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 Group. Independence is judged against the ability,
integrity and willingness of the Director to act. The Board has
established a policy limiting Directors' tenures to ensure that skill
sets remain appropriate in a dynamic industry.
Education
Directors participate in an induction program upon appointment
and in a refresher program on a regular basis. The Board has
established a program of continuing education to ensure that it is
kept up to date with developments in the industry both locally
and globally. This includes sessions with local and overseas
experts in the particular fields relevant to the Group’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 process includes an assessment
of the performance of the Board Committees and each Director.
the
After consideration of
the performance
assessment, the Board will determine its endorsement of the
Directors to stand for re-election at the next Annual General
Meeting.
results of
Each Director may from time to time have personal dealings with
the Group. Each Director is involved with other companies or
professional firms which may from time to time have dealings
with the Group. Details of offices held by Directors with other
organisations are set out in the Directors' Report and on the
Group's website. Full details of related party dealings are set out
in notes to the Financial Statements as required by law.
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.
All the current Non-Executive Directors of the Bank have been
assessed as
that
determination, the Board has taken into account (in addition to
the matters set out above):
independent Directors.
reaching
In
• The specific disclosures made by each Director as referred to
above;
• Where applicable, the 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;
44 Commonwealth Bank of Australia Annual Report 2008
Selection of Directors
The Board Performance and Renewal Committee has
developed a set of criteria for Director appointments which has
been adopted by the Board. The criteria are aimed at creating a
Board capable of challenging, stretching and motivating
to achieve sustained outstanding company
management
performance in all respects. These criteria, which are reviewed
annually, aim to ensure that any new appointee is able to
contribute to the Board constituting a competitive advantage for
the Group and:
• Be capable of operating as part of an exceptional team;
• Contribute outstanding performance and exhibit impeccable
values;
• Be capable of inputting strongly to risk management, strategy
and policy;
• Provide skills and experience required currently and for the
future strategy of the Group;
• Be excellently prepared and receive all necessary education;
• Provide
important and significant
input and
questions to management from their experience and skill;
and
insights,
• Vigorously debate and challenge management.
regularly compares
The Committee
the skill base and
experience of existing Directors with that required for the future
strategy of the Group to enable identification of attributes
required in new Directors.
Executive search firms are engaged to identify potential
candidates based on the identified criteria.
Candidates for appointment as Directors are considered by the
Board Performance and Renewal 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 Group 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 Group’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 Board
Performance and Renewal, 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;
Corporate Governance
• The Board will meet regularly with an agenda designed to
provide adequate information about the affairs of the Group,
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
to Company
Directors are entitled
documents and information and to meet with management;
and
to obtain access
• The Group has in place a procedure whereby, after
appropriate consultation, Directors are entitled to seek
independent professional advice, at the expense of the
Group, to assist them to carry out their duties as Directors.
The policy of the Group provides that any such advice is
generally made available to all Directors.
Ethical Standards
Conflicts of Interest
In accordance with the Constitution and the Corporations Act
2001, Directors are required to disclose to the Board any
material contract in which they may have an interest. In
compliance with section 195 of the Corporations Act 2001 any
Director with a material personal interest in a matter being
considered by the Board will not be present when the matter is
being considered and will not vote on the matter. 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
The restrictions imposed by law on dealings by Directors in the
securities of the Group have been supplemented by the Board
of Directors adopting guidelines which further limit any such
dealings by Directors, their spouses, any dependent child, family
Company or family trust.
The guidelines provide, that in addition to the requirement that
Directors not deal in the securities of the Group 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
to
executives of the Group.
those securities. Similar restrictions apply
in
In addition, Group policy prohibits:
• For Directors and executives who report to the Chief
Executive Officer, any hedging of publicly disclosed
shareholding positions;
• For executives, any trading (including hedging) in positions
prior to vesting of shares or options; and
• The use, by Directors and executives who report to the Chief
Executive Officer, of investments of arrangements for margin
borrowing, short selling or stock lending, in connection with
the securities of the Group.
Commonwealth Bank of Australia Annual Report 2008 45
Corporate Governance
Remuneration Arrangements
In carrying out these functions, the Committee:
• Reviews the Financial Statements and reports of the Group;
• Reviews accounting policies to ensure compliance with
current laws, relevant regulations and 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,
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:
in
• The Financial Statements and
accounting standards, other mandatory
statutory requirements; and
their conformity with
reporting and
• The quality of the accounting policies applied and any other
significant judgments made.
The external audit partner attends Audit Committee and Board
meetings by invitation, which is normally all Audit Committee
meetings and the Board meetings when the annual and half
yearly accounts are approved and signed.
The Committee, at least twice a year, meets separately with
each of the chief internal audit executive and the external
Auditor, without management, as part of the process of ensuring
independence of the audit functions.
is
responsible
The Audit Committee
for oversight of
management in the preparation of the Group’s Financial
Statements and financial disclosures. The Audit Committee
relies on
information provided by management and
considers matters raised by the external auditor. The Audit
Committee does not have the duty to plan or conduct audits to
determine whether the Group’s Financial Statements and
disclosures are complete and accurate.
the
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
is
to ensure
independent and effective. Among these are:
the Committee
that
• The Audit Committee consists entirely of independent Non-
Executive Directors, all of whom are financially literate and at
least one has expertise in financial accounting and reporting.
The Chairman of the Risk Committee is also a member of the
Audit Committee. 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 the chief internal audit executive;
• The Audit Committee is responsible for nominating the
external Auditor
for appointment by
the Board
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;
to
• The Audit Committee discusses audit issues and receives
periodic reports from the external Auditors on the quality of
the Group’s systems, its accounting processes and its
financial results. It also receives a report from the Auditors on
any significant matters
the Auditors with
management;
raised by
• 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.
46 Commonwealth Bank of Australia Annual Report 2008
Non-Audit Services
Auditor
Corporate Governance
PricewaterhouseCoopers was appointed as the Auditor of the
Bank at the 2007 Annual General Meeting, effective from the
beginning of the 2008 financial year.
The audit partner from PricewaterhouseCoopers will attend the
2008 Annual General Meeting of the Bank and will be available
to respond to shareholder audit-related questions.
The Group currently requires that the partner managing the audit
for the external Auditor be changed after a period of no longer
than five years.
The Chief Executive Officer is authorised to appoint and remove
the chief internal audit executive only after consultation with the
Audit Committee.
Due to SEC rules that apply to various activities that the Group
continues to undertake in the United States, notwithstanding the
Bank’s de-registration under the Exchange Act, the Group and
its Auditor must continue
to comply with U.S. Auditor
independence requirements.
The Board has in place an External Auditor Services Policy
which requires the Audit Committee (or its delegate) to approve
all audit and non-audit services before engaging the Auditors.
The policy also prohibits the Auditors from providing certain
services to the Group or its affiliates. The objective of this policy
is to avoid prejudicing the independence of the Auditors.
The policy is designed to ensure that the Auditors do not:
• Assume the role of management or act as an employee;
• Become an advocate for the Group;
• Audit their own work;
• Create a mutual or conflicting interest between the Auditor
and the Group;
• Require an indemnification from the Group to the Auditor;
• Seek contingency fees; nor
• Have a direct financial or business interest or a material
indirect financial or business interest in the Group or any of
its affiliates, or an employment relationship with the Group or
any of its affiliates.
Under the policy, the Auditor shall not provide certain services
including the following services:
• Bookkeeping or other services relating to accounting records
or Financial Statements of the Group;
• Financial information systems design and implementation;
• Appraisal or valuation services (other than certain tax only
valuation services) and fairness opinions;
• Actuarial services when approved
in accordance with
independence guidelines;
•
Internal audit outsourcing services;
• Management functions, including acting as an employee and
secondment arrangements;
• Human resources;
• Broker-dealer, investment adviser or investment banking
services;
• Legal services; or
• Expert services for the purpose of advocating the interests of
the Group.
In general terms, the permitted services are:
• Audit services to the Group or an affiliate;
• Related services connected with
lodgement of
statements or documents with the Australian Securities
Exchange (ASX), ASIC, APRA or other regulatory or
supervisory bodies;
the
• 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 Group’s
financing or related activities; and
• Other services pre-approved by the Audit Committee.
Commonwealth Bank of Australia Annual Report 2008 47
Board Performance and Renewal Committee
The Board Performance and Renewal Committee critically
reviews, at least annually, the corporate governance procedures
of the Group and the composition and effectiveness of the
Commonwealth Bank of Australia Board and the Boards of the
major wholly owned subsidiaries. The policy of the Board is that
the Committee shall consist solely of
independent Non-
Executive Directors. The Chief Executive Officer attends the
meeting by invitation.
In addition to its role in proposing candidates for Director
appointment for consideration by the Board, the Committee
reviews fees payable to Non-Executive Directors and reviews,
and advises the Board in relation to Chief Executive Officer
succession planning and Board renewal.
Continuous Disclosure
in place
“Guidelines
securities. The Group’s
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
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 Group’s
activities in compliance with continuous disclosure requirements.
Management procedures are
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 Group’s Executive
Committee. Matters reported are assessed and, where required
by the Listing Rules, advised to the market. A Disclosure
Committee has been
the
requirements for disclosure of information 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.
to provide advice on
throughout
formed
Corporate Governance
Risk Management
Risk Committee
The Risk Committee oversees credit, market (traded and non-
traded), funding and liquidity, operational and strategic business,
business continuity, compliance and security risks assumed by
the Group in the course of carrying on its business. A primary
action is to construct the Group’s risk appetite for consideration
by the Board in its role of oversight of the Internal Capital
Adequacy Assessment Process, which is updated on at least an
annual basis.
the Group’s credit policies and ensures
The Committee guides the setting of risk appetite for credit risks,
considers
that
management maintains a set of credit underwriting standards
designed to achieve portfolio outcomes consistent with the
Group’s risk/return expectations.
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. It guides the setting
of risk appetite for traded and non-traded market risks, including
the establishment of limits for these risk exposures. The
Committee reviews progress in implementing management
procedures and identifying new areas of exposure relating to
market, funding and liquidity risk.
The Committee guides the setting of risk appetite for operational
risks, including ratification of the Group’s operational risk policies
for approval by the Board and reviews and informs the Board of
risk.
the measurement and management of operational
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, with insurance risk
coverage levels disclosed to the Risk Committee for comment.
The Committee oversees risk management of compliance risk
through the Group’s Compliance Risk Management Framework,
which provides
risks,
implementation of controls, monitoring and testing of framework
effectiveness, and the escalation, remediation and reporting of
compliance incidents and control weaknesses.
for assessment of compliance
The Committee meets, at least seven times each year and at
least annually with the Group Chief Risk Officer, in the absence
of other management to allow the Committee to form a view on
the independence of the function.
Framework
The Group has in place an integrated risk management
framework to identify, assess, manage and report risks and risk
adjusted returns on a consistent and reliable basis.
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 15 and 42 to
the Financial Statements.
48 Commonwealth Bank of Australia Annual Report 2008
Ethical Policies
Behaviour Issues
Corporate Governance
The Group’s objective is to create long term value for its
shareholders
its
customers
best-in-industry
performance in safety, community, reputation and environmental
impact.
through providing
and
financial services
producing
sustained
to
The Group’s vision is to be Australia’s finest financial services
organisation through excelling in customer service.
The values of the Group are trust, honesty and integrity. The
Board carries out the legal duties of its role in accordance with
the values and having appropriate regard to the interests of the
Group’s customers, shareholders, staff and
the broader
community in which the Group operates.
Policies and codes of conduct have been established by the
Board and the Group Executive team to support the Group’s
objectives, vision and values.
Statement of Professional Practice
The Group has adopted a code of ethics, known as a Statement
of Professional Practice, which sets standards of behaviour
required of all employees and directors including:
• To act properly and efficiently in pursuing the objectives of
the Group;
• To avoid situations which may give rise to a conflict of
interest;
• To know and adhere to the Group’s Equal Employment
Opportunity policy and programs;
• To maintain confidentiality in the affairs of the Group and its
customers; and
• To be absolutely honest in all professional activities.
These standards are regularly communicated to staff. In
addition, the Group has established insider trading guidelines for
staff to ensure that unpublished price-sensitive information about
the Group or any other Company is not used in an illegal
manner or so that inside information could be used for personal
advantage.
Our People
The Group is committed to providing fair, safe, challenging and
rewarding work, recognising the importance of attracting and
retaining high quality staff and consequently, being in a position
to excel in customer service.
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.
The Group 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
the Chief Security Officer, who
Compliance Officer by
administers the reporting and investigation system. The Chief
Security Officer reports any such matters
the Audit
Committee, noting the status of resolution and actions to be
taken.
to
Code of Conduct
In carrying out its role, the Board will operate in a manner
reflecting the Group’s values and in accordance with its agreed
corporate governance guidelines, the Bank’s Constitution, the
Corporations Act and all other application regulations.
The Board operates and requires at all levels, impeccable
values, honesty and openness. Through its processes it
achieves transparent, open governance and communications
under all circumstances with both performance and
conformance addressed.
The Board’s policies and codes include detailed provisions
dealing with:
• The interface between the Board and management to ensure
there is effective communications of the Board’s views and
decisions resulting in motivation and focus towards long term
shareholder value behaviours and outcomes;
• Disclosure of relevant personal interests so that potential
situations of conflict of interest can be identified and
appropriate action undertaken to avoid compromising the
independence of the Board; and
• Securities dealings in compliance with the Group’s strict
guidelines and in accordance with the values of honesty and
integrity.
Commonwealth Bank of Australia Annual Report 2008 49
Director: International Cricket Council
Other Interests: Institute of Financial Professionals New Zealand
(Fellow), Institute of Directors (Fellow), New Zealand Society of
Accountants (Fellow), Australian Institute Banking and Finance
(Life Member) and Hawkes Bay District Health Board
(Commissioner).
Sir John is a resident of Wellington, New Zealand. Age 61.
Reg J Clairs, AO
Mr Clairs has been a member of the Board since 1999 and is
Chairman of the People & Remuneration Committee. As the
former Chief Executive Officer of Woolworths Limited, he had 33
years experience in retailing, branding and customer service.
Director: David Jones Limited
Other Interests: Australian Institute of Company Directors
(Member).
Mr Clairs is a resident of Queensland. Age 70.
Colin R Galbraith, AM
Mr Galbraith has been a member of the Board since 2000 and is
a member of the Audit Committee and Board Performance &
Renewal Committee. He is a special advisor for Gresham
Partners Limited.
Chairman: BHP Billiton Community Trust.
Director: OneSteel Limited and Australian Institute of Company
Directors.
Other Interests: CARE Australia (Director) and Royal Melbourne
Hospital Neuroscience Foundation (Trustee).
Mr Galbraith is a resident of Victoria. Age 60.
Jane S Hemstritch
Ms Hemstritch was appointed to the Board effective 9 October
2006 and is a member of the People & Remuneration
Committee and Risk Committee.
Ms Hemstritch was Managing Director - Asia Pacific, Accenture
Limited from 2004 until her retirement in February 2007. In this
role, she was a member of Accenture’s global executive
leadership team and oversaw the management of Accenture’s
business portfolio in Asia Pacific. She holds a Bachelor of
Science Degree in Biochemistry and Physiology and has
professional expertise in technology, communications, change
management and accounting. She also has experience across
the financial services, telecommunications, government, energy
and manufacturing sectors and in business expansion in Asia.
Director: The Global Foundation and Tabcorp (subject to
regulatory approval).
Other Interests: Institute of Chartered Accountants in Australia
(Fellow), Institute of Chartered Accountants in England and
Wales (Fellow), Chief Executive Women Inc. (Member) and
Council of Governing Members of The Smith Family.
Ms Hemstritch is a resident of Victoria. Age 55.
Directors’ Report
report,
together with
The Directors of the Commonwealth Bank of Australia submit
their
the
Commonwealth Bank of Australia (“the ‘Bank”) and of the
Group, being the Bank and its controlled entities, for the year
ended 30 June 2008.
report of
financial
the
The names of the Directors holding office during the financial
year are set out below together with details of Directors’
experience,
and
organisations in which each of the Directors has declared an
interest.
responsibilities
qualifications,
special
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 Board
Performance & Renewal Committee and a member of the
People & Remuneration Committee. He holds a Bachelor’s
Degree and PhD in Chemical Engineering and has executive
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 the
former Chairman and Managing Director of Esso Australia Ltd.
Chairman: G2 Therapies Limited, Great Barrier Reef
Foundation.
Director: BHP Billiton Limited, BHP Billiton Plc and Qantas
Airways Limited.
Interests: Academy of Technological Science and
Other
Engineering (Fellow),
Institute of Engineers (Fellow) and
Honorary Member & Past President, Business Council of
Australia.
Dr Schubert is a resident of New South Wales. Age 65.
Ralph J Norris, DCNZM, Managing Director and Chief
Executive Officer
Mr Norris was appointed as Managing Director and Chief
Executive Officer with effect from September 2005. Mr Norris
had been Chief Executive Officer and Managing Director of Air
New Zealand since 2002 and had been a Director of that
Company since 1998. He retired from that Board in 2005 to take
up his position with the Group. He is a member of the Risk
Committee.
Mr Norris has a 30 year career in Banking. He was Chief
Executive Officer of ASB Bank Limited from 1991 until 2001 and
Head of International Financial Services from 1999 until 2001.
In 2005, Mr Norris retired from the Board of Fletcher Building
Limited where he had been a Director since 2001.
Other Interests: New Zealand Institute of Management (Fellow)
and New Zealand Computer Society (Fellow).
Mr Norris is a resident of New South Wales. Age 59.
Sir John A Anderson, KBE
Sir John joined the Board on 12 March 2007. He is a member of
the Risk Committee. Sir John is a highly respected business and
community leader, having held many senior positions in New
Zealand finance including Chief Executive and Director of ANZ
National Bank Limited from 2003 to 2005 and the National Bank
of New Zealand Limited from 1989 to 2003.
In 1994, Sir John was awarded Knight Commander of the Civil
Division of the Order of the British Empire, and in 2005 received
“Outstanding Leadership
inaugural Blake Medal
the
Contributions to New Zealand”.
for
Chairman: Television New Zealand Limited, New Zealand
Cricket Inc., Capital and Coast District Health Board, New
Zealand Venture Investment Fund and New Zealand Meat
Industry Taskforce.
50 Commonwealth Bank of Australia Annual Report 2008
S Carolyn H Kay
Harrison H Young
Directors’ Report
Ms Kay has been a member of the Board since 2003 and is also
a member of
the People & Remuneration and Audit
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: Brambles Industries Limited, Starlight Foundation and
Allens Arthur Robinson.
Other Interests: Australian Institute of Company Directors
(Fellow) and Chief Executive Women’s Inc (member).
Ms Kay is a resident of New South Wales. Age 46.
Fergus D Ryan
Mr Ryan has been a member of the Board since 2000 and is
Chairman of the Audit Committee and a member of the Risk
Committee. He has extensive experience in accounting, audit,
finance and risk management. He was a senior partner of Arthur
Andersen until his retirement in 1999 after 33 years with that firm
including five years as Managing Partner Australasia. Until 2002,
he was Strategic Investment Co-ordinator and Major Projects
Facilitator for the Commonwealth Government.
Director: Australian Foundation Investment Company Limited,
Clayton Utz, National Australia Day Council and Deputy
Chairman for National Library of Australia.
Other Interests: Committee for Melbourne (Counsellor) and
Pacific Institute (Patron).
Mr Ryan is a resident of Victoria. Age 65.
David J Turner
Mr Turner was appointed to the Board in August 2006 and is a
member of the Audit and Board Performance and Renewal
Committees.
Until his retirement on 30 June 2007, Mr Turner was CEO of
Brambles. He occupied that role since October 2003. He joined
Brambles as Chief Financial Officer in 2001 having previously
been Finance Director of GKN plc. Mr Turner has also served as
a member of the Board of Whitbread plc and as Chairman of its
Audit Committee from 2000 until 2006. He is a Fellow of The
Institute of Chartered Accountants in England and Wales and
has wide experience in finance, international business and
governance.
Chairman: Cobham plc.
Director: Brambles Limited.
Mr Turner is a resident of the United Kingdom. Age 63.
Mr Young has been a member of the Board since 2007. He is
Chairman of the Risk Committee and a member of the Audit
Committee. At the time of appointment to the Board, Mr Young
retired as Chairman of Morgan Stanley Australia, a position he
had held since 2003. In an investment banking career of more
than 30 years, he did business in 20 countries and advised eight
foreign governments. From 1997 to 2003 he was a Managing
Director and Vice Chairman of Morgan Stanley Asia. Prior to
that, he spent two years in Beijing as Chief Executive of China
International Capital Corporation.
From 1991 to 1994 he was a senior officer of the Federal
Deposit Insurance Corporation in Washington.
Chairman: Asia Society AustralAsia Centre and Howard Florey
Institute Foundation.
Board member: Florey Neuroscience
Services Volunteer Corps and the Asia Society.
Institutes, Financial
Mr Young is a resident of Victoria. Age 63.
Andrew M Mohl
Mr Mohl was appointed to the Board effective 1 July 2008 and is
a member of the People & Remuneration Committee.
Mr Mohl was Managing Director and Chief Executive Officer of
AMP Limited from October 2002 until his retirement at the end of
December 2007. He has over 30 years of financial services
experience. Mr Mohl was a former Senior and Chief Economist
at ANZ Banking Group and worked at the Reserve Bank of
Australia for eight years and was Deputy Head of Research.
Director: AMP Foundation.
Mr Mohl is a resident of New South Wales. Age 52.
Warwick G Kent, AO (retired 7 November 2007)
Mr Kent was a member of the Board from 2000 until his
retirement in November 2007. He was a member of the Audit
and Risk Committees. He was previously a Director of Colonial
Limited, appointed in 1998. He was Managing Director and
Chief Executive Officer of BankWest until his retirement in 1997.
Prior to joining BankWest, Mr Kent had a long and distinguished
career with Westpac Banking Corporation.
Other interests: Walter and Eliza Hall Trust (Trustee), Australian
Institute of Company Directors (Fellow), Australian Society of
CPAs (Fellow), Finsia (Senior Fellow) and the Chartered
Institute of Company Secretaries (Fellow).
Mr Kent is a resident of Western Australia. Age 72.
Frank J Swan (retired 7 November 2007)
Mr Swan was a member of the Board since 1997 and was
Chairman of the Risk Committee and a member of the Audit
Committee and Board Performance and Renewal Committee.
He holds a Bachelor of Science degree and has 23 years senior
management experience in the food and beverage industries.
Chairman: Centacare Catholic Family Services.
Other Interests: Institute of Directors (Fellow), Australian Institute
of Company Directors (Fellow).
Mr Swan is a resident of Victoria. Age 67.
Commonwealth Bank of Australia Annual Report 2008 51
Directors’ Report
Other Directorships
The Directors held directorships on listed companies within the last three years as follows:
Director
Company
J M Schubert
BHP Biliton Limited
BHP Biliton Plc
Qantas Airways Limited
R J Norris
Air New Zealand Limited
Fletcher Building Limited
R J Clairs
David Jones Limited
Cellnet Group Limited
C R Galbraith
OneSteel Limited
GasNet Australia Group
S C H Kay
Brambles Industries Limited
Symbion Health Limited
F D Ryan
Australian Foundation Investment Company Limited
D J Turner
Brambles Limited
Cobham plc
W G Kent
F J Swan
West Australian Newspaper Holdings Limited
Coventry Group Limited
Perpetual Trustees Australia Limited (Group)
Foster’s Group Limited
National Foods Limited
Southcorp Limited
Date Appointed
Date of Ceasing
(if applicable)
01/06/2000
29/06/2001
23/10/2000
18/02/2002
17/04/2001
22/02/1999
01/07/2004
25/10/2000
17/12/2001
01/06/2006
28/09/2001
08/08/2001
21/03/2006
01/12/2007
02/02/1998
01/07/2001
01/05/1998
26/08/1996
11/03/1997
26/05/2005
30/08/2005
09/08/2005
20/08/2007
10/11/2006
02/03/2007
16/11/2007
01/11/2006
01/11/2006
31/07/2005
31/08/2007
30/06/2005
29/07/2005
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
(1)
Held
11
11
11
11
11
11
11
11
11
11
-
4
4
No. of Meetings
Attended
11
11
11
11
10
10
11
11
10
11
-
4
4
Director
J M Schubert
R J Norris
J A Anderson
R J Clairs
C R Galbraith
J S Hemstritch
S C H Kay
F D Ryan
D J Turner
H H Young
A M Mohl (2)
W G Kent (3)
F J Swan (3)
(1) The number of meetings held during the time the Director was a member of the Board.
(2) Mr Mohl was appointed effective 1 July 2008.
(3) Mr Kent and Mr Swan retired 7 November 2007.
52 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report
Committee Meetings
Risk Committee
Audit Committee
People & Remuneration
Committee
No. of Meetings
(1)
Held
-
-
-
-
7
-
7
7
7
5
-
2
2
No. of Meetings
Attended
-
-
-
-
7
-
7
7
7
5
-
2
2
No. of Meetings
(1)
Held
-
7
7
-
-
3
-
7
-
7
-
3
3
No. of Meetings
Attended
-
7
7
-
-
3
-
7
-
7
-
3
3
Director
J M Schubert
R J Norris
J A Anderson
R J Clairs
C R Galbraith
J S Hemstritch
S C H Kay
F D Ryan
D J Turner
H H Young
A M Mohl (2)
W G Kent (3)
F J Swan (3)
Director
J M Schubert
C R Galbraith
D J Turner
F J Swan (2)
No. of Meetings
(1)
Held
7
-
-
7
-
7
7
-
-
No. of Meetings
Attended
7
-
-
7
-
7
7
-
-
-
-
-
-
-
-
Board Performance & Renewal
Committee
No. of Meetings
(1)
Held
6
6
4
2
No. of Meetings
Attended
6
6
4
2
(1) The number of meetings held during the time the Director was a member of the relevant committee.
(2) Mr Mohl was appointed to the Board effective 1 July 2008.
(3) Mr Kent and Mr Swan retired 7 November 2007.
Principal Activities
(iv) International Financial Services
integrated
financial services
institutional banking, superannuation,
The Commonwealth Bank Group is one of Australia’s leading
including retail,
providers of
business and
life
insurance, general insurance, funds management, broking
services and finance company activities. The principal activities
of the Commonwealth Bank Group during the financial year
were:
(i) Retail Banking Services
The Group provides retail banking services within Australia
including housing loans, credit cards, personal loans, savings
and cheque accounts, and demand and term deposits.
(ii) Premium Business Services
The Group offers commercial products within Australia including
business loans, equipment and trade finance, and rural and
agribusiness products and provides private banking services to
high net worth individuals and direct trading and margin lending
through CommSec. This segment also has wholesale banking
operations in London, New York, Singapore, Hong Kong and
Malta.
(iii) Wealth Management
The Wealth Management segment conducts Australian funds
retail
management business comprising wholesale and
investment, superannuation and retirement funds. Investments
are across all major asset classes including Australian and
international shares, property, fixed interest and cash. This
segment also has funds management businesses in the United
Kingdom and Asia.
The Wealth Management segment also provides Australian term
insurance, disability
trusts,
investment products and general insurance.
insurance, annuities, master
The Group has full service banking operations in New Zealand,
Fiji, Indonesia and Vietnam. The Group conducts wholesale
operations in New York, London, Hong Kong, Singapore and
Malta and is represented in Japan and selected regions of China
together with a representative office in India. The Group’s
International Financial Services segment also conducts Life
Insurance operations in New Zealand, where it has the leading
market share, as well as Asia and the Pacific, and conducts
Funds Management business in New Zealand.
Consolidated Profit
Consolidated net profit after income tax and minority interests for
the financial year ended 30 June 2008 was $4,791 million (2007:
$4,470 million).
The net operating profit for the year ended 30 June 2008 after
tax, and before the gain on Visa Initial Public Offering,
Provisions for investment and restructuring and asset write-offs,
defined benefit superannuation plan income, treasury shares
valuation adjustments, hedging and AIFRS volatility and
shareholder investment returns was $4,746 million. This is an
increase of $315 million or 7% over the year ended 30 June
2007.
The principal contributing factors to the profit increase were
strong growth in banking income following growth in average
lending assets. Funds management and insurance income
growth was strongly supported by solid growth in both average
Funds Under Administration and average inforce premiums.
There have been no significant changes in the nature of the
principal activities of the Group during the financial year.
Commonwealth Bank of Australia Annual Report 2008 53
Directors’ Report
Operating expense growth reflected continued investment in the
business to support productivity and growth initiatives as well as
the effect of inflation on salary and general expenses, the
commencement of spend on a number of strategic initiatives
and ongoing compliance expenditure, partly offset by the
realisation of expense savings.
Dividends
The Directors have declared a fully franked (at 30%) final
dividend of 153 cents per share amounting to $2,029 million.
The dividend will be payable on 1 October 2008 to shareholders
on the register at 5pm on 22 August 2008. Dividends paid in the
year to 30 June 2008 were as follows:
• As declared in the 30 June 2007 Annual Report, a fully
franked final dividend of 149 cents per share amounting to
$1,938 million was paid on 5 October 2007. The payment
comprised cash disbursements of $1,229 million with $709
million being reinvested by participants through the Dividend
Reinvestment Plan (DRP); and
•
In respect of the year to 30 June 2008, a fully franked interim
dividend of 113 cents per share amounting to $1,487 million
was paid on 2 April 2008. The payment comprised direct
cash disbursements of $989 million, with $498 million being
reinvested by participants through the DRP of which $98
million of shares were provided by an on-market purchase.
Review of Operations
An analysis of operations for the financial year is set out in the
Highlights section in pages 6 to 9 and in the sections for Retail
Banking Services, Premium Business Services, Wealth
Management, International Financial Services and Other on
pages 14 to 25. A review of the financial condition of the Group
is set out in the Highlights on page 6.
Changes in State of Affairs
During the year, the Group continued to make significant
progress in implementing a number of strategic initiatives.
The initiatives are designed to ensure a better service outcome
for the Group’s customers.
Progress within the major initiatives included the following:
• Further roll-out of the new branch design with 70 new state-
of-the-art branches completed or under construction by June
2008;
• Market leading product development with the full suite of
rated personal deposit and transaction products receiving a
five star rating from CANNEX;
• Opening of eight new Business Banking centres across New
South Wales, South Australia and Victoria, adding to the
eight centres opened in the prior year;
• Continued investment in Local Business Banking including
the progressive roll-out of Business Bankers across more
than 700 branches and the implementation of the new 24
hour, 7 days a week, Customer Service Centre; and
•
Investment in Branch Insurance representatives across
remaining regions of the Group’s Retail branch network
contributing to solid growth across both life and general new
business sales.
There were no significant changes in the state of affairs of the
Group during the financial year.
54 Commonwealth Bank of Australia Annual Report 2008
Events Subsequent to Balance Date
The Directors are not aware of any matter or circumstance that
has occurred since the end of the financial year that has
significantly affected or may significantly affect the operations of
the Group, the results of those operations or the state of affairs
of the Group in subsequent financial years.
The Bank expects to issue around $609 million of shares in
respect of the Dividend Reinvestment Plan for the final dividend
for the year ended 30 June 2008.
Business Strategies and Future Developments
Accommodation Strategy
The Group is implementing a property strategy to relocate
approximately 3,500 staff from the Sydney Central Business
District (CBD) to Sydney Olympic Park or Parramatta by 30
June 2010. This will result in rationalisation of the existing
Sydney CBD property space.
As part of the Group’s accommodation strategy, staff in the CBD
are being located across fewer sites, including rationalisation of
certain CBD sites in line with lease expiry profiles.
In December 2007
approximately 51,500 square metres at Darling Park, Tower 1.
the Group executed a
lease
for
These changes have not had a material financial impact on the
Group’s results and it is not anticipated that the future relocation
will have a material impact on the Group’s results.
Business Strategies
Business strategies, prospects and future developments, which
may affect the operations of the Group in subsequent financial
years, are referred to in the Chief Executive Officer’s Statement
on pages 4 to 5. 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 Energy Efficiency Opportunities Act 2006 (EEO) which aims
to promote energy efficiencies by business, commenced on 1
July 2006.
The Group, including several Colonial First State managed
funds, is required to comply with the EEO, and has registered
with the Federal Government for this purpose.
As required by the EEO the Group has lodged a five year
energy efficiency assessment plan and will report to the
Government and publicly by 31 December 2008, and each
subsequent year, on assessments carried out under the plan.
The Group does not anticipate any obstacles in complying with
the legislation. Considerable energy efficiency work has already
been undertaken across the Group during the last five years.
From 1 July 2008 the Group becomes subject to the National
Greenhouse and Energy Reporting Scheme (NGERS). As a
result of a long history of voluntary reporting, the Group is well
placed to meet the NGERS’ mandatory requirements, and is
currently revising its data capture and reporting systems to
comply with the new legislation.
The Group is not subject to any other particular or significant
environmental regulation under a law of the Commonwealth or
of a State or Territory, but can incur environmental liabilities as a
lender. The Group has developed credit policies to ensure this is
managed appropriately.
Directors’ Report
Directors’ Shareholdings and options
Particulars of shares held by Directors in the Commonwealth
Bank or in a related body corporate are set out in the
Remuneration Report within this report.
(“EOP”) was approved by
An Executive Option Plan
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.
All option grants have now met their specified performance
hurdles and are available for exercise by participants.
During the financial year and for the period to the date of this
report 125,000 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 33 to the Financial
Statements. No options have been allocated since the beginning
of the 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.
No options have previously been granted to the Chief Executive
Officer. Refer to the Remuneration Report within this report for
further details.
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 50 and 51 of this report, and
the Secretaries of the Commonwealth Bank of Australia, being J
D Hatton, and C F Collingwood are indemnified under articles
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 the above articles in favour of
each Director.
A deed poll has been executed by Commonwealth Bank of
Australia consistent with the above articles in favour of each
secretary and senior manager of the Bank, each Director,
secretary and senior manager of a related body corporate of the
Bank (except where in the case of a partly owned subsidiary the
person is a nominee of an entity which is not a related body
corporate of the Bank unless the Bank's Chief Executive Officer
has certified that the indemnity shall apply to that person), and
any employee of the Bank or any related body corporate of the
Bank who acts as a Director or secretary of a body corporate
which is not a related body corporate of the Bank.
Directors’ Interests in Contracts
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. In accordance with commercial practice,
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.
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.
Commonwealth Bank of Australia Annual Report 2008 55
Directors’ Report - Remuneration Report
Remuneration Report
Key Terms
Introduction
Remuneration Philosophy
People & Remuneration Committee
Remuneration for the Year Ended 30 June 2008
Remuneration Mix
Fixed Remuneration
Short Term Incentive (STI)
Long Term Incentive (LTI)
Group Leadership Share Plan (GLSP)
Equity Reward Plan (ERP)
Group Performance for the Year Ended 30 June 2008
Short Term Performance
Summary of Group Performance
Long Term Performance
Variable Remuneration Life Cycle
Directors’ Remuneration
Managing Director and CEO
Non-Executive Directors
Retirement Benefits
Directors’ Retirement Allowance Scheme
Remuneration of Key Management Personnel and Other Executives
Remuneration of Directors
Remuneration of Executives
Termination Arrangements of Key Management Personnel and Other Executives
STI Allocations to Executives for the Year Ended 30 June 2008
LTI Allocations to Executives for the Year Ended 30 June 2008
Equity Holdings of Key Management Personnel and Other Executives
Shareholdings
Share Trading Policy
Shares Held by Directors
Shares Held by Executives
Total Loans to Key Management Personnel and Other Executives
Individual Loans above $100,000 to Key Management Personnel and Other Executives
Terms and Conditions of Loans
Other Transactions of Key Management Personnel and Other Executives and Related Parties
Audit
56 Commonwealth Bank of Australia Annual Report 2008
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Directors’ Report - Remuneration Report
Key Terms
To assist readers a number of key terms and abbreviations used in the Remuneration Report are set out below:
Term
Definition
Base Remuneration
Cash and non-cash remuneration paid regularly with no performance conditions. Calculated on a total cost
basis and includes any Fringe Benefits tax related to Salary Packaging.
Board
Committee
The Board of Directors of the Bank.
The People & Remuneration Committee of the Board.
Earnings Per Share (EPS)
Net profit after tax divided by the weighted average number of ordinary shares outstanding during the year.
Equity Reward (Performance
Units) Plan (ERPUP)
The Group’s previous cash-based Equity Reward Plan (see below) replicator scheme where grants are
delivered in the form of Performance Units.
Equity Reward Plan (ERP)
The Group's previous long term incentive plan.
Executive Committee
Fixed Remuneration
A management committee comprising the Chief Executive Officer (CEO), Group Executives and any other
executives selected by the CEO.
Consists of Base Remuneration plus employer contributions to superannuation. For further details please
refer to page 59.
Group
Commonwealth Bank of Australia and its subsidiaries.
Group Executive
Key Management Personnel who are also members of the Group’s Executive Committee.
Group Leadership Share Plan
(GLSP)
Key Management Personnel
Long Term Incentive (LTI)
NPAT
Options
Other Executives
The Group's current long term incentive plan from 1 July 2007 for the CEO and Group Executives.
Persons having authority and responsibility for planning, directing and controlling the activities of an entity,
directly or indirectly, including any Director (whether executive or otherwise) of that entity.
The GLSP which grants rights to participating executives that may vest as ordinary shares in the Bank if,
and to the extent that, performance hurdles are met over a three year period. For further details please
refer to page 60.
The ERP and ERPUP which were the Group’s previous long term incentive plans.
Net profit after tax.
Rights to acquire a Bank share on payment of an exercise price if relevant performance hurdles are met.
Those executives who are not Key Management Personnel but are amongst the “Company Executives” or
“Group Executives” as defined by the Corporations Act 2001 and for whom disclosure is required in
accordance with section 300A(1)(c) of the Corporations Act 2001.
Performance Rights
Rights to acquire a Bank share with no payment by the recipient if relevant performance hurdles are met.
PACC
Remuneration
Profit after capital charge.
All forms of consideration paid, payable or provided by the Group, or on behalf of the Group, in exchange
for services rendered to the Group. In reading this report, the term “remuneration” means the same as the
term “compensation” for the purposes of the Corporations Act 2001 and the accounting standard
AASB124.
Remuneration Mix
The weighting of each component of remuneration (Fixed Remuneration, STI and LTI) for each employee
group.
Reward Shares
Shares in the Bank granted under the Equity Reward Plan and subject to a performance hurdle.
Salary Packaging
An arrangement where an employee agrees to forego part of his or her cash component of Base
Remuneration in return for non-cash benefits of a similar value.
Short Term Incentive (STI)
Remuneration paid with direct reference to the Group’s and the individual’s performance over the financial
year. For further details please refer to page 59.
Total Shareholder Return (TSR) Calculated by combining the reinvestment of dividends and the movement in the Bank’s share price, the
performance hurdle used to determine vesting of grants made under the ERP and ERPUP.
Commonwealth Bank of Australia Annual Report 2008 57
Directors’ Report - Remuneration Report
The Group’s performance management framework and setting
of appropriate Key Performance Indicators (KPIs) supports the
Group’s remuneration strategy by providing employees with
competitive remuneration and valuable rewards for outstanding
performance. It has supported the key behaviours which
generate shareholder value and are necessary to support
achievement of the Group’s vision, to be Australia’s finest
financial services organisation through excelling in customer
service.
People & Remuneration Committee
The People & Remuneration Committee of the Board consists
entirely of independent Non-Executive Directors.
It is this independence which allows the Committee to ensure
that the Group’s remuneration framework can reflect the guiding
principles of its remuneration philosophy.
The Committee has an active and ongoing role in evaluating any
proposed enhancements to the framework, and seeks advice
and information from independent sources in order to satisfy
itself
remain
that
competitive.
remuneration practices
the Group’s
The Committee oversees all executive
arrangements and currently consists of:
remuneration
• Mr Clairs (Chairman);
• Ms Hemstritch;
• Ms Kay;
• Mr Mohl (appointed 1 July 2008); and
• Dr Schubert.
The CEO attends Committee meetings by invitation, but does
not attend in relation to matters that can affect him.
The Committee’s activities are governed by its terms of
reference, which are available on the Group’s website at
www.commbank.com.au/shareholder.
Introduction
This Remuneration Report sets out the Group’s remuneration
framework
for Key Management Personnel and Other
Executives. It demonstrates the links between the performance
It discloses
of
remuneration arrangements, equity holdings, loans and other
transactions for Key Management Personnel.
individual’s remuneration.
the Group and
The year ended 30 June 2008 saw some significant and exciting
enhancements to the Group’s remuneration framework. These
enhancements aim to ensure the Group remains competitive in
the employment field of the financial services industry and to
strengthen the motivation of executives to produce superior
performance.
Remuneration Philosophy
The guiding principles of the Group’s remuneration philosophy
for all Key Management Personnel, Other Executives and
employees generally are:
• To motivate employees to produce superior sustainable
performance towards achieving the Group’s vision;
• To be transparent and simple to understand, administer and
communicate;
• To be competitive; and
• To be flexible enough to ensure that the remuneration
arrangements for specific roles can reflect the external
market.
The Group has enjoyed success over the years in delivering
solid shareholder returns. The guiding principles of
the
remuneration philosophy support this success.
58 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report - Remuneration Report
Remuneration for the Year Ended 30 June 2008
The Group provides remuneration for its employees in the
following components:
• Fixed Remuneration;
• Short Term Incentive (STI); and
• Long Term Incentive (LTI).
The weighting of each of these components differs for each
employee, depending on their role and seniority within the
Group. Typically, there is greater weighting on the variable
components (STI and LTI) for more senior employees.
Employees below Group Executive level generally do not
receive an LTI component.
The Group's remuneration structure is designed to motivate
employees to achieve superior performance over the short and
long term. Incentive plans are at their most effective when
employees feel they can directly influence the outcomes to
which they are linked. In the 2008 financial year, in response to
research supporting STI as the most effective driver of
performance, the Group removed LTI and increased the
weighting on STI for General Managers and Executive General
Managers. In order to ensure alignment with shareholder
interests, retention of talent and a continued focus on long term
value creation, the Group also introduced compulsory deferral
of a third of earned STI into shares, to vest after three years.
Remuneration Mix
The relationship of fixed and variable remuneration (potential
short term and long term incentives) is approved for each level
of executive management by the Committee.
For the financial year ended 30 June 2008, the target
remuneration mixes that generally applied for individuals in
each of the following executive groups were:
Target Remuneration Mix
Fixed
STI
LTI
CEO
Group Executives
28%
30%
55%
17%
60%
10%
Executive General Managers
40%
General Managers
50%
60%
50%
Fixed Remuneration
Fixed Remuneration comprises base remuneration, calculated
on a total cost basis including the cost of salary packaging and
employer contributions to superannuation. (Note that salary
packaging arrangements are available
to employees on
individual contracts and to a limited extent to some other
employees.)
The Group sets Fixed Remuneration competitively, facilitated by
regular independent benchmarking analysis and advice.
Short Term Incentive (STI)
All permanent employees participate in some form of STI
arrangement. Individual STI potentials (as applicable) are set at
the beginning of the financial year and payments are determined
through the Group’s performance management framework.
The Committee, in conjunction with the Board, determines the
pool of STI payments available for the performance year with
reference to the Group’s business performance relative to
targets. Those targets that are not disclosed are commercially
sensitive.
The assessment of business performance takes into account
factors which include financial results and progress against the
Group’s five strategic priorities of Customer Service, Business
Banking, Technology and Operational Excellence, Trust and
Team Spirit and Profitable Growth.
For the performance year ended 30 June 2008, STI payments
for General Managers and above were determined with
reference to the performance of the individual and the business
against certain Key Performance Indicators (KPIs).
The weighting of each of these factors is adjusted for each
executive group, to ensure the criteria are within the area of
control and influence of each executive.
Individual performance for Key Management Personnel and
Other Executives is assessed through the Group’s performance
management system by measuring actual results of KPIs
against operating targets and behavioural standards with
reference to their area of responsibility. Examples of KPIs can
include measures such as profitability, market share, balance
growth, costs, margins, customer satisfaction, employee
engagement, succession planning and strategic priorities.
Business performance
factors
discussed earlier.
is assessed against
the
The targets within the Group’s performance management
framework allow for three levels of stretch targets on each KPI.
This means that the ability of the participant to access the STI
potential will only occur where there have been outstanding
levels of performance. Employees must achieve a minimum of
meets expectations on the behaviours and compliance KPIs to
trigger any STI payment.
Commonwealth Bank of Australia Annual Report 2008 59
Directors’ Report - Remuneration Report
Customer satisfaction is of the highest importance to the
Group’s overall performance and forms the basis of its vision.
Three well established independent external surveys will be
used
the Group’s customer satisfaction
performance at the end of the three year performance period.
to determine
These surveys have been chosen as they measure customer
satisfaction across the operations of the Group as follows:
• Roy Morgan, which measures customer satisfaction across
the retail bank base, including CommInsure products sold
through retail bank sales channels;
• TNS Business Finance Monitor, which measures business
banking customer satisfaction; and
• Wealth Insights Service Level Survey Master Trust/WRAP,
which measures wealth management service performance of
master trusts/wraps in Australia.
In order to determine the Group’s level of achievement against
the customer satisfaction performance hurdle, scores are taken
for both the Group and the peer group from the three
independent external surveys. A ranking is then determined and
a vesting scale applied, as follows:
Group Ranking
% of Pool to Vest
1
2
3
4
5
100
75
50
30
0
The Board may exercise discretion to ensure the rewards
resulting
the Group’s
the GLSP are reflective of
performance over the three year period.
from
These performance measures place the Group’s profitability and
customer service uppermost, and reward participants for driving
long term shareholder value. The criteria are based on results
which participants can directly influence and which are publicly
available.
The plan will provide shares to the participants if and when
grants vest. The number of shares to vest will be determined by
the value of the pool that vests at the end of the performance
period and the share price at the end of the relevant
performance period.
For the performance year ended 30 June 2008, STI deferral
applied for the CEO, Group Executives, Executive General
Managers and some other executives. STI payments were
delivered in two components:
• 2/3 as an immediate cash payment; and
• 1/3 used to acquire shares in the Bank which will be held in
trust for three years. After the three year vesting period, the
executive will receive the shares and any dividends accrued
over that time. These shares will generally be subject to
forfeiture in circumstances of dismissal or resignation prior to
the conclusion of the vesting period.
Long Term Incentive (LTI)
The Group’s LTI arrangements for grants made during the year
ended 30 June 2008 are known as the Group Leadership Share
Plan (“GLSP”). New grants under the Group’s previous LTI plan,
the Equity Reward Plan (“ERP”), have ceased.
Group Leadership Share Plan (GLSP)
The objective of the GLSP is to motivate participants to increase
profitability and customer satisfaction in order to improve long
term shareholder value and achieve the Group’s vision.
Participation in the plan is currently limited to the CEO and other
Executive Committee members. For allocations made during the
year ended 30 June 2008, participants will share in a pool to the
value of 2.2% of the growth in the Group’s Profit after Capital
Charge (PACC), capped at a maximum pool of $34 million
subject
following
performance hurdles:
to performance against both of
the
• The Group’s cash NPAT growth over the three year period
must be above the average of NPAT growth of the peer
group; and
• The Group’s customer satisfaction ranking relative to the
peer group.
The current GLSP grant is measured from 1 July 2007 to 1 July
2010 and may vest depending on performance.
Performance Conditions
The Group’s performance relative to the peer group which
comprises of ANZ, NAB, St George and Westpac will be tested
on the third anniversary of the grant.
The relative cash NPAT performance to peers and its link to
growth in PACC have been incorporated into the GLSP to
ensure the Group continues to provide above average long term
financial performance for all stakeholders.
Cash NPAT performance will be measured over the three year
performance period and the hurdle will be measured following
the release of the Group’s full year profit results for the last
financial year of the period. This will then be tested against Cash
NPAT results for peer group companies over the same
performance period. This is a gateway hurdle – if the Group’s
Cash NPAT performance over the period is not above the
average Cash NPAT performance of the peer group then,
subject to Board discretion, nothing will vest under the plan.
The customer satisfaction performance hurdle was chosen as
research has shown a direct correlation between high levels of
customer satisfaction and high shareholder returns.
60 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report - Remuneration Report
Equity Reward Plan (ERP)
New grants under the Group’s previous LTI plan, the ERP, have
ceased. The last grant from July 2006 is not due to be tested for
vesting until 14 July 2009 and this will apply to selected
executives in General Manager roles and above who have
participated in this plan. Grants are delivered in the form of
ordinary shares in the Bank that may vest in the executive in
some proportion, to the extent that a performance hurdle is met.
For a limited number of executives, a cash-based ERP replicator
plan was operated where grants were delivered in the form of
Performance Units. This was known as the Equity Reward
(Performance Unit) Plan (ERPUP).
In assessing whether the performance hurdles for each ERP or
ERPUP grant have been met, the Group receives independent
data from Standard & Poor’s which provides both the Bank’s
TSR growth from the commencement of each grant and that of
the peer group (excluding the Bank, as shown in the below
table). The Bank’s performance against the hurdle is then
determined by ranking each company in the peer group against
the Bank 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 relevant company by
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.
Relative TSR was previously selected as the performance
measure based on its link to shareholder value. However, the
current measures of customer satisfaction and the profitability of
the Group better align executive’s motivation and behaviours
with achieving the Group’s strategic vision and improving long
term shareholder value.
Grants under the ERP and ERPUP were made annually and
vesting is subject to the Bank’s Total Shareholder Return (TSR)
performance relative to the other entities in the peer group over
a three to four year period as follows:
Years of Grant Vesting Scale
2004 & 2005
<50th percentile = Nil Shares
50th – 67th percentile = 50% - 75% of shares
68th – 75th percentile = 76% - 100% of shares
<51st percentile = Nil Shares
51st – 75th percentile = 50% - 100% of shares
2006
AMP
ANZ Group
AXA
Bank of Queensland
Bendigo Bank*
IAG
Peer Group
Macquarie Bank
National Australia Bank
QBE insurance
St George
Suncorp-Metway
Westpac Banking Group
* Adelaide Bank was removed from the peer group when it was taken over by Bendigo Bank in November 2007.
Summary of the Group’s LTI grants
The table below provides a summary of the LTI grants that were in operation during the year ended 30 June 2008.
Year of Grant
Current LTI - GLSP
2007
Previous LTI - ERP
2004
2005
2006
Performance Period
Retesting
Expiry date
if unvested
Status
as at 30 June 2008
July 2007 to July 2010
None
1 July 2010
Unvested
Sept 2004 to Sept 2007
July 2005 to July 2008
July 2006 to July 2009
Every 6 months to Sept 2009
Every 6 months to July 2010
Once only in July 2010
23 Sept 2009
15 July 2010
14 July 2010
100% vested
63rd percentile
69th percentile
The departure from CFS GAM of a number of key employees
participating in the scheme indicated that the arrangements
were insufficiently competitive against arrangements offered
elsewhere in the market.
For the 2008 financial year the Board agreed to remove the
performance hurdles in return for an increase in the vesting
period from three to five years to focus the LTI style
arrangement more directly on the long term retention of key
individuals in an increasingly volatile market.
Other LTI Style Arrangements
Certain executives
in Colonial First State Global Asset
Management (CFS GAM) participate in a specific cash-settled
LTI style arrangement relating to that business. The purpose of
this LTI style arrangement is the retention of key employees with
specific and unique skill sets highly valued in the market. The
decision of investors to grant an investment mandate to CFS
GAM is highly dependent on their confidence in the investment
capability and experience of individual fund managers. As such,
the loss of these individuals from CFS GAM could put current
and future mandates at risk.
During the 2007 financial year this LTI style arrangement was
allocated a three year vesting period and between 50% and
100% of the pool may vest depending on performance hurdles
relating to the CFS GAM profit growth rate over a period of three
years. There were also limits on how much of the vested
entitlement employees were eligible to redeem in any one year.
Commonwealth Bank of Australia Annual Report 2008 61
Directors’ Report - Remuneration Report
Group Performance for the Year Ended 30 June 2008
following
The
the Group’s
table gives an overview of
performance for the year ended 30 June 2008, in the context of
the remuneration criteria. Continuing strong results, driven by
progress made on our strategic priorities towards achieving the
Group’s vision, have meant that variable remuneration awarded
to executives is at the higher end of their potential.
Details of the remuneration outcomes based on business
performance are provided on pages 59
this
remuneration report.
to 61 of
The Key Performance
reference to the Group’s five strategic priorities, being:
Indicators are set with particular
• Customer Service;
• Business Banking;
• Technology and Operational Excellence;
• Trust and Team Spirit; and
• Profitable Growth.
The following table provides a description of the Group’s
performance in relation to each strategic priority for the
performance year ending 30 June 2008.
Summary of Group Performance
Strategic Priorities
Commentary
Customer Service
Business Banking
Technology & Operational
Excellence
Trust & Team Spirit
Profitable Growth
The Group’s vision is “to be Australia’s finest financial services organisation through excelling in customer
service”. The Group has made significant progress on this strategic priority including investing in front line
staff, the refurbishment and redesign of retail branches, the opening of new business banking centres,
the introduction of new and enhanced product offerings and simplified processes and procedures.
These and a number of other initiatives have contributed to improvements in a range of customer service
measures. The Group’s MFI customer satisfaction levels as measured by Roy Morgan(1) reached a 10
year high during the year. The Group was awarded Money Magazine’s “Bank of the Year” for 2008 and
24 of the retail bank’s products have received CANNEX 5-star ratings. The Group also recorded the
strongest gains in Business Customer satisfaction amongst the peer group over the past 12 months
(Source: TNS Business Finance Monitor – businesses with annual turnover to $100 million), FirstChoice
was rated the number one platform by financial advisers as measured by Investment Trends and ASB
Bank once again won The Banker’s “Bank of the Year Award for New Zealand”. There have also been
significant reductions in customer complaints and increases in customer compliments.
Improving the Group’s competitive position in Business Banking remains a key strategic priority, with
recent progress including the introduction of business bankers into selected branches, the acquisition and
successful integration of IWL providing a strategic entry into the wholesale online broking market, the
launch of CommSec banking solutions and the iPhone share trading option, and the continued migration
of business customer to CommBiz, our internet-based business banking offering. During the year
CommSec won the AFR Smart Investor’s “Highest Polling Online Broker 2008” award and Trade Choice
Awards “Best Margin Lender 2008”. Customer Complaints for Premium Business Services declined
significantly and the Group recorded strong above system growth in business deposits during 2008.
Initiatives in this area are designed to deliver greater efficiency across the Group as well as providing
competitive leverage through innovative process and systems. Progress during the year included the
announcement of a $580 million, four year Core Banking Modernisation project to replace the Group’s
legacy systems designed to drive significant improvements in customer service and productivity, further
IT efficiency savings and significant improvements in systems stability and resilience. Good progress was
also made on a number of initiatives designed to improve customer service, increase operational
efficiency and increase security for the Group and its customers. The restructuring of relationships with IT
providers was also advanced through the execution of new application sourcing agreements designed to
deliver greater contestability, flexibility and delivery capability.
A number of key measures indicate the Group is continuing to make good progress on employee
engagement, highlighted by the fact the Group is now placed in the top quartile of the Gallup worldwide
database. There has also been a significant improvement in Workplace Safety, with the Group’s Lost
Time Injury Frequency Rate falling by a further 31%. During the year ASB Bank received the Gallup
“Great Workplace Award 2008” and the Group continued to demonstrate support to the community
through a range of initiatives including financial literacy, environmental partnerships and community
assistance.
The Group continued to make good progress in seeking out and developing new opportunities for
profitable growth and value creation, with highlights including the continued strong performance from our
Indonesian and Chinese businesses, CFS GAM’s focus on a wide range of opportunities to grow its
global footprint, and further strong gains in Group-wide referral rates designed to better leverage the
significant opportunities in our existing customer base.
(1) Source: Roy Morgan Research MFI Customer Satisfaction is based on Australians aged 14+, Very or Fairly Satisfied, a 6 month moving average.
62 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report - Remuneration Report
Cash NPAT performance 2004 to 2008 ($M)
Cash EPS performance 2004 to 2008 (cents)
4,527
4,733
4,086
3,492
2,695
4,700
4,100
3,500
2,900
2,300
1,700
1,100
500
-100
347.1
356.9
318.5
264.8
206.6
s
t
n
e
C
400
350
300
250
200
150
100
50
0
Jun 04
AGAAP
Jun 05
Jun 06
Jun 07
Jun 08
AIFRS
Jun 04
Jun 05
Jun 06
Jun 07
Jun 08
AGAAP
AIFRS
n
o
i
l
l
i
M
$
Long Term Performance
The objective of LTI grants during the year ended 30 June 2008 is to improve shareholder value over the long term. Further details on the
GLSP performance hurdles are on page 60.
For the ERP, long term performance of the Bank is measured on the Bank’s Total Shareholder Return (TSR) relative to its peers.
The following graph indicates the Bank’s TSR by showing share price and dividend growth over the past 5 years.
)
s
t
n
e
c
(
s
d
n
e
d
i
v
i
D
280
260
240
220
200
180
160
140
120
65
60
55
50
45
40
35
30
25
20
)
$
(
e
c
i
r
P
e
r
a
h
S
Jun 04
Jun 05
Jun 06
Jun 07
Jun 08
Dividends Per Share
Share Price
Commonwealth Bank of Australia Annual Report 2008 63
Directors’ Report - Remuneration Report
Variable Remuneration Life Cycle
This life cycle depicts how the variable remuneration arrangements for the CEO and the other Executive Committee members operate for the
year ended 30 June 2008.
July 2007
July 2008
July 2009
July 2010
July 2011
• July 2008 STI
payments
deferred until
Bank shares
vest after three
years.
LTI measurement
and allocation
• GLSP pool is
determined
(percentage of
PACC growth
over the past
three years),
capped at $34
million;
• Performance is
tested against
relative NPAT
and customer
satisfaction
hurdles; and
• Subject to
satisfaction of
the performance
conditions, a
proportion of the
GLSP allocation
pool value may
vest. The
performance
rights already
granted may be
exercisable
immediately into
shares.
• Performance
reviews;
• STI payments
determined; and
• 2/3 of STI
payment is
made
immediately in
cash, the other
1/3 is deferred
into Bank shares
for three years.
The following is set
for each executive:
• STI potential;
and
• Performance
plans (including
Key
Performance
Indicators,
behaviours,
targets and
stretch targets).
The following is set
for the performance
period:
• LTI potential for
each executive,
being a potential
share in the
GLSP pool; and
• Relative NPAT
and customer
satisfaction
performance
hurdles.
STI
LTI
64 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report - Remuneration Report
Directors’ Remuneration
Ralph Norris (Managing Director and CEO)
Summary of Remuneration Arrangements
Mr Norris’ remuneration consists of fixed and variable (at risk)
components.
Fixed Remuneration
the year ended 30 June 2008, Mr Norris’ Fixed
For
Remuneration was 30% of total remuneration.
Variable Remuneration
Mr Norris’ variable remuneration consists of short and long-term
incentives. Variable remuneration for the year ended 30 June
2008 was 70% of total remuneration.
For the year ended 30 June 2008, a Short Term Incentive (STI)
was delivered in two components; 2/3 made as an immediate
cash payment and 1/3 deferred into Bank shares for three years.
Performance was measured against Key Performance
Indicators. The Board has assessed Mr Norris’ performance for
the year and has approved a total STI payment of $2.85 million.
This assessment took into account the following factors:
• Business and financial results;
• The Group’s customer service levels;
• Technology and operational excellence;
• The Group’s core behaviours; and
•
Identifying and developing talent.
Incentive (LTI) was allocated
Following shareholder approval at the 2007 Annual General
Meeting, a Long Term
in
November 2007 in the form of Performance Rights under the
Group Leadership Share Plan (GLSP). Vesting will occur subject
to the satisfaction of the performance conditions - the Group’s
relative NPAT and customer satisfaction ranking against the
peer group at the end of the three year performance period.
(Refer to the GLSP on page 60).
Terms and conditions of appointment
The Board determines Mr Norris’ 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 Norris which was effective from
22 September 2005. Remuneration is subject to review annually
by the Board. Mr Norris’ remuneration arrangements are
detailed on page 68 and follow the same principles as other
executives.
in cases other
Mr Norris’ contract provides for no end date, although he may
resign at any time by giving six months’ notice. The Group may
terminate Mr Norris’ employment,
than
misconduct, on six months’ notice. In this case, the Group will
pay all Fixed Remuneration relating to the notice period, and any
outstanding statutory entitlements. Any unvested STI or LTI
amounts will be payable at the discretion of the Board. 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 Group had terminated his employment.
On ceasing employment with the Group, Mr Norris 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 executives.
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. The total remuneration for Non-Executive
Directors is less than that approval. No component of Non-
Executive Director
upon
remuneration
performance.
contingent
is
On appointment to 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 Group's website, summarises the Board policies and
terms, including remuneration, relevant up to and including the
office of Director. All Non-Executive Directors have entered into
a form of service agreement.
The policy of the Board is that the aggregate amount of fees
should be set at a level which provides the Group with the
necessary degree of flexibility to enable it to attract and retain
the services of Directors of the highest calibre.
The Board Performance and Renewal Committee annually
reviews the fees payable to individual Non-Executive Directors,
takes into account relevant factors and, where appropriate,
receives external advice on comparable remuneration. The last
review was conducted in December 2007 and changes to the
level of remuneration were agreed with effect from 1 January
2008.
Non-Executive Directors have 20% of their annual fees applied
to the mandatory on-market acquisition of shares in the Bank,
under the Non-Executive Director Share Plan. In addition, Non-
Executive Directors can voluntarily elect to sacrifice up to a
further 80% of their fees for the acquisition of shares, or into
superannuation.
The Bank’s Non-Executive Directors’ fee structure provides for a
base fee for all Directors of $210,000, and a base Chairman’s
fee of $695,000. In addition, amounts are payable where
Directors are members of, or chair a Committee. Details of the
breakdown of each Non-Executive Directors' fees as at 30 June
2008 is provided on page 66. The Bank also contributes to
compulsory superannuation on behalf of Non-Executive
Directors.
Commonwealth Bank of Australia Annual Report 2008 65
Directors’ Report - Remuneration Report
Details of Components of Non-Executive Directors’ Fees
Board
Audit Committee
Risk Committee
People & Remuneration Committee
Board Performance & Renewal Committee
Committee Remuneration
Position
Chairman
Non-Executive Director
Chairman
Member
Chairman
Member
Chairman
Member
Chairman
Member
Fee (1)
$
695,000
210,000
50,000
25,000
50,000
25,000
40,000
20,000
10,000
10,000
(1) Non-Executive Directors sacrifice 20% of these fees on a mandatory basis under the Non-Executive Directors Share Plan (NEDSP). Fees were adjusted as from 1
January 2008.
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 12
years’ service. No benefit accrued until the Director had served
three years on the Board. In 2002, the Board decided to
the Directors’ Retirement Allowance Scheme
discontinue
without affecting the entitlements of the existing Non-Executive
Directors at the time. Since that year, new Directors have not
been entitled to participate in the scheme.
The Board resolved with effect from the 2004 Annual General
Meeting to terminate the 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 entitlements of the Non-Executive Directors under the Directors’ Retirement Allowance Scheme are:
Directors’ Retirement Allowance Scheme
Director
J M Schubert
J A Anderson (1)
R J Clairs
C R Galbraith
J S Hemstritch (1)
S C H Kay (1)
F D Ryan
D J Turner (1)
H H Young (1)
W G Kent (2)
F J Swan (2)
Total
Increase in Accrued Benefit
in Year $
-
-
-
-
-
-
-
-
-
-
-
-
Entitlement as at 30 June 2008
$
636,398
-
202,989
159,092
-
-
168,263
-
-
-
-
1,166,742
(1) Sir John Anderson, Ms Hemstritch, Ms Kay, Mr Turner and Mr Young were appointed as Directors after the closure of the scheme.
(2) Mr Kent and Mr Swan retired at the 2007 Annual General Meeting on 7 November 2007 and received payments of $159,092 and $266,173 respectively, representing
their entitlements under the Scheme.
66 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report - Remuneration Report
Remuneration of Key Management Personnel and Other Executives
The executives and Directors listed in the tables below include
Key Management Personnel (KMP) and Other Executives
during the year ended 30 June 2008. The KMP are the CEO,
members of the Group’s Executive Committee and all members
of the Board.
The position and tenure for each of the executives and
Directors
table. The
subsequent tables refer to these employees by surname and
initials only.
listed are shown on
following
the
Name
Position
Tenure (if not full year)
Non-Executive Directors
J M Schubert
J A Anderson
R J Clairs
C R Galbraith
J S Hemstritch
S C Kay
F D Ryan
D J Turner
H H Young
W G Kent
F J Swan
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Managing Director and CEO
R J Norris
Managing Director and CEO
Executives
B J Chapman
D Cohen
D P Craig
S I Grimshaw
M R Harte
G L Mackrell
R M McEwan
J K O’Sullivan
G A Petersen
A Toevs
Other Executives
W Negus
Group Executive, Human Resources and Group Services
Group General Counsel
Group Executive, Financial Services
Group Executive, Premium Business Services
Group Executive, Enterprise IT & Chief Information Officer
Group Executive, International Finance Services
Group Executive, Retail Banking Services
Chief Solicitor and General Counsel
Group Executive, Wealth Management
Group Chief Risk Officer
Retired on 7 November 2007
Retired on 7 November 2007
Commenced on 16 June 2008
Ceased employment on 31 January 2008
Commenced on 23 June 2008
Chief Executive Officer, Colonial First State Global Asset
Management (CEO CFS GAM)
Ceased as CEO CFS GAM on 1 June 2008
Commonwealth Bank of Australia Annual Report 2008 67
Directors’ Report - Remuneration Report
Individual remuneration details for Directors for the year ended 30 June 2008 are set out below:
Remuneration of Directors
Short Term Benefits
Cash
(1)
Fixed
$
Cash STI
payment
At Risk
$
STI Deferred
in Shares
At Risk
$
Other Short
Term
Benefits
$
Post-
employment
Benefits
Share-based Payments
Super-
annuation
(2)
Fixed
$
LTI Reward
Shares
At Risk
$
Performa
nce
Rights
$
NEDSP
(1)
Fixed
$
Termination
Benefits
$
Other Long
Term
Benefits
$
Total
Remuneration
$
188,471
88,260
192,482
175,277
551,342
505,096
113,980
90,171
178,433
51,090
J M Schubert
2008
2007
J A Anderson
2008
2007
R J Clairs
2008
2007
C R Galbraith
2008
2007
J S Hemstritch
2008
2007
S C H Kay
2008
2007
F D Ryan
2008
2007
D J Turner
2008
2007
H H Young
2008
2007
W G Kent (3)
2008
2007
F J Swan (3)
35,834
2008
2007
187,112
Non-Executive Director Total
1,977,111
2008
1,757,806
2007
203,803
63,518
218,542
92,767
196,493
174,553
-
175,901
97,731
42,214
Managing Director and CEO
R J Norris (4)
2008
2007
Director Grand Totals
2008
3,122,450
1,467,450
5,099,561
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
52,570
45,459
17,012
4,598
18,367
15,775
17,983
88,943
90,161
36,759
18,751
15,710
20,848
109,467
104,524
105,257
19,417
5,717
78,363
15,831
52,483
16,840
490,479
465,451
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
137,836
126,603
44,608
12,658
48,121
43,937
47,118
42,427
46,603
29,112
49,123
43,748
54,636
48,595
46,159
35,918
50,951
15,879
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,847
44,088
159,092
-
13,359
46,885
266,173
-
550,361
518,034
425,265
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
741,748
677,158
240,053
68,346
258,970
234,989
253,572
219,630
250,744
156,042
264,367
234,011
294,026
250,829
248,414
183,389
274,171
85,114
249,302
235,820
367,849
250,837
3,443,216
2,741,291
1,900,000
1,425,000
950,000
1,514,063
-
81,125
100,014
792,672
1,237,635
1,237,635
1,280,790
-
-
-
-
-
72,031
52,040
8,662,920
6,569,985
2007
3,225,256
1,425,000
1,514,063
81,125
1,258,123
1,237,635
-
1,900,000
950,000
-
590,493
1,237,635
1,280,790
550,361
518,034
425,265
72,031
12,106,136
-
52,040
9,311,276
Group totals in respect of the financial year ended 30 June 2007 do not necessarily equal the sum of amounts disclosed for individuals listed above as there are some different individuals specified
as Directors in 2008.
Amounts in the table above reflect remuneration for the time the Director has been in a Key Management Personnel role i.e. pro-rating is applied relative to the date the Director commenced or
ceased a Key Management Personnel role.
(1) For Non-Executive Directors, this includes that portion of base fees and committee fees paid as cash. Non-Executive Directors also salary sacrifice 20% of their fees on a mandatory basis
under the Non-Executive Directors Share Plan (NEDSP). Further details on the NEDSP is contained in Note 33 to the Financial Statements.
(2) Represents company contribution to superannuation and includes any allocations made by way of salary sacrifice by Directors.
(3) Mr Kent and Mr Swan retired at the 2007 Annual General Meeting on 7 November 2007.
(4) Cash STI payment represents the amount of cash immediately payable in recognition of performance for the year ended 30 June 2008, with the exception of STI sacrificed to superannuation
which is included under 'Superannuation'. STI deferred in shares represents the compulsory deferral of 1/3 of the STI payment for the performance year ended 30 June 2008. This amount is
deferred until 1 July 2011. Generally, Mr Norris will need to be an employee of the Bank at the end of the deferral period to receive this portion. The 2007 financial year figure represents STI
deferred in cash. The value of LTI Performance Rights under the GLSP and Reward Shares under the ERP has been calculated using a Monte-Carlo simulation method. Details on the
assumptions incorporated are set out on page 70 under Reward Shares Valuation Assumptions and Performance Rights Valuation Assumptions.
68 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report - Remuneration Report
Individual remuneration details for Executives for the year ended 30 June 2008 are set out below:
Remuneration of Executives
Short Term Benefits
Cash
(1)
Fixed
$
Non
Monetary
Fixed
$
(2)
Cash STI
payment
(3)
At Risk
STI Deferred
in Shares
(4)
At Risk
Other Short
Term
Benefits
(5)
$
$
$
Post-
employ-
ment
Benefits
Super-
annuation
(6)
Fixed
$
Share-based Payments
Performance
Rights
(7)
LTI Reward
Shares
(7)
At Risk
LTI
Performance
Units At Risk
(7)
Other Long
Term
Benefits
(8)
$
$
$
$
Total
Remuneration
$
B J Chapman
2008
2007
D Cohen (9)
2008
2007
D P Craig
2008
2007
S I Grimshaw
2008
2007
M R Harte
2008
2007
G L Mackrell
2008
2007
R M McEwan
2008
2007
J K O’Sullivan (10)
2008
2007
G A Petersen
2008
2007
A Toevs (11)
2008
2007
Total Remuneration (12)
2008
2007
931,854
113,426
1,406,154
1,215,608
862,067
632,568
770,205
600,724
924,144
116,999
486,042
848,665
1,022,877
442,521
1,130,595
-
8,375,607
5,756,239
807,709
112,213
13,763
9,726
666,667
312,164
333,333
331,674
263,352
144,739
49,838
601,128
263,692
-
133,247
125,259
110,997
397,554
18,703
16,535
2,661,301
2,050,992
33,960
-
564
-
-
-
-
-
-
-
2,271
-
263,692
-
-
-
13,763
8,236
1,000,000
306,647
500,000
325,812
100,000
-
86,128
774,720
301,362
-
177,673
142,138
13,507
10,200
1,000,000
556,600
500,000
591,388
-
-
94,030
81,288
376,703
-
715,296
1,713,785
13,653
10,260
866,667
296,100
433,333
314,606
73,756
310,618
49,352
42,500
263,692
-
111,929
111,929
13,763
10,260
633,333
415,000
316,667
440,938
-
-
173,753
202,503
301,362
-
534,536
1,270,275
-
-
-
-
-
-
-
-
-
-
786
-
301,273
-
22,094
14,935
3,132,874
1,685,914
32,560
28,148
4,138,250
4,197,017
19,961
14,647
2,694,410
1,733,228
20,178
18,599
2,763,797
2,958,299
13,653
1,321
1,000,000
47,612
500,000
50,588
101,036
17,725
93,838
8,730
376,703
-
-
-
238,692
181,058
22,094
2,729
3,270,160
426,762
8,160
10,260
-
332,645
-
395,935
13,763
10,260
733,333
410,576
366,667
436,237
-
-
-
-
33,677
96,800
-
-
(78,900)
734,820
50,000
476,449
339,033
-
400,040
607,463
-
-
-
-
-
-
61,222
-
2,186
-
-
-
-
-
-
-
-
-
-
-
-
19,651
448,979
2,438,776
23,685
19,945
2,949,398
2,403,451
42,374
-
1,236,377
-
104,589
92,757
5,900,000
2,677,344
2,950,000
2,887,178
599,366
473,082
635,073
4,582,851
2,486,239
-
1,993,821
6,150,372
349,689
578,612
202,435
135,189
23,596,819
27,792,307
Other Executives (13)
W Negus
2008
2007
1,022,877
1,004,395
13,763
10,260
1,466,666
888,000
-
943,500
-
-
50,000
67,164
-
-
212,720
212,720
304,157
1,779,157
23,685
23,257
3,093,868
4,928,453
Total Remuneration of Executives
2008
2007
9,398,484
6,760,634
118,352
103,017
7,366,666
3,565,344
2,950,000
3,830,678
599,366
473,082
685,073
4,650,015
2,486,239
-
2,206,541
6,363,092
653,846
2,357,769
226,120
158,446
26,690,687
32,720,760
Grand totals in respect of the financial year ended 30 June 2007 do not necessarily equal the sum of amounts disclosed for individuals listed above as there are different individuals specified as
Executives in 2008.
Amounts in the table above reflect remuneration for the time the Executive has been in a Key Management Personnel role i.e. pro-rating is applied relative to the date the Executive commenced
or ceased a Key Management Personnel role.
1) Reflects the amounts paid in the year ended 30 June 2008 and is calculated on a total cost basis. Included may be annual leave accruals and salary sacrifice amounts with the exception of
salary sacrifice superannuation which is included under 'Superannuation'. For Mr Toevs, this also includes a cash payment upon commencement.
(2) Represents the cost of car parking (including FBT).
(3) Cash STI payment represents the amount of cash immediately payable to an Executive in recognition of performance for the year ended 30 June 2008, with the exception of STI sacrificed to
superannuation which is included under 'Superannuation'.
(4) STI deferred in Shares represents the compulsory deferral of 1/3 of STI payments for Executives for performance to the year ended 30 June 2008. These amounts are deferred until 1 July
2011. Generally, the Executive will need to be an employee of the Group at the end of the deferral period to receive this portion. The 2007 financial year figure represents STI deferred in
cash.
(5) All Other Short Term Benefits payable that are not covered above.
(6) Represents company contribution to superannuation and includes any allocations made by way of salary sacrifice by Executives.
Commonwealth Bank of Australia Annual Report 2008 69
Directors’ Report - Remuneration Report
(7) The ‘fair value’ of LTI performance rights under the GLSP and ERP reward shares has been calculated using a Monte-Carlo simulation method, incorporating the
assumptions below:
Reward Share Valuation Assumptions
Purchase Date
Fair Value
Exercise Price
Risk Free Rate Assumption Term
Dividend Yield
Volatility
22-Sep-04
5-Nov-04
23-Nov-05
3-Nov-06
$16.72
$19.72
$24.51
$30.62
$0.00
$0.00
$0.00
$0.00
5. 48%
5. 61%
5. 65%
6. 04%
59 mths
57 mths
56 mths
47 mths
Nil
Nil
Nil
Nil
15. 0%
15. 0%
15. 0%
15. 0%
Performance Rights Valuation Assumptions
12-Oct-07
$53.50
$0.00
7. 75%
33 mths
5. 94%
15. 0%
- The Reward Shares assessment has been made as at purchase date for each ERP grant based on the expected future TSR performance of the Bank and each
member of its peer group. The annualised equivalent of the ‘fair value’ in respect of the number of shares for each grant has been amortised on a straight line basis
over the term of the grant.
- The Performance Rights assessment under the GLSP has been made at grant date based on the expected future NPAT growth (using TSR) and customer satisfaction
outcomes of the Group and each member of the peer group. The annualised equivalent of the ‘fair value’ in respect of the number of performance rights for the grant
has been amortised on a straight line basis over the term of the grant.
- For the GLSP, the final allocation pool can only be determined at the end of the performance period. As each participant’s allocation is based on the proportion of the
pool that may vest, the above assumptions have been used to determine the maximum number of performance rights that may vest. Each participant has been
granted their allocated percentage of the pool based on the above valuation assumptions.
(8) All other benefits payable that are not covered above.
For Mr Toevs, this represents equity arrangements offered at commencement.
(9) Mr Cohen commenced in his role on 16 June 2008.
(10) Mr O’Sullivan ceased employment on 31 January 2008
(11) Mr Toevs commenced in his role on 23 June 2008
(12) Termination benefits to the value of $4,458,683 were included in the total remuneration for Executives for the year ended 30 June 2007. No termination benefits
were paid in the year ended 30 June 2008.
(13) Mr Negus, who is not a Key Management Personnel, and Messrs Craig, Grimshaw, McEwan and Petersen are the five executives who received the highest
remuneration for the year ended 30 June 2008 as defined in the Section 300A of the Corporations Act 2001.
Termination Arrangements of Key Management Personnel and Other Executives
The Group’s executive contracts provide for the following termination arrangements for KMP and Other Executives:
Name
B J Chapman
Contract Type
Permanent
Permanent
Permanent
Permanent
Permanent
Permanent
Permanent
D Cohen
D P Craig
S I Grimshaw
M R Harte
G L Mackrell
R M McEwan
J K O’Sullivan (2)
G A Petersen
A Toevs
Other Executives
W Negus
Notice
4 weeks
6 months
4 weeks
3 months
4 weeks
4 weeks
3 months
Severance (1)
Linked to years of service with a maximum of 64
weeks payment after 19 years service (including ASB
service)
6 months
6 months
12 months
6 months
6 months
Linked to years of service with a maximum of 64
weeks payment after 19 years service (including ASB
service)
12 months
6 months
If terminated in first two years, the greater of
$5,000,000 or remuneration for remainder of term
Permanent
Permanent
2 year term with the option to
extend to a maximum of 3 years
4 weeks
4 weeks
Not Applicable
Fixed Term, expires on 1 June
2009
Not Applicable
None
(1) Severance applies where termination is initiated by the Group, other than for misconduct or unsatisfactory performance.
(2) Mr O’Sullivan ceased employment on 31 January 2008.
Upon ceasing employment with the Group, executives are
entitled to receive their statutory entitlements of accrued annual
and long service leave, as well as accrued superannuation
benefits.
Executives who cease employment with the Group during a
given performance year (i.e. 1 July to 30 June) will generally not
receive an STI payment
the
for
circumstances of retrenchment, retirement or death.
that year except
in
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 forfeited where the
executive resigns or
In circumstances of
is dismissed.
retrenchment, retirement or death, the executive or their estate
may, at Board discretion, retain their full or pro-rata grant of LTI.
Vesting of any LTI retained by the executive will still be subject
to the performance hurdle relevant to that grant.
70 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report - Remuneration Report
STI Allocations to Executives for the Year Ended 30 June 2008
Directors
R J Norris
Executives
B J Chapman
D Cohen (4)
D P Craig
S I Grimshaw
M R Harte
G L Mackrell
R M McEwan
J K O’Sullivan (5)
G A Petersen
A Toevs (6)
Other Executives
W Negus
Portion Paid
Paid
Percentage
Forfeited
%
Portion
(1)
Deferred
Minimum Total
(2)
Value
Maximum Total
(3)
Value
$
$
2/3
2/3
-
2/3
2/3
2/3
2/3
2/3
-
2/3
-
100%
-
-
-
-
-
-
-
-
100
-
-
-
1/3
1/3
-
1/3
1/3
1/3
1/3
1/3
-
1/3
-
-
1,900,000
2,850,000
666,667
-
1,000,000
1,000,000
866,667
633,333
1,000,000
-
733,333
-
1,000,000
-
1,500,000
1,500,000
1,300,000
950,000
1,500,000
-
1,100,000
-
1,466,666
1,466,666
(1) Used to acquire shares in the Bank that will generally vest on 1 July 2011 subject to not being forfeited due to resignation or misconduct including misrepresentation
of performance outcomes. Will generally vest early in circumstances of retrenchment, retirement or death.
(2) For those executives with a minimum total value greater than zero, this reflects the 2/3 component of the STI payment which is immediately payable determined by
actual performance over the year ended 30 June 2008. Executives generally do not receive an STI payment unless their individual performance is at least meeting
expectations.
(3) Includes value of shares purchased at commencement of vesting period for the deferred portion.
(4) Mr Cohen commenced employment on 16 June 2008.
(5) Mr O’Sullivan ceased employment on 31 January 2008.
(6) Mr Toevs commenced employment on 23 June 2008.
LTI Allocations to Executives for the Year Ended 30 June 2008
Percentage
Paid
%
Percentage
Forfeited
%
Percentage
Deferred (1)
%
Current
Allocation
(Percentage of
Pool) (2)
Minimum Total
Value
$
Maximum Total
Value (3)
$000s
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
100
100
100
100
100
100
100
100
-
100
-
-
34
7
7
8
10
7
8
10
-
9
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,560
2,380
2,380
2,720
3,400
2.380
2,720
3,400
-
3,060
-
-
Directors
R J Norris
Executives
B J Chapman
D Cohen (4)
D P Craig
S I Grimshaw
M R Harte
G L Mackrell
R M McEwan
J K O’Sullivan (5)
G A Petersen
A Toevs (6)
Other Executives
W Negus (3)
(1) Will vest in July 2010 under the GSLP subject to the performance conditions and the performance hurdle being met (see page 60).
(2) Each participant’s allocated percentage of the proportion of the pool that may vest (capped at $34 million). See page 60.
(3) Equals the participant’s allocated percentage of the maximum pool that may vest – $34 million, except for Mr Negus who participates in a cash settled LTI style
arrangement that is specific to Colonial First State Global Asset Management (CFS GAM). Allocations under this arrangement vest depending on the CFS GAM net
profit before tax growth rate over three years.
(4) Mr Cohen commenced employment on 16 June 2008.
(5) Mr O’Sullivan ceased employment on 31 January 2008.
(6) Mr Toevs commenced employment on 23 June 2008.
Commonwealth Bank of Australia Annual Report 2008 71
Directors’ Report - Remuneration Report
Equity Holdings of Key Management Personnel and Other Executives
Shareholdings
Share trading policy
All shares were acquired by Directors on normal terms and
conditions or through the Non-Executive Directors’ Share Plan.
Shares awarded under the Equity Reward Plan and the
mandatory component of the Equity Participation Plan are
registered in the name of the Trustee of the employee share
plan trust. For further details of the Non-Executive Directors’
Share Plan, previous Equity Reward Plan, previous Executive
Option Plan and Equity Participation Plan refer to Note 33 to the
Financial Statements.
The Group has guidelines restricting the dealings of Directors
and certain executives in Bank securities. In particular, they are
instruments or
prohibited
arrangements for margin borrowing, short selling or stock
lending in relation to securities of the Bank or of any other
member of the Group.
from hedging and
from using
Directors and executives are reminded of the share trading
policy each six months and are required to complete an annual
declaration confirming their compliance with the policy.
Details of shareholdings of Key Management Personnel and
Other Executives (or close family or entities controlled, jointly
controlled, or significantly influenced by them, or any entity over
which any of the aforementioned hold significant voting power)
are as follows:
Shares Held by Directors
Name
Directors
J M Schubert
R J Norris
J A Anderson
R J Clairs
C R Galbraith
J S Hemstritch
S C H Kay
F D Ryan
D J Turner
H H Young
W G Kent (3)
F J Swan (3)
Total For Directors
Class
Ordinary
Ordinary
Reward Shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Reward Shares
Balance
1 July 2007
24,418
10,000
191,238
10,000
17,886
11,404
15,565
5,901
9,196
301
20,000
17,070
8,181
149,922
191,238
Acquired/Granted
as
Remuneration
(1)
On Exercise of
Options
Net Change
(2)
Other
2,890
-
-
773
1,014
992
926
1,036
1,146
940
866
441
497
11,521
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
792
-
658
-
2,100
5,000
-
1,131
1,689
-
11,370
-
Balance
30 June 2008
27,308
10,000
191,238
11,565
18,900
13,054
16,491
9,037
15,342
1,241
21,997
19,200
8,678
172,813
191,238
(1) For Non-Executive Directors, represents shares acquired under NEDSP on 20 August 2007 and 4 March 2008 by mandatory sacrifice of fees. All shares acquired
through NEDSP are subject to a 10 year trading restriction (shares will be tradeable earlier if the Director leaves the Board). For Mr Norris this represents Reward
Shares granted under the ERP subject to performance hurdles. For the ERP, the first possible date for meeting the performance hurdle is 14 July 2009 with the last
possible date for vesting being 14 July 2010. See Note 33 to the Financial Statements for further details on the NEDSP and ERP.
(2) “Net Change Other” incorporates changes resulting from purchases and sales during the year.
(3) Mr Kent and Mr Swan retired at the 2007 Annual General Meeting on 7 November 2007.
72 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report - Remuneration Report
Shares Held by Executives
Name
Executives
B J Chapman
D Cohen (4)
D P Craig
S I Grimshaw
M R Harte
G L Mackrell
R M McEwan
J K O’Sullivan (5)
G A Petersen
A Toevs (6)
Other Executives
W Negus
Total for
Executives
(1)
Class
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Deferred Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Deferred Shares
Balance
30 June 2007
Acquired/Granted
as
Remuneration
On Exercise of
Options
Reward
Shares
(2)
Vested
Net Change
(3)
Other
-
17,046
-
-
-
22,728
29,999
105,140
-
14,318
39,808
80,018
-
-
45,767
69,770
14,652
64,780
-
-
-
3,680
40,500
133,906
414,300
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
37,784
-
-
-
-
37,784
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(37,500)
-
-
-
(28,130)
-
-
-
(25,940)
-
(19,500)
-
-
-
-
-
-
(111,070)
-
450
-
-
-
6,000
-
-
-
-
-
2,388
-
-
-
25,940
(43,830)
(1,287)
-
-
-
-
-
-
33,491
(43,830)
-
Balance
30 June 2008
450
17,046
-
-
6,000
22,728
29,999
67,640
-
14,318
42,196
51,888
-
-
71,707
-
13,365
45,280
-
-
37,784
3,680
40,500
167,397
259,400
37,784
(1) Reward Shares represents shares granted under the Equity Reward Plan (ERP) and are subject to a performance hurdle. The last possible date for vesting is 14
July 2010. See Note 33 to the Financial Statements for further details on the ERP.
(2) Reward Shares become ordinary shares upon vesting.
(3) “Net Change Other” incorporates changes resulting from purchases, sales and forfeitures during the year.
(4) Mr Cohen commenced employment on 16 June 2008.
(5) Mr O’Sullivan ceased employment on 31 January 2008.
(6) Mr Toevs commenced employment on 23 June 2008.
Commonwealth Bank of Australia Annual Report 2008 73
1
1
9
6
10
7
1
1
11
8
Highest
Balance
in Period
$000s
3,181
2,852
936
215
100
3,544
647
748
3,874
2,702
Directors’ Report - Remuneration Report
Total Loans to Key Management Personnel and Other Executives
Year Ended
30 June
Balance
1 July
$000s
Interest
Charged
$000s
Interest Not
Charged
$000s
Write-off
$000s
Balance
30 June
$000s
Number in
Group at
30 June
Directors
Executives
Total for Key
Management
Personnel
Other Executives
Total
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
3,648
464
6,103
9,178
9,751
9,642
1,442
554
11,193
10,196
258
21
781
425
1,039
446
68
35
1,107
481
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,795
464
12,369
5,965
15,164
6,429
1,335
443
16,499
6,872
Details of Individuals with Loans above $100,000 in the reporting period are as follows:
Individual Loans above $100,000 to Key Management Personnel and Other Executives
Balance
1 July 2007
$000s
Interest
Charged
$000s
Interest Not
Charged
$000s
Write-off
$000s
Balance
30 June 2008
$000s
Directors
R J Norris (1)
Executives
B J Chapman (1)
D Cohen
D P Craig
S I Grimshaw
M R Harte
G L Mackrell
R M McEwan (1)
J K O’Sullivan (2)
G A Petersen
Total for Key
Management Personnel
Other Executives
W Negus
Total for Other Executives
Total for Key Management
Personnel & Other Executives
3,648
-
936
-
-
-
647
279
3,599
642
9,751
1,442
1,442
258
153
75
5
-
218
1
39
200
90
1,039
68
68
11,193
1,107
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,795
2,679
936
213
50
3,394
647
460
3,013
977
15,164
18,799
1,335
1,335
1,845
1,845
16,499
20,644
(1) Balance declared in NZD for Mr Norris, Ms Chapman and Mr McEwan. Exchange rates are taken from Forex as at 30 June 2008 for interest charged, 30 June 2008
balances and highest balance in period. The exchange rate as at 30 June 2007 has been used for the 1 July 2007 balances.
(2) Mr O’Sullivan ceased employment on 31 January 2008.
74 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report - Remuneration Report
Terms and Conditions of Loans
Transactions other than Financial Instrument Transactions
of Banks
All other transactions with Key Management Personnel, Other
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 Group.
Audit
Certain disclosures required by the Corporations Act 2001 and
accounting standard AASB124 Related Party Disclosures have
been made
this Remuneration Report. The entire
Remuneration Report has been audited as required.
in
All loans to Key Management Personnel and Other Executives
(or close family members or entities controlled, jointly controlled,
or significantly influenced by them, or any entity over which any
of the aforementioned held significant voting power) have been
provided on an arm’s length commercial basis including the term
of the loan, security required and the interest rate (which may be
fixed or variable).
Other Transactions of Key Management Personnel and
Other Executives and Related Parties
Financial Instrument Transactions
Financial instrument transactions (other than loans and shares
disclosed within this report) of Key Management Personnel and
Other Executives occur in the ordinary course of business on an
arm’s length basis.
Disclosure of financial instrument transactions regularly made as
part of normal banking operations is limited to disclosure of such
transactions with Key Management Personnel and Other
Executives and entities controlled or significantly influenced by
them.
All such financial instrument transactions that have occurred
between entities within the Group and their Key Management
Personnel and Other Executives have been trivial or domestic in
nature and were in the nature of normal personal banking and
deposit transactions.
Commonwealth Bank of Australia Annual Report 2008 75
Directors’ Report
Company Secretaries
Audit Services
The details of the Bank’s Company Secretaries, including their
experience and qualifications are set out below.
John Hatton has been Company Secretary of
Commonwealth Bank of Australia since 1994.
the
From 1985 until 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.
Carla Collingwood was appointed a Company Secretary to the
Bank in July 2005.
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.
Non-Audit Services
Amounts paid or payable to PricewaterhouseCoopers for non-
audit services provided during the year, as set out in the Annual
Report in Note 38 to the Financial Statements are as follows:
Regulatory audits, reviews, attestations and
assurances for Group entities – Australia
APRA reporting (including the tripartite review)
Financial and other audits, reviews, attestations
and assurances for Group entities - Australia
Financial and other audits, reviews, attestations
and assurances for Group entities – Offshore
Agreed upon procedures and comfort letters in
respect of financing, debt raising and related
activities
Taxation services
Controls review and related work
Other
Total
2008
$’000
135
245
26
544
272
2,011
1,680
982
5,895
(1) An additional amount of $5,877,085 was paid to PricewaterhouseCoopers
by way of fees for entities not consolidated into the Financial Statements.
Of this amount $4,527,545 relates to statutory audits.
Signed in accordance with a resolution of the Directors.
Amounts
audit
PricewaterhouseCoopers totalled $14,041,000.
payable
paid
for
or
services
to
The Bank has in place an External 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 PricewaterhouseCoopers and has
those services did not
concluded
compromise the auditor independence requirements of the
Corporations Act.
the provision of
that
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 PricewaterhouseCoopers during the year was
compatible with the general standard of independence imposed
by the Corporations Act.
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 External Auditor Services Policy during
the year
the nature of non-audit services
engagements, to prohibit certain services and to require
Audit Committee pre-approval for all such engagements; and
to restrict
• 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 an independence declaration from our
auditor, PricewaterhouseCoopers as presented on the following
page.
Incorporation of Additional Material
This report incorporates the Chairman’s Statement (pages 2 to
3), Highlights (pages 6 to 9), Analysis sections for Retail Banking
Services (pages 14 to 15), Premium Business Services (pages
to 21) and
16
to 24) and
International Financial Services
Shareholding Information (pages 226 to 229) sections of this
Annual report.
to 17), Wealth Management (pages 18
(pages 22
J M Schubert
Chairman
13 August 2008
R J Norris
Managing Director and Chief Executive Officer
76 Commonwealth Bank of Australia Annual Report 2008
Directors’ Report
Commonwealth Bank of Australia Annual Report 2008 77
This page has been intentionally left blank.
78 Commonwealth Bank of Australia Annual Report 2008
Five Year Financial Summary
2008
$M
7,907
6,434
14,341
930
7,021
-
7,021
6,390
(1,626)
(31)
4,733
9
60
(42)
295
(264)
-
-
2007
$M
7,036
6,161
13,197
434
6,427
-
6,427
6,336
(1,782)
(27)
4,527
5
(75)
13
-
-
-
-
AIFRS
(1)
AGAAP
(1)
2006
$M
6,514
5,613
12,127
398
5,994
-
5,994
5,735
(1,618)
(31)
4,086
(25)
(100)
(33)
-
-
-
-
2005
$M
6,026
5,076
11,102
322
5,719
150
5,869
4,911
(1,409)
(10)
3,492
(53)
(39)
- -
-
-
-
-
2004
$M
5,410
5,081
10,491
276
5,500
749
6,249
3,966
(1,262)
(9)
2,695
-
-
-
-
-
201
(324)
4,791
4,470
3,928
3,400
2,572
1,904
1,480
756
563
43
4,746
(13)
-
-
4,733
9
60
(42)
295
(264)
-
-
4,791
1,766
1,445
548
461
211
4,431
96
-
-
4,527
5
(75)
13
-
-
-
-
4,470
1,576
1,138
441
442
278
3,875
66
-
145
4,086
(25)
(100)
(33)
-
-
-
-
3,928
n/a
n/a
n/a
n/a
n/a
3,420
177
(105)
-
3,492
(53)
(39)
-
-
-
-
-
3,400
n/a
n/a
n/a
n/a
n/a
3,078
152
(535)
-
2,695
-
-
-
-
-
(324)
201
2,572
361,282
487,572
263,706
461,435
26,137
16,422
315,465
440,157
219,068
415,713
24,444
15,158
273,525
382,850
243,232
351,662
187,576
361,507
182,912
329,019
21,343
12,087
22,643
10,938
189,391
305,995
163,177
281,110
22,405
17,700
205,501(2)
245,347
216,438
189,559
169,321
385,667
362,249
332,492
311,236
289,416
269,718
260,085
240,974
214,187
197,532
410,225
54,312
23,035
487,572
360,188
55,160
24,809
440,157
318,578
43,318
20,954
382,850
294,513
41,383
15,766
351,662
252,652
35,059
18,284
305,995
Income Statement
Net interest income
Other operating income
Total operating income
Loan Impairment expense
Operating expenses:
Comparable business
Initiatives including Which new Bank
Total operating expenses
Operating profit before goodwill amortisation, appraisal
value uplift and income tax expense
Corporate tax expense
Minority interests
Net profit after income tax (“cash basis”)
Defined benefit superannuation plan income/(expense)
Treasury shares valuation adjustment
Hedging and AIFRS volatility
Visa Initial Public Offering gain after tax
Investment and restructuring
Appraisal value uplift
Goodwill amortisation
Net profit after income tax attributable to Equity holders of
the Bank
Contributions to profit (after tax)
Retail Banking Services
Premium Business Services
Wealth Management
International Financial Services
Other
Net profit after income tax (“underlying basis”)
Shareholder investment returns
Which new Bank
Profit on sale of the Hong Kong Insurance Business
Net profit after income tax (“cash basis”)
Defined benefit superannuation plan (expense)/income
Treasury shares valuation adjustment
Hedging and AIFRS volatility
Visa Initial Public Offering gain after tax
Strategic investment initiatives and asset write-offs
Goodwill amortisation
Appraisal value uplift
Net profit after income tax
Balance Sheet
Loans, advances and other receivables
Total assets
Deposits and other public borrowings
Total liabilities
Shareholders’ equity
Net tangible assets
Risk weighted assets
Average interest earning assets
Average interest bearing liabilities
Assets (on Balance Sheet)
Australia
New Zealand
Other
Total assets
(1) The Group adopted AIFRS accounting standards for the reporting period beginning 1 July 2004. As a result the 2008, 2007, 2006 and 2005 results are presented on
an AIFRS basis, while the 2004 result is presented on the previous AGAAP basis.
(2) Risk weighted assets for 30 June 2008 are calculated in accordance with the Group’s advanced accreditation under Basel II.
Commonwealth Bank of Australia Annual Report 2008 79
Five Year Financial Summary
Shareholder Summary
Dividend per share – fully franked (cents)
Dividend cover – statutory (times)
Dividend cover – cash (times)
Dividend cover – underlying (times)
Earnings per share (cents)
Basic
Statutory
Cash basis
Underlying basis
Fully diluted
Statutory
Cash basis
Underlying basis
Dividend payout ratio (%)
Statutory
Cash basis
Underlying basis
Net tangible assets per share ($)
Weighted average number of shares (statutory basic)
Weighted average number of shares (statutory fully diluted)
Weighted average number of shares (cash basic)
Weighted average number of shares (cash fully diluted)
Number of Shareholders
Share prices for the year ($)
Trading high
Trading low
End (closing price)
Performance Ratios (%)
Return on average Shareholders’ equity
Statutory
Cash basis
Underlying basis
Return on average total assets
Statutory
Cash basis
Underlying basis
Capital adequacy – Tier One
Capital adequacy – Tier Two
Capital adequacy – Deductions
Capital adequacy – Total
Net interest margin
Other Information (numbers)
Full-time equivalent employees
Branches/services centres (Australia)
Agencies (Australia)
ATMs (proprietary)
EFTPOS terminals
EzyBanking locations
2008
2007
2006
2005
2004
AIFRS
(1)
AGAAP
(1)
266
1. 3
1. 3
1. 3
363. 0
356. 9
357. 9
348. 7
343. 1
344. 0
74. 1
75. 0
74. 8
12. 4
1,307
1,424
1,313
1,430
741,072
62. 16
37. 02
40. 17
19. 8
20. 4
20. 4
1. 0
1. 0
1. 0
8. 17
3. 41
-
11. 58
2. 02
39,621
1,009
3,814
3,301
187,377
930
256
1. 3
1. 3
1. 3
344. 7
347. 1
339. 6
339. 7
342. 1
335. 0
75. 2
74. 2
75. 8
11. 7
1,281
1,344
1,289
1,351
696,118
56. 16
42. 98
55. 25
20. 7
21. 7
21. 2
1. 1
1. 1
1. 1
7. 14
3. 41
(0. 79)
9. 76
2. 08
224
1. 4
1. 4
1. 3
308. 2
318. 5
302. 0
303. 1
312. 9
297. 1
73. 3
70. 5
74. 3
9. 4
1,275
1,329
1,283
1,338
698,552
47. 41
36. 62
44. 41
20. 4
21. 5
20. 4
1. 1
1. 1
1. 1
7. 56
3. 10
(1. 00)
9. 66
2. 22
197
1. 3
1. 3
1. 3
259. 6
264. 8
259. 2
255. 3
260. 5
255. 0
77. 0
74. 9
76. 5
8. 5
1,260
1,316
1,269
1,325
704,906
38. 52
28. 79
37. 95
18. 2
18. 8
18. 4
1. 0
1. 1
1. 0
7. 46
3. 21
(0. 92)
9. 75
2. 29
183
1. 1
1. 1
1. 3
196. 9
206. 6
237. 1
196. 8
206. 5
237. 0
93. 5
89. 1
77. 6
12. 2
1,256
1,257
1,256
1,257
714,901
33. 54
27. 00
32. 58
12. 5
12. 7
14. 6
0. 9
0. 9
1. 1
7. 43
3. 93
(1. 11)
10. 25
2. 53
37,873
1,010
3,833
3,242
171,138
907
36,664
1,005
3,836
3,191
157,350
862
35,313
1,006
3,864
3,154
137,240
841
36,296
1,012
3,866
3,109
126,049
815
Productivity
Total net operating income per full-time (equivalent)
employee ($)
Employee expense/Total operating income (%)
Total operating expenses/Total operating income (%)
361,955
25. 5
49. 0
348,454
24. 5
48. 7
330,760
23. 3
49. 4
314,388
24. 1
52. 9
289,040
24. 3
59. 6
(1) The Group adopted AIFRS accounting standards for the reporting period beginning 1 July 2004. As a result the 2008, 2007, 2006 and 2005 results are presented on
an AIFRS basis, while the 2004 result is presented on the previous AGAAP basis.
80 Commonwealth Bank of Australia Annual Report 2008
Income Statements
Balance Sheets
Statements of Recognised Income and Expense
Statements of Cash Flows
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Note 18
Note 19
Note 20
Note 21
Note 22
Note 23
Note 24
Note 25
Note 26
Note 27
Note 28
Note 29
Note 30
Note 31
Note 32
Note 33
Note 34
Note 35
Note 36
Note 37
Note 38
Note 39
Note 40
Note 41
Note 42
Note 43
Note 44
Note 45
Note 46
Note 47
Note 48
Note 49
Accounting Policies
Profit
Income from Ordinary Activities
Average Balances and Related Interest
Income Tax Expense
Dividends
Earnings Per Share
Cash and Liquid Assets
Receivables due from Other Financial Institutions
Assets at Fair Value through Income Statement
Derivative Assets and Liabilities
Available-for-Sale Investments
Loans, Advances and Other Receivables
Provisions for Impairment
Credit Risk Management
Asset Quality
Shares in and Loans to Controlled Entities
Investment Property
Property, Plant and Equipment
Intangible Assets
Other Assets
Assets Held for Sale
Deposits and Other Public Borrowings
Payables due to Other Financial Institutions
Liabilities at Fair Value through Income Statement
Income Tax Liability
Other Provisions
Debt Issues
Managed Funds Units on Issue
Bills Payable and Other Liabilities
Loan Capital
Detailed Statements of Changes in Equity
Share Capital
Minority Interests
Capital Adequacy
Financial Reporting by Segments
Life Insurance Business
Remuneration of Auditors
Commitments for Capital Expenditure Not Provided for
Lease Commitments – Property, Plant and Equipment
Contingent Liabilities, Assets and Commitments
Risk Management
Retirement Benefit Obligations
Controlled Entities
Investments in Associated Entities and Joint Ventures
Director and Executive Disclosures
Related Party Disclosures
Notes to the Statements of Cash Flows
Disclosures about Fair Value of Financial Instruments
Financial Statements
82
83
84
85
87
100
102
103
109
112
113
113
114
114
116
122
125
128
132
139
149
149
150
152
153
154
154
155
155
155
156
157
159
160
160
168
171
177
178
179
182
189
189
190
191
194
206
209
212
212
213
218
220
Commonwealth Bank of Australia Annual Report 2008 81
Financial Statements
Income Statements
For the year ended 30 June 2008
Interest income
Interest expense
Net interest income
Other operating income
Net banking operating income (1)
Funds management income
Investment (expense)/revenue
Claims and policyholder liability
revenue/(expense)
Net funds management operating income
Premiums from insurance contracts
Investment (expense)/revenue
Claims and policyholder liability expense from
insurance contracts
Insurance margin on services operating income
Total net operating income
Loan impairment expense
Operating expenses
Defined benefit superannuation plan
income/(expense)
Net profit before income tax
Corporate tax expense
Policyholder tax (benefit)/expense
Net profit after income tax
Minority interests
Net profit attributable to Equity holders of the
Bank
Note
2
2
2
2
2
2
2,14,15
2
2,43
2
5
5
2008
$M
29,234
21,327
7,907
3,559
11,466
2,369
(525)
519
2,363
1,373
(27)
(606)
740
2007
$M
23,862
16,826
7,036
3,341
10,377
1,871
2,120
(2,020)
1,971
1,117
858
(932)
1,043
Group
2006
$M
19,758
13,244
6,514
3,036
9,550
1,589
2,098
(2,064)
1,623
1,052
1,031
(970)
1,113
2008
$M
25,585
19,667
5,918
5,786
11,704
Bank
2007
$M
20,068
14,916
5,152
5,522
10,674
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
14,569
13,391
12,286
11,704
10,674
930
7,398
14
6,255
1,548
(115)
4,822
(31)
4,791
434
6,427
8
6,538
1,775
266
4,497
(27)
4,470
398
5,994
(35)
5,859
1,569
331
3,959
(31)
3,928
902
5,593
14
5,223
865
-
4,358
-
4,358
390
4,882
8
5,410
933
-
4,477
-
4,477
Group
2006
(1) Net Banking operating income of the Bank is greater than the Group due to the receipt of tax exempt intragroup dividends.
2008
2007
Note
Cents per share
Earnings per share:
Basic
Fully diluted
Dividends per share attributable to shareholders
of the Bank:
Ordinary shares
Trust preferred securities (TPS) – issued 8
March 2006
7
7
6
363. 0
348. 7
344. 7
339. 7
308. 2
303. 1
266
256
6,850
7,821
224
-
These Financial Statements should be read in conjunction with the accompanying notes.
82 Commonwealth Bank of Australia Annual Report 2008
Balance Sheets
As at 30 June 2008
Assets
Cash and liquid assets
Receivables due from other financial institutions
Assets at fair value through Income Statement:
Trading
Insurance
Other
Derivative assets
Available-for-sale investments
Loans, advances and other receivables
Bank acceptances of customers
Shares in and loans to controlled entities
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Assets held for sale
Total assets
Liabilities
Deposits and other public borrowings
Payables due to other financial institutions
Liabilities at fair value through Income Statement
Derivative liabilities
Bank acceptances
Due to controlled entities
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Managed funds units on issue
Bills payable and other liabilities
Loan capital
Total liabilities
Net assets
Shareholders’ Equity
Share capital:
Ordinary share capital
Other equity instruments
Reserves
Retained profits
Shareholders’ equity attributable to Equity
holders of the Bank
Minority interests:
Controlled entities
Total minority interests
Total Shareholders’ equity
Financial Statements
2008
$M
7,736
6,984
21,676
20,650
3,266
18,232
11,488
361,282
18,278
-
1,640
906
8,258
76
6,492
486,964
608
487,572
263,706
17,672
15,526
19,541
18,278
-
768
266
1,174
18,495
85,817
1,109
7,524
449,876
11,559
461,435
26,137
Group
2007
$M
10,108
5,495
21,469
23,519
4,073
12,743
9,672
315,465
18,721
-
1,436
836
7,835
254
7,157
438,783
1,374
440,157
219,068
14,386
16,396
16,680
18,721
-
882
908
878
21,613
88,525
310
7,346
405,713
10,000
415,713
24,444
2008
$M
7,282
6,731
19,168
-
274
19,287
27,067
309,714
18,278
37,472
1,336
757
2,826
54
5,369
455,615
412
456,027
240,871
17,625
2,930
19,367
18,278
54,119
708
19
983
-
55,778
-
6,301
416,979
11,620
428,599
27,428
Bank
2007
$M
7,401
5,772
20,287
-
448
13,862
8,468
262,967
18,721
37,596
1,112
749
2,788
25
6,786
386,982
21
387,003
194,630
14,322
5,206
16,786
18,721
45,642
800
91
734
-
47,760
-
6,366
351,058
10,422
361,480
25,523
15,727
939
1,206
7,747
14,483
939
2,143
6,367
15,927
1,895
2,253
7,353
14,691
1,895
2,622
6,315
25,619
23,932
27,428
25,523
518
518
26,137
512
512
24,444
-
-
27,428
-
-
25,523
Note
8
9
10
11
12
13
17
19
45
20
5
21
22
23
24
25
11
26
5
27
37
28
29
30
31
33
33
32
32
34
These Financial Statements should be read in conjunction with the accompanying notes. Comparative information has been restated to
conform to presentation in the current period. Refer to Note 1 (b).
Commonwealth Bank of Australia Annual Report 2008 83
Financial Statements
Statements of Recognised Income and Expense
For the year ended 30 June 2008
Actuarial (losses)/gains from defined benefit
superannuation plans
Gains/(losses) on cash flow hedging instruments:
Recognised in equity
Transferred to Income Statement
Gains/(losses) on available-for-sale investments:
Recognised in equity
Transferred to Income Statement on disposal
Transferred to Income Statement on impairment
Revaluation of properties
Transfer from Foreign Currency Translation
Reserve to Income Statement on disposal
Exchange differences on translation of foreign
operations
Income tax on items transferred directly to/from
equity:
Foreign Currency Translation Reserve
Available-for-sale investments revaluation
reserve
Revaluation of properties
Cash flow hedge reserve
Net (expense)/income recognised directly in equity
Profit for the period
Total net income recognised for the period
Attributable to:
Equity holders of the Bank
Minority interests
Total net income recognised for the period
Note
32,43
32
32
32
32
32
32
32
32
32
32
32
32
2008
$M
2007
$M
(240)
422
(573)
262
(312)
-
20
-
(648)
414
429
120
28
(138)
-
79
-
54
Group
2006
$M
387
89
(58)
51
(33)
(3)
19
41
2008
$M
(240)
426
(318)
240
(272)
-
19
-
Bank
2007
$M
414
125
167
18
(119)
-
75
-
(232)
(103)
(119)
53
(13)
13
1
(1)
44
(4)
52
(924)
4,822
3,898
3,867
31
3,898
10
(23)
(168)
792
4,497
5,289
5,262
27
5,289
(6)
(4)
(11)
253
3,959
4,212
4,181
31
4,212
7
(4)
(27)
(271)
4,358
4,087
4,087
-
4,087
14
(23)
(87)
464
4,477
4,941
4,941
-
4,941
These Financial Statements should be read in conjunction with the accompanying notes.
84 Commonwealth Bank of Australia Annual Report 2008
Statements of Cash Flows (1)
For the year ended 30 June 2008
Cash Flows From Operating Activities
Interest received
Interest paid
Other operating income received
Expenses paid
Income taxes paid
Net (increase)/decrease in assets at fair value through
Income Statement (excluding life insurance)
Net increase/(decrease) in liabilities at fair value
through Income Statement:
Life insurance:
Investment income
Premiums received (2)
Policy payments (2)
Other liabilities at fair value through Income
Statement
Cash Flows from operating activities before
changes in operating assets and liabilities
Changes in operating assets and liabilities arising
from cash flow movements
Movement in available-for-sale investments:
Purchases
Proceeds from sale
Proceeds at or close to maturity
Lodgement of deposits with regulatory authorities
Net (increase) in loans, advances and other receivables
Net (increase)/decrease in receivables due from other
financial institutions not at call
Net decrease/(increase) in securities purchased under
agreements to resell
Life insurance business:
Purchase of insurance assets at fair value through
Income Statement
Proceeds from sale/maturity of insurance assets at
fair value through Income Statement
Net increase in deposits and other borrowings
Net proceeds from issuance of debt securities
Net increase in payables due to other financial
institutions not at call
Net (decrease)/increase in securities sold under
agreements to repurchase
Changes in operating assets and liabilities arising
from cash flow movements
Net cash (used in)/provided by operating activities
Cash Flows from Investing Activities
Payment for acquisition of entities and management
rights
Proceeds from disposal of controlled entities
Proceeds from disposal of entities and businesses
(net of cash disposals)
Dividends received
Net amounts received from controlled entities
Proceeds from sale of property, plant and equipment
Purchases of property, plant and equipment
Payment for acquisitions of investments in
associates/joint ventures
Purchases of intangible assets
Sale/(purchases) of assets held for sale
Net (increase)/decrease in other assets
Net cash (used in)/provided by investing activities
Financial Statements
Note
2008
$M
2007
$M
29,464
(20,786)
5,314
(6,882)
(1,905)
23,123
(16,405)
4,627
(5,699)
(1,942)
Group
2006
$M
19,712
(12,555)
4,319
(5,813)
(1,980)
2008
$M
25,445
(19,098)
3,485
(5,385)
(1,601)
Bank
2007
$M
19,471
(14,614)
2,826
(4,364)
(1,056)
(990)
(1,715)
(307)
200
(3,206)
509
2,304
(3,789)
2,296
2,431
(5,346)
2,399
2,338
(4,938)
-
-
-
-
-
-
810
4,831
1,941
(2,279)
3,373
4,049
6,201
5,116
767
2,430
(35,113)
610
31,974
13
(51,570)
(22,214)
1,480
21,139
(8)
(37,885)
(28,189)
646
24,831
(29)
(31,996)
(48,162)
577
28,432
1
(47,536)
(21,411)
1,101
20,582
(2)
(35,037)
(2,621)
833
(881)
(2,126)
2,089
634
(1,647)
537
311
(1,867)
(8,719)
(8,476)
(8,078)
-
-
11,159
49,603
(4,816)
8,842
26,361
7,207
9,398
12,799
14,109
-
48,418
6,274
-
20,914
(5,254)
4,486
1,865
2,571
4,584
1,864
(1,764)
1,943
328
(1,835)
2,013
(6,124)
(2,075)
(560)
5,641
(3,954)
1,162
(11,062)
(10,295)
(15,008)
(12,578)
(241)
2
-
39
-
14
(482)
-
(226)
766
(24)
(152)
(7)
-
16
3
-
53
(314)
(6)
(130)
(1,091)
(800)
(2,276)
(414)
553
35
4
-
32
(385)
(152)
(90)
-
31
(386)
-
-
-
1,667
8,864
10
(421)
-
(183)
(391)
1,025
10,571
-
-
-
1,881
11,760
49
(242)
(6)
(51)
-
(738)
12,653
48(a)
48(e)
48(c)
(1) It should be noted that the Group does not use these accounting Statements of Cash Flows in the internal management of its liquidity positions.
(2) Represents gross premiums and policy payments before splitting between policyholders and shareholders.
These Financial Statements should be read in conjunction with the accompanying notes. Comparative information has been restated
to conform to presentation in the current period. Refer to Note 1 (b).
Commonwealth Bank of Australia Annual Report 2008 85
Financial Statements
Statements of Cash Flows (1)
For the year ended 30 June 2008
Cash Flows from Financing Activities
On-market share purchase
Proceeds from issue of shares (net of costs)
Proceeds from issue of other equity instruments
(net of costs)
Dividends paid (excluding Dividend Reinvestment
Plan) (2)
Net movement in other liabilities
Net (purchase)/sale of treasury shares
Issue of loan capital
Redemption of loan capital
Other
Net cash provided by/(used in) 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 (3)
Note
2008
$M
2007
$M
-
3
-
(2,351)
553
(9)
2,091
(7)
128
-
19
-
(2,284)
219
55
1,969
(1,069)
(228)
Group
2006
$M
(500)
49
939
(2,163)
139
(10)
2,446
(915)
1
408
(1,319)
(14)
(1,819)
4,084
2,265
2,046
2,038
4,084
762
1,276
2,038
48(b)
2008
$M
-
3
-
(2,317)
453
(17)
1,784
(7)
34
(67)
209
128
337
Bank
2007
$M
-
19
-
(2,229)
1,197
(55)
1,865
(965)
(20)
(188)
(113)
241
128
(1) It should be noted that the Group does not use these accounting Statements of Cash Flows in the internal management of its liquidity positions.
(2) Includes $98 million allocated to participants under the Dividend Reinvestment Plan by an on-market purchase.
(3) For the purposes of the Statements of Cash Flows, cash includes cash, money at short call, at call deposits with other financial institutions and settlement account
balances with other banks.
These Financial Statements should be read in conjunction with the accompanying notes
86 Commonwealth Bank of Australia Annual Report 2008
Note 1 Accounting Policies
General Information
The Financial Statements of the Commonwealth Bank of
Australia (the “Bank”) and the Bank and its subsidiaries (the
“Group”) for the year ended 30 June 2008, were approved and
authorised for issue by the Board of Directors on 13 August
2008.
The Bank is incorporated and domiciled in Australia. It is a
company limited by shares that are publicly traded on the
Australian Stock Exchange. The address of its registered office
is Level 7, 48 Martin Place, Sydney, NSW 1155, Australia.
The Group is one of Australia’s leading providers of integrated
financial services including retail, business and institutional
banking, superannuation, life insurance, general insurance,
funds management, broking services and finance company
activities. The principal activities of the Group during the financial
year were:
(i) Retail Banking Services
The Group provides retail banking services within Australia
including housing loans, credit cards, personal loans, savings
and cheque accounts, and demand and term deposits.
(ii) Premium Business Services
The Group offers commercial products within Australia including
business loans, equipment and trade finance, and rural and
agribusiness products and provides private banking services to
high net worth individuals and direct trading and margin lending
through CommSec. This segment also has wholesale banking
operations in London, New York, Singapore, Hong Kong and
Malta.
(iii) Wealth Management
The Wealth Management segment conducts Australian funds
management business comprising wholesale and
retail
investment, superannuation and retirement funds. Investments
are across all major asset classes including Australian and
international shares, property, fixed interest and cash. This
segment also has funds management businesses in the United
Kingdom and Asia.
The Wealth Management segment also provides Australian term
trusts,
insurance, disability
investment products and general insurance.
insurance, annuities, master
(iv) International Financial Services
The Group has full service banking operations in New Zealand,
Fiji and Indonesia. The Group also has wholesale banking
operations in Indonesia, regions of China and Tokyo. The
Group’s International Financial Services segment also conducts
Life Insurance operations in New Zealand, where it has the
leading market share, as well as Asia and the Pacific, and
conducts Funds Management business in New Zealand.
There have been no significant changes in the nature of the
principal activities of the Group during the financial year.
(a) Bases of accounting
This general purpose Financial Report for the year ended 30
June 2008 has been prepared in accordance with the Australian
equivalents
International Financial Reporting Standards
(“AIFRS”) and the requirements of the Corporations Act 2001.
to
The basis of the AIFRS standards are the International Financial
Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”). As a result of complying
with AIFRS, the Group Financial Statements comply with IFRS,
and interpretations as issued by the IASB.
Notes to the Financial Statements
requires management
The preparation of the Annual Financial Report conforming with
AIFRS
to make estimates and
assumptions that affect the amounts reported in the Financial
Statements and accompanying notes. Further information is
included in Note 1 (mm) Critical Accounting Policies and
Estimates.
The use of available information and
the application of
judgement are inherent in the formation of estimates. Actual
results could differ from these estimates.
(b) Basis of preparation
The Financial Statements are prepared on the basis of historical
cost except that the following assets and liabilities are measured
at fair value: derivative financial instruments, assets and
liabilities at fair value through Income Statement, available-for-
sale investments, insurance policy liabilities, domestic bills
discounted which are included in loans, advances and other
receivables, investment property which backs liabilities paying a
return linked to the fair value or returns from assets including the
investment property, owner-occupied property, defined benefit
plan assets and liabilities, employee share-based remuneration
liabilities and recognised assets and liabilities attributable to the
hedged risk in a hedging relationship that qualifies for hedge
accounting treatment.
The Financial Report is presented in Australian dollars.
The following comparative information has been restated:
• During the year the Group reassessed the application of
AASB 132 Financial Instruments: Presentation, to certain
products with legal right of set off, for which interest is
calculated and charged on a net basis. While interest
continues to be calculated and charged on a net basis, the
Group no longer considers that these products meet the
requirements for set off in the Balance Sheet, so they are
now presented on a gross basis. Prior periods have been
restated by
increasing: Loans, advances and other
receivables and Deposits and other public borrowings as
follows - 2007: increased $15,686 million, 2006: increased
$14,349 million;
• During the year the Group reassessed the application of
AASB 139 Financial
Instruments: Recognition and
Measurement, to certain liabilities previously designated as
Liabilities at fair value through Income Statement. These
liabilities did not meet the necessary requirements for this
designation. Consequently
liabilities have been
reclassified to Debt issues. Prior periods have been restated,
by decreasing Liabilities at fair value through Income
Statement and increasing Debt issues as follows - 2007:
$3,035 million, 2006: $2,144 million; and
these
• During the year the Group reassessed the application of
AASB 112: Income Taxes, to presentation of deferred
income tax balances for the tax-consolidated group and
determined that the conditions for set-off have been met.
This has had the effect of reducing Deferred tax assets and
Deferred tax liabilities as follows - 2007: $668 million, 2006:
$602 million.
Commonwealth Bank of Australia Annual Report 2008 87
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
The following standards, interpretations and amendments have
been early adopted during the financial year commencing 1 July
2007:
• AASB Interpretation 13 Customer Loyalty Programmes, was
early adopted on 1 July 2007. Upon transition this resulted in
a reduction in retained earnings of $5 million and replacement
of the Group’s provision for future expenses in relation to its
credit card loyalty programmes with an equivalent amount of
deferred income. Income in relation to the credit card loyalty
program will be recognised in subsequent periods when the
loyalty points are redeemed and CBA fulfils its obligation; and
• AASB 8 Operating Segments and AASB 2007-3
Amendments to Australian Accounting Standards arising from
AASB 8 (February 2007), was early adopted effective 1 July
2007. This has resulted in changes to the presentation of the
Group’s segment reporting.
The following standards, interpretations and amendments have
been applied by
financial year
the Group during
commencing 1 July 2007:
the
• AASB 7 Financial Instruments: Disclosures (August 2005)
supersedes AASB 130 and the disclosure requirements of
AASB 132. This new standard has no impact on the
recognition, measurement or presentation of
financial
instruments, so does not impact the Group’s financial
position or results.
the
significance of financial instruments to the Group’s financial
position and result, and the nature and extent of credit,
market and liquidity risks arising from financial instruments,
including how they are managed;
It requires disclosures about
• AASB 2005-10 Amendments
(September
2005) made
to Australian Accounting
consequential
Standards
amendments
Instruments:
to AASB 132 Financial
Disclosures and Presentation, AASB 101 Presentation of
Financial Statements, AASB 114 Segment Reporting, AASB
117 Leases, AASB 133 Earnings per Share, AASB 139
Financial Instruments: Recognition and Measurement, AASB
1 First-time Adoption of Australian Equivalents
to
International Financial Reporting Standards, AASB 4
Insurance
Insurance Contracts, AASB 1023 General
Contracts and AASB 1038 Life Insurance Contracts, arising
from the release of AASB 7;
• AASB 2007-4 Amendments
to Australian Accounting
Standards Arising from ED 151 and Other Amendments
(April 2007)[1, 2, 3, 4, 5, 6, 7, 102, 107, 108, 110, 112, 114,
116, 117, 118, 119, 120, 121, 127, 128, 129, 130, 131, 132,
133, 134, 136, 137, 138, 139, 141, 1023 & 1038] allows
additional choices in the application of AASB 107 Cash Flow
Statements and AASB 131 Interests in Joint Ventures,
amends the definition of “separate financial statements” in
certain standards, removes the commentary from AASB 119
Employee Benefits, that Australia does not have a sufficiently
active and liquid market for high quality corporate bonds for
the purpose of discounting employee benefit liabilities, and
removes many of
the additional Australian disclosure
requirements in a number of standards, other than those
considered
the Australian
environment;
particularly
relevant
in
88 Commonwealth Bank of Australia Annual Report 2008
• AASB 2007-7 Amendments
to Australian Accounting
Standard [AASB 1, AASB 2, AASB 4, AASB 5, AASB 107 &
AASB 128] which follows the issuance of AASB 2007-4
Amendments to Australian Accounting Standards arising
from ED 151 and Other Amendments;
interaction between
• AASB Interpretation 10 Interim Financial Reporting and
Impairment addresses
the
the
requirements of AASB 134 Interim Financial Reporting and
the recognition of impairment losses on goodwill in AASB
136 and certain financial assets in AASB 139, and the effect
of that interaction on subsequent interim and annual financial
reports;
• AASB Interpretation 11 AASB 2 Group and Treasury Share
Transactions addresses whether certain types of share-
based payment transactions with employees (or other
suppliers of good and services) should be accounted for as
equity-settled or as cash-settled transactions under AASB 2
and also specifies the accounting in a subsidiary’s financial
statements for share-based payment arrangements involving
equity instruments of the parent;
• AASB 2007-1 Amendments
to Australian Accounting
Standards. This follows the issuance of Interpretation 11; and
• AASB 2008-4 Amendments
to Australian Accounting
Standard – Key Management Personnel Disclosures by
Disclosing Entities removes the requirement for disclosing
entities that are companies from having to make Key
Management Personnel (KMP) compensation disclosures in
the financial report as well as in the remuneration report. This
standard amends AASB 124 to exclude the Group from the
application of AASB 124 paragraphs 25.2-25.6 and 25.7.1
and 25.7.2. This has resulted in the removal of the KMP from
the financial report.
None of these had a material effect on the financial results or
position of the Group.
The following interpretations will be applied from the financial
year commencing 1 July 2008:
• AASB Interpretation 4 Determining whether an Arrangement
contains a Lease is applicable to annual reporting periods
beginning on or after 1 January 2008. The initial application
of AASB Interpretation 4 is not expected to materially impact
the financial results of the Bank or the Group;
• AASB Interpretation 12 Service Concession Arrangements
and AASB 2007-2 Amendments to Australian Accounting
Standards arising from AASB Interpretation 12 are applicable
to annual reporting periods beginning on or after 1 January
2008. The initial application of AASB Interpretation 12 is not
expected to materially impact the financial results of the Bank
or the Group; and
• AASB Interpretation 14 The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction is
applicable to annual reporting periods beginning on or after 1
January 2008. The initial application of AASB Interpretation
14 is not expected to materially impact the financial results of
the Bank or the Group.
Note 1 Accounting Policies (continued)
The following standards and amendments are available for early
adoption at 1 July 2008 and will be applied from the financial
year commencing 1 July 2009:
• AASB 2007-6 Amendments
to Australian Accounting
Standards Arising from AASB 123 (June 2007) and Revised
AASB 123 Borrowing Costs (June 2007) which removes the
option to expense borrowing costs related to “qualifying
assets”. AASB 2007-6 and the revised AASB 123 are
applicable for annual reporting periods beginning on or after
1 January 2009. The initial application of AASB 2007-6 is not
expected to materially impact the financial results of the Bank
or the Group;
• Revised AASB 3 Business Combinations, AASB 127
Consolidated and Separate Financial Statements and AASB
2008-3 Amendments to Australian Accounting Standards
arising from AASB 3 and AASB 127. The initial application of
these revised standards is not expected to materially impact
the financial results of the Bank or the Group;
• Revised AASB 101 Presentation of Financial Statements and
AASB 2007-8 Amendments
to Australian Accounting
Standards arising from AASB 101 and AASB 2007-10
Further Amendments to Australian Accounting Standards
arising from AASB 101. The initial application of the revised
AASB 101 and the revised AASB 2007-10 is not expected to
materially impact the financial results of the Bank or the
Group. This standard has no impact on the Bank or the
Group’s financial position or results;
• AASB 2008-1 Amendments
to Australian Accounting
Standards – Share based Payments: Vesting Conditions and
Cancellations clarifies
that vesting conditions comprise
service conditions and performance conditions only and that
other features of a share-based payment transaction are not
vesting conditions and specifies
that all cancellations,
whether by the entity or by other parties, should receive the
same accounting treatment. The initial application of AASB
2008-1 is not expected to materially impact the financial
results of the Bank or the Group; and
• AASB 2008-2 Amendments
to Australian Accounting
Standards – Puttable Financial Instruments and Obligations
Arising on Liquidation introduces an exception to the
definition of financial liability to classify as equity instruments
certain puttable financial instruments and certain instruments
that impose on an entity an obligation to deliver to another
party a pro rata share of the net assets of the entity only on
liquidation of the entity. The initial application of AASB 2008-
2 is not expected to materially impact the financial results of
the Bank or the Group.
Other standards and amendments are unlikely to have a
material effect on the Group.
(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 the entity.
Potential voting rights are considered when assessing control. A
number of consolidated entities were formed by the Group for
the purpose of asset securitisation transactions and structured
debt issuance, or to accomplish certain other narrow and well-
defined objectives. Such entities may acquire assets directly or
indirectly from the Bank or its affiliates.
Notes to the Financial Statements
Additionally, some of these entities are bankruptcy-remote (i.e.
their assets are not available to satisfy the claims of creditors of
the Group or any other of its subsidiaries). These entities are
consolidated in the Group’s Financial Statements when the
majority of exposure to risks and benefits from the entity resides
with the Group.
All balances and transactions between Group entities, including
unrealised gains and
losses, have been eliminated on
consolidation.
The consolidated Financial Statements also include the Group’s
share of the financial results of entities where the Group holds
an investment in, and has significant influence over, the financial
and operating policies of the entity. This is normally evidenced
when the Group owns 20% or more of the voting rights.
Associated companies are defined as those entities over which
the Group has significant influence but there is no capacity to
control. Investments in associates are carried at cost plus the
Group’s share of post-acquisition profit or loss and other
reserves. The Group’s share of profit or loss of associates is
included in the Group’s Income Statement.
(d) Revenue recognition
Revenue is recognised to the extent it is probable that economic
benefits will flow to the Group and the revenue can be reliably
measured. The principal sources of revenue are interest income
and fees and commissions.
Interest income
Interest income is recognised on an accrual basis using the
effective interest method. Further information is included in Note
1 (g) Receivables from other financial institutions, Note 1 (i)
Assets at fair value through Income Statement, Note 1 (j)
Available-for-sale investments, Note 1 (l) Loans, advances and
other receivables, and Note 1 (m) Leasing.
Lending fees
Fee income and direct costs relating to loan origination,
financing or restructuring and to loan commitments are deferred
and amortised to interest income over the expected life of the
loan using the effective interest method. Fees received for
commitments which are not expected to result in a loan are
recognised in the Income Statement over the commitment
period.
Loan syndication fees where the Group does not retain a portion
of the syndicated loan are recognised in income once the
syndication has been completed. Where fees are received on an
ongoing basis and represent the recoupment of the costs of
maintaining and administering existing loans, these fees are
recognised in Income Statement on an accrual basis.
Fees and commissions
fees
to specific
When commission charges and
transactions or events, they are recognised in income in the
period in which they are earned. However, when they are
charged for services provided over a period, they are recognised
in the income on an accrual basis.
relate
Other income
Trading income is recognised when earned based on changes
in fair value of financial instruments and is recorded from trade
date. Further information is included in Notes 1 (e) Foreign
currency translations, 1 (i) Assets at fair value through Income
Statement, and Note 1 (ff) Derivative financial instruments.
Life insurance business income recognition is explained in Note
1 (hh).
Commonwealth Bank of Australia Annual Report 2008 89
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
• Available-for-sale investments (Note 1 (j));
(e) Foreign currency translations
• Derivative assets (Note 1 (ff));
The functional and presentation currency of the domestic
operations of the Bank has been determined to be Australian
Dollars (“AUD”) as this currency best reflects the economic
substance of the underlying events and circumstances relevant
to the Bank. Each entity and overseas branch within the Group
has also determined their functional currency based on their own
primary economic indicators.
All foreign currency monetary items are revalued at spot rates of
exchange prevailing at Balance Sheet date and changes in the
spot rate are recorded in the Income Statement. Foreign
currency forward, futures, swaps and option positions are
revalued at appropriate market rates applying at Balance Sheet
date.
Non-monetary assets and liabilities that are measured in terms
of historical cost in a foreign currency are translated using the
exchange rate at the date of transaction.
Non-monetary assets and liabilities denominated in foreign
currencies that are measured at fair value are translated into
AUD at foreign exchange rates ruling at the dates the fair value
was determined.
With the exception of the revaluations classified in equity,
unrealised foreign currency gains and losses arising from these
revaluations and gains and losses arising from foreign exchange
dealings are included in the Income Statement.
The foreign currency assets and liabilities of overseas branches
and controlled entities with an overseas functional currency are
converted to AUD at Balance Sheet date in accordance with the
foreign exchange rates ruling at that date. Profit and loss items
for overseas branches and controlled entities are converted to
AUD progressively throughout the year at the spot exchange
rate at the date of the transaction. All resulting exchange
differences are recognised in the Foreign Currency Translation
Reserve (“FCTR”) as a separate component of equity.
Translation differences arising from translation of opening
balances of shareholders’ funds of overseas branches and
controlled entities at year end exchange rates are reflected in
the FCTR. The Group maintains a substantially matched
position in assets and liabilities in foreign currencies and the
level of net foreign currency exposure does not have a material
impact on its financial condition.
(f) Cash and liquid assets
Cash and liquid assets includes cash at branches, cash at
banks, nostro balances, money at short call with an original
maturity of three months or less and securities held under
reverse repurchase agreements. They are measured at face
value or the gross value of the outstanding balance. Interest is
recognised in the Income Statement using the effective interest
method.
(g) Receivables from other financial institutions
Receivables from other financial institutions include loans,
deposits with regulatory authorities and settlement account
balances due from other banks. They are measured at
amortised cost similar to loans, advances and other receivables,
refer Note 1 (l). Interest is recognised in the Income Statement
using the effective interest method.
(h) Financial instruments
Financial instruments are classified into one of the following
categories which determines their measurement basis:
• Assets at fair value through Income Statement (Note 1 (i));
90 Commonwealth Bank of Australia Annual Report 2008
• Loans, advances and other receivables (Note 1 (l));
• Liabilities at fair value through Income Statement (Note 1 (x));
• Liabilities at amortised cost;
• Derivative liabilities (Note 1 (ff)); and
• Shareholders’ equity (Note 1 (ee)).
Except for restructured facilities referred to in Note 1(l) Loans,
advances and other receivables, 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.
The Group has no held to maturity investments.
Offsetting financial instruments
The Group offsets financial assets and liabilities where there is a
legally enforceable right to set off, and there is an intention to
settle on a net basis or to realise the asset and settle the liability
simultaneously.
Derecognition of financial assets
Financial assets are derecognised either when sold, or when the
rights to receive cash flows from the financial assets have
expired or have been transferred, or when the Group has
transferred substantially all the risks and rewards of ownership.
In transactions where substantially all the risks and rewards are
neither retained nor transferred, the Group derecognises assets
when control is no longer retained, or when control is retained
the assets are recognised to the extent of the Group’s continuing
involvement.
(i) Assets at fair value through Income Statement
Assets at fair value through Income Statement include assets
held for trading and assets that upon initial recognition are
designated by the Group as at fair value through Income
Statement. This designation is made when it reduces significant
accounting mismatches between assets and related liabilities,
the group of
their
performance is evaluated on a fair value basis, or where the
asset is a contract which contains an embedded derivative.
financial assets are managed and
These assets are recognised on trade date at fair value with
transaction costs including brokerage, commissions and fees
expensed through the Income Statement. Subsequent changes
in fair value are recognised in other operating income. Dividends
earned are recorded in other operating income. Interest earned
is recorded within net interest earnings using the effective
interest method.
Assets at fair value through Income Statement are classified into
three subcategories: Trading, Insurance and Other.
Trading
Trading assets are short and long term public, bank and other
debt securities and equities that are acquired and held for
trading purposes. Subsequent to initial recognition, fair value is
measured using quoted bid prices where available. In a trading
portfolio with offsetting risk positions, quoted mid prices, where
available, are used to measure the fair value. Non-market
quoted assets are valued using valuation techniques based on
market conditions and risks existing at Balance Sheet date.
Insurance
Insurance assets are investments that back life insurance
contracts and life investment contracts. They are measured at
fair value based on quoted bid prices or using appropriate
valuation techniques. Refer to Note 1 (hh), Life insurance
business for further details.
Note 1 Accounting Policies (continued)
Other
Other investments include financial assets which the Group has
designated as at fair value through Income Statement at
inception to eliminate an accounting mismatch. Subsequent to
initial recognition fair value is measured using quoted bid prices
where available. Quoted mid prices, where available, are used
to measure fair value in a portfolio with offsetting risk positions.
Non-market quoted instruments are valued using valuation
techniques, based on market conditions and risks existing at
Balance Sheet date.
(j) Available-for-sale investments
Available-for-sale investments are short and long term public,
bank and other securities and include bonds, notes, bills of
exchange, commercial papers, certificates of deposit, equities
and rolling loan originations and syndications.
investments whose
Available-for-sale investments are initially recognised at fair
value including transaction costs, and thereafter at fair value.
Equity
fair value cannot be reliably
measured are valued at cost. Gains and losses arising from
changes in fair value are reported in the Available-for-sale
investments reserve within equity net of applicable income taxes
until such investments are sold, collected, otherwise disposed of,
or become impaired. Interest, premiums and dividends are
reflected in other operating income when earned.
Available-for-sale investments are tested for impairment in line
with Note 1 (n) Provisions for impairment.
Upon disposal or impairment, the accumulated change in fair
value within
is
transferred to the Income Statement and reported within other
operating income.
the Available-for-sale
investments reserve
(k) Repurchase agreements
Securities sold under agreements to repurchase are retained
within the Available-for-sale investments or Assets at fair value
through
for
accordingly in line with Note 1 (j) and (i) respectively.
Income Statement categories and accounted
Liability accounts are used to record the obligation to repurchase
and disclosed as Deposits. Securities held under reverse
repurchase agreements are recorded within Cash and liquid
assets.
(l) Loans, advances and other receivables
Loans, advances and other receivables are financial assets with
fixed and determinable payments that are not quoted in an
active market.
term
finance
lending,
They include overdrafts, home loans, credit card and other
financing, redeemable
personal
loans, bill
preference shares, securities and
leases. Loans,
advances and other receivables are initially recognised at fair
value including direct and incremental transaction costs. They
are subsequently measured at amortised cost using the effective
interest method and are presented net of provisions for
impairment. Where loans, advances and other receivables are
originated with the intent to be sold immediately or in the short
term, they are recorded in Assets at fair value through Income
Statement.
Note 1 (d) and Note 1 (n) provide additional information with
respect to revenue recognition and impairment respectively.
Non-Performing Facilities
Individual provisions for impairment are recognised to reduce
the carrying amount of loans, advances and other receivables to
their estimated recoverable amounts. Individually significant
provisions are calculated based on discounted cash flows.
Notes to the Financial Statements
The unwinding of the discount from initial recognition of
impairment through to recovery of the written down amount is
recognised as interest income. In subsequent periods, interest in
arrears/due on non-performing facilities is recognised in the
Income Statement using the interest rate used for the purpose of
measuring the impairment of the asset.
Restructured Facilities
When the original contractual terms of facilities (primarily loans)
are modified, the accounts become classified as restructured.
Such accounts continue to accrue interest as long as the facility
is performing in accordance with the restructured terms. If
performance is not maintained, or collection of interest and/or
principal is no longer probable, the account will be returned to
the non-performing classification. Facilities are generally kept as
non-performing until they are returned to a performing basis.
Assets Acquired Through Securities Enforcement
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 an individually assessed provision or written off.
AATSE are further classified as Other Real Estate Owned or
Other Assets Acquired Through Security Enforcement and
classified in the appropriate asset classifications in the Balance
Sheet.
Impairment of loans, advances and other receivables
The Group has individually assessed and collective provisions
for impairment as explained in Note 1 (n).
(m) Leasing
Leases where the Group transfers substantially all the risks and
rewards incident to ownership of an asset to the lessee or a third
party are classified as finance leases. A receivable at an amount
equal to the present value of the lease payments, including any
guaranteed residual value, is recognised.
Income on finance lease transactions is recognised on a basis
reflecting a constant periodic return based on the lessor’s net
investment outstanding in respect of the finance lease.
The difference between the gross receivable and the present
value of the receivable is unearned finance income and is
recognised over the term of the lease using the effective interest
method. Finance lease receivables are included in Loans,
advances and other receivables.
Leases where the Group retains substantially all the risks and
rewards incident to ownership of an asset are classified as
operating leases.
Operating lease rental revenue and expense is recognised in the
Income Statement on a straight-line basis over the lease term.
The Group classifies assets leased out under operating leases
as property, plant and equipment. These assets are depreciated
over their expected useful lives on a basis consistent with similar
fixed assets.
(n) Provisions for impairment
Financial assets
Financial assets, excluding Derivative assets and Assets at fair
value through Income Statement, are reviewed at each Balance
Sheet date to determine whether there is objective evidence of
impairment.
Commonwealth Bank of Australia Annual Report 2008 91
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
A financial asset or portfolio of financial assets is impaired and
impairment losses are incurred if, and only if, there is objective
evidence of impairment as a result of one or more loss events
that occurred after the initial recognition of the asset and prior to
the Balance Sheet date (“a loss event”) and that loss event or
events has had an impact on the estimated future cash flows of
the financial asset or the portfolio that can be reliably estimated.
If any such indication exists, the asset’s carrying amount is
written down to the asset’s estimated recoverable amount.
Loans, advances and other receivables
The Group assesses at each balance date whether there is any
objective evidence of impairment.
If there is objective evidence that an impairment loss on loans,
advances and other receivables has been incurred, the amount
of the loss is measured as the difference between the asset’s
carrying amount and the present value of the expected future
cash flows (excluding future credit losses that have not been
incurred), discounted at the financial asset’s original effective
interest rate. Short-term balances are not discounted.
The Group has individually assessed provisions and collectively
assessed provisions. Individually assessed provisions are made
against individually significant financial assets and groups of
financial assets with similar credit risk characteristics.
Individually significant provisions are assessed as the difference
between an asset’s carrying amount and the present value of
estimated future cash flows discounted at the asset’s original
effective interest rate.
All other loans and advances that do not have an individually
assessed provision are assessed collectively for impairment.
Collective provisions are maintained to reduce the carrying
amount of portfolios of similar loans and advances to their
estimated recoverable amounts at the Balance Sheet date.
The expected future cash flows for portfolios of assets with
similar risk characteristics are estimated on the basis of historical
loss experience. Loss experience is adjusted on the basis of
current observable data to reflect
the effects of current
conditions that did not affect the period on which the loss
experience is based and to remove the effects of conditions in
the period that do not currently exist. Increases or decreases in
the provision amount are recognised in the Income Statement.
Available-for-sale investments
When a decline in the fair value of an Available-for-sale
investment has been recognised directly in equity and there is
objective evidence that the asset is impaired, the cumulative loss
is removed from equity and recognised in the Income Statement
through a provision account.
If in a subsequent period the amount of an impairment loss for
an available-for-sale debt security decreases and the decrease
can be linked objectively to an event occurring after the
impairment event, the impairment is reversed through the
Income Statement. However, impairment losses on available-
for-sale equity securities are not reversed through the Income
Statement while the asset is still recognised.
Goodwill and other non-financial assets
Goodwill balances and intangible assets with an indefinite useful
life are assessed for impairment at each reporting date or more
regularly where an indication of impairment exists. Refer to Note
1 (t) Intangibles for more details on goodwill and intangibles
impairment testing. If any such indication exists, the asset’s
carrying amount is written down to the asset’s estimated
92 Commonwealth Bank of Australia Annual Report 2008
recoverable amount and the loss is recognised in the Income
Statement in the period in which it occurs.
The carrying amounts of the Group’s other non-financial assets
are reviewed at each Balance Sheet date to determine whether
there is any indication of impairment. If any such indication
exists, the asset’s recoverable amount is estimated.
The recoverable amount of an asset or cash generating unit can
be the greater of the fair value less cost to sell, or value in use.
An impairment loss is recognised whenever the carrying amount
of an asset or its cash-generating unit exceeds its recoverable
amount. Impairment losses are recognised in the Income
Statement.
A previously recognised impairment loss (except for goodwill) is
reversed if there has been a change in the estimates used to
determine the recoverable amount. However, the reversal is not
to an amount higher than the carrying amount that would have
been determined, net of amortisation or depreciation, if no
impairment loss had been recognised in prior years.
Off-balance sheet items
Provisions for impairment for off-balance sheet items such as a
commitment are reported in other provisions. Measurement of
provisions is discussed further in Note 1 (aa) Provisions.
The Group recognises impairment provisions in respect of only
those advances and credit transactions for which there is
objective evidence of impairment at Balance Sheet date.
The amounts required to bring the provisions for impairment to
their assessed levels are recognised in the Income Statement.
(o) Bank acceptances of customers
The exposure arising from the acceptance of bills of exchange
that are sold into the market is recognised 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
recognised in the Income Statement when earned.
(p) Shares in and loans to controlled entities
Equity contributions to controlled entities are carried in the
Bank’s Financial Statements at the lower of cost of acquisition or
recoverable amount, and loans to controlled entities are
measured at amortised cost using the effective interest method.
These assets are measured at fair value when impaired and a
provision is raised as per Note 1 (n) Provisions for impairment.
(q) Investment property
Investment properties are classified as properties held to earn
rental income and/or for capital appreciation.
The Group carries investment property which backs liabilities
paying a return linked to the fair value or returns from assets
including the investment property at fair value based on a
valuation performed by professional valuers. Valuations are
carried out annually. Fair value movements are recognised in
the Income Statement in the period in which they arise.
(r) Assets classified as held for sale
Assets are classified as held for sale when their carrying
amounts will be recovered principally through sale within 12
months. They are measured at the lower of carrying amount and
fair value less costs to sell unless the nature of the assets
requires they be measured in line with another accounting
standard. Where this is the case the asset’s measurement basis
is separately outlined.
Assets classified as held for sale are neither amortised nor
depreciated unless the nature of the asset requires it.
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(s) Property, plant and equipment
(t) Intangibles
Goodwill
The Group measures its property assets (land and buildings) on
a fair value measurement basis using independent market
valuations.
Revaluation adjustments are generally reflected in the Asset
Revaluation Reserve, except to the extent they reverse a
revaluation decrease of the same asset previously recognised in
the Income Statement. Gains or losses on disposals are
the net disposal
determined as
proceeds, if any, and the carrying amount of the item. Realised
amounts in the Asset Revaluation Reserve are transferred to the
Capital Reserve.
the difference between
Equipment is measured at cost less accumulated depreciation
and provision for impairment, if any. Depreciation is calculated
principally on a category basis at rates applicable to each
category’s useful life using the straight-line method and treated
as an operating expense charged to the Income Statement.
Computer software is capitalised at cost and classified as
Property, Plant and Equipment where it is integral to the
operation of associated hardware.
The useful lives of major depreciable asset categories are as
follows:
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
recognised in the Balance Sheet.
Goodwill is reviewed annually for impairment at each reporting
date, or more frequently if events or changes in circumstances
indicate that it might be impaired. For the purposes of
impairment testing, goodwill is allocated to cash-generating units
or groups of units. A cash-generating unit is the smallest
identifiable group of assets that generate independent cash
flows. Goodwill is allocated by the Group to cash generating
units or groups of units based on how goodwill is monitored by
management.
An impairment loss is recognised for a cash-generating unit if
the higher of the recoverable amount or the value in use of the
unit/group of units is less than the carrying amount of the
unit/group of units.
The recoverable amount of
is
calculated as the fair value less costs to sell, measured using
readily available market data and assumptions. Impairment
losses on goodwill are not subsequently reversed.
the cash-generating units
Gains and losses on the disposal of an entity are net of the
carrying amount of the goodwill relating to the entity.
Buildings
Shell
Maximum 30 years
Computer software costs
Integral plant and equipment:
Carpets
10 years
All other (air-conditioning, lifts)
20 years
Non-integral plant and equipment:
Fixtures and fittings
10 years
Leasehold improvements
Leasehold improvements
Lesser of unexpired lease
term or lives as above
Equipment
Security surveillance systems
Furniture
Office machinery
EFTPOS machines
7 years
8 years
5 years
3 years
Depreciation rates and methods underlying the calculation of
depreciation of items of property, plant and equipment are kept
under review to take account of any change in circumstances.
Where computer software costs are not integrally related to
associated hardware, the Group recognises them as an
intangible asset where they are clearly identifiable, can be
reliably measured and it is probable they will lead to future
economic benefits that the Group controls.
The Group carries capitalised software assets at cost less
amortisation and any impairment losses.
These assets are amortised over their estimated useful lives on
a straight-line basis which is usually between three and five
years.
Estimates of useful lives are revised when a change in
circumstances indicates a reassessment should be performed.
Any impairment loss is recognised when incurred.
Software maintenance costs are expensed as incurred.
Other Intangibles
Other intangibles comprise acquired management fee rights and
customer lists where they are clearly identifiable, can be reliably
measured and where it is probable they will lead to future
economic benefits that the Group controls.
Estimates of useful lives are revised when a change in
circumstances indicates a reassessment should be performed.
Management fee rights have been assessed to have indefinite
lives and are carried at cost less any impairment losses.
No depreciation is charged on freehold land, although, in
common with all long-lived assets, it is subject to impairment
testing, if deemed appropriate.
Property, plant and equipment are periodically reviewed for
impairment. Where the carrying amount of an asset is greater
than its estimated recoverable amount, it is written down
immediately through the Income Statement to its recoverable
amount.
Where the Group expects the carrying amount of assets held
within property, plant and equipment to be recovered principally
through a sale transaction in the short-term rather than through
continuing use, these assets are classified as Held for sale.
Customer lists are carried at cost less amortisation, which is
generally over a period of ten years.
(u) Other assets
Other assets include all other financial assets and include
interest, fees and other unrealised income receivable, and
securities sold not delivered. These assets are recorded at the
amortised cost.
The net surpluses or deficits that arise within defined benefit
superannuation plans are recognised and disclosed separately
in Other assets and Bills payable and Other liabilities.
Commonwealth Bank of Australia Annual Report 2008 93
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(v) Deposits from customers
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 initially recognised at fair value
including directly attributable transaction costs and subsequently
measured at amortised cost. Interest and yield related fees are
recognised on an effective interest basis.
Where
the Group has hedged deposits with derivative
instruments, hedge accounting rules are applied (refer to Note 1
(ff) Derivative financial instruments).
(w) Payables to other financial institutions
Payables to other financial institutions include deposits, vostro
balances and settlement account balances due to other banks.
They are recognised at fair value including directly attributable
transaction costs at inception.
to other
institutions are subsequently
Payables
recognised at amortised cost. Interest and yield related fees are
recognised using the effective interest method.
financial
Where the Group has designated payables to other financial
institutions as Liabilities at fair value through Income Statement,
the changes in fair value are reported in the Income Statement
(refer Note 1 (x) Liabilities at fair value through Income
Statement).
(x) Liabilities at fair value through Income Statement
The Group designates certain liabilities at fair value through
Income Statement on origination where those liabilities are
managed on a fair value basis or where the liabilities eliminate
an accounting mismatch. The liabilities are recognised on trade
date at fair value and transaction costs are taken directly to the
Income Statement. Subsequent changes in fair value are
recognised in the Income Statement. For quoted liabilities,
quoted offer prices are subsequently used to measure fair value.
Quoted mid prices are used to measure liabilities with offsetting
risk positions in a portfolio at fair value. For non-market quoted
liabilities, subsequent fair values are determined using valuation
techniques.
A deferred tax asset is recognised only to the extent it is
probable that future taxable profits will be available against
which the asset can be utilised. Deferred tax assets are reduced
to the extent that it is no longer probable that the related tax
benefit will be realised.
The Commonwealth Bank of Australia Group elected to be taxed
as a single entity under the tax consolidation system with effect
from 1 July 2002.
The Bank has formally notified the Australian Taxation Office of
its adoption of the tax consolidation regime. In addition to the
Group electing to be taxed as a single entity under the tax
consolidation regime, the measurement and disclosure of
deferred tax assets and liabilities has been performed in
accordance with the principles in AASB 112, and on a modified
stand alone basis under UIG 1052.
Any current tax liabilities/assets (after the elimination of intra-
Group transactions) and deferred tax assets arising from unused
tax losses assumed by the Bank from the subsidiaries in the tax
consolidated group are recognised in conjunction with any tax
funding arrangement amounts (refer below).
Any difference between these amounts is recognised by the
Bank as an equity contribution to or distribution from the
subsidiary.
The Bank recognises deferred tax assets arising from unused
tax losses of the tax-consolidated group to the extent it is
probable that future taxable profits of the tax-consolidated group
will be available against which the asset can be utilised.
Any subsequent period adjustments to deferred tax assets
arising from unused tax losses assumed from subsidiaries are
recognised by the Bank only.
The members of the tax-consolidated group have entered into a
tax funding arrangement which sets out the funding obligations
of members of the tax-consolidated group in respect of tax
amounts.
(z) Employee benefits
Annual leave
The provision
outstanding liability to employees at Balance Sheet date.
for annual
represents
leave
the current
(y) Income taxes
Long service leave
Income tax on the profit and loss for the period comprises
current and deferred tax.
Income tax is recognised in the Income Statement, except to the
extent that it relates to items recognised directly in equity, in
which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income
for the year, using tax rates enacted or substantially enacted at
the Balance Sheet date, and any adjustment to tax payable in
respect of previous years.
Deferred tax is provided using the Balance Sheet liability
method, providing
for temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes.
The amount of deferred tax provided is based on the expected
manner of realisation or settlement of the carrying amount of
assets and liabilities, using tax rates enacted or substantially
enacted at the Balance Sheet date which are expected to apply
when the deferred tax asset is realised or the deferred tax
liability is settled.
94 Commonwealth Bank of Australia Annual Report 2008
The provision for long service leave is discounted to the present
value, is subject to actuarial review and is maintained at a level
that accords with actuarial advice.
Other employee benefits
The provision for other employee entitlements represents
liabilities for staff housing loan benefits, a subsidy to a registered
health fund with respect to retired and current employees, and
employee incentives under employee share plans and bonus
schemes.
The Group engages in share-based remuneration in respect of
services received from certain of its employees. The share
based remuneration may be cash settled or equity settled. The
fair value of equity settled remuneration is calculated at grant
date and amortised to the Income Statement over the vesting
period, with a corresponding
the Equity
Compensation Reserve. For these awards, market vesting
conditions, such as share price performance conditions, are
taken into account when estimating the fair value. Non–market
vesting conditions, such as service conditions, are taken into
account by adjusting the number of the equity instruments
included in the measurement of the expense.
increase
in
Note 1 Accounting Policies (continued)
Cash settled remuneration is recognised as a liability and
remeasured to fair value until settled, with changes in the fair
value recognised as an expense.
Defined benefit superannuation plans
currently
The Group
two defined benefit
sponsors
superannuation plans for its employees. The assets and
liabilities of these plans are legally held in separate trustee-
administered funds. They are calculated separately for each
plan by assessing the fair value of plan assets and deducting the
amount of future benefit that employees have earned in return
for their service in current and prior periods discounted to
present value. The discount rate is the yield at Balance Sheet
date on government securities which have terms to maturity
approximating to the terms of the related liability.
The defined benefit superannuation plan surpluses and/or
deficits are calculated by fund actuaries. Contributions to all
superannuation plans are made in accordance with the rules of
the plans. As the Australian plan is in surplus, no funding is
currently necessary.
losses
related
Actuarial gains and
to defined benefit
superannuation plans are directly recorded in Retained Profits.
The net surpluses or deficits that arise within defined benefit
superannuation plans are recognised and disclosed separately
in Other assets or Bills payable and other liabilities.
Defined contribution superannuation plans
The Group sponsors a number of defined contribution
superannuation plans. Certain plans permit employees to make
contributions and earn matching or other contributions from the
Group. The Group recognises contributions due in respect of the
accounting period in the Income Statement. Any contributions
unpaid at the Balance Sheet date are included as a liability.
(aa) Provisions
Provision for dividends
A provision for dividend payable is recognised when dividends
are declared by the Directors.
Provisions for restructuring
Provisions for restructuring are recognised where there is a
for restructure and a demonstrated
detailed
commitment to that plan.
formal plan
Notes to the Financial Statements
Where the Group has designated debt instruments at fair value
through Income Statement, the changes in fair value are
recognised in the Income Statement. Refer to Note 1 (x)
Liabilities at fair value through Income Statement.
Embedded derivatives with economic characteristics and risks
that are not wholly related to the economic characteristics and
notes of the host instruments are separated from the debt
issues. Refer Note 1 (ff) Derivative financial instruments.
Hedging
The Group hedges interest rate and foreign currency risk on
certain debt issues. When hedge accounting is applied to fixed
rate debt issues, the carrying values are adjusted for changes in
fair value related to the hedged risks rather than carried at
to Note 1 (ff) Derivative financial
amortised cost. Refer
instruments.
(cc) Bills payable and other liabilities
Bills payable and other liabilities includes interest, fees, other
expenses payable, securities purchased not delivered and any
defined benefit superannuation plan deficit.
Any superannuation plan deficit is recorded in line with Note 1
(z) Employee benefits while the remaining liabilities are recorded
at amortised cost using the effective interest method.
Where the Group has designated bills payable and other
liabilities at fair value through Income Statement, the changes in
fair value are reported in the Income Statement (refer to Note 1
(x) Liabilities at fair value through Income Statement).
(dd) Loan capital
Loan capital is debt issued by the Group with terms and
conditions, such as being undated or subordinated, which qualify
for inclusion as capital under APRA Prudential Standards. Loan
capital debt issues are initially recorded at fair value plus directly
attributable transaction costs. After initial recognition loan capital
debt issues are measured at amortised cost using the effective
interest method.
Interest inclusive of premiums, discounts and associated issue
expenses is recognised in the Income Statement using the
effective interest method over the expected life of the instrument
so that they attain their redemption values by maturity date. Any
profits or losses arising from redemption prior to expected
maturity are recognised in the Income Statement in the period in
which they are realised.
Provision for self-insurance
(ee) Shareholders’ equity
The provision for self-insurance covers certain non-lending
losses and non-transferred insurance risks. Actuarial reviews
are carried out at regular intervals with provisioning effected in
accordance with actuarial advice.
(bb) Debt issues
Debt issues are short and long term debt issues of the Group
including commercial papers, notes, term loans and medium
term notes. Commercial paper, floating, fixed and structured
debt issues are recorded at cost or amortised cost using the
effective interest method.
Premiums, discounts and associated issue expenses are
recognised in the Income Statement using the effective interest
method, from the date of issue, to ensure that securities attain
their redemption values by maturity date.
Interest is recognised in the Income Statement using the
effective interest method. Any profits or losses arising from
redemption prior to maturity are taken to the Income Statement
in the period in which they are realised.
Ordinary share capital is the amount of paid up capital from the
issue of ordinary shares.
Treasury Shares are deducted from Ordinary share capital.
Gains or losses on the reissue of Treasury Shares are
recognised in shareholders’ equity within Retained Profits.
The movement between the acquisition and reissue price of
Treasury Shares remains within shareholders’ equity.
The General Reserve is derived from revenue profits and is
available for dividend payments except for undistributable profits
in respect of the Group’s life insurance businesses.
The Capital Reserve is derived from capital profits (refer to Note
1 (s) Property, Plant and Equipment) and is available for
dividend payments.
for Credit Losses was originally
The General Reserve
appropriated from Retained Profits to comply with APRA
prudential requirements in prior periods and has been returned
to Retained Profits.
Commonwealth Bank of Australia Annual Report 2008 95
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
Cash flow hedges
(ff) Derivative financial instruments
The Group has a significant volume of derivative financial
instruments that include foreign exchange contracts, forward
rate agreements, futures, options and interest rate, currency,
equity and credit swaps.
Derivative financial instruments are used as part of the Group’s
trading activities and to hedge certain assets and liabilities.
Derivatives that do not meet the hedging criteria are classified as
derivatives held for trading, or as other derivatives.
The Group initially recognises derivative financial instruments at
the fair value of consideration given or received.
They are subsequently remeasured to fair value based on
quoted market prices, or broker or dealer price quotations. Non-
market quoted instruments are subsequently valued using
valuation techniques based on market conditions and risks
existing at Balance Sheet date.
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 fair value of derivatives are recognised in the
Income Statement unless designated within a cash flow hedging
relationship.
Swaps
Interest rate swap receipts and payments are recognised within
net interest income using the effective interest method as
interest of the designated hedged item or class of items being
hedged over the term for which the swap is effective as a hedge,
whereas revaluation gains and losses are recognised within
other operating income.
Similarly with cross currency swaps, interest rate receipts and
payments are recognised on the same basis as for interest rate
swaps. In addition, the initial principal flows are revalued to fair
value at the current market exchange rate with revaluation gains
and losses recognised in the Income Statement against
revaluation losses and gains of the underlying hedged item or
class of items.
Derivative financial instruments utilised for hedging
relationships
The Group uses derivative instruments as part of its asset and
liability management activities to manage exposures to interest
rate, foreign currency and credit risks, including exposures
arising from forecast transactions. Hedge accounting can be
applied subject to certain rules for fair value hedges, cash flow
hedges and hedges of foreign operations. Cash flow and fair
value hedges are the predominant hedges applied by the Group.
Swaps are the major financial instruments used in the Group’s
hedging arrangements.
Fair value hedges
For fair value hedges, the change in fair value of the hedging
derivative, and the hedged risk of the hedged item, is recognised
immediately in the Income Statement within other operating
income. If the fair value hedge relationship is terminated for
reasons other than the derecognition of the hedged item, fair
value hedge accounting ceases and, in the case of an interest
bearing item, the fair value adjustment of the hedged item is
amortised to the Income Statement over the remaining term of
the original hedge. If the hedged item is derecognised the
unamortised fair value adjustment is recognised immediately in
the Income Statement.
96 Commonwealth Bank of Australia Annual Report 2008
A fair valuation gain or loss associated with the effective portion
of a derivative designated as a cash flow hedge is recognised
initially in shareholders’ equity within the Cash flow hedge
reserve. Amounts
flow hedge reserve are
transferred to the Income Statement when the cash flows on the
hedged item are recognised in profit and loss. Gains and losses
resulting from cash flow hedge ineffectiveness are recorded
immediately in the Income Statement.
the Cash
in
A fair valuation gain or loss represents the amount by which
changes in the fair value of the expected cash flow of the
hedging derivative differ from the fair value of the changes (or
expected changes) in the cash flow of the hedged item.
Where the hedged item is derecognised, the cumulative gain or
loss is recognised immediately in the Income Statement. If for
reasons other than the derecognition of the hedged item, cash
flow hedge accounting ceases, the cumulative gains or losses
are amortised to the Income Statement over the remaining term
of the original hedge.
Net Investment Hedges
Hedges of net investments in overseas subsidiaries are
accounted for in a manner similar to cash flow hedges. Any gain
or loss on the hedging instrument relating to the effective portion
of the hedge is recognised in the Foreign Currency Translation
Reserve (“FCTR”) and the gain or loss relating to the ineffective
portion is immediately recognised in the Income Statement.
Gains and losses accumulated in the FCTR are transferred to
the Income Statement when the overseas subsidiary is disposed
of.
Embedded derivatives
A derivative may be embedded within a host contract. If the host
contract is not already measured at fair value with changes in
fair value reported in the Income Statement, and where the
economic characteristics and risks of the embedded derivative
are not closely related to the economic characteristics and risks
of the host contract, the embedded derivative is separated from
the host contract and accounted for as a stand-alone derivative
instrument at fair value.
(gg) Commitments to extend credit, letters of credit,
guarantees, warranties and indemnities issued
Contingent liabilities are possible obligations whose existence
will be confirmed only by uncertain future events, or present
obligations where the transfer of economic benefit is uncertain or
cannot be reliably measured. Contingent liabilities are not
recognised, but are disclosed, unless they are remote.
Financial guarantees are given to banks, financial institutions
and other bodies on behalf of customers to secure loans,
overdrafts and other banking facilities, and to other parties in
connection with the performance of customers under obligations
related to contracts, advance payments made by other parties,
tenders, retentions and the payment of import duties.
Financial guarantee contracts are initially recognised at fair
value.
Subsequent to initial recognition, financial guarantees are
measured at the higher of the initial measurement amount, less
amortisation calculated to recognise fee income earned, and the
best estimate of the expenditure required to settle any financial
obligation at the Balance Sheet date.
Any increase in the liability relating to financial guarantees is
recognised in the Income Statement. Any liability remaining is
recognised in the Income Statement when the guarantee is
discharged, cancelled or expires.
Note 1 Accounting Policies (continued)
(hh) Life and general insurance business
Life Insurance business
The Group’s life insurance business is comprised of insurance
contracts and investment contracts as defined by AASB 4.
Insurance contracts are accounted for in accordance with the
requirements of AASB 1038.
Investment contracts are
accounted
instruments with a separate
for as
management services element in accordance with AASB 118,
139 and 1038. Details are set out below.
financial
All assets, liabilities, revenues, expenses and equity are
recognised irrespective of whether they are designated as
relating to policyholders or to shareholders.
All assets backing insurance liabilities are classified as Assets at
fair value through Income Statement. They are measured at fair
value based on quoted bid prices or using appropriate valuation
techniques.
Life insurance contract liabilities are measured at the net present
value of future receipts from and payments to policyholders
using a risk free discount rate (or expected fund earning rate
where benefits are contractually
the asset
performance), and are calculated in accordance with the
principles of Margin on Services (“MoS”) profit reporting as set
out in Prudential Standard LPS 1.04 – Valuation of Policy
Liabilities (“LPS 1.04”) issued by APRA.
linked
to
Life investment contract liabilities are measured at fair value in
accordance with AASB 139 as Liabilities at fair value through
Income Statement.
Returns on all investments controlled by life insurance entities
within the Group are recognised as revenues. Investments in the
Group’s own equity instruments held within the life insurance
statutory funds and other funds are treated as Treasury Shares
in accordance with Note 1 (ee) Shareholders’ equity.
Initial entry fee income on investment contracts issued by life
insurance entities is recognised upfront where the Group
provides financial advice. Other entry fees are deferred and
recognised over the life of the underlying investment contract.
Participating benefits vested in relation to the financial year,
from unvested policyholder benefits
transfers
other
liabilities, are recognised as expenses.
than
Reinsurance contracts entered into are recognised on a gross
basis.
Premiums and claims
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.
(i) Life insurance contracts
Premiums received for providing services and bearing risks are
recognised as revenue. Premiums with a regular due date are
recognised as revenue on a due and receivable basis.
Premiums with no due date are recognised on a cash received
basis. Insurance contract claims are recognised as an expense
when a liability has been established.
(ii) Investment contracts
Premiums received include the fee portion of the premium
recognised as revenue over the period the underlying service is
provided and the deposit portion recognised as an increase in
investment contract liabilities. Premiums with no due date are
recognised on a cash received basis.
Notes to the Financial Statements
Fees earned for managing the funds invested are recognised as
revenue. Claims under
represent
withdrawals of investment deposits and are recognised as a
reduction in investment contract liabilities.
investment contracts
Life insurance liabilities and profit
Life insurance contract 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 policy payments are used to
determine profit recognition.
insurance contract and
Investment assets are held in excess of those required to meet
life
liabilities.
Investment earnings are directly influenced by market conditions
and as such this component of profit varies from year to year.
investment contract
Participating policies
insurance contract policy
Life
participating policies include
shareholder profit margins and an allowance
supportable bonuses.
liabilities attributable
to
the value of future planned
future
for
The value of supportable bonuses and planned shareholder
profit margins account for all profit on participating policies based
on best estimate assumptions.
Under the “Margin on Services” profit recognition methodology,
the value of supportable bonuses and the shareholder profit
margin relating to a reporting year will emerge as planned profits
in that year.
Life insurance contract acquisition costs
Acquisition costs for life insurance contracts include the fixed
and variable costs of acquiring new business. These costs are
effectively deferred through the determination of life insurance
contract liabilities at the balance date to the extent that they are
deemed recoverable from the expected future profits of an
amount equivalent to the deferred cost.
Deferred acquisition costs are amortised over the expected life
of the life insurance contract.
Life investment contract acquisition costs
Acquisition costs for investment contracts include the variable
costs of acquiring new business. However, the deferral of
investment contract acquisition costs is limited by the application
of AASB 118 to the extent that only incremental transaction
costs (for example commissions and volume bonuses) are
deferred. The
in
accordance with AASB 139 is no less than the contract
surrender value.
investment contract
liability calculated
Managed fund units on issue – held by minority unitholders
The life insurance statutory funds and other funds include
controlling interests in trusts and companies, and the total
amounts of each underlying asset, liability, revenue and
expense of the controlled entities are recognised in the Group’s
consolidated Financial Statements.
When a controlled unit trust is consolidated, the share of the unit
holder liability attributable to the Bank is eliminated but amounts
due to external unitholders remain as liabilities in the Group’s
consolidated Balance Sheet. The share of the net assets of
controlled companies attributable to minority unit holders is
disclosed separately on the Balance Sheet.
In the Income Statement, the net profit or loss of the controlled
entities relating to minority interests is eliminated before arriving
at the net profit or loss attributable to Equity holders of the Bank.
Commonwealth Bank of Australia Annual Report 2008 97
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(ii) Asset securitisation
General Insurance Business
Premium revenue
Premium revenue comprises amounts charged to policyholders,
including fire service levies, but excludes taxes collected on
behalf of third parties. The earned portion of premiums received
and receivable is recognised as revenue. Premium revenue is
earned from the date of attachment of risk and over the term of
the policies written, based on assessment of the likely pattern in
which risk will emerge. The portion not earned as determined by
the above methods is recognised as unearned premium liability.
Unearned Premium Liability
The adequacy of the unearned premium liability is assessed by
considering current estimates of all expected future cash flows
relating to future claims covered by current insurance contracts.
If the present value of the expected future cash flows relating to
future claims, plus the additional risk margin to reflect the
inherent uncertainty in the estimate, exceeds the unearned
premium liability less related deferred acquisition costs, then the
unearned premium liability is deemed deficient. Any deficiency is
recognised
Income Statement as an
the
expense, both gross and net of reinsurance. The deficiency is
recognised by writing down any related deferred acquisition
costs, with any excess being recorded on the Balance Sheet as
an unexpired risk liability.
immediately
in
Reinsurance
Premium ceded to reinsurers is recognised as an expense from
the attachment date over the period of indemnity of the
reinsurance contract,
the pattern of
reinsurance service received. Accordingly, a portion of outwards
reinsurance premium is treated at the Balance Sheet date as
deferred reinsurance.
in accordance with
Claims expense
Claims expense and a liability for outstanding claims are
recognised in respect of all business. The liability covers claims
reported but not yet paid, incurred but not reported claims
("IBNR") and the anticipated direct and indirect costs of settling
those claims. The liability for outstanding claims is determined
having regard to an independent actuarial assessment. The
liability is measured as the estimate of the present value of the
expected future payments against claims incurred at the
Balance Sheet date, with an additional risk margin to allow for
the inherent uncertainty in the estimate. These payments are
estimated on the basis of the ultimate cost of settling claims,
which is affected by factors arising during the period to
settlement, such as inflation. The expected future payments are
discounted to present value at the Balance Sheet date using
market-determined, risk-adjusted discount rates.
A risk margin is applied to the outstanding claims liability,
sufficient to ensure the probability of adequacy of the liabilities to
a 75% confidence level.
Acquisition costs
Acquisition costs include brokerage and other selling and
underwriting costs incurred in obtaining general insurance
premiums. A portion of acquisition costs relating to unearned
premium revenue
is recognised as an asset. Deferred
acquisition costs are amortised over the financial years expected
to benefit from the expenditure and are stated at the lower of
cost and recoverable value.
98 Commonwealth Bank of Australia Annual Report 2008
The Group conducts an asset securitisation program through
which it packages and sells assets as securities to investors.
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. Therefore the Group is considered to hold the
majority of the residual risks and benefits within the entities
through which asset securitisation is conducted and so it
consolidates these entities.
Liabilities associated with asset securitisation entities and related
issue costs are accounted for on an amortised cost basis using
the effective interest method. Interest rate swaps and liquidity
facilities are provided at arm’s length to the program by the
Group in accordance with APRA Prudential Guidelines.
Derivatives return the risks and rewards of ownership of the
securitised assets to the Bank and consequently the Bank
cannot derecognise
is
these assets. An
recognised inclusive of the derivative and any related fees.
imputed
liability
For further details on the treatment of securitisation entities, refer
to Note 1 (c) Consolidation.
(jj) 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.
The assets and liabilities of these trusts and funds are not
included in the consolidated Financial Statements as the Group
does not have direct or indirect control of the trusts and funds.
Commissions and fees earned in respect of the activities are
included in the Income Statement of the Group.
(kk) Comparative figures
Where necessary, comparative figures have been adjusted to
conform with changes in presentation in these Financial
Statements.
(ll) Roundings
The amounts contained in this Financial Report and the
Financial Statements are presented in Australian Dollars and
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).
(mm) Critical accounting policies and estimates
to be more
These Notes to the Financial Statements contain a summary of
the Group’s significant accounting policies. Certain of these
policies are considered
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.
important
in
for
loan balances, actuarial assumptions
These policies include judgements as to levels of provisions for
in
impairment
determining life insurance policy liabilities and determining
whether certain entities should be consolidated. An explanation
of these policies and the related judgements and estimates
involved is set out below.
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
Life insurance policyholder liabilities
Provisions for impairment
Provisions for impairment of financial assets are raised where
there is objective evidence of impairment and at an amount
adequate to cover assessed credit related losses.
Credit losses arise primarily from loans but also from other credit
instruments such as bank acceptances, contingent liabilities,
guarantees and other financial instruments and assets acquired
through security enforcement.
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.
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;
Individually assessed provisions
• 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 the
statistical analysis using their experience and judgement.
Additional information on the accounting policy is set out in Note
1 (hh) Life and General Insurance Business, and Note 37 Life
Insurance Business details the key actuarial assumptions.
Consolidation of special purpose entities
The Group assesses whether a special purpose entity should be
consolidated based on the risks and rewards of each entity and
whether the majority pass to the Group. Such assessments are
predominately
the Group’s
securitisation program and structured transactions.
the context of
required
in
Individually assessed provisions are raised where there is
objective evidence of impairment and full recovery of principal is
considered doubtful.
Individually assessed 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 and are measured as the difference between a
financial asset’s carrying amount and the present value of the
expected future cash flows (excluding future credit losses that
have not been incurred), discounted at the financial asset’s
original effective interest rate. Short term balances are not
discounted.
Individually assessed provisions (in bulk) are also made against
statistically managed segments 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 credit risks
identified in specific segments in the credit risk rated portfolio.
These provisions are derived primarily by reference to historical
ratios of write-offs to balances in default.
Individually assessed provisions are provided for from the
collective provision.
Collective provision
All other loans and advances that do not have an individually
assessed provision are assessed collectively for impairment.
The collective provision is maintained to reduce the carrying
amount of portfolios of similar loans and advances to their
estimated recoverable amounts at the Balance Sheet date.
The evaluation process is subject to a series of estimates and
judgements.
In the credit risk rated 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 retail statistically managed segment the history of defaults
and losses, and the size, structure and diversity of portfolios are
considered.
In addition management considers overall indicators of portfolio
performance, quality and economic conditions.
Changes in these estimates could have a direct impact on the
level of provision determined.
The amount required to bring the collective provision to the level
assessed is recognised in the Income Statement as set out in
Note 14 Provisions for Impairment.
Commonwealth Bank of Australia Annual Report 2008 99
Notes to the Financial Statements
Note 2 Profit
Profit before income tax has been determined as follows:
Interest Income
Loans
Other financial institutions
Cash and liquid assets
Assets at fair value through Income Statement
Available-for-sale investments
Controlled entities
Total interest income
Interest Expense
Deposits
Other financial institutions
Liabilities at fair value through Income Statement (1)
Debt issues (1)
Controlled entities
Loan capital
Total interest expense
Net interest income
Other Operating Income
Loan service fees:
From financial assets
Other
Commission and other fees:
From financial liabilities
Other
Trading income
Net gain/(loss) on disposal of available-for-sale investments
Net (loss)/gain on other non-trading instruments
Net hedging ineffectiveness
Net (loss)/gain on other financial instruments:
Fair value through Income Statement
Reclassification of net interest on swaps
Non-trading derivatives
Dividends – Controlled entities
Dividends – Other
Net (loss)/gain on sale of property, plant and equipment
Funds management and investment contract income:
Fees receivable on trust and other fiduciary activities
Other
Insurance contracts income
Other
Total other operating income
Total net operating income
Loan Impairment Expense
Loan impairment expense
Loan impairment expense (Note 14)
2008
$M
25,598
474
473
1,933
756
-
29,234
12,393
989
1,129
6,024
-
792
21,327
7,907
933
43
507
1,320
546
309
(1)
(58)
(9)
(265)
37
-
39
(15)
1,835
528
740
173
6,662
14,569
2007
$M
20,711
443
483
1,495
730
-
23,862
8,995
674
1,087
5,506
-
564
16,826
7,036
873
23
501
1,228
555
138
9
30
65
(107)
(98)
-
3
(15)
1,449
522
1,043
136
6,355
13,391
Group
2006
$M
17,304
333
287
1,149
685
-
19,758
7,385
475
947
3,861
-
576
13,244
6,514
783
17
497
1,138
505
36
-
(15)
35
(46)
(44)
-
4
4
1,132
491
1,113
122
5,772
12,286
2008
$M
21,369
423
427
1,409
880
1,077
25,585
12,168
903
217
4,241
1,295
843
19,667
5,918
860
43
413
959
504
272
(36)
(33)
(26)
73
44
1,636
31
(14)
-
-
-
1,060
5,786
11,704
Bank
2007
$M
16,715
506
327
1,072
597
851
20,068
8,570
653
209
3,409
1,400
675
14,916
5,152
826
7
412
932
492
(34)
7
14
135
(25)
(201)
1,879
3
(15)
-
-
-
1,090
5,522
10,674
930
930
434
434
398
398
902
902
390
390
(1) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
100 Commonwealth Bank of Australia Annual Report 2008
Note 2 Profit (continued)
Staff Expenses
Salaries and wages
Share based compensation
Superannuation contributions
Provisions for employee entitlements
Payroll tax
Fringe benefits tax
Other staff expenses
Total staff expenses
Occupancy and Equipment Expenses
Operating lease rentals
Depreciation:
Buildings
Leasehold improvements
Equipment
Operating lease assets
Repairs and maintenance
Other
Total occupancy and equipment expenses
Information Technology Services
Application, maintenance and development
Data processing
Desktop
Communications
Amortisation of software assets
IT equipment depreciation
Total information technology services
Other Expenses
Postage
Stationery
Fees and commissions:
Fees payable on trust and other fiduciary activities
Other
Advertising, marketing and loyalty
Amortisation of other intangible assets (excluding software)
Non-lending losses
Other
Total other expenses
Investment and restructuring
Write-down of leasehold improvements
Write-down of software assets
Other provisions
Total investment and restructuring
Total operating expenses
Defined benefit superannuation plan income/(expense)
Profit before income tax
Net hedging ineffectiveness comprises:
Gain/(Loss) on fair value hedges:
Hedging instruments
Hedged items
Cash flow hedge ineffectiveness
Net hedging ineffectiveness
Notes to the Financial Statements
2008
$M
3,097
106
14
90
162
32
160
3,661
403
27
63
84
20
81
89
767
224
195
114
174
88
31
826
119
98
538
280
348
15
78
291
1,767
18
77
282
377
7,398
14
6,255
921
(970)
(9)
(58)
2007
$M
2,746
89
8
61
139
34
152
3,229
367
22
59
73
22
71
74
688
304
206
119
168
62
24
883
109
104
402
289
326
8
97
292
1,627
-
-
-
-
6,427
8
6,538
285
(271)
16
30
Group
2006
$M
2,419
39
8
66
123
34
134
2,823
338
22
56
64
9
73
59
621
364
227
137
201
43
13
985
118
98
351
285
307
6
116
284
1,565
-
-
-
-
5,994
(35)
5,859
(2,183)
2,163
5
(15)
2008
$M
2,278
102
(28)
72
129
28
108
2,689
345
26
52
54
11
74
54
616
195
195
114
148
76
28
756
102
70
-
565
273
1
66
90
1,167
18
65
282
365
5,593
14
5,223
937
(971)
1
(33)
Bank
2007
$M
2,059
89
(27)
54
114
31
73
2,393
312
21
47
43
12
64
42
541
286
175
119
165
59
24
828
94
77
3
495
259
-
91
101
1,120
-
-
-
-
4,882
8
5,410
268
(262)
8
14
Commonwealth Bank of Australia Annual Report 2008 101
Notes to the Financial Statements
Note 3 Income from Ordinary Activities
Banking
Interest income
Fees and commissions
Trading income
Net gains/(losses) on disposal of available-for-sale investments
Net (losses)/gains on disposal of non-trading instruments
Net hedging ineffectiveness
Net gains/(losses) on other financial instruments:
Fair value through Income Statement
Reclassification of net interest on swaps
Non-trading derivatives
Dividends
Net (losses)/gains on sale of property, plant and equipment
Other income
Funds Management, Investment contract and Insurance
contract revenue
Funds management and investment contract income including
premiums
Insurance contract premiums and related income
Funds management claims and policy holder liability revenue
Investment income
Total income
2008
$M
29,234
2,803
546
309
(1)
(58)
(9)
(265)
37
39
(15)
173
32,793
2,369
1,373
519
-
4,261
37,054
2007
$M
23,862
2,625
555
138
9
30
65
(107)
(98)
3
(15)
136
27,203
1,871
1,117
-
2,978
5,966
33,169
Group
2006
$M
19,758
2,435
505
36
-
(15)
35
(46)
(44)
4
4
122
22,794
1,589
1,052
-
3,129
5,770
28,564
2008
$M
25,585
2,275
504
272
(36)
(33)
(26)
73
44
1,667
(14)
1,060
31,371
-
-
-
-
-
31,371
Bank
2007
$M
20,068
2,177
492
(34)
7
14
135
(25)
(201)
1,882
(15)
1,090
25,590
-
-
-
-
-
25,590
102 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 4 Average Balances and Related Interest
The following 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
rate for each of the years ended 30 June 2008, 30 June 2007
and 30 June 2006. Averages used were predominantly daily
averages. Interest is accounted for based on product yield, while
all trading gains and losses are disclosed as Trading income
within Other banking income.
Where assets or liabilities are hedged, the amounts are shown
net of the hedge, however individual items not separately hedged
may be affected by movements in exchange rates.
The overseas component comprises overseas branches of the
Bank and overseas domiciled controlled entities.
Non-accrual loans were included in interest earning assets
under Loans, Advances and Other receivables.
The official cash rate in Australia increased by 100 basis points
during the year while rates in New Zealand increased by a total
of 25 basis points.
During the year the Group reassessed the application of AASB
132 Financial Instruments: Presentation. As a result, Mortgage
Interest Saver Accounts and business overdraft set off
accounts are now presented on a gross basis as savings
deposits and other demand deposits, respectively, instead of
being netted against loan balances. Prior period average
balances have been restated for this change.
Average Interest Earning
Assets and Income
Cash and liquid assets (1)
Australia
Overseas
Receivables due from other financial
institutions (1)
Australia
Overseas
Assets at fair value through Income
Statement – Trading (1)
Average
Balance
$M
3,930
4,101
5,403
3,700
Interest
$M
238
235
242
232
2008
Average
Rate
%
Average
Balance
$M
6. 1
5. 7
4. 5
6. 3
5,648
2,608
3,089
4,581
Interest
$M
322
161
170
273
2007
Average
Rate
%
Average
Balance
$M
5. 7
6. 2
5. 5
6. 0
3,581
1,442
3,016
4,007
Australia
Overseas
20,127
3,186
1,388
245
6. 9
7. 7
15,458
2,818
1,075
210
7. 0
7. 5
12,161
3,388
Assets at fair value through Income
Statement – Other (1)
Australia
Overseas
Available-for-sale investments (1)
Australia
Overseas
Loans, advances and other
receivables (1) (2)
Australia
Overseas
Intragroup loans
Australia
Overseas
Average interest earning assets and
interest income including intragroup
Intragroup eliminations
Total average interest earning
assets and interest income (3)
Securitisation home loan assets
383
4,813
6,017
6,182
27
273
402
354
273,124
54,701
20,047
4,463
-
8,144
-
295
393,811
(8,144)
28,441
(295)
385,667
13,427
28,146
1,088
7. 0
5. 7
6. 7
5. 7
7. 3
8. 2
-
3. 6
7. 2
3. 6
7. 3
8. 1
430
3,013
4,932
6,944
29
181
315
415
6. 7
6. 0
6. 4
6. 0
355
2,707
5,010
6,508
234,022
48,949
16,016
3,686
6. 8
7. 5
206,704
40,537
13,527
3,012
-
8,199
-
404
340,691
(8,199)
23,257
(404)
332,492
13,344
22,853
1,009
-
4. 9
6. 8
4. 9
6. 9
7. 6
-
9,623
-
338
299,039
(9,623)
19,331
(338)
289,416
10,887
18,993
765
Interest
$M
221
66
145
188
725
262
22
140
349
336
2006
Average
Rate
%
6. 2
4. 6
4. 8
4. 7
6. 0
7. 7
6. 2
5. 2
7. 0
5. 2
6. 5
7. 4
-
3. 5
6. 5
3. 5
6. 6
7. 0
(1) During the current year, certain balances and associated interest amounts were reclassified to ensure consistent classification of amounts across all of the Group’s
businesses. Prior years have been restated on a consistent basis.
(2) Comparisons between years are impacted by the re-classification of net swap interest from Net interest Income to Other banking income related to certain economic
hedges which do not qualify for AIFRS hedge accounting.
(3) Used for calculating net interest margin.
Commonwealth Bank of Australia Annual Report 2008 103
Notes to the Financial Statements
Note 4 Average Balances and Related Interest (continued)
Average Non-Interest Earning Assets
Bank acceptances
Australia
Overseas
Assets at fair value through Income Statement - Insurance
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 (%)
2008
Average
Balance
$M
2007
Average
Balance
$M
2006
Average
Balance
$M
19,735
-
17,896
2,634
1,242
192
28,182
8,093
(1,219)
(111)
76,644
475,738
18,779
-
19,352
2,680
1,075
165
19,951
5,675
(1,132)
(96)
66,449
412,285
18,014
-
20,529
3,468
978
158
20,699
5,113
(1,144)
(86)
67,729
368,032
18. 4
18. 8
18. 3
104 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 4 Average Balances and Related Interest (continued)
Average Interest Bearing
Liabilities and Loan Capital and
Interest Expense
Time deposits (1)
Average
Balance
$M
Interest
$M
5,985
1,353
1,468
324
2,947
316
290
699
197
932
4,234
822
566
226
295
-
2008
Average
Rate
%
Average
Balance
$M
6. 5
6. 3
3. 2
6. 8
4. 1
7. 0
5. 0
5. 1
6. 3
7. 8
7. 4
4. 9
6. 4
6. 0
3. 6
-
67,186
18,406
40,930
4,703
62,401
3,563
2,628
9,724
3,881
11,312
57,403
18,835
8,357
1,907
8,199
-
Interest
$M
4,107
1,018
1,016
313
2,314
227
153
521
292
795
3,537
1,075
410
154
404
-
2007
Average
Rate
%
Average
Balance
$M
6. 1
5. 5
2. 5
6. 7
3. 7
6. 4
5. 8
5. 4
7. 5
7. 0
6. 2
5. 7
4. 9
8. 1
4. 9
-
60,725
15,732
33,765
3,632
57,229
3,602
1,982
7,649
2,038
10,887
46,315
16,982
7,936
1,244
9,623
-
Interest
$M
3,533
932
603
222
1,905
190
119
356
192
755
2,547
643
450
126
338
-
92,297
21,364
46,472
4,759
71,525
4,501
5,748
13,658
3,124
11,893
57,440
16,929
8,781
3,758
8,144
-
370,393
(8,144)
20,654
(295)
5. 6
3. 6
319,435
(8,199)
16,336
(404)
5. 1
4. 9
279,341
(9,623)
12,911
(338)
362,249
14,005
20,359
968
5. 6
6. 9
311,236
13,861
15,932
894
5. 1
6. 4
269,718
11,541
12,573
671
Australia
Overseas
Savings deposits (1)
Australia
Overseas
Other demand deposits (1)
Australia
Overseas
Payables due to other financial
institutions (1)
Australia
Overseas
Liabilities at fair value through
Income Statement (1)
Australia
Overseas
Debt issues (1) (2)
Australia
Overseas
Loan capital (1) (2)
Australia
Overseas
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
Securitisation debt issues
Average Non-Interest Bearing Liabilities
Deposits not bearing interest
Australia
Overseas
Liabilities on Bank acceptances
Australia
Overseas
Insurance policy liabilities
Australia
Overseas
Other liabilities
Australia
Overseas
Total average non-interest bearing liabilities
Total average liabilities and loan capital
Shareholders’ equity
Total average liabilities, loan capital and Shareholders’ equity
Total average liabilities and Loan Capital applicable to overseas operations (%)
2008
Average
Balance
$M
6,132
1,545
19,735
-
19,185
2,296
18,538
6,647
74,078
450,332
25,406
475,738
19. 4
2007
Average
Balance
$M
5,896
1,473
18,779
-
20,100
2,344
8,439
7,399
64,430
389,527
22,758
412,285
20. 5
2006
Average
Rate
%
5. 8
5. 9
1. 8
6. 1
3. 3
5. 3
6. 0
4. 7
9. 4
6. 9
5. 5
3. 8
5. 7
10. 1
3. 5
-
4. 6
3. 5
4. 7
5. 8
2006
Average
Balance
$M
5,797
1,170
18,014
-
20,731
3,040
11,476
4,552
64,780
346,039
21,993
368,032
19. 8
(1) During the current year, certain balances and associated interest amounts were reclassified to ensure consistent classification of amounts across all of the Group’s
businesses. Prior years have been restated on a consistent basis.
(2) Comparisons between years are impacted by the re-classification of net swap interest from Net interest Income to Other banking income related to certain economic hedges
which do not qualify for AIFRS hedge accounting.
Commonwealth Bank of Australia Annual Report 2008 105
Loans, Advances and Other
Receivables (1)
Australia
Overseas
Total
Non-lending Interest Earning
Assets (1)
Australia
Overseas
Total
Interest Bearing Deposits (1)
Australia
Overseas (1)
Total
Notes to the Financial Statements
Note 4 Average Balances and Related Interest (continued)
Net Interest Margin
Total interest earning assets
(excluding securitisation)
Total interest bearing liabilities
(excluding securitisation)
Net interest income & interest
spread (excluding securitisation)
Benefit of free funds
Net interest margin
Avg Bal
$M
Income
$M
2008
Yield
%
Avg Bal
$M
Income
$M
2007
Yield
%
Avg Bal
$M
Income
$M
2006
Yield
%
385,667
28,146
7. 30
332,492
22,853
6. 87
289,416
18,993
6. 56
362,249
20,359
5. 62
311,236
15,932
5. 12
269,718
12,573
4. 66
7,787
1. 68
0. 34
2. 02
6,921
1. 75
0. 33
2. 08
6,420
1. 90
0. 32
2. 22
Geographical analysis of key categories
Year Ended 30 June
Avg Bal
$M
Income
$M
2008
Yield
%
Avg Bal
$M
Income
$M
2007
Yield
%
Avg Bal
$M
Income
$M
273,124
54,701
327,825
20,047
4,463
24,510
7. 34
8. 16
7. 48
234,022
48,949
282,971
16,016
3,686
19,702
6. 84
7. 53
6. 96
206,704
40,537
247,241
13,527
3,012
16,539
35,860
21,982
57,842
2,297
1,339
3,636
6. 41
6. 09
6. 29
29,557
19,964
49,521
210,294
30,624
240,918
10,400
1,993
12,393
4. 95
6. 51
5. 14
170,517
26,672
197,189
1,911
1,240
3,151
7,437
1,558
8,995
4,392
2,545
6,937
6. 47
6. 21
6. 36
24,123
18,052
42,175
4. 36
5. 84
4. 56
151,719
22,966
174,685
6. 08
6. 09
6. 08
58,271
36,762
95,033
1,462
992
2,454
6,041
1,344
7,385
3,308
1,880
5,188
Other Interest Bearing Liabilities (1)
Australia
Overseas (1)
Total
75,093
46,238
121,331
5,287
2,679
7,966
7. 04
5. 79
6. 57
72,269
41,778
114,047
(1) During the current year, certain balances and associated interest amounts were reclassified to ensure consistent classification of amounts across all of the Group’s
businesses. Prior years have been restated on a consistent basis.
The overseas component comprises overseas branches of the
Bank and overseas domiciled controlled entities. Overseas
intragroup borrowings have been adjusted into the interest
spread and margin calculations to more appropriately reflect the
overseas cost of funds. Non–accrual loans were included in
interest earning assets under loans, advances and other
receivables.
In calculating net interest margin, assets, liabilities, interest
income and interest expense related to securitisation vehicles
have been excluded. This has been done to more accurately
reflect the Group’s underlying net margin.
Change in Net Interest Income
Due to changes in average volume of interest earning assets and interest bearing liabilities
Due to changes in interest margin
Change in net interest income
2008 vs 2007
Increase/(Decrease)
$M
1,090
(224)
866
Year Ended
2007 vs 2006
Increase/(Decrease)
$M
926
(425)
501
106 Commonwealth Bank of Australia Annual Report 2008
2006
Yield
%
6. 54
7. 43
6. 69
6. 06
5. 50
5. 82
3. 98
5. 85
4. 23
5. 68
5. 11
5. 46
Notes to the Financial Statements
Note 4 Average Balances and Related Interest (continued)
Changes in Net Interest Income:
Volume and Rate Analysis
Interest Earning Assets
Cash and liquid assets (1)
Australia
Overseas
Receivables due from other financial institutions (1)
Australia
Overseas
Assets at fair value through Income Statement – Trading (1)
Australia
Overseas
Assets at fair value through Income Statement – Other (1)
Australia
Overseas
Available-for-sale investments (1)
Australia
Overseas
Loans, advances and other receivables (1) (2)
Australia
Overseas
Intragroup loans
Australia
Overseas
Changes in interest income including intragroup
Intragroup eliminations
Changes in interest income
Securitisation home loan assets
Interest Bearing Liabilities and Loan Capital
Time deposits (1)
Australia
Overseas
Savings deposits (1)
Australia
Overseas
Other demand deposits (2)
Australia
Overseas
Payables due to other financial institutions
Australia
Overseas
Liabilities at fair value through Income Statement (1)
Australia
Overseas
Debt issues (1) (2)
Australia
Overseas
Loan capital (1) (2)
Australia
Overseas
Intragroup borrowings
Australia
Overseas
Changes in interest expense including intragroup
Intragroup eliminations
Changes in interest expense
Changes in net interest income
Securitisation debt issues
June 2008 vs June 2007
June 2007 vs June 2006
Volume
$M
Rate
$M
Total
$M
Volume
$M
Rate
$M
Total
$M
(101)
89
115
(54)
323
28
(3)
105
71
(45)
2,773
451
-
(2)
3,731
2
3,768
7
1,582
175
156
4
357
63
170
206
(52)
43
3
(101)
24
130
(2)
-
2,724
2
2,739
1,090
10
17
(15)
(43)
13
(10)
7
1
(13)
16
(16)
1,258
326
-
(107)
1,453
107
1,525
72
296
160
296
7
276
26
(33)
(28)
(43)
94
694
(152)
132
(58)
(107)
-
1,594
107
1,688
(224)
64
(84)
74
72
(41)
313
35
(2)
92
87
(61)
4,031
777
-
(109)
5,184
109
5,293
79
1,878
335
452
11
633
89
137
178
(95)
137
697
(253)
156
72
(109)
-
4,318
109
4,427
866
74
123
63
4
31
213
(43)
5
17
(5)
24
1,829
629
-
(60)
2,768
60
2,894
179
385
153
153
68
182
(2)
38
104
156
30
646
88
22
60
(60)
-
1,952
60
2,030
926
142
(22)
32
21
54
137
(9)
2
24
(29)
55
660
45
-
126
1,158
(126)
966
65
189
(67)
260
23
227
39
(4)
61
(56)
10
344
344
(62)
(32)
126
-
1,473
(126)
1,329
(425)
81
101
95
25
85
350
(52)
7
41
(34)
79
2,489
674
-
66
3,926
(66)
3,860
244
574
86
413
91
409
37
34
165
100
40
990
432
(40)
28
66
-
3,425
(66)
3,359
501
223
(1) During the current year, certain balances and associated interest amounts were reclassified to ensure consistent classification of amounts across all of the Group’s
businesses. Prior years have been restated on a consistent basis.
(2) Comparisons between years are impacted by the reclassification of net swap interest from Net interest Income to Other banking income related to certain economic
hedges which do not qualify for AIFRS hedge accounting.
Commonwealth Bank of Australia Annual Report 2008 107
Note 4 Average Balances and Related Interest (continued)
Changes in Net Interest Income: Volume and Rate Analysis
Volume and rate variance for total interest earning assets and
liabilities have been calculated separately (rather than being the
sum of the individual categories).
Notes to the Financial Statements
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 year
due to movement in the average balance. Rate variance reflects
the change in interest from the prior year due to changes in
interest rates.
Geographical analysis of key categories
Australia
Interest spread (1)
Benefit of net free liabilities, provisions and equity (2)
Net interest margin (3)
Overseas
Interest spread (1)
Benefit of net free liabilities, provisions and equity (2)
Net interest margin (3)
Group
Interest spread (1)
Benefit of net free liabilities, provisions and equity (2)
Net interest margin (3)
2008
%
1. 79
0. 27
2. 06
1. 11
0. 57
1. 68
1. 68
0. 34
2. 02
2007
%
1. 93
0. 23
2. 16
0. 92
0. 68
1. 60
1. 75
0. 33
2. 08
2006
%
2. 08
0. 22
2. 30
0. 97
0. 67
1. 64
1. 90
0. 32
2. 22
(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.
108 Commonwealth Bank of Australia Annual Report 2008
Note 5 Income Tax Expense
Profit from ordinary activities before Income Tax
Retail Banking Services
Premium Business Services
Wealth Management
International Financial Services
Other
Prima Facie Income Tax at 30%
Retail Banking Services
Premium Business Services
Wealth Management
International Financial Services
Other
Tax effect of expenses that are non-deductible/income non-
assessable in determining taxable profit:
Current period
Taxation offsets and other dividend adjustments
Tax adjustment referable to policyholder income
Non–assessable gains
Tax losses recognised
Tax losses assumed by the Bank under UIG 1052
Difference in overseas and offshore banking unit tax rates
Other
Prior periods
Other (1)
Total income tax expense
Income Tax Attributable to Profit from ordinary activities
Retail Banking Services
Premium Business Services
Wealth Management
International Financial Services
Other
Corporate tax expense
Policyholder tax expense
Total income tax expense
Effective Tax Rate
Total – corporate
Retail Banking Services – corporate
Premium Business Services – corporate
Wealth Management – corporate
International Financial Services – corporate
Recognised in the Income Statement
Australia
Current tax expense
Deferred tax (benefit)/expense
Total Australia
Overseas
Current tax expenses
Deferred tax expense
Total Overseas
Total income tax expense
Notes to the Financial Statements
2008
$M
2,675
1,865
986
777
(48)
6,255
803
560
296
233
(15)
1,877
(65)
(81)
-
(89)
-
(51)
(36)
(322)
(122)
1,433
801
402
310
170
(135)
1,548
(115)
1,433
2007
$M
2,522
1,905
1,090
678
343
6,538
757
571
327
204
103
1,962
(55)
186
-
(24)
-
(43)
35
99
(20)
2,041
756
463
275
150
131
1,775
266
2,041
Group
2006
$M
2,252
1,554
798
839
416
5,859
676
466
239
252
124
1,757
(57)
232
(43)
(35)
-
(13)
44
128
15
1,900
676
422
143
160
168
1,569
331
1,900
%
%
%
24. 3
29. 9
21. 6
27. 9
22. 1
28. 3
30. 0
24. 3
33. 3
22. 2
28. 4
30. 0
27. 2
26. 1
21. 1
$M
$M
$M
1,522
(326)
1,196
127
110
237
1,433
2,209
(390)
1,819
141
81
222
2,041
1,366
382
1,748
114
38
152
1,900
2008
$M
n/a
n/a
n/a
n/a
n/a
5,223
n/a
n/a
n/a
n/a
n/a
1,567
(479)
-
-
(87)
(72)
(37)
76
(599)
(103)
865
n/a
n/a
n/a
n/a
n/a
865
-
865
%
16.6
n/a
n/a
n/a
n/a
$M
854
(22)
832
32
1
33
865
Bank
2007
$M
n/a
n/a
n/a
n/a
n/a
5,410
n/a
n/a
n/a
n/a
n/a
1,623
(556)
-
-
(20)
(85)
(36)
(2)
(699)
9
933
n/a
n/a
n/a
n/a
n/a
933
-
933
%
17. 2
n/a
n/a
n/a
n/a
$M
1,322
(392)
930
3
-
3
933
(1) The 2008 year prior period tax expense has arisen primarily due to the satisfactory resolution of long outstanding tax issues with the tax authorities.
Commonwealth Bank of Australia Annual Report 2008 109
Notes to the Financial Statements
Note 5 Income Tax Expense (continued)
The significant temporary differences are as follows:
Deferred tax assets arising from:
Provision for employee benefits
Provisions for impairment on loans, advances and other receivables
Other provisions not tax deductible until expense incurred
Recognised value of tax losses carried forward
Financial instruments
Other
Total deferred tax assets
Set off of tax (1)
Net deferred tax assets
Deferred tax liabilities arising from:
Property asset revaluations
Lease financing
Defined benefit superannuation plan surplus
Intangible assets
Financial instruments
Other
Total deferred tax liabilities
Set off of tax (1)
Net deferred tax liabilities (Note 26)
Deferred tax assets opening balance:
Movement in temporary differences during the year:
Provisions for employee benefits
Provisions for impairment on loans, advances and other receivables
Other provisions not tax deductible until expense incurred
Recognised value of tax losses carried forward
Financial instruments
Other
Set off of tax (1)
Deferred tax assets closing balance
Deferred tax liabilities opening balance:
Movements in temporary differences during the year:
Property asset revaluations
Lease financing
Defined benefit superannuation plan surplus
Intangible assets
Financial instruments
Other
Set off of tax (1)
Deferred tax liabilities closing balance (Note 26)
Deferred tax assets not taken to account
Tax losses and other temporary differences on revenue account
Tax losses on capital account
Closing balance
2008
$M
2007
$M
294
523
192
6
162
171
1,348
(1,272)
76
59
287
461
24
437
270
1,538
(1,272)
266
254
6
152
56
(2)
(8)
(145)
(237)
76
908
4
(43)
(83)
14
(45)
(252)
(237)
266
2008
$M
35
-
35
288
371
136
8
170
316
1,289
(1,035)
254
55
330
544
10
482
522
1,943
(1,035)
908
48
27
21
(10)
(1)
(25)
19
175
254
734
26
18
176
-
(144)
(77)
175
908
2007
$M
40
130
170
Group
2006
$M
261
350
146
9
195
297
1,258
(1,210)
48
29
312
368
10
626
599
1,944
(1,210)
734
651
-
(81)
34
9
42
164
(771)
48
921
-
16
153
(1)
217
199
(771)
734
Group
2006
$M
30
101
131
2008
$M
268
476
175
6
113
54
1,092
(1,038)
54
59
105
461
-
378
54
1,057
(1,038)
19
25
6
150
68
(2)
(43)
(64)
(86)
54
91
4
(5)
(83)
-
88
10
(86)
19
2008
$M
28
-
28
Bank
2007
$M
262
326
107
8
156
118
977
(952)
25
55
110
544
-
290
44
1,043
(952)
91
392
17
(15)
22
(1)
94
(91)
(393)
25
640
26
(34)
176
-
(296)
(28)
(393)
91
Bank
2007
$M
30
85
115
(1) Deferred tax assets and liabilities are set off where they relate to income tax levied by the same taxation authority on either the same taxable entity or different
taxable entities within the same taxable group.
(1) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
110 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 5 Income Tax Expense (continued)
Expiration of deferred tax assets not taken to
account
At Balance Sheet date carry-forward losses expire as follows:
From one to two years
From two to four years
After four years
Losses and other temporary differences that do not expire under
current tax law
Total
2008
$M
2007
$M
2
4
22
7
35
3
9
25
133
170
Group
2006
$M
2
14
30
85
131
Bank
2007
$M
-
6
25
84
115
2008
$M
-
2
19
7
28
Potential deferred tax assets of the Group arose from:
Tax Consolidation
Tax consolidation legislation has been enacted to allow
Australian resident entities to elect to consolidate and be
treated as single entities for Australian tax purposes. The
Commonwealth Bank of Australia elected to be taxed as a
single entity with effect from 1 July 2002.
• Capital losses arising under the tax consolidations systems;
and
• Tax losses and temporary differences in offshore centres.
These deferred assets have not been recognised because it is
not considered probable that future taxable profit will be
available against which they can be realised.
These potential tax benefits will only be obtained if:
• The company derives future capital gains and assessable
income of a nature and of an amount sufficient to enable the
benefit from the losses to be realised;
• The company continues to comply with the conditions for
claiming capital losses and deductions imposed by tax
legislation; and
• No changes in tax legislation adversely affect the company in
realising the benefit from deductions for the losses.
Commonwealth Bank of Australia Annual Report 2008 111
Notes to the Financial Statements
Note 6 Dividends
Ordinary Shares
Interim ordinary dividend (fully franked) (2008: 113 cents, 2007:
107 cents, 2006: 94 cents)
Interim ordinary dividend paid – cash component only
Interim ordinary dividend paid – dividend reinvestment plan
Total dividends paid
Other Equity Instruments
Dividends paid
Total dividends provided for, reserved or paid
Other provision carried
Dividends proposed and not recognised as a liability (fully
franked) (2008: 153 cents, 2007: 149 cents, 2006: 130 cents) (1)
Provision for dividends
Opening balance
Provisions made during the year
Provisions used during the year
Provisions reversed during the year
Closing balance (Note 27)
2008
$M
2007
$M
1,087
400
1,487
48
1,535
5
2,029
6
3,425
(3,426)
-
5
862
518
1,380
55
1,435
7
1,939
6
3,048
(3,048)
-
6
Group
2006
$M
992
219
1,211
-
1,211
6
1,668
14
2,646
(2,645)
(9)
6
2008
$M
1,087
400
1,487
-
1,487
5
2,029
7
3,425
(3,427)
-
5
Bank
2007
$M
862
518
1,380
-
1,380
7
1,939
6
3,048
(3,047)
-
7
(1) The 2006 final dividend was satisfied by cash disbursements of $1,368 million and the issue of $300 million of ordinary shares through the Dividend Reinvestment
Plan “DRP”. The 2007 final dividend was satisfied by cash disbursements of $1,229 million and the issue of $709 million of ordinary shares through the DRP. The
2008 final dividend is expected to be satisfied by cash disbursements of $1,420 million and the estimated issue of $609 million of ordinary shares through the DRP.
The Bank expects that future tax payments will generate
sufficient franking credits for the Bank to be able to continue to
fully frank future dividend payments. These calculations have
been based on the taxation law as at 30 June 2008.
Dividend Franking Account
After fully franking the final dividend to be paid for the year
ended 30 June 2008, the amount of credits available, at the 30%
tax rate as at 30 June 2008 to frank dividends for subsequent
financial years, is $495 million (2007: $559 million). This figure is
based on the combined franking accounts of the Bank at 30
June 2008, 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 2008, 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.
Dividend History
Half Year Ended
31 December 2005
30 June 2006
31 December 2006
30 June 2007
31 December 2007
30 June 2008 (4)
Cents Per
Share
94
130
107
149
113
153
Date Paid
05/04/06
05/10/06
05/04/07
03/10/07
02/04/08
-
Half-year
(1)
Payout Ratio
Full Year
(1)
Payout Ratio
Full Year
Payout Ratio
(2)
Cash Basis
DRP
Participation
(3)
Rate
DRP
Price
%
60. 6
86. 5
63. 8
86. 1
63. 4
-
%
-
73. 3
-
75. 2
-
74. 1
%
-
70. 5
-
74. 2
-
75. 0
43. 89
45. 24
50. 02
54. 80
39. 44
-
%
18. 1
18. 0
37. 6
36. 6
33. 5
-
(1) Dividend Payout Ratio: dividends divided by statutory earnings.
(2) Payout ratio based on net profit after tax before defined benefit superannuation plan expense, treasury shares valuation adjustment, and hedging and AIFRS
volatility. Includes the profit on sale of CMG Asia for the financial year ended 30 June 2006.
(3) DRP Participation Rate: the percentage of total issued share capital participating in the Dividend Reinvestment Plan.
(4) Dividend expected to be paid on 1 October 2008.
112 Commonwealth Bank of Australia Annual Report 2008
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 after income tax
Less: Other equity instrument dividends
Less: Minority interests
Earnings used in calculation of basic earnings per share
Add: Profit impact of assumed conversions
Loan capital
Earnings used in calculation of fully diluted earnings per share
Weighted average number of ordinary shares (net of treasury shares) used in the calculation
of basic earnings per share
Effect of dilutive securities – share options and convertible loan capital instruments
Weighted average number of ordinary shares (net of treasury shares) used in the calculation
of fully diluted earnings per share (1)
(1) Figures presented in this table have been rounded.
2008
2007
Cents per share
363. 0
348. 7
344. 7
339. 7
Group
2006
308. 2
303. 1
$M
$M
$M
4,822
(48)
(31)
4,743
222
4,965
2008
M
1,307
118
4,497
(55)
(27)
4,415
150
4,565
3,959
-
(31)
3,928
100
4,028
Number of Shares
2006
M
2007
M
1,281
62
1,275
54
1,424
1,344
1,329
Basic earnings per share amounts are calculated by dividing net
profit for the year attributable to ordinary equity holders of the
Bank by the weighted average number of ordinary shares
outstanding during the year.
Diluted earnings per share amounts are calculated by dividing
net profit attributable to ordinary equity holders of the Bank
(after deducting interest on the convertible redeemable loan
capital instruments) by the weighted average number of
ordinary shares outstanding during the year (adjusted for the
effects of dilutive options and dilutive convertible non-
cumulative redeemable loan capital instruments).
Note 8 Cash and Liquid Assets
Australia
Notes, coins and cash at banks
Money at short call
Securities purchased under agreements to resell
Bills received and remittances in transit
Total Australia
Overseas
Notes, coins and cash at banks
Money at short call
Securities purchased under agreements to resell
Total Overseas
Total cash and liquid assets
2008
$M
1,512
1
3,227
101
4,841
964
1,207
724
2,895
7,736
Group
2007
$M
1,754
1
4,164
65
5,984
2,803
901
420
4,124
10,108
2008
$M
1,298
-
3,227
84
4,609
46
1,034
1,593
2,673
7,282
Bank
2007
$M
1,364
-
4,164
97
5,625
13
797
966
1,776
7,401
Commonwealth Bank of Australia Annual Report 2008 113
2008
$M
4,880
4,880
61
2,043
2,104
6,984
2008
$M
21,676
20,650
3,266
45,592
2008
$M
565
1,478
1,237
11,673
1,518
261
348
1,377
18,457
823
92
1,425
571
250
56
2
-
-
-
3,219
21,676
Group
2007
$M
2,809
2,809
83
2,603
2,686
5,495
Group
2007
$M
21,469
23,519
4,073
49,061
Group
2007
$M
1,117
2,777
4,709
5,484
3,604
550
-
770
19,011
383
378
789
55
365
86
-
208
188
6
2,458
21,469
2008
$M
4,880
4,880
3
1,848
1,851
6,731
2008
$M
19,168
-
274
19,442
2008
$M
565
1,478
1,237
11,673
1,518
261
348
1,377
18,457
453
92
-
-
166
-
-
-
-
-
711
19,168
Bank
2007
$M
3,283
3,283
4
2,485
2,489
5,772
Bank
2007
$M
20,287
-
448
20,735
Bank
2007
$M
1,117
2,777
4,709
5,484
3,604
724
-
770
19,185
336
377
-
-
365
24
-
-
-
-
1,102
20,287
Notes to the Financial Statements
Note 9 Receivables Due from Other Financial Institutions
Australia
Placements with and loans to other banks and financial institutions
Total Australia
Overseas
Deposits with regulatory authorities (1)
Other placements with and loans to other banks and financial institutions
Total Overseas
Total receivables from other financial institutions
(1) Required by law for the Group to operate in certain regions.
Note 10 Assets at Fair Value through Income Statement
Trading
Insurance
Other
Total assets at fair value through Income Statement
Trading
Australia
Market Quoted:
Australian Public Securities
Commonwealth and States
Local and semi-government
Bills of exchange
Certificates of deposit
Medium term notes
Other securities
Non-Market Quoted:
Medium term notes
Commercial paper
Total Australia
Overseas
Market Quoted:
Government securities
Eurobonds
Certificates of deposit
Medium term notes
Floating rate notes
Commercial paper
Other securities
Non-Market Quoted:
Commercial paper
Bills of exchange
Other securities
Total Overseas
Total trading assets
114 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 10 Assets at Fair Value through Income Statement (continued)
Insurance
Equity Security Investments:
Direct
Indirect
Total equity security investments
Debt Security Investments:
Direct
Indirect
Total debt security investments
Property Investments:
Direct
Indirect
Total property investments
Other Assets
Total life insurance investment assets
Investments
Backing Life
Risk
Contracts
Investments
Backing Life
Investment
Contracts
Investments
Backing Life
Risk
Contracts
Investments
Backing Life
Investment
Contracts
2008
$M
523
936
1,459
723
2,335
3,058
102
525
627
70
5,214
2008
$M
1,650
4,919
6,569
1,400
5,361
6,761
112
804
916
1,190
15,436
2008
$M
2,173
5,855
8,028
2,123
7,696
9,819
214
1,329
1,543
1,260
20,650
2007
$M
620
948
1,568
882
2,865
3,747
87
357
444
76
5,835
2007
$M
2,160
5,332
7,492
1,965
5,569
7,534
217
967
1,184
1,474
17,684
2007
$M
2,780
6,280
9,060
2,847
8,434
11,281
304
1,324
1,628
1,550
23,519
Direct investments refer to positions held directly in the issuer of
the investment. Indirect investments refer to investments that are
held through unit trusts or similar investment vehicles.
All financial assets within the life statutory funds have been
determined to back either life insurance or life investment
contracts.
Disclosure on Asset Restriction
Investments held in the Australian statutory funds may only be
used within the restrictions imposed under the Life Insurance Act
1995.
The main restrictions are that assets in a fund may only be used to
meet the liabilities and expenses of the fund, to acquire
investments to further the business of the fund, or as distributions
when solvency and capital adequacy requirements are met.
Participating policyholders can receive a distribution when
solvency requirements are met, whilst shareholders can only
receive a distribution when the higher levels 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.
The Group also holds investments in the Colonial First State
Property Trust Group and Colonial Mastertrust Wholesale funds
(including Fixed Interest, Australian Shares, International Shares,
Property Securities, Capital Stable, Balanced and Diversified
Growth funds) through controlled life insurance entities, which
have been designated as assets at fair value through Income
Statement instead of being accounted for under the equity
accounting method.
Instead, these investments are brought to account at fair value at
Balance Sheet date in compliance with the requirements of AASB
1038: Life Insurance Business.
Other (1)
Fair value structured transactions
Receivables due from financial institutions
Term loans
Other lending
Total other assets at fair value through Income Statement
2008
$M
1,980
318
948
20
3,266
Group
2007
$M
1,363
657
1,984
69
4,073
2008
$M
274
-
-
-
274
Bank
2007
$M
425
-
-
23
448
(1) Designated at Fair Value through Income Statement at inception as they are managed by the Group on a fair value basis.
The change in fair value of loans and receivables designated at fair value through Income Statement due to changes in credit risk for the
Group is insignificant for the years ended 30 June 2007 and 30 June 2008.
Commonwealth Bank of Australia Annual Report 2008 115
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities
Cash flow hedges
The Group uses interest rate swaps and cross currency swaps
to minimise the variability in cash flows of interest-earning
assets, interest-bearing liabilities or forecast transactions caused
by interest rate or foreign exchange fluctuations. For the year
ended 30 June 2008, there has been no material gain or loss
associated with ineffective portions of cash flow hedges.
Gains and losses on derivative contracts designated as cash
flow hedges are initially recorded in shareholders’ equity but are
reclassified to current period earnings when the hedged cash
flows occur, as explained in Note 1 (ff) Derivative financial
instruments. As at 30 June 2008, deferred net gains on
derivative
flow hedges
accumulated in shareholders’ equity were $486 million (2007:
$637 million). The amount recognised in shareholders’ equity at
30 June 2008 related to cash flows expected to occur within one
month to approximately 30 years of the Balance Sheet date, with
the main portion expected to occur within five years (refer to
Note 32 Detailed Statement of Changes in Equity).
instruments designated as cash
As at 30 June 2008, the fair value of outstanding derivatives
designated as cash flow hedges was $1,169 million (2007:
$1,280 million) of assets and $711 million (2007: $415 million) of
liabilities. Amounts reclassified from gains/(losses) on cash flow
hedging instruments recognised in equity to current period
earnings due to discontinuation of hedge accounting were
immaterial.
Net Investment Hedges
The Group uses forward foreign exchange transactions to
minimise the Group’s exposure to currency translation risk of
some of its net investments in foreign operations. For the year
ended 30 June 2008 there has been no material gain or loss
associated with ineffective portions of net investment hedges.
Gains and losses on derivative contracts relating to the effective
portion of the hedge are recognised in the Foreign Currency
Translation Reserve. Gains and losses accumulated in Foreign
Currency Translation Reserve are reclassified in current period
earnings when the overseas subsidiary is disposed of as
explained in Note 1 (ff) Derivative financial instruments.
Derivative contracts
Each derivative is classified as held for “Trading”, held for
“Hedging”, or as “Other” derivatives. Derivatives classified as
“Hedging” are derivative transactions entered into in order to
manage the risks arising from non-traded assets, liabilities and
commitments
in Australia and offshore centres. Other
derivatives are those held in relation to a portfolio designated at
fair value through Income Statement.
Derivatives transacted for hedging purposes
the accounting requirements
The Group enters into derivative
transactions which are
designated and qualify as either fair value or cash flow hedges
for recognised assets or liabilities or forecast transactions.
Forward Foreign Exchange transactions are also designated as
hedges of currency translation risk of net investments in foreign
operations. The Group also enters into derivative transactions
which provide economic hedges for risk exposures but do not
for hedge accounting
meet
treatment. As stated
financial
instruments, the Group uses Credit Default Swaps (CDSs) and
equity swaps as economic hedges to manage credit risk in the
asset portfolio and risks associated with both the capital
investment in equities and the related yield respectively, but
cannot apply hedge accounting to such positions. Gains or
losses on these CDSs and equity swaps have therefore been
recorded in trading income.
in Note 1 (ff) Derivative
Derivatives designated and accounted for as hedging
instruments
The Group’s accounting policies for derivatives designated and
accounted for as hedging instruments are explained in Note 1
(ff) Derivative financial instruments where terms used in the
following sections are explained.
Fair value hedges
The Group’s fair value hedges principally consist of interest rate
swaps, cross currency swaps and futures. Fair value hedges are
used to limit the Group’s exposure to changes in the fair value of
its fixed-rate interest bearing assets or liabilities that are due to
interest rate or foreign exchange volatility.
For the year ended 30 June 2008, the Group recognised a net
loss of $49 million (2007: $14 million net gain) (reported within
other operating income in the Financial Statements), which
represents the ineffective portion of fair value hedges.
As at 30 June 2008, the fair value of outstanding derivatives
designated as fair value hedges was $1,381 million (2007: $463
million) of assets and $1,674 million (2007: $2,451 million) of
liabilities.
116 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Derivative Assets and Liabilities
Held for trading
Held for hedging
Other derivatives
Total derivative assets/(liabilities)
Derivatives held for trading
Exchange rate related contracts:
Forward contracts
Swaps
Options purchased and sold
Total exchange rate related contracts
Interest rate related contracts:
Forward contracts
Swaps
Futures
Options purchased and sold
Total interest rate related contracts
Credit related contracts:
Swaps
Total credit related contracts
Equity related contracts:
Swaps
Options purchased and sold
Total equity related contracts
Commodity related contracts:
Swaps
Options purchased and sold
Total commodity related contracts
Fair Value
Asset
$M
2008
Fair Value
Liability
$M
15,233
2,550
449
18,232
2,962
4,609
544
8,115
2
5,869
-
256
6,127
142
142
181
10
191
523
135
658
(16,791)
(2,385)
(365)
(19,541)
(4,367)
(5,183)
(473)
(10,023)
(3)
(5,795)
(9)
(350)
(6,157)
(93)
(93)
(30)
(62)
(92)
(295)
(131)
(426)
Group
2007
Fair Value
Asset
$M
Fair Value
Liability
$M
10,666
1,743
334
12,743
(13,230)
(2,866)
(584)
(16,680)
Face Value
$M
1,115,684
121,495
58,774
1,295,953
287,107
130,962
57,220
475,289
6,956
433,693
142,487
46,036
629,172
5,928
5,928
381
-
381
2,506
2,408
4,914
2,312
3,715
51
6,078
1
3,915
71
110
4,097
18
18
-
-
-
422
51
473
(4,134)
(4,184)
(50)
(8,368)
(1)
(4,129)
(54)
(173)
(4,357)
(17)
(17)
(44)
-
(44)
(394)
(50)
(444)
Face Value
$M
1,205,981
155,095
65,381
1,426,457
228,440
129,152
35,610
393,202
22,228
482,920
238,944
55,267
799,359
6,958
6,958
586
2,839
3,425
1,436
1,601
3,037
Total derivative assets/(liabilities) held for
trading
1,205,981
15,233
(16,791)
1,115,684
10,666
(13,230)
Commonwealth Bank of Australia Annual Report 2008 117
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Derivatives designated as fair value hedges
Exchange rate related contracts:
Forward contracts
Swaps
Total exchange rate related contracts
Interest rate related contracts:
Swaps
Total interest rate related contracts
Equity related contracts:
Swaps
Total equity related contracts
Commodity related contracts:
Swaps
Total commodity related contracts
Face Value
$M
137
12,800
12,937
22,156
22,156
593
593
16
16
Fair Value
Asset
$M
2008
Fair Value
Liability
$M
1
831
832
544
544
5
5
-
-
-
(871)
(871)
(749)
(749)
(54)
(54)
-
-
Face Value
$M
1,285
12,041
13,326
26,336
26,336
292
292
1
1
Group
2007
Fair Value
Asset
$M
Fair Value
Liability
$M
74
300
374
83
83
6
6
-
-
(14)
(772)
(786)
(1,657)
(1,657)
(8)
(8)
-
-
Total fair value hedges
35,702
1,381
(1,674)
39,955
463
(2,451)
Derivatives designated as cash flow hedges
Exchange rate related contracts:
Swaps
Total exchange rate related contracts
Interest rate related contracts:
Swaps
Total interest rate related contracts
1,261
1,261
28
28
(2)
(2)
2,152
2,152
118,132
118,132
1,141
1,141
(709)
(709)
79,388
79,388
369
369
911
911
Total cash flow hedges
119,393
1,169
(711)
81,540
1,280
(40)
(40)
(375)
(375)
(415)
Total derivative assets/(liabilities) held for
hedging
155,095
2,550
(2,385)
121,495
1,743
(2,866)
118 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Other Derivatives
Exchange rate related contracts:
Forward contracts
Swaps
Options purchased and sold
Total exchange rate related contracts
Interest rate related contracts:
Forward contracts
Swaps
Futures
Options purchased and sold
Total interest rate related contracts
Credit related contracts:
Swaps
Total credit related contracts
Equity related contracts:
Futures
Options purchased and sold
Total equity related contracts
Commodity related contracts:
Forward contracts
Total commodity related contracts
Identified embedded derivatives
Total other derivatives
Total recognised derivative
assets/(liabilities)
Face Value
$M
8,356
3,071
12
11,439
11,148
34,329
7,032
568
53,077
818
818
9
37
46
1
1
Fair Value
Asset
$M
2008
Fair Value
Liability
$M
129
49
-
178
1
224
1
1
227
37
37
-
7
7
-
-
(17)
(48)
-
(65)
(2)
(260)
(2)
-
(264)
(33)
(33)
-
(3)
(3)
-
-
Face Value
$M
8,374
7,834
164
16,372
5,673
29,802
5,313
1,445
42,233
-
-
-
21
21
-
-
Group
2007
Fair Value
Asset
$M
Fair Value
Liability
$M
77
98
2
177
1
155
1
-
157
-
-
-
-
-
-
-
(212)
(186)
(2)
(400)
(1)
(170)
-
(4)
(175)
-
-
-
-
-
-
-
-
65,381
-
449
-
(365)
148
58,774
-
334
(9)
(584)
1,426,457
18,232
(19,541)
1,295,953
12,743
(16,680)
Commonwealth Bank of Australia Annual Report 2008 119
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Derivative Assets and Liabilities
Held for trading
Held for hedging
Other derivatives
Total derivative assets/(liabilities)
Derivatives held for trading
Exchange rate related contracts:
Forward contracts
Swaps
Options purchased and sold
Derivatives held with controlled entities
Total exchange rate related contracts
Interest rate related contracts:
Forward contracts
Swaps
Futures
Options purchased and sold
Derivatives held with controlled entities
Total interest rate related contracts
Credit related contracts:
Swaps
Derivatives held with controlled entities
Total credit related contracts
Equity related contracts:
Swaps
Options purchased and sold
Derivatives held with controlled entities
Total equity related contracts
Commodity related contracts:
Swaps
Options purchased and sold
Total commodity related contracts
Total derivative assets/(liabilities) held for
trading
Face Value
$M
1,227,719
127,093
439
1,355,251
228,440
128,317
35,610
16,679
409,046
22,228
484,452
238,944
55,290
4,210
805,124
6,958
-
6,958
586
2,839
129
3,554
1,436
1,601
3,037
Fair Value
Asset
$M
2008
Fair Value
Liability
$M
16,906
2,376
5
19,287
2,963
4,552
543
1,605
9,663
2
5,911
-
256
83
6,252
142
-
142
160
10
22
192
523
134
657
(17,189)
(2,177)
(1)
(19,367)
(4,367)
(5,053)
(473)
(392)
(10,285)
(3)
(5,799)
(9)
(350)
(131)
(6,292)
(93)
-
(93)
(30)
(63)
-
(93)
(295)
(131)
(426)
Bank
2007
Fair Value
Asset
$M
Fair Value
Liability
$M
12,522
1,340
-
13,862
(14,084)
(2,683)
(19)
(16,786)
Face Value
$M
1,172,891
90,878
400
1,264,169
287,107
130,632
57,220
39,223
514,182
6,956
433,676
142,487
46,036
16,620
645,775
5,928
173
6,101
381
-
1,538
1,919
2,506
2,408
4,914
2,314
3,699
51
1,736
7,800
1
3,926
71
110
46
4,154
18
-
18
-
-
77
77
422
51
473
(4,134)
(3,958)
(50)
(867)
(9,009)
(1)
(4,167)
(54)
(173)
(115)
(4,510)
(17)
-
(17)
(44)
-
(60)
(104)
(394)
(50)
(444)
1,227,719
16,906
(17,189)
1,172,891
12,522
(14,084)
120 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Derivatives designated as fair value hedges
Exchange rate related contracts:
Forward contracts
Swaps
Derivatives held with controlled entities
Total exchange rate related contracts
Interest rate related contracts:
Swaps
Derivatives held with controlled entities
Total interest rate related contracts
Equity related contracts:
Swaps
Total equity related contracts
Commodity related contracts:
Swaps
Total commodity related contracts
Total fair value hedges
Derivatives designated as cash flow hedges
Exchange rate related contracts:
Swaps
Derivatives held with controlled entities
Total exchange rate related contracts
Interest rate related contracts:
Swaps
Total interest rate related contracts
Total cash flow hedges
Total derivative assets/(liabilities) held for
hedging
Other Derivatives
Interest rate related contracts:
Swaps
Total interest rate related contracts
Credit related contracts:
Swaps
Total credit related contracts
Identified embedded derivatives
Total other derivatives
Total recognised derivative
assets/(liabilities)
Face Value
$M
16
12,800
-
12,816
18,662
601
19,263
593
593
16
16
32,688
35
570
605
93,800
93,800
94,405
Fair Value
Asset
$M
2008
Fair Value
Liability
$M
-
831
-
831
510
16
526
5
5
-
(871)
-
(871)
(725)
-
(725)
(54)
(54)
-
-
1,362
-
-
(1,650)
4
-
4
1,010
1,010
1,014
-
(10)
(10)
(517)
(517)
(527)
Face Value
$M
13
11,876
165
12,054
23,651
484
24,135
292
292
1
1
36,482
983
328
1,311
53,085
53,085
54,396
Bank
2007
Fair Value
Asset
$M
Fair Value
Liability
$M
-
300
-
300
57
-
57
6
6
-
-
363
364
-
364
613
613
977
-
(742)
(31)
(773)
(1,615)
(11)
(1,626)
(8)
(8)
-
-
(2,407)
-
(21)
(21)
(255)
(255)
(276)
127,093
2,376
(2,177)
90,878
1,340
(2,683)
Face Value
$M
4
4
435
435
-
439
Fair Value
Asset
$M
2008
Fair Value
Liability
$M
-
-
5
5
-
5
(1)
(1)
-
-
-
(1)
Face Value
$M
252
252
-
-
148
400
Bank
2007
Fair Value
Asset
$M
Fair Value
Liability
$M
-
-
-
-
-
-
(10)
(10)
-
-
(9)
(19)
1,355,251
19,287
(19,367)
1,264,169
13,862
(16,786)
Commonwealth Bank of Australia Annual Report 2008 121
Notes to the Financial Statements
Note 12 Available-for-Sale Investments
Australia
Market Quoted:
Australian Public Securities:
Local and semi-government
Shares and equity investments
Medium term notes
Floating rate notes
Mortgage backed securities
Other securities
Non-Market Quoted:
Australian Public Securities:
Local and semi-government
Medium term notes
Shares and equity investments
Mortgage backed securities
Other securities
Total Australia
Overseas
Market Quoted:
Government securities
Shares and equity investments
Bills of exchange
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Other securities
Non-Market Quoted:
Government securities
Floating rate notes
Other securities
Total Overseas
Less: specific provisions for impairment
Total available-for-sale investments
2008
$M
2,981
203
1,873
399
-
8
-
59
57
1,419
192
7,191
167
33
-
2,031
1,407
304
272
87
25
2
-
4,328
(31)
11,488
Group
2007
$M
2,376
41
524
605
1,417
191
80
-
54
-
158
5,446
174
-
78
1,763
161
365
967
436
36
66
181
4,227
(1)
9,672
2008
$M
2,905
201
1,873
-
-
-
-
784
42
17,074
90
22,969
53
1
-
2,017
1,407
304
272
58
-
-
-
4,112
(14)
27,067
Bank
2007
$M
2,378
37
517
-
1,417
-
-
824
38
-
91
5,302
51
-
78
1,741
147
171
931
50
-
-
-
3,169
(3)
8,468
Revaluation of Available-for-sale investments resulted in a gain of $262 million (2007: $28 million) recognised directly in equity. As a
result of sale, derecognition or impairment of Available-for-sale investments, net gains of $312 million (2007: $138 million) were
removed from equity and reported in profit and loss for the year.
122 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 12 Available-for-Sale Investments (continued)
Australia
Australian Public Securities:
Local and semi-government
Medium term notes
Floating rate notes
Mortgage backed securities
Other securities and equity investments
Impairment provisions
Total Australia
Overseas
Government securities
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Other securities and equity investments
Impairment provisions
Total Overseas
Total available-for-sale investments
Group
At 30 June 2008
Amortised
Cost
$M
Gross
Unrealised
Gains
$M
Gross
Unrealised
Losses
$M
2,980
1,979
399
1,446
402
(27)
7,179
191
2,056
1,409
305
280
106
(4)
4,343
11,522
78
1
-
-
89
-
168
1
-
9
1
-
15
-
26
194
(77)
(48)
-
(27)
(31)
-
(183)
-
(25)
(11)
(2)
(6)
(1)
-
(45)
(228)
Fair
Value
$M
2,981
1,932
399
1,419
460
(27)
7,164
192
2,031
1,407
304
274
120
(4)
4,324
11,488
Maturity Distribution and Weighted Average Yield
Group
Maturity Period at 30 June 2008
0 to 3 months 3 to 12 months
%
$M
$M
%
Australia
Australian Public Securities:
Local and semi-
government
Medium term notes
Floating rate notes
Mortgage backed securities
Other securities and equity
investments
Impairment provisions
Total Australia
Overseas
Government securities
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Other securities and equity
investments
Impairment provisions
Total Overseas
Total available-for-sale
investments
Additional Disclosure
-
-
-
-
4
-
4
61
1,316
332
16
12
-
-
1,737
1,741
-
-
-
-
4. 80
-
-
5. 33
4. 18
4. 03
3. 25
9. 95
-
30
399
-
123
(21)
531
19
684
716
188
59
-
-
-
-
-
(1)
1,665
2,196
-
8. 23
7. 64
-
7. 00
-
-
7. 17
3. 82
6. 36
7. 23
4. 78
-
-
-
-
1 to 5 years
%
$M
2,844
1,758
-
-
4
-
4,606
112
31
56
100
201
87
(3)
584
7. 65
7. 89
-
-
-
-
-
3. 30
3. 30
3. 05
5. 36
4. 17
4. 83
-
-
5,190
-
593
5 to 10 years 10 years or more
%
$M
$M
%
Non-
Maturing
$M
Total
$M
137
144
-
-
7
-
288
-
-
303
-
2
-
-
305
7. 37
7. 68
-
-
3. 00
-
-
-
-
4. 00
-
2. 20
-
-
-
-
-
-
-
1,419
-
-
1,419
-
-
-
-
-
-
-
-
1,419
-
-
-
7. 96
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
322
(6)
316
-
-
-
-
-
33
-
33
2,981
1,932
399
1,419
460
(27)
7,164
192
2,031
1,407
304
274
120
(4)
4,324
349 11,488
Proceeds at or close to maturity of Available-for-sale investments in 2008 were $31,974 million (2007: $21,139 million).
Proceeds from sale of Available-for-sale investments in 2008 were $610 million (2007: $1,480 million).
Commonwealth Bank of Australia Annual Report 2008 123
Notes to the Financial Statements
Note 12 Available-for-Sale Investments (continued)
Australia
Australian Public Securities:
Local and semi-government
Medium term notes
Floating rate notes
Mortgage backed securities
Other securities and equity investments
Impairment provisions
Total Australia
Overseas
Government securities
Bills of exchange
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Other securities and equity investments
Total Overseas
Total available-for-sale investments
Maturity Distribution and Weighted Average Yield
Group
At 30 June 2007
Amortised
Cost
$M
Gross
Unrealised
Gains
$M
Gross
Unrealised
Losses
$M
2,411
535
605
1,416
441
(1)
5,407
210
78
1,764
164
366
1,033
619
4,234
9,641
81
1
-
1
4
-
87
-
-
-
1
-
1
-
2
89
(36)
(12)
-
-
(1)
-
(49)
-
-
(1)
(4)
(1)
(1)
(2)
(9)
(58)
Fair
Value
$M
2,456
524
605
1,417
444
(1)
5,445
210
78
1,763
161
365
1,033
617
4,227
9,672
Group
Maturity Period at 30 June 2007
0 to 3 months 3 to 12 months
%
$M
$M
%
150
-
5
-
95
-
250
138
-
1,536
26
194
81
6. 73
-
6. 86
-
5. 83
-
-
7. 28
-
5. 77
4. 68
4. 53
4. 28
504
-
75
-
190
(1)
768
12
78
215
93
27
617
6. 48
-
7. 11
-
4. 68
-
-
6. 65
4. 11
5. 37
5. 59
5. 94
6. 04
179
2,154
4. 43
-
349
1,391
6. 21
-
1 to 5 years
%
$M
1,603
363
388
-
36
-
2,390
60
-
12
42
144
316
89
663
6. 21
6. 27
6. 69
-
6. 00
-
-
2. 40
-
5. 86
2. 64
4. 74
5. 11
4. 50
-
Australia
Australian Public Securities:
Local and semi-
government
Medium term notes
Floating rate notes
Mortgage backed securities
Other securities and equity
investments
Impairment provisions
Total Australia
Overseas
Government securities
Bills of exchange
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Other securities and equity
investments
Total Overseas
Total available-for-sale
investments
5 to 10 years 10 years or more
%
$M
$M
%
Non-
Maturing
$M
Total
$M
199
161
86
-
67
-
513
-
-
-
-
-
8
-
8
6. 61
5. 87
6. 65
-
6. 33
-
-
-
-
-
-
-
4. 53
-
-
-
-
-
51
1,417
-
-
1,468
-
-
-
-
-
11
-
11
1,479
-
-
6. 74
6. 51
-
-
-
-
-
-
-
-
7. 09
-
-
-
-
-
-
-
56
-
56
-
-
-
-
-
-
-
-
2,456
524
605
1,417
444
(1)
5,445
210
78
1,763
161
365
1,033
617
4,227
56
9,672
2,404
-
2,159
-
3,053
-
521
124 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 13 Loans, Advances and Other Receivables
Australia
Overdrafts (1)
Housing loans (1) (2)
Credit card outstandings
Lease financing
Bills discounted
Term loans
Other lending
Other securities
Total Australia
Overseas
Overdrafts
Housing loans
Credit card outstandings
Lease financing
Bills discounted
Term loans
Redeemable preference share financing
Other lending
Other securities
Total Overseas
Gross loans, advances and other receivables
Less
Provisions for impairment (Note 14):
Collective provision
Individually assessed provisions against loans and advances
Unearned income:
Term loans
Lease financing
Net loans, advances and other receivables
2008
$M
20,047
186,926
7,555
4,239
5,868
83,431
1,076
13
309,155
716
28,817
538
563
-
23,916
1,194
25
300
56,069
365,224
(1,346)
(367)
(1,047)
(1,182)
(3,942)
361,282
Group
2007
$M
16,155
163,839
7,185
4,532
3,640
68,577
1,339
11
265,278
1,605
28,931
533
531
33
20,027
1,194
183
303
53,340
318,618
2008
$M
20,085
184,326
7,555
1,680
5,868
80,664
1,076
13
301,267
-
164
-
115
-
10,587
-
-
-
10,866
312,133
Bank
2007
$M
16,155
160,501
7,185
1,324
3,640
65,777
989
11
255,582
34
94
-
160
33
8,742
-
147
3
9,213
264,795
(1,034)
(199)
(1,240)
(326)
(907)
(176)
(941)
(979)
(3,153)
315,465
(491)
(362)
(2,419)
309,714
(515)
(230)
(1,828)
262,967
(1) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
(2) The Group has entered into securitisation transactions on residential mortgage loans that do not qualify for derecognition. The Group is entitled to any residual
income of the securitisation program after all payments due to investors and costs of the program have been met, to this extent the Group retains credit and liquidity
risk. In addition, derivatives return the interest rate and foreign currency risk to the Group. The carrying value of assets that did not qualify for derecognition for the
Group were $10,684 million (2007: $13,910 million) and for the Bank were $10,359 million (2007: $13,500 million). The carrying value of liabilities associated with
non-derecognised assets for the Group were $9,762 million (2007: $14,071 million) and for the Bank were $10,359 million (2007: $13,500 million).
Finance Leases
Minimum lease payments receivable:
Not later than one year
Later than one year but not later than five years
Later than five years
Lease financing
2008
$M
1,354
2,328
1,120
4,802
Group
2007
$M
1,462
2,583
1,018
5,063
2008
$M
532
868
395
1,795
Bank
2007
$M
388
883
213
1,484
Commonwealth Bank of Australia Annual Report 2008 125
Notes to the Financial Statements
Note 13 Loans, Advances and Other Receivables (continued)
Australia
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Australia
Overseas
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset 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
Group
Maturity Period at 30 June 2008
Maturing 1
Year
or Less
$M
Maturing
Between 1 &
5 Years
$M
Maturing
After 5 Years
$M
84
417
4,612
23,535
735
9,613
2,329
45,074
86,399
691
2,326
3,312
4,076
559
468
67
7,176
18,675
105,074
78,501
14,042
92,543
7,898
4,633
12,531
105,074
397
1,375
3,125
11,338
839
8,826
3,991
28,878
58,769
329
1,148
1,344
4,151
14
40
192
3,805
11,023
69,792
44,571
4,710
49,281
14,198
6,313
20,511
69,792
1,087
755
1,180
152,053
73
794
1,574
6,471
163,987
210
1,340
2,087
20,590
33
24
289
1,798
26,371
190,358
107,947
5,514
113,461
56,040
20,857
76,897
190,358
Total
$M
1,568
2,547
8,917
186,926
1,647
19,233
7,894
80,423
309,155
1,230
4,814
6,743
28,817
606
532
548
12,779
56,069
365,224
231,019
24,266
255,285
78,136
31,803
109,939
365,224
126 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 13 Loans, Advances and Other Receivables (continued)
Australia
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Australia
Overseas
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset 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
Group
Maturity Period at 30 June 2007
Maturing 1
Year
or Less
$M
Maturing
Between 1 &
5 Years
$M
Maturing
After 5 Years
$M
289
709
4,213
21,633
693
9,078
2,467
33,598
72,680
858
1,043
2,978
3,868
395
624
68
5,626
15,460
88,140
56,770
10,022
66,792
15,910
5,438
21,348
88,140
377
808
2,016
11,928
602
8,689
4,106
22,966
51,492
1,121
1,076
2,004
3,592
76
31
165
2,043
10,108
61,600
36,480
4,906
41,386
15,012
5,202
20,214
61,600
1,111
974
1,665
130,278
293
485
1,254
5,046
141,106
1,210
2,032
1,961
21,471
147
5
274
672
27,772
168,878
98,852
4,273
103,125
42,254
23,499
65,753
168,878
Total
$M
1,777
2,491
7,894
163,839
1,588
18,252
7,827
61,610
265,278
3,189
4,151
6,943
28,931
618
660
507
8,341
53,340
318,618
192,102
19,201
211,303
73,176
34,139
107,315
318,618
Commonwealth Bank of Australia Annual Report 2008 127
Notes to the Financial Statements
Note 14 Provisions for Impairment
Provisions for impairment losses
Collective provisions
Opening balance
Total charge against profit and loss for impairment losses
Net transfer to individually assessed provisions
Impairment losses recovered
Adjustments for exchange rate fluctuations and other items
Impairment losses written off
Closing balance
Individually assessed provisions
Opening balance
Charge against profit and loss for:
New and increased provisioning
Less write-back of provisions no longer required
Net transfer from collective provision
Discount unwind to interest income
Adjustment for exchange rate fluctuations and other items
Impairment losses
Closing balance
Total provisions for loan impairment
Other credit provisions
Total provisions for impairment losses
Coverage Ratios
Collective provision as a % of gross loans and acceptances
Collective provisions as a % of risk weighted assets – Basel I
Collective provisions as a % of risk weighted assets – Basel II
Individually assessed provisions for impairment as a % of gross
impaired assets (1)
Total provisions for impairment as % of gross impaired assets
2008
$M
2007
$M
1,034
930
(625)
77
(22)
1,394
(48)
1,346
1,046
434
(507)
103
9
1,085
(51)
1,034
Group
2006
$M
1,021
398
(440)
127
(7)
1,099
(53)
1,046
2008
$M
907
902
(574)
68
(30)
1,273
(33)
1,240
Bank
2007
$M
938
390
(477)
93
-
944
(37)
907
199
171
191
176
157
658
(33)
625
(9)
7
(455)
367
1,713
32
1,745
2008
%
0. 35
-
0. 65
40. 8
255. 5
523
(16)
507
(6)
(5)
(468)
199
1,233
23
1,256
2007
%
0. 31
0. 42
-
23. 8
298. 3
468
(28)
440
(13)
(3)
(444)
171
1,217
24
1,241
Group
2006
%
0. 36
0. 48
-
24. 5
380. 7
602
(28)
574
(9)
10
(425)
326
1,566
32
1,598
2008
%
0. 38
-
n/a
40. 1
269. 5
490
(13)
477
(6)
(3)
(449)
176
1,083
23
1,106
Bank
2007
%
0. 32
0. 38
-
20. 8
298. 9
(1) Portfolio provisions of $88 million as at 30 June 2008 (2007: $99 million) to cover unsecured personal loans and credit card lending have been deducted from
individually assessed provisions to calculate this ratio. These provisions are deducted due to the exclusion of the related assets from gross impaired assets. The
related asset amounts are instead included in the 90 days or more past due disclosure. Refer note 1 (mm).
128 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 14 Provisions for Impairment (continued)
Total Loan Impairment Expense
Comprising:
Individually assessed provisioning
New and increased provisioning
Less provisions no longer required
Net individually assessed provisions
Provided from collective provisioning
Charge to profit and loss
Collective provisioning
Direct write-offs
Recoveries of amounts previously written off
Movement in collective provision
Funding of individually assessed provisions
Charge to profit and loss
Total charge to profit and loss for loan impairment
expense
2008
$M
930
658
(33)
625
(625)
-
48
(77)
334
625
930
930
2007
$M
434
523
(16)
507
(507)
-
51
(103)
(21)
507
434
Group
2006
$M
398
468
(28)
440
(440)
-
53
(127)
32
440
398
2008
$M
902
602
(28)
574
(574)
-
33
(68)
363
574
902
434
398
902
Individually Assessed Provisions for Impairment by Industry Category
Australia
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Australia
Overseas
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Overseas
Total individually assessed provisions
2008
$M
2007
$M
2006
$M
-
4
27
34
1
97
12
161
336
-
-
4
7
8
2
2
8
31
367
-
3
2
23
1
104
13
39
185
-
-
1
4
-
1
1
7
14
199
-
4
1
17
2
96
11
35
166
-
-
1
2
-
2
-
-
5
171
Bank
2007
$M
390
490
(13)
477
(477)
-
37
(93)
(31)
477
390
390
Group
2005
$M
-
16
1
3
7
63
13
41
144
-
-
1
11
-
1
-
-
13
157
Commonwealth Bank of Australia Annual Report 2008 129
Notes to the Financial Statements
Note 14 Provisions for Impairment (continued)
Loan Impairments Written Off by Industry Category
Loan Impairments Written Off
Australia
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Australia
Overseas
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Overseas
Gross loan impairments written off
Loan Impairments Recovered
Australia
Overseas
Total loan impairments recovered
Net loan impairments written off
2008
$M
2007
$M
2006
$M
Group
2005
$M
-
3
5
23
1
364
49
34
479
-
-
4
1
1
13
-
5
24
503
73
4
77
426
-
1
-
20
1
408
49
30
509
-
-
-
-
-
7
-
3
10
519
99
4
103
416
-
8
1
8
3
388
42
36
486
-
-
-
-
-
7
-
4
11
497
122
5
127
370
-
1
3
8
3
280
26
63
384
-
-
-
6
-
-
-
1
7
391
76
5
81
310
130 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 14 Provisions for Impairment (continued)
Loan Impairments Recovered by Industry Category
Loan Impairments Recovered
Australia
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Australia
Overseas
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Overseas
Total loan impairments recovered
2008
$M
2007
$M
2006
$M
Group
2005
$M
-
-
-
1
1
61
5
5
73
-
-
-
-
-
3
-
1
4
77
-
1
1
1
1
77
10
8
99
-
-
-
-
-
4
-
-
4
103
-
1
-
1
-
99
5
16
122
-
-
-
-
-
5
-
-
5
127
-
1
3
1
-
59
5
7
76
-
-
-
-
-
4
-
1
5
81
Commonwealth Bank of Australia Annual Report 2008 131
Notes to the Financial Statements
Note 15 Credit Risk Management
Credit Risk Management is one of the key inputs into the
Group’s Integrated Risk Management framework. The Group
maintains a robust system of controls and processes to optimise
the Group’s credit risk-taking activities.
Credit risk is the potential of loss arising from failure for a debtor
or counterparty to meet their contractual obligations. It arises
primarily from lending activities, the provision of guarantees
including letters of credit and commitments to lend, investments
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 Group applies the following elements for effective credit risk
practice in its day-to-day business activities:
• Credit Risk Management Principles and Portfolio Standards;
and
• Credit Risk Measurement.
These portfolios are managed on a delinquency band approach
(e.g. actions taken when loan payments are greater than 30
days past due differ from actions when payments are greater
than 60 days past due) and are reviewed by the relevant
Business Credit Support and Monitoring Unit. Commercial
lending up to $1 million is reviewed as part of the Client Quality
Assurance process and overview is provided by the independent
Portfolio Quality Assurance unit. Facilities in the Retail segment
become classified for remedial management by centralised units
based on delinquency band.
(ii) Credit Risk Rated
This segment comprises commercial exposures, including bank
and government exposures. Each exposure with commercial
content exceeding $50,000 is assigned an internal Credit Risk
Rating (CRR). The CRR is normally assessed by reference to a
matrix where the risk of default and the risk of loss in the event
of default combine to determine a CRR grade. The CRR is
designed to:
• Aid in assessing changes to the client quality of the Group's
Credit Risk Management Principles and Portfolio Standards
credit portfolio;
The Risk Committee of the Board operates under a Charter by
which it oversees the Group’s credit risk management policies
and portfolio standards. These are designed to achieve portfolio
outcomes that are consistent with the Group’s risk/return
expectations. The Committee usually meets every two months,
and more often if required.
The Group has clearly defined credit policies for the approval
and management of credit risk. Formal credit standards apply to
all credit risks, with Specific Portfolio Standards applying to all
major lending areas. These incorporate income/repayment
capacity, acceptable terms and security and loan documentation
tests.
The Group uses a Risk Committee approved diversified portfolio
approach for the management of credit risk comprised of the
following:
• A large credit policy for aggregate exposures to individual,
commercial and industrial client groups;
• A system of industry limits and targets for exposures by
industry; and
• A system of country limits for geographic exposures.
The Group assesses the integrity and ability of debtors or
counterparties to meet their contracted financial obligations for
repayment. Collateral security, in the form of real estate or a
floating charge over assets, is generally taken for business credit
except for major government, bank and corporate counterparties
of externally risk rated and strong financial standing. Longer
term consumer finance (e.g. housing loans) is generally secured
against real estate while short term revolving consumer credit is
generally not secured by formal collateral.
While the Group applies policies, standards and procedures in
governing the credit process, the management of credit risk also
relies on the application of judgement and the exercise of good
faith and due care of relevant staff within their delegated
authority.
A centralised exposure management system is used to record
all significant credit risks borne by the Group. The credit risk
portfolio has two major segments:
(i) Retail
This segment has sub-segments covering housing loan, credit
card, personal loan facilities, some leasing products and most
secured commercial lending up to $1 million.
132 Commonwealth Bank of Australia Annual Report 2008
•
Influence decisions on approval, management and pricing of
individual credit facilities; and
• Provide the basis for reporting details of the Group's credit
portfolio to the Australian Prudential Regulatory Authority
(APRA).
CRR exposures are generally reviewed on an individual basis, at
least annually, although small transactions may be managed on
a behavioural basis after their initial rating at origination.
CRR fall within the following categories:
1. ‘Pass’ – Internal CRR of 1-6, or if not individually credit risk
rated, less than 30 days past due. These credit facilities qualify
for approval of new or
increased exposure on normal
commercial terms; and
2. ‘Troublesome or Impaired Assets (TIAs)’ – Internal CRR of 7-
9 or, if not individually credit risk rated, 30 days or more past
due. These credit facilities are not eligible for new or increases in
exposure unless it will protect or improve the Group’s position by
maximising recovery prospects or to facilitate rehabilitation.
For the purpose of determining an impaired CRR, default is
defined as any one of the following:
• A contractual payment is overdue by 90 days or more;
• An approved overdraft limit has been exceeded for 90 days
or more;
• A credit officer becomes aware that the client will not be able
to meet future repayments or service alternative acceptable
repayment arrangements e.g. the client has been declared
bankrupt;
• A credit officer has determined that full recovery of both
principal and interest is unlikely. This may be the case even if
all the terms of the client's credit facilities are currently being
met; and
• A credit obligation is sold at a material credit related
economic loss.
The Portfolio Quality Assurance unit reviews credit portfolios and
receives reports covering business unit compliance with policies,
portfolio standards, application of credit risk ratings and other
key practices and policies on a regular basis. The Portfolio
Quality Assurance unit reports its findings to the Board Audit and
Risk Committees as appropriate.
Notes to the Financial Statements
Auto Decisioning for the approval of credit risk exposures is
used for eligible business and consumer applications. Auto
Decisioning uses a scorecard approach whereby
the
performance of historical applications is supplemented by
information from a credit reference bureau and/or from the
Group’s existing knowledge of a customer’s behaviour.
For credit risk exposures greater than $2 million or decisioned
outside of the scorecard approach, a PD calculator or Expert
Judgement is used.
Expert Judgement is used where the complexity of the
transaction and/or the debtor is such that it is inappropriate to
rely completely on a statistical model. Ratings by Moody’s or
Standard and Poor’s may be used as inputs into the Expert
Judgement assessment.
tools are available
Where
to support a more objective
determination of PD, the CRR may be calculated using a
formula approved by the Group Chief Risk Officer incorporating
numeric representations of PD and LGD. These numeric
representations must be identified with the appropriate, internally
defined, alphabetic PD and LGD ratings.
(ii) Unexpected Loss
In addition to expected loss, a more stressed loss amount is
calculated. This unexpected loss estimate directly affects the
calculation of
internal economic capital
requirements (refer note 35, Capital Adequacy, for information
relating to Regulatory and Economic Capital).
regulatory and
In addition to the credit risk management processes used to
manage exposures to credit risk in the credit portfolio, the
internal ratings process also assists management in assessing
impairment and provisioning of financial assets (refer Note 16).
Note 15 Credit Risk Management (continued)
Credit Risk Measurement
The measurement of credit risk uses analytical tools to calculate
both (i) expected and (ii) unexpected loss probabilities for the
credit portfolio.
(i) Expected Loss
The Expected Loss (EL) is the product of:
• Probability of Default (PD);
• Exposure at Default (EAD); and,
• Loss Given Default (LGD) that would likely be experienced in
the event of a write-off.
For Credit Risk Rated facilities, ELs are allocated within CRR
bands. All ratings are reviewed at least annually or as specified
by the Group Chief Risk Officer.
The PD, expressed as a percentage, is the estimate of the
probability that a client will default within the next twelve months.
It reflects a client's ability to generate sufficient cash flows into
the future to meet the terms of all its credit obligations with the
Group. When assessing a client's PD, all relevant and material
information is considered. The same PD is applied to all credit
facilities provided to a client.
EAD, expressed as a percentage of the facility limit, is the
proportion of a facility that may be outstanding in the event of
default. For committed facilities such as fully drawn loans and
advances this will generally be the higher of the limit or
outstanding balance. For uncommitted facilities this will generally
be the outstanding balance only.
LGD, expressed as a percentage, is the estimated proportion of
a facility likely to be lost in the event of default. LGD is impacted
by:
• Type and level of any collateral held;
• Liquidity and volatility of collateral; and
• Carrying costs (effectively the costs of providing a facility that
is not generating an interest return) and management
expenses (realisation costs).
Various risks are considered when calculating PD, EAD and
LGD. Considerations include the potential for default by a
borrower due to economic, management, industry and other
risks and the mitigating benefits of any collateral.
Where it is considered appropriate, the Group has policies and
procedures in place setting out the circumstances where
acceptable and appropriate collateral is to be taken to mitigate
credit risk, including valuation parameters, review frequency and
independence of valuation. In some instances, such as certain
types of consumer loans (e.g. credit cards), a client’s facilities
may not be secured by formal collateral.
Main collateral types include:
• Residential mortgages;
• Charges over other properties (including Commercial and
Broad-acre);
• Cash (usually in the form of a charge over a Term Deposit);
• Guarantees by company directors supporting commercial
lending;
• A floating charge over a company’s assets, including stock
and work in progress; and
• A charge over stock or scrip.
Commonwealth Bank of Australia Annual Report 2008 133
Notes to the Financial Statements
Note 15 Credit Risk Management (continued)
Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements
Sover-
eign
$M
Agricul-
ture
$M
Bank
& Other
Financial
$M
Real
Estate
Mortgage
$M
Real
Estate
Constr-
uction
$M
Asset
Financing
$M
Other
Comm &
Indust.
$M
Personal
$M
Group
At 30 June 2008
Other
$M
Total
$M
-
-
2,043
4,096
-
204
2,981
1,568
8
20
-
-
-
-
-
15
4,841
4,880
12,910
3,527
295
13,560
-
1,419
-
-
-
313
-
-
-
-
-
-
24
-
5
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,504
10,716
-
2,555
2,764
-
-
-
-
-
-
-
4,841
4,880
18,457
18,676
295
16,339
7,164
2,547
2,764
32
8,917
485
1,018
186,926
-
2,338
1,647
533
21
19,233
-
240
7,894
-
99
80,423
14,488
1,405
-
-
10,647
309,155
18,278
15,820
10,920
5,358
51,852
189,577
2,230
19,473
7,993 115,855
10,647
413,905
-
-
823
394
1,069
54
-
-
-
-
33
19
2,895
2,104
1,425
1,070
1,204
1,213
225
-
2,031
-
-
-
-
-
-
-
1,230
-
23
4,814
-
89
6,743
-
125
28,817
-
535
3,818
4,955
18,810
29,352
-
-
-
-
40
-
-
606
-
11
657
-
-
-
-
29
-
-
532
-
10
571
2,706
85,253
10,698
512,562
-
-
-
-
-
-
-
2,895
2,104
3,219
1,974
2,971
1,893
4,324
-
-
-
-
-
-
-
-
-
971
510
596
607
2,068
548
-
10
12,779
-
433
-
-
924
56,069
-
2,160
558
17,964
924
77,609
96
12,051
275
90,031
602,593
Australia
Credit risk exposures
relating to on balance
sheet assets:
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through
Income Statement:
Trading
Insurance (1)
Other
Derivative assets
Available-for-sale
investments
Loans, advances and other
receivables
Bank acceptances
Other assets (2)
Total on balance sheet
Australia
Credit risk exposures
relating to off balance
sheet items:
Guarantees
Loan commitments
Other commitments
Total Australia
Overseas
Credit risk exposures
relating to on balance
sheet assets:
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through
Income Statement:
Trading
Insurance (1)
Other
Derivative assets
Available-for-sale
investments
Loans, advances and other
receivables
Bank acceptances
Other assets (2)
Total on balance sheet
Overseas
Credit risk exposures
relating to off balance
sheet items:
Guarantees
Loan commitments
Other commitments
Total Overseas
Total gross credit risk
(1) In most cases the credit risk of insurance assets is borne by policyholders. However, on certain insurance contracts the Group retains exposure to credit risk.
(2) Other assets predominantly comprises assets which do not give rise to credit exposure, including intangible assets, property, plant and equipment, and defined benefit
superannuation plan surplus, which are shown in “Other” for the purpose of reconciling to the Balance Sheet.
134 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 15 Credit Risk Management (continued)
Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements
Sover-
eign
$M
Agricul-
ture
$M
Bank
& Other
Financial
$M
Real
Estate
Mortgage
$M
Real
Estate
Constru-
ction
$M
Asset
Financing
$M
Other
Comm &
Indust.
$M
Personal
$M
Group
At 30 June 2007
Other
$M
Total
$M
-
-
3,894
4,300
-
170
2,456
1,777
11
28
-
-
-
-
-
-
-
2,491
2,155
39
5,984
2,809
10,193
3,888
423
8,494
1,417
7,894
441
960
-
-
-
374
-
-
-
-
-
-
33
-
14
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,924
12,225
-
296
1,572
-
-
-
-
-
-
-
5,984
2,809
19,011
20,820
423
8,974
5,445
163,839
-
2,575
1,588
571
25
18,252
-
287
7,827
-
123
61,610
15,543
968
-
-
10,745
265,278
18,721
15,750
12,636
4,685
42,503
166,788
2,231
18,539
7,950
97,138
10,745
363,215
2,281
72,167
12,842
450,505
-
-
383
487
244
50
210
-
-
-
-
365
-
4,124
2,686
977
1,641
2,369
1,541
-
1,841
-
-
-
-
-
-
-
3,189
-
63
4,151
-
82
6,943
-
137
28,931
-
571
4,626
4,598
22,259
29,502
-
-
-
-
67
-
-
618
-
12
697
-
-
-
-
-
-
-
660
-
13
673
-
-
-
-
-
-
-
507
-
10
-
-
1,098
571
605
2,178
2,176
8,341
-
1,236
-
-
-
-
-
-
-
4,124
2,686
2,458
2,699
3,650
3,769
4,227
-
-
1,018
53,340
-
3,142
517
16,205
1,018
80,095
570
13,264
598
94,527
545,032
Australia
Credit risk exposures
relating to on balance
sheet assets:
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through
Income Statement:
Trading
Insurance (1)
Other
Derivative assets
Available-for-sale
investments
Loans, advances and other
receivables
Bank acceptances
Other assets (2)
Total on balance sheet
Australia
Credit risk exposures
relating to off balance
sheet items:
Guarantees
Loan commitments
Other commitments
Total Australia
Overseas
Credit risk exposures
relating to on balance
sheet assets:
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through
Income Statement:
Trading
Insurance (1)
Other
Derivative assets
Available-for-sale
investments
Loans, advances and other
receivables
Bank acceptances
Other assets (2)
Total on balance sheet
Overseas
Credit risk exposures
relating to off balance
sheet items:
Guarantees
Loan commitments
Other commitments
Total Overseas
Total gross credit risk
(1) In most cases the credit risk of insurance assets is borne by policyholders. However, on certain insurance contracts the Group retains exposure to credit risk.
(2) Other assets predominantly comprises assets which do not give rise to credit exposure, including intangible assets, property, plant and equipment, and defined benefit
superannuation plan surplus, which are shown in “Other” for the purpose of reconciling to the Balance Sheet.
Commonwealth Bank of Australia Annual Report 2008 135
Notes to the Financial Statements
Note 15 Credit Risk Management (continued)
Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements
Sover-
eign
$M
Agricul-
ture
$M
Bank
& Other
Financial
$M
Real
Estate
Mortgage
$M
Real
Estate
Constru-
ction
$M
Asset
Financing
$M
Other
Comm &
Indust.
$M
Personal
$M
Bank
At 30 June 2008
Other
$M
Total
$M
-
-
2,043
-
-
204
2,905
1,568
8
16
-
-
-
-
-
15
4,609
4,880
12,910
-
274
13,560
-
1,419
-
-
-
-
-
-
-
-
-
-
-
-
5
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,504
-
-
1,996
18,635
-
-
-
-
-
-
-
4,609
4,880
18,457
-
274
15,780
22,959
2,546
2,764
26
8,917
485
29,173
184,326
-
1,907
1,646
533
17
19,183
-
198
2,897
-
30
80,184
14,488
1,231
-
-
6,159
301,267
18,278
38,757
6,744
5,351
76,227
186,233
2,201
19,381
2,927 120,038
6,159
425,261
-
-
453
-
-
49
54
40
-
1
-
-
-
-
-
-
-
50
-
1
2,673
1,851
-
-
-
679
2,017
5,401
-
9,297
597
51
21,918
-
-
-
-
-
-
-
-
-
-
-
-
-
-
164
-
4
168
245
-
7
252
-
-
-
-
-
-
-
42
-
1
43
-
-
-
-
-
-
-
-
-
-
-
3,707
85,253
10,698
524,919
-
-
-
-
-
-
-
2,673
1,851
711
-
-
3,507
4,108
-
-
23
10,866
-
9,469
-
-
258
-
-
2,779
2,037
4,924
-
135
10,133
23
33,185
-
5,617
108
38,910
563,829
Australia
Credit risk exposures
relating to on balance
sheet assets:
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through
Income Statement:
Trading
Insurance (1)
Other
Derivative assets
Available-for-sale
investments
Loans, advances and other
receivables
Bank acceptances
Other assets (2)
Total on balance sheet
Australia
Credit risk exposures
relating to off balance
sheet items:
Guarantees
Loan commitments
Other commitments
Total Australia
Overseas
Credit risk exposures
relating to on balance
sheet assets:
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through
Income Statement:
Trading
Insurance (1)
Other
Derivative assets
Available-for-sale
investments
Loans, advances and other
receivables
Bank acceptances
Other assets (2)
Total on balance sheet
Overseas
Credit risk exposures
relating to off balance
sheet items:
Guarantees
Loan commitments
Other commitments
Total Overseas
Total gross credit risk
(1) In most cases the credit risk of insurance assets is borne by policyholders. However, on certain insurance contracts the Group retains exposure to credit risk.
(2) Other assets predominantly comprises assets which do not give rise to credit exposure, including intangible assets, property, plant and equipment, and defined benefit
superannuation plan surplus, which are shown in “Other” for the purpose of reconciling to the Balance Sheet.
136 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 15 Credit Risk Management (continued)
Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements
Sover-
eign
$M
Agricul-
ture
$M
Bank
& Other
Financial
$M
Real
Estate
Mortgage
$M
Real
Estate
Constru-
ction
$M
Asset
Financing
$M
Other
Comm &
Indust.
$M
Personal
$M
Bank
At 30 June 2007
Other
$M
Total
$M
-
-
3,894
-
-
170
2,379
1,769
11
26
-
-
-
-
-
-
-
5,625
3,283
10,193
-
424
8,494
1,417
-
-
-
-
-
-
-
-
-
-
-
-
14
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,098
-
-
2,174
1,503
-
-
-
-
-
-
-
5,625
3,283
19,185
-
424
10,852
5,299
2,487
2,155
36
7,894
441
28,805
160,501
-
2,329
1,587
571
23
18,237
-
265
4,810
-
70
58,297
15,543
846
-
-
6,078
255,582
18,721
38,478
8,249
4,678
66,576
162,830
2,195
18,502
4,880
83,461
6,078
357,449
-
-
336
-
-
32
51
48
-
5
472
-
-
-
-
-
-
-
-
-
-
-
1,776
2,489
-
-
-
959
1,820
4,199
-
10,070
-
-
-
-
-
-
-
94
-
9
21,313
103
-
-
-
-
-
-
-
-
-
-
-
-
-
-
211
-
21
232
106
-
10
116
-
-
-
-
-
-
-
-
-
-
-
4,334
72,122
12,842
446,747
-
-
-
-
-
-
-
1,776
2,489
1,102
-
24
3,010
3,169
-
-
33
9,213
-
10,599
-
-
766
-
24
2,019
1,298
4,555
-
451
9,113
33
31,382
568
6,160
375
38,485
485,232
Australia
Credit risk exposures
relating to on balance
sheet assets:
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through
Income Statement:
Trading
Insurance (1)
Other
Derivative assets
Available-for-sale
investments
Loans, advances and other
receivables
Bank acceptances
Other assets (2)
Total on balance sheet
Australia
Credit risk exposures
relating to off balance
sheet items:
Guarantees
Loan commitments
Other commitments
Total Australia
Overseas
Credit risk exposures
relating to on balance
sheet assets:
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through
Income Statement:
Trading
Insurance (1)
Other
Derivative assets
Available-for-sale
investments
Loans, advances and other
receivables
Bank acceptances
Other assets (2)
Total on balance sheet
Overseas
Credit risk exposures
relating to off balance
sheet items:
Guarantees
Loan commitments
Other commitments
Total Overseas
Total gross credit risk
(1) In most cases the credit risk of insurance assets is borne by policyholders. However, on certain insurance contracts the Group retains exposure to credit risk.
(2) Other assets predominantly comprises assets which do not give rise to credit exposure, including intangible assets, property, plant and equipment, and defined benefit
superannuation plan surplus, which are shown in “Other” for the purpose of reconciling to the Balance Sheet.
Commonwealth Bank of Australia Annual Report 2008 137
Notes to the Financial Statements
Note 15 Credit Risk Management (continued)
Credit Portfolio Loans and Advances by Industry
The following table sets out the distribution of the Group’s loans, advances and other receivables (excluding bank acceptances) by
industry.
Industry
Australia
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Australia
Overseas
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Overseas
Gross loans, advances and other receivables
Provisions for Loan Impairment and unearned income
Net loans, advances and other receivables
2008
$M
1,568
2,547
8,917
186,926
1,647
19,233
7,894
80,423
309,155
1,230
4,814
6,743
28,817
606
532
548
12,779
56,069
365,224
Group
2007
$M
1,777
2,491
7,894
163,839
1,588
18,252
7,827
61,610
265,278
3,189
4,151
6,943
28,931
618
660
507
8,341
53,340
318,618
(3,942)
361,282
(3,153)
315,465
Large Exposures
Concentrations of exposure to any debtor or counterparty group
are controlled by a large credit exposure policy. All exposures
outside the policy are approved by the Board Risk Committee.
The following table shows the aggregated number of the
Group’s counterparty Corporate and
Industrial exposures
(including direct and contingent exposures) which individually
were greater then 5% of the Group’s capital resources (Tier
One and Tier Two capital):
2008
Number
1
-
2007
Number
-
-
Group
2006
Number
-
-
Derivative financial instruments expose the Group to credit risk
where there is a positive fair value current. In the case of credit
derivatives, the Group is also exposed to or protected from the
risk of default of the underlying entity referenced by the
derivative. For further information regarding derivatives see
Notes 11, 42 and 49.
The Group also nets its credit exposure through the operation
of certain consumer and corporate facilities that allow on
balance sheet netting for credit management purposes. As at
30 June 2008 these facilities reduced the credit risk of the
Group by approximately $20 billion (2007: $16 billion).
5% to less than 10% of Group’s capital resources
10% to less than 15% of Group’s capital resources
The Group has a good quality and well diversified credit
portfolio, with 51.2% of the gross loans and advances in
domestic mortgage loans and a further 7.9% in overseas
mortgage loans primarily in New Zealand. Overseas loans
account for 15.4% of loans and advances at $56.1 billion.
The Group restricts its exposure to credit losses by entering into
master netting arrangements with counterparties with which it
undertakes a significant volume of transactions. Master netting
arrangements do not generally result in an offset of Balance
Sheet assets and liabilities as transactions are usually settled on
a gross basis.
However, the credit risk associated with favourable contacts is
reduced by a master netting arrangement to the extent that if an
event of default occurs, all amounts with the counterparty are
terminated and settled on a net basis. As at 30 June 2008,
master netting arrangements reduced the credit risk of the
Group by approximately $6.5 billion (2007: $4.8 billion).
138 Commonwealth Bank of Australia Annual Report 2008
Note 16 Asset Quality
Impaired Assets
The Group administers its credit exposure to the Credit Risk
Rated and Retail segments, as discussed in Note 15, Credit
Risk Management.
Credit Risk Rated portfolios are assessed at least at each
Balance Sheet date for objective evidence that the financial
asset or portfolio of assets is impaired.
Impaired financial assets in the Retail segment are those
facilities that are not well secured and past due 180 days or
more.
The Group applies APRA’s prudential standards in classifying
impaired assets into three categories, comprising:
(a) Non-Performing:
• Any credit risk facility against which an individually assessed
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.
(b) Restructured Facilities:
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 terms will result in immediate
reclassification to non-performing.
Distribution of loans and advances by credit quality
Gross loans and advances
Australia
Neither past due nor impaired
Past due but not impaired
Impaired
Total Australia
Overseas
Neither past due nor impaired
Past due but not impaired
Impaired
Total Overseas
Total gross loans and advances
Notes to the Financial Statements
(c) Assets Acquired through Security Enforcement:
• Other Real Estate Owned, comprising real estate where the
Group assumed ownership or foreclosed in settlement of a
debt;
• Other Assets Acquired through Securities Enforcement,
comprising assets other than real estate where the Group
has assumed ownership or foreclosed in settlement of a
debt; and
• Other real estate owned and other assets acquired through
security enforcement are sold through the Group’s existing
disposal processes. These processes are generally expected
to take no longer than six months.
The Group does not manage credit risk based solely on arrears
categorisation, but also uses the Credit Risk Rating principles as
described in Note 15 Credit Risk Management.
Provisions for Impairment
Provisions for impairment of financial assets are raised where
there is objective evidence of impairment and at an amount
adequate to cover assessed credit related losses. Credit losses
arise primarily from loans but also from other credit instruments
such as bank acceptances, contingent liabilities, guarantees and
other financial instruments and assets acquired through security
enforcement.
For further information about the accounting policy for provisions
for impairment see Note 1 (n).
2008
$M
302,156
6,379
620
309,155
53,440
2,566
63
56,069
365,224
Group
2007
$M
259,158
5,722
398
265,278
51,291
2,026
23
53,340
318,618
2008
$M
294,578
6,096
593
301,267
10,838
28
-
10,866
312,133
Bank
2007
$M
249,725
5,487
370
255,582
9,206
7
-
9,213
264,795
Commonwealth Bank of Australia Annual Report 2008 139
Notes to the Financial Statements
Note 16 Asset Quality (continued)
The segmentation of Loans and Advances for the retail and risk-rated portfolios into investment, pass and weak (including default
grades) excluding those past due or impaired, is based on the mapping of Probability of Default (PD) to Standard and Poor’s ratings,
reflecting a client’s ability to meet their credit obligations. In particular, retail PD pools have been aligned to the Group’s risk-rated PD
grades which are consistent with rating agency views of credit quality segmentation.
Investment grade is representative of lower assessed default probabilities with other classifications reflecting progressively higher default
risk. No consideration is given to Loss Given Default (LGD), the impact of any recoveries or the potential benefit of mortgage insurance.
Loans and Advances which were neither
past due nor impaired
Housing
Loans
$M
Other
Personal
$M
Asset
Financing
$M
Commercial
Industrial
$M
Group
2008
Total
$M
203,772
90,434
7,950
302,156
25,855
24,786
2,799
53,440
147,377
31,696
3,583
182,656
8,733
15,736
2,434
26,903
2,575
13,583
2,200
18,358
56
181
-
237
-
7,500
-
7,500
-
528
-
528
53,820
37,655
2,167
93,642
17,066
8,341
365
25,772
Credit Grading
Australia
Investment
Pass
Weak
Total Australia
Overseas (1)
Investment
Pass
Weak
Total Overseas
Total loans and advances which were neither past
due nor impaired
209,559
18,595
8,028
119,414
355,596
(1) For New Zealand Housing Loans, PDs reflect Reserve Bank of New Zealand requirements resulting in higher PDs on average and lower grading.
Credit Grading
Australia
Investment
Pass
Weak
Total Australia
Overseas (1)
Investment
Pass
Weak
Total Overseas
Total loans and advances which
were neither past due nor impaired
Housing
Loans
$M
Other
Personal
$M
Asset
Financing
$M
Commercial
Industrial
$M
135,379
21,163
3,754
160,296
5,518
19,701
2,317
27,536
2,545
13,148
1,638
17,331
76
315
-
391
-
7,475
-
7,475
-
490
1
491
43,444
29,727
885
74,056
16,223
6,422
228
22,873
Group
2007
Total
$M
181,368
71,513
6,277
259,158
21,817
26,928
2,546
51,291
187,832
17,722
7,966
96,929
310,449
(1) For New Zealand Housing Loans, PDs reflect Reserve Bank of New Zealand requirements resulting in higher PDs on average and lower grading.
140 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 16 Asset Quality (continued)
Loans and Advances which were neither
past due nor impaired
Housing
Loans
$M
Other
Personal
$M
Asset
Financing
$M
Commercial
Industrial
$M
Credit Grading
Australia
Investment
Pass
Weak
Total Australia
Overseas
Investment
Pass
Weak
Total Overseas
Total loans and advances which
were neither past due nor impaired
Credit Grading
Australia
Investment
Pass
Weak
Total Australia
Overseas
Investment
Pass
Weak
Total Overseas
Total loans and advances which
were neither past due nor impaired
Bank
2008
Total
$M
199,200
87,346
8,032
294,578
9,058
1,713
67
10,838
142,993
33,419
3,666
180,078
2,539
13,567
2,202
18,308
-
136
-
136
-
42
-
42
-
2,791
-
2,791
-
-
-
-
53,668
37,569
2,164
93,401
9,058
1,535
67
10,660
180,214
18,350
2,791
104,061
305,416
Housing
Loans
$M
Other
Personal
$M
Asset
Financing
$M
Commercial
Industrial
$M
132,622
20,706
3,645
156,973
2,514
13,157
1,645
17,316
-
87
-
87
-
106
-
106
-
4,707
-
4,707
-
-
-
-
41,649
28,248
832
70,729
7,812
1,189
12
9,013
Bank
2007
Total
$M
176,785
66,818
6,122
249,725
7,812
1,382
12
9,206
157,060
17,422
4,707
79,742
258,931
Commonwealth Bank of Australia Annual Report 2008 141
Notes to the Financial Statements
Note 16 Asset Quality (continued)
Loans and Advances which were past due
but not impaired (1)
Housing
Loans
$M
Other
Personal (2)
$M
Asset
Financing
$M
Commercial
Industrial
$M
2,147
822
359
455
330
4,113
1,529
212
74
42
19
1,876
530
147
74
99
9
859
216
45
16
10
6
293
219
73
26
20
1
339
14
4
1
1
-
20
806
113
74
50
25
1,068
281
33
18
23
22
377
Group
2008
Total
$M
3,702
1,155
533
624
365
6,379
2,040
294
109
76
47
2,566
Australia
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Past due 180 days or more
Total Australia
Overseas
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due date 90-179 days
Past due 180 days or more
Total Overseas
Total loans and advances which
were past due but not impaired
5,989
1,152
359
1,445
8,945
(1) Collateral held against past due Housing Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown.
Other Personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and
Other Commercial/ Industrial receivables.
(2) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made
with the debtor.
142 Commonwealth Bank of Australia Annual Report 2008
Note 16 Asset Quality (continued)
Loans and Advances which were past due
but not impaired (1)
Housing
Loans
$M
Other
Personal (2)
$M
Asset
Financing
$M
Commercial
Industrial
$M
Notes to the Financial Statements
1,824
653
293
305
285
3,360
1,099
179
55
40
10
1,383
558
137
82
128
13
918
201
39
10
11
6
267
218
55
26
16
2
317
12
2
1
1
-
16
789
134
86
55
63
1,127
282
26
17
20
15
360
Group
2007
Total
$M
3,389
979
487
504
363
5,722
1,594
246
83
72
31
2,026
Australia
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Past due 180 days or more
Total Australia
Overseas
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due date 90-179 days
Past due 180 days or more
Total Overseas
Total loans and advances which
were past due but not impaired
4,743
1,185
333
1,487
7,748
(1) Collateral held against past due Housing Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown.
Other Personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and
Other Commercial/ Industrial receivables.
(2) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made
with the debtor.
Commonwealth Bank of Australia Annual Report 2008 143
Notes to the Financial Statements
Note 16 Asset Quality (continued)
Loans and Advances which were past due but
not impaired (1)
Housing
Loans
$M
Other
Personal (2)
$M
Asset
Financing
$M
Commercial
Industrial
$M
Australia
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Past due 180 days or more
Total Australia
Overseas
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Past due 180 days or more
Total Overseas
Total loans and advances which were past due but
not impaired
2,128
820
358
455
330
4,091
20
6
1
1
-
28
530
147
74
99
9
859
-
-
-
-
-
-
39
16
6
10
7
78
-
-
-
-
-
-
806
113
74
50
25
1,068
-
-
-
-
-
-
Bank
2008
Total
$M
3,503
1,096
512
614
371
6,096
20
6
1
1
-
28
4,119
859
78
1,068
6,124
(1) Collateral held against past due Housing Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown. Other
Personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and Other
Commercial/ Industrial receivables.
(2) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made
with the debtor.
Loans and Advances which were past due but
not impaired (1)
Australia
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Past due 180 days or more
Total Australia
Overseas
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Past due 180 days or more
Total Overseas
Total loans and advances which were past due but
not impaired
Housing
Loans
$M
Other
Personal (2)
$M
Asset
Financing
$M
Commercial
Industrial
$M
1,812
651
292
305
286
3,346
7
-
-
-
-
7
558
137
82
128
13
918
-
-
-
-
-
-
47
21
12
13
3
96
-
-
-
-
-
-
789
134
86
55
63
1,127
-
-
-
-
-
-
Bank
2007
Total
$M
3,206
943
472
501
365
5,487
7
-
-
-
-
7
3,353
918
96
1,127
5,494
(1) Collateral held against past due Housing Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown. Other
Personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and Other
Commercial/ Industrial receivables.
(2) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made
with the debtor.
144 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 16 Asset Quality (continued)
Impaired Financial Assets
Impaired Asset Ratios
Gross impaired assets as a % of gross loans and acceptances
Net impaired assets as % of:
Gross loans and acceptances
Total Shareholders’ equity
Financial assets individually assessed as impaired
2008
%
0. 18
0. 08
1. 21
2007
%
0. 13
0. 07
0. 91
2006
%
0. 11
0. 06
0. 73
Australia
Loans and other receivables:
Housing loans
Other personal (1)
Asset financing
Other commercial and industrial
Financial assets individually assessed as impaired-
Australia
Overseas
Loans and other receivables:
Housing loans
Other personal
Asset financing
Other commercial and industrial
Financial assets individually assessed as impaired-
Overseas
Total financial assets individually assessed as impaired
Gross
Impaired
Assets
$M
Individually
Assessed
Provisions
$M
2008
Net
Impaired
Assets
$M
Gross
Impaired
Assets
$M
Individually
Assessed
Provisions
$M
157
14
55
394
620
37
2
1
23
63
683
34
97
12
193
336
7
2
2
20
31
367
123
(83)
43
201
284
30
-
(1)
3
32
316
182
3
35
178
398
12
2
1
8
23
421
23
104
13
45
185
4
1
1
8
14
199
Group
2005
%
0. 16
0. 09
0. 97
Group
2007
Net
Impaired
Assets
$M
159
(101)
22
133
213
8
1
-
-
9
222
(1) Portfolio provisions of $88 million at 30 June 2008 (2007: $99 million) to cover unsecured personal loans and credit card lending are included in the individually
assessed provisions. However, the related assets are not included in impaired assets. The related asset amounts are instead included in the 90 days or more past
due disclosure. Refer Note 1 (mm).
Australia
Loans and other receivables:
Housing
Other personal (1)
Asset financing
Other commercial and industrial
Financial assets individually assessed as impaired-
Australia
Overseas
Loans and other receivables:
Housing
Other personal
Asset financing
Other commercial and industrial
Financial assets individually assessed as impaired-
Overseas
Total financial assets individually assessed as impaired
Gross
Impaired
Assets
$M
Individually
Assessed
Provisions
$M
2008
Net
Impaired
Assets
$M
Gross
Impaired
Assets
$M
Individually
Assessed
Provisions
$M
Bank
2007
Net
Impaired
Assets
$M
157
14
28
394
593
-
-
-
-
-
593
34
97
3
192
326
-
-
-
-
-
326
123
(83)
25
202
267
-
-
-
-
-
267
182
3
7
178
370
-
-
-
-
-
370
23
104
4
45
176
-
-
-
-
-
176
159
(101)
3
133
194
-
-
-
-
-
194
(1) Portfolio provisions of $88 million at 30 June 2008 (2007: $99 million) to cover unsecured personal loans and credit card lending are included in the individually
assessed provisions. However, the related assets are not included in impaired assets. The related asset amounts are instead included in the 90 days or more past
due disclosure. Refer Note 1 (mm).
Commonwealth Bank of Australia Annual Report 2008 145
Notes to the Financial Statements
Note 16 Asset Quality (continued)
Impaired Assets by classification
Australia
Non-Performing loans:
Gross balances
Less provisions for impairment
Net non-performing loans
Restructured loans:
Gross balances
Less provisions
Net restructured loans
Assets Acquired Through Security Enforcement:
Gross balances
Less provisions for impairment
Net assets acquired through security enforcement
Net Australia impaired assets
Overseas
Non-Performing loans:
Gross balances
Less provisions for impairment
Net non-performing loans
Restructured loans:
Gross balances
Less provisions for impairment
Net restructured loans
Assets Acquired Through Security Enforcement:
Gross balances
Less provisions for impairment
Net assets acquired through security enforcement
Net Overseas impaired assets
2008
$M
2007
$M
2006
$M
620
(336)
284
398
(185)
213
312
(166)
146
Group
2005
$M
362
(144)
218
-
-
-
-
-
-
284
63
(31)
32
-
-
-
-
-
-
32
-
-
-
-
-
-
213
23
(14)
9
-
-
-
-
-
-
9
-
-
-
-
-
-
146
14
(5)
9
-
-
-
-
-
-
9
-
-
-
-
-
-
218
14
(13)
1
-
-
-
-
-
-
1
Total net impaired assets
316
222
155
219
Non-Performing Loans by Size of Loan
Less than $1 million
$1 million to $10 million
Greater than $10 million
Total
Australia
2008
$M
Overseas
2008
$M
Total
2008
$M
Australia
2007
$M
Overseas
2007
$M
189
175
256
620
39
24
-
63
228
199
256
683
194
151
53
398
14
9
-
23
Group
Total
2007
$M
208
160
53
421
146 Commonwealth Bank of Australia Annual Report 2008
Note 16 Asset Quality (continued)
Movement in Impaired Asset Balances
Gross Impaired Assets
Gross impaired assets – opening balance
New and increased
Balances written off
Returned to performing or repaid
Gross impaired assets – closing balance
Impaired Assets by Industry and Status
Industry
Australia
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Australia
Overseas
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Overseas
Gross balances
Notes to the Financial Statements
2008
$M
421
1,104
(470)
(372)
683
2007
$M
326
928
(482)
(351)
421
2006
$M
395
745
(450)
(364)
326
Impaired
Assets
$M
Individually
Assessed
Provisions
$M
Total Risk
$M
Write-offs
$M
Recoveries
$M
1,568
2,547
8,917
186,926
1,647
19,233
7,894
80,423
309,155
1,230
4,814
6,743
28,817
606
532
548
12,779
56,069
365,224
-
15
58
157
11
14
55
310
620
-
1
4
37
3
2
1
15
63
683
-
4
27
34
1
97
12
161
336
-
-
4
7
8
2
2
8
31
367
-
3
5
23
1
364
49
34
479
-
-
4
1
1
13
-
5
24
503
-
-
-
(1)
(1)
(61)
(5)
(5)
(73)
-
-
-
-
-
(3)
-
(1)
(4)
(77)
Group
2005
$M
363
769
(350)
(387)
395
Group
2008
Net
Write-offs
$M
-
3
5
22
-
303
44
29
406
-
-
4
1
1
10
-
4
20
426
Commonwealth Bank of Australia Annual Report 2008 147
Notes to the Financial Statements
Note 16 Asset Quality (continued)
Impaired Assets by Industry and Status
Industry
Australia
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Australia
Overseas
Sovereign
Agriculture
Bank and other financial
Real estate:
Mortgage
Construction
Personal
Asset financing
Other commercial and industrial
Total Overseas
Gross balances
Impaired
Assets
$M
Individually
Assessed
Provisions
$M
Total Risk
$M
Write-offs
$M
Recoveries
$M
Group
2007
Net
Write-offs
$M
1,777
2,491
7,894
163,839
1,588
18,252
7,827
61,610
265,278
3,189
4,151
6,943
28,931
618
660
507
8,341
53,340
318,618
-
5
2
182
8
3
35
163
398
-
-
-
12
-
2
1
8
23
421
-
3
2
23
1
104
13
39
185
-
-
1
4
-
1
1
7
14
199
-
1
-
20
1
408
49
30
509
-
-
-
-
-
7
-
3
10
519
-
(1)
(1)
(1)
(1)
(77)
(10)
(8)
(99)
-
-
-
-
-
(4)
-
-
(4)
(103)
-
-
(1)
19
-
331
39
22
410
-
-
-
-
-
3
-
3
6
416
148 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 17 Shares in and Loans to Controlled Entities
Shares in controlled entities
Loans to controlled entities (1)
Total shares in and loans to controlled entities
(1) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
A list of the Group’s controlled entities is provided in Note 44 Controlled Entities.
2008
$M
23,676
13,796
37,472
Bank
2007
$M
23,311
14,285
37,596
Note 18 Investment Property
Investment Property
2008
$M
-
Group
2007
$M
-
2008
$M
-
Bank
2007
$M
-
Investment property which backs liabilities paying a return linked directly to the property’s fair value is measured at fair value through
profit and loss. The fair value is based on valuations performed by an independent valuer who holds a recognised and relevant
professional qualification and has recent experience in the location and category of the investment property being valued.
Amounts recognised in profit and loss relating to investment property
Rental income (1)
Net gains or losses from fair value adjustments (1)
Direct operating expenses (2)
Total
(1) This income is disclosed as part of Other operating income – Other in Note 2.
(2) This expense is disclosed as part of Other operating income – Other in Note 2.
Investment Property (reconciliation)
Opening balance
Net gains or losses from fair value adjustments
Assets reclassified to Assets held for sale
Closing balance
2008
$M
-
-
-
-
2008
$M
-
-
-
-
Group
2007
$M
15
23
(2)
36
Group
2007
$M
258
23
(281)
-
Commonwealth Bank of Australia Annual Report 2008 149
Notes to the Financial Statements
Note 19 Property, Plant and Equipment
Land and Buildings
Land
At 30 June 2008 valuation
At 30 June 2007 valuation
Closing balance
Buildings
At 30 June 2008 valuation
At 30 June 2007 valuation
Closing balance
Total land and buildings
Leasehold Improvements
At cost
Provision for depreciation
Investment and restructuring
Closing balance
Equipment
At cost
Provision for depreciation
Closing balance
Assets under Lease
At cost
Provision for depreciation
Closing balance
Total property, plant and equipment (1)
(1) Assets held for sale are separately disclosed in Note 22.
2008
$M
258
-
258
341
-
341
599
941
(475)
(18)
448
936
(578)
358
290
(55)
235
1,640
Group
2007
$M
-
215
215
-
361
361
576
822
(441)
-
381
891
(565)
326
189
(36)
153
1,436
2008
$M
232
-
232
312
-
312
544
819
(424)
(18)
377
663
(381)
282
152
(19)
133
1,336
Bank
2007
$M
-
193
193
-
333
333
526
691
(387)
-
304
606
(366)
240
51
(9)
42
1,112
Land and buildings are carried at fair value based on independent valuations performed in 2008, refer Note 1 (s). Under the cost model
these assets would have been recognised at the carrying amount outlined in the table below.
Carrying Amount of Land and Buildings under the Cost Model:
Land
Buildings
Total land and buildings
2008
$M
117
244
361
Group
2007
$M
115
245
360
2008
$M
108
229
337
Bank
2007
$M
109
229
338
150 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 19 Property, Plant and Equipment (continued)
Reconciliation of movements in the carrying amount of Property, Plant and Equipment
Reconciliation
Land
Opening balance
Acquisitions attributed to business combinations
Disposals/transfers to Assets held for sale
Disposals
Net revaluations
Foreign currency translation adjustment
Closing balance
Buildings
Opening balance
Acquisitions
Acquisitions attributed to business combinations
Disposals/transfers to Assets held for sale
Disposals
Net revaluations
Depreciation
Foreign currency translation adjustment
Closing balance
Leasehold Improvements
Opening balance
Acquisitions
Disposals
Net revaluations
Depreciation
Investment and restructuring
Foreign currency translation adjustment
Closing balance
Equipment
Opening balance
Acquisitions
Disposals/transfers
Depreciation
Foreign currency translation adjustment
Closing balance
Assets Under Lease
Opening balance
Acquisitions
Disposals/transfers
Depreciation
Closing balance
2008
$M
Group
2007
$M
2008
$M
Bank
2007
$M
215
7
-
(2)
41
(3)
258
361
35
2
-
(7)
(19)
(27)
(4)
341
381
170
(6)
(2)
(63)
(18)
(14)
448
326
174
(17)
(115)
(10)
358
153
103
(1)
(20)
235
199
-
(9)
(3)
26
2
215
288
52
-
(11)
(2)
53
(22)
3
361
316
122
(4)
-
(59)
-
6
381
289
139
(12)
(97)
7
326
221
1
(47)
(22)
153
193
-
-
(1)
40
-
232
333
33
-
-
(6)
(21)
(26)
(1)
312
304
150
(7)
-
(52)
(18)
-
377
240
135
(11)
(82)
-
282
42
103
(1)
(11)
133
182
-
(9)
(3)
24
(1)
193
263
51
-
(11)
(1)
51
(21)
1
333
271
83
(3)
-
(47)
-
-
304
210
107
(9)
(67)
(1)
240
100
1
(47)
(12)
42
Commonwealth Bank of Australia Annual Report 2008 151
Notes to the Financial Statements
Note 20 Intangible Assets
Intangible Assets
Goodwill
Computer software costs
Management fee rights
Other
Total intangible assets
Goodwill
Purchased goodwill – Colonial
Purchased goodwill – other
Total goodwill
Computer Software Costs
Cost
Accumulated amortisation
Investment and restructuring
Total computer software costs
Management Fee Rights (1)
Cost
Total management fee rights
Other
Cost
Accumulated amortisation
Total other
Goodwill (reconciliation)
Opening balance
Additions
Disposal
Impairment
Closing balance
Computer Software Costs (reconciliation)
Opening balance
Additions:
From purchases
From internal development
Amortisation
Investment and restructuring write-down
Closing balance
Management Fee Rights (reconciliation)
Opening balance
Closing balance
Other (reconciliation)
Opening balance
Additions:
From acquisitions
Disposals
Amortisation
Closing balance
2008
$M
7,484
353
311
110
8,258
6,705
779
7,484
629
(199)
(77)
353
311
311
159
(49)
110
7,163
323
(2)
-
7,484
297
90
131
(88)
(77)
353
311
311
64
64
(3)
(15)
110
Group
2007
$M
7,163
297
311
64
7,835
6,705
458
7,163
420
(123)
-
297
311
311
85
(21)
64
7,200
3
-
(40)
7,163
229
20
110
(62)
-
297
311
311
69
3
-
(8)
64
2008
$M
2,522
304
-
-
2,826
2,229
293
2,522
560
(191)
(65)
304
-
-
-
-
-
2,522
-
-
-
2,522
262
89
94
(76)
(65)
304
-
-
4
-
(3)
(1)
-
Bank
2007
$M
2,522
262
-
4
2,788
2,229
293
2,522
377
(115)
-
262
-
-
4
-
4
2,522
-
-
-
2,522
212
19
90
(59)
-
262
-
-
4
-
-
-
4
(1) Management fee rights have an indefinite useful life under the contractual terms of the management agreements and are subject to an annual valuation for
impairment testing purposes. No impairment was required as a result of this valuation.
152 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 20 Intangible Assets (continued)
Segment Allocation of Goodwill
Segment
Retail Banking Services (1)
Premium Business Services
Wealth Management (2)
International Financial Services
Total
2008
$M
4,149
297
2,358
680
7,484
Group
2007
$M
4,149
-
2,361
653
7,163
(1) The allocation to Retail Banking Services includes goodwill related to the acquisitions of Colonial, State Bank of Victoria and 25% of ASB Bank.
(2) The allocation to Wealth Management principally relates to the goodwill on acquisition of Colonial.
Impairment Tests for Goodwill and Intangible Assets with Indefinite Lives
To assess whether goodwill is impaired, the carrying amount of a cash generating unit is compared to the recoverable amount,
determined based on net selling price less costs to sell, using an earnings multiple applicable to that type of business, or actuarial
assessment.
Australian
Retail
Banking
$M
4,149
Australian
Premium
Business
$M
297
Funds
Management
(Excluding
Property)
$M
2,149
Funds
Management
(Property)
$M
78
Australian
Life
Insurance
$M
131
New Zealand
Banking
$M
238
New Zealand
Life
Insurance
$M
442
Carrying amount of goodwill
Group
At 30 June 2008
Key Assumptions Used in Selling Price less Cost to Sell Calculations
Earnings multiples relating to the Group’s Banking (Retail
Banking Services, Premium Business Services and International
Financial Services) and Australian Life Insurance and Funds
Management cash-generating units are sourced from publicly
available data associated with valuations performed on recent
businesses displaying similar characteristics to those cash-
generating units, and are applied to current earnings.
The New Zealand Life Insurance cash-generating unit is valued
via an actuarial assessment.
The key assumptions used when completing the actuarial
assessment include new business multiples, discount rates,
investment market returns, mortality, morbidity, persistency and
expense inflation. These have been determined by reference to
historical company and
industry experience and publicly
available data.
Note 21 Other Assets
Accrued interest receivable
Defined benefit superannuation plan surplus
Accrued fees/reimbursements receivable
Securities sold not delivered
Intragroup current tax receivable
Current tax assets
Other
Total other assets
Note
43
2008
$M
1,904
1,536
985
766
-
50
1,251
6,492
Group
2007
$M
2,091
1,813
832
1,144
-
122
1,155
7,157
2008
$M
2,067
1,536
387
325
419
-
635
5,369
Bank
2007
$M
1,893
1,813
581
632
352
-
1,515
6,786
Commonwealth Bank of Australia Annual Report 2008 153
Notes to the Financial Statements
Note 22 Assets Held for Sale
Available-for-sale investments (1)
Loans, advances and other receivables (1)
Investment property (2)
Property, plant and equipment
Total assets held for sale
2008
$M
406
191
-
11
608
Group
2007
$M
765
306
281
22
1,374
2008
$M
262
139
-
11
412
Bank
2007
$M
-
-
-
21
21
(1) During the year ended 30 June 2007 the Group purchased, through Colonial First State, a 32% stake in AWG plc. The stake was acquired through the purchase of
preference shares and Eurobonds that on acquisition were classified as Assets held for sale ($1.3 billion) based on the Group’s intention to dispose of its holding into
Australian and European based infrastructure funds within the next 12 months. Since acquisition the Group has sold down ($1.0 billion) worth of AWG related
Eurobonds and preference shares.
(1) During the year ended 30 June 2008 the Group purchased, through Colonial First State, a 50% stake in ENW Ltd. The stake was acquired through the purchase of
preference shares and Eurobonds that on acquisition were classified as Assets held for sale ($616 million) based on the Group’s intention to dispose of its holding into
Australian and European based infrastructure funds within the next 12 months. Since acquisition the Group has sold down ($200 million) worth of ENW related
Eurobonds and preference shares.
(1) Until sold, the Eurobonds are being measured on the same basis as Loans, advances and other receivables, while the preference shares are being measured on the
same basis as Available-for-sale investments.
(2) This investment property is measured in accordance with the Group’s policy for investment property backing liabilities that pay a return linked directly to its fair value.
Note 23 Deposits and Other Public Borrowings
Australia
Certificates of deposit
Term deposits
On demand and short term deposits (1)
Deposits not bearing interest
Securities sold under agreements to repurchase
Total Australia
Overseas
Certificates of deposit
Term deposits
On demand and short term deposits
Deposits not bearing interest
Securities sold under agreements to repurchase
Total Overseas
Total deposits and other public borrowings
2008
$M
36,981
71,637
117,712
6,142
1,462
233,934
4,139
15,687
8,351
1,468
127
29,772
263,706
Group
2007
$M
20,165
50,888
109,680
6,662
3,323
190,718
903
16,416
9,183
1,818
30
28,350
219,068
2008
$M
36,981
70,858
118,270
6,194
1,462
233,765
4,139
2,679
159
2
127
7,106
240,871
Bank
2007
$M
20,165
49,454
109,656
6,660
3,323
189,258
903
4,245
94
30
100
5,372
194,630
(1) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
Maturity Distribution of Certificates of Deposit and Time Deposits
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
Maturing
Three Months
or Less
$M
Maturing
Between Three
& Six Months
$M
Maturing
Between Six &
Twelve Months
$M
Maturing
After
Twelve Months
$M
28,656
36,704
65,360
4,108
5,816
9,924
75,284
5,938
12,253
18,191
-
4,235
4,235
22,426
733
21,391
22,124
31
4,587
4,618
26,742
1,654
1,289
2,943
-
1,049
1,049
3,992
Group
At 30 June 2008
Total
$M
36,981
71,637
108,618
4,139
15,687
19,826
128,444
(1) All certificates of deposit issued by the Bank are for amounts greater than $100,000.
154 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 24 Payables due to Other Financial Institutions
Australia
Overseas
Total payables due to other financial institutions
2008
$M
4,390
13,282
17,672
Note 25 Liabilities at Fair Value through Income Statement
Deposits and other borrowings (1)
Debt instruments (1) (2)
Trading liabilities
Total liabilities at fair value through Income Statement
2008
$M
4,586
9,047
1,893
15,526
Group
2007
$M
4,208
10,178
14,386
Group
2007
$M
6,687
5,744
3,965
16,396
2008
$M
4,391
13,234
17,625
2008
$M
-
1,037
1,893
2,930
Bank
2007
$M
4,210
10,112
14,322
Bank
2007
$M
-
241
4,965
5,206
(1) Designated at Fair Value through Income Statement at inception as they are managed by the Group on a fair value basis. Designating these liabilities at Fair Value
through Income Statement has also eliminated an accounting mismatch created by measuring assets and liabilities on a different basis.
(2) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
The change in fair value due to credit risk for the Group is $22 million and for the Bank is $15 million, which has been calculated by
determining the changes in credit spread implicit in the fair value of the instruments issued. In 2007 the amount was insignificant as
reflected in the Group’s and Bank’s credit ratings.
The increment on top of the carrying amount that would be contractually required to be paid at maturity to the holders of these financial
liabilities for the Group is $326 million (2007: $139 million) and for the Bank is $59 million (2007: $65 million).
Note 26 Income Tax Liability
Australia
Current tax liability
Deferred tax liability (Note 5)
Total Australia
Overseas
Current tax liability
Deferred tax liability (Note 5)
Total Overseas
Total income tax liability
2008
$M
696
-
696
72
266
338
1,034
Group
2007
$M
866
556
1,422
16
352
368
1,790
2008
$M
707
17
724
1
2
3
727
Bank
2007
$M
797
90
887
3
1
4
891
Commonwealth Bank of Australia Annual Report 2008 155
Notes to the Financial Statements
Note 27 Other Provisions
Provision for:
Long service leave
Annual leave
Other employee entitlements
Restructuring costs
General insurance claims
Self insurance/non-lending losses
Dividends
Other
Total other provisions
Reconciliation
Restructuring costs:
Opening balance
Additional provisions
Amounts utilised during the year
Closing balance
General insurance claims:
Opening balance
Additional provisions
Amounts utilised during the year
Closing balance
Self insurance/non-lending losses:
Opening balance
Additional provisions
Amounts utilised during the year
Closing balance
Other:
Opening balance
Additional provisions
Amounts utilised during the year
Closing balance
Note
6
2008
$M
299
205
69
284
117
64
5
131
1,174
2008
$M
26
282
(24)
284
94
80
(57)
117
83
9
(28)
64
107
83
(59)
131
Group
2007
$M
281
186
95
26
94
83
6
107
878
Group
2007
$M
37
15
(26)
26
85
56
(47)
94
90
25
(32)
83
71
66
(30)
107
2008
$M
292
185
66
284
-
64
5
87
983
2008
$M
26
282
(24)
284
-
-
-
-
82
10
(28)
64
99
37
(49)
87
Bank
2007
$M
267
163
90
26
-
82
7
99
734
Bank
2007
$M
37
15
(26)
26
-
-
-
-
87
25
(30)
82
60
63
(24)
99
Provision Commentary
Restructuring costs
Provisions are for amounts expected to be utilised in the short to
medium term.
During the current year the Group has recognised a provision for
Investment and restructuring of $282 million relating to the cost
of implementation of Core Banking Modernisation and other
investment and restructuring. Related asset write-downs of $95
million, including Computer Software write offs of $77 million
have also been recognised.
General Insurance Claims
This provision is to cover future claims on general insurance
contracts that have been incurred but not reported.
Self Insurance and Non-Lending Losses
This provision covers certain non-transferred insurance risk and
non-lending losses. The self insurance provision is reassessed
annually in consultation with actuarial advice.
156 Commonwealth Bank of Australia Annual Report 2008
Note 28 Debt Issues (1)
Short term debt issues
Long term debt issues
Total debt issues
Short Term Debt Issues
AUD Promissory Notes
AUD Bank Bills
AUD Commercial Paper
USD Commercial Paper
EUR Commercial Paper
Other Currency 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
NZD Medium Term Notes
JPY Medium Term Notes
GBP Medium Term Notes
EUR 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 three months
Between three months to 12 months
Between one year and five years
Greater than five years
Total debt issues
Notes to the Financial Statements
2008
$M
35,877
49,940
85,817
-
-
1,024
14,116
622
416
19,699
35,877
19,065
9,332
438
6,463
3,482
6,478
3,630
152
900
49,940
21,757
14,120
35,234
14,706
85,817
Group
2007
$M
28,607
59,918
88,525
523
505
2,828
7,793
1,581
4
15,373
28,607
30,675
10,918
161
3,062
3,544
6,670
3,839
148
901
59,918
10,178
18,429
36,205
23,713
88,525
2008
$M
16,208
39,570
55,778
-
-
265
1,861
622
416
13,044
16,208
16,101
3,991
54
6,347
3,482
4,913
3,630
152
900
39,570
6,664
9,544
26,459
13,111
55,778
Bank
2007
$M
10,288
37,472
47,760
-
-
459
173
1,581
4
8,071
10,288
20,403
3,629
161
3,062
2,477
4,146
2,545
148
901
37,472
4,767
5,521
23,546
13,926
47,760
(1) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
The Bank’s debt issues include a Euro Medium Term Note
program under which it may issue notes up to an aggregate
amount outstanding of USD 50 billion. The Bank also has a U.S.
Medium Term Note program under which it may issue notes up
to an aggregate amount outstanding of USD 15 billion. Notes
issued under debt programs are both fixed and variable rate.
Interest rate risk associated with the notes is incorporated within
the Bank’s interest rate risk framework.
Subsequent to 30 June 2008, notable debt issuances of the
Bank under these specified programs include:
• USD medium term notes: between one and five years – USD
495 million (AUD 513 million);
• BRL medium term notes: between one and five years – BRL
16 million (AUD 10 million);
• EUR medium term notes: between one and five years – EUR
300 million (AUD 491 million); greater than five years – EUR
50 million (AUD 82 million);
• JPY medium term notes: between one and five years – JPY
14 billion (AUD 137 million); greater than five years – JPY
500 million (AUD 5 million);
• NZD medium term notes: between one and five years –
NZD 180 million (AUD 143 million); and
• ZAR medium term notes: between one and five years –
ZAR 15 million (AUD 2 million).
Where any debt issue is booked in an offshore branch or
subsidiary, the amounts have first been converted into the
functional currency of the branch at a branch defined exchange
rate, before being converted into the AUD equivalent.
Where proceeds have been employed in currencies other than
that of the ultimate repayment liability, swaps or other risk
management arrangements have been entered into.
Commonwealth Bank of Australia Annual Report 2008 157
Notes to the Financial Statements
Note 28 Debt Issues (continued)
Short Term Borrowings
The following table analyses the Group’s short term borrowings for the financial years ended 30 June 2008, 2007 and 2006.
USD 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
EUR 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
AUD 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
Other Currency 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
2008
2007
Group
2006
(AUD Millions, except where indicated)
14,116
14,693
11,000
4. 2%
2. 6%
622
1,589
885
4. 4%
4. 3%
1,024
2,588
1,430
7. 0%
7. 9%
416
1,525
827
4. 7%
7. 0%
7,793
10,438
7,953
5. 3%
5. 3%
1,581
1,581
940
4. 2%
4. 7%
3,955
9,619
7,413
6. 3%
6. 4%
-
-
-
-
-
6,861
13,717
9,754
4. 4%
5. 2%
4,248
4,441
3,177
4. 4%
5. 2%
1,592
2,665
1,880
6. 3%
6. 4%
-
-
-
-
-
(1) The amount outstanding at period end is measured at amortised cost.
(2) The maximum and average amounts over the period are reported on a face value basis because the carrying values of these amounts are not available. Any
differences between face value and carrying value would not be material given the short term nature of the borrowings.
Exchange Rates Utilised (End of day, Sydney time)
AUD 1.00 =
Currency
USD
EUR
GBP
JPY
NZD
HKD
CAD
CHF
ILS
SGD
As At
30 June
2008
0. 9656
0. 6113
0. 4841
102. 070
1. 2631
7. 5323
0. 9734
0. 9821
3. 2298
1. 3145
As At
30 June
2007
0. 8497
0. 6319
0. 4241
104. 889
1. 102
6. 6426
0. 8987
1. 0470
3. 6054
1. 3023
158 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
• The CDBL’s liabilities continue to remain guaranteed by the
Commonwealth of Australia; 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 to a person
other than the Commonwealth of Australia 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 of Australia
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 (also 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 Transfer of Business Act 1999.
The NSW Government guarantee of the liabilities and products
as described above continues unchanged by the succession.
Note 28 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 Banks Act 1959 (as amended) at 30
June 1996. This guarantee has been progressively phased out
following
the Commonwealth of Australia’s
shareholding in the Bank on 19 July 1996.
the sale of
transitional arrangements
The
the
Commonwealth of Australia’s guarantee are contained in the
Commonwealth Bank Sale Act 1995.
for phasing out
In relation to the Commonwealth of Australia’s guarantee of the
Bank’s liabilities, transitional 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 that three year period being
guaranteed until maturity; and
• All other amounts payable under a contract that was entered
into, or under an instrument executed, issued, endorsed or
accepted by the Bank at 19 July 1996 will be guaranteed until
their maturity.
Accordingly, demand deposits are no longer guaranteed. Term
deposits outstanding at 19 July 1999 remain guaranteed until
maturity. The run-off of the Government guarantee has no effect
on the Bank’s access to deposit markets.
Commonwealth Development Bank
On 24 July 1996, the Commonwealth of Australia sold its 8.1%
shareholding in the Commonwealth Development Bank of
Australia Limited (CDBL) to the Bank for $12.5 million.
Under the arrangements relating to the purchase by the Bank of
the Commonwealth of Australia’s 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;
Note 29 Managed Funds Units on Issue
Managed Funds Units on Issue
2008
$M
1,109
Group
2007
$M
310
2008
$M
-
Bank
2007
$M
-
Managed funds units on issue represents the liability to minority interest unit holders in funds which have been consolidated by the
Group.
Commonwealth Bank of Australia Annual Report 2008 159
Notes to the Financial Statements
Note 30 Bills Payable and Other Liabilities
Bills payable
Accrued interest payable
Accrued fees and other items payable
Defined benefit superannuation plan deficit
Securities purchased not delivered
Other liabilities
Total bills payable and other liabilities
Note 31 Loan Capital (1)
Note
43
2008
$M
884
2,397
1,426
65
1,018
1,734
7,524
Group
2007
$M
978
1,949
1,794
29
1,519
1,077
7,346
Group
Currency
Amount (M)
Footnotes
USD 38
USD 64
USD 100
USD 550
AUD 750
AUD 1,166
AUD 1,465
USD 700
FRN
FRN
FRN
TPS
PERLS II
PERLS III
PERLS IV
TPS
Tier One Loan Capital
Exchangeable
Exchangeable
Undated
Undated
Undated
Undated
Undated
Undated
Total Tier One loan
capital
Tier Two Loan Capital
AUD denominated
USD denominated
JPY denominated
GBP denominated
NZD denominated
EUR denominated
CAD denominated
Total Tier Two loan capital
Fair value hedge adjustments
Total loan capital
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(14)
(14)
2008
$M
39
66
104
569
749
1,151
1,447
-
4,125
2,098
2,439
732
307
726
490
614
7,406
28
11,559
2007
$M
44
84
118
647
747
1,147
-
-
2,787
2,098
2,770
710
350
500
474
333
7,235
(22)
10,000
2008
$M
653
2,161
773
65
533
2,116
6,301
2008
$M
39
66
104
569
749
1,151
1,447
718
4,843
2,098
2,439
732
307
277
490
614
6,957
(180)
11,620
Bank
2007
$M
800
1,710
1,322
29
981
1,524
6,366
Bank
2007
$M
44
84
118
647
747
1,147
-
815
3,602
2,098
2,770
710
350
318
474
333
7,053
(233)
10,422
(1) Effective yield adjustments have been included in the carrying values of the issues. Prior year comparatives have been restated on the same basis.
160 Commonwealth Bank of Australia Annual Report 2008
Note 31 Loan Capital (continued)
(2) USD 300 million undated Floating Rate Notes (FRNs) issued
11 July 1988 exchangeable into dated FRNs.
Outstanding notes at 30 June 2008 were:
Undated:
USD 37.5 million
(3) USD 400 million undated FRNs issued 22 February 1989
exchangeable into dated FRNs.
Outstanding notes at 30 June 2008 were:
Due February 2011:
USD 64 million
(4) USD 100 million undated capital notes issued on 15 October
1986.
The Bank has entered into separate agreements with the
Commonwealth of Australia relating to each of the above issues
(the “Agreements”) which qualify the issues as Tier One capital.
The Agreements provide that, upon the occurrence of certain
events listed below, the Bank may issue either fully paid ordinary
shares to the Commonwealth of Australia or (with the consent of
the Commonwealth of Australia) rights to all shareholders to
subscribe for fully paid ordinary shares up to an amount equal to
the outstanding principal value of the relevant note issue or
issues plus any interest paid in respect of the notes for the most
recent financial year and accrued interest. The issue price of
such shares will be determined by reference to the prevailing
market price for the Bank’s shares.
Any one or more of the following events may trigger the issue of
shares to the Commonwealth of Australia or a rights issue:
• A relevant event of default (discussed below) occurs in
respect of a note issue and the Trustee of the relevant notes
gives notice to the Bank that the notes are immediately due
and payable;
• The most recent audited annual Financial Statements of the
Group show a loss (as defined in the Agreements);
• The Bank does not declare a dividend in respect of its
ordinary shares;
• The Bank, if required by the Commonwealth of Australia and
subject to the agreement of the APRA, exercises its option to
redeem a note issue; or
•
In respect of Undated FRNs which have been exchanged to
Dated FRNs, the Dated FRNs mature.
Any payment made by the Commonwealth of Australia pursuant
to its guarantee in respect of the relevant notes will trigger the
issue of shares to the Commonwealth of Australia to the value of
such payment.
The relevant events of default differ depending on the relevant
Agreement. In summary, they cover events such as failure of the
Bank to meet its monetary obligation in respect of the relevant
notes; the insolvency of the Bank; any law being passed to
dissolve the Bank or the Bank ceasing to carry on general
Banking business in Australia; and the Commonwealth of
Australia ceasing to guarantee the relevant notes. In relation to
Dated FRNs which have matured to date, the Bank and the
Commonwealth agreed to amend the relevant Agreement to
reflect that the Commonwealth of Australia was not called upon
to subscribe for fully paid ordinary shares up to an amount equal
to the principal value of the maturing FRNs.
Notes to the Financial Statements
(5) TPS 2003
Each trust preferred security represents a beneficial ownership
interest in the assets of CBA Capital Trust. The sole assets of
CBA Capital Trust are the funding preferred securities issued by
CBA Funding Trust, which represent preferred beneficial
ownership interests in the assets of CBA Funding Trust, and a
limited CBA guarantee. The securities qualify as innovative
residual Tier One capital of the Bank.
CBA Funding Trust applied all of the proceeds from the sale of
the funding preferred securities to purchase the convertible
notes from the Bank’s New Zealand Branch.
The trust preferred securities provide for a semi-annual cash
distribution in arrears at the annual rate of 5.805%. The
distributions on the trust preferred securities are non-cumulative.
CBA Capital Trust’s ability to pay distributions on the trust
preferred securities is ultimately dependent upon the ability of
CBA to make interest payments on the convertible notes.
The Bank’s New Zealand branch will make interest payments on
the convertible notes only if and when declared by the Board of
Directors of CBA. The Board of Directors is not permitted, unless
approved by APRA, to declare interest.
If interest is not paid on the convertible notes on an interest
payment date, holders will not receive a distribution on the trust
preferred securities and, unless at the time of the non-payment
the Bank is prevented by applicable law from issuing the CBA
preference shares, convertible notes will automatically convert
into CBA preference shares, which will result in mandatory
redemption of trust preferred securities for American Depository
Shares (“ADS”).
No later than 35 business days prior period to June 30, 2015,
holders may deliver a notice to CBA requiring it to exchange
each trust preferred security for CBA ordinary shares. The Bank
may satisfy the obligation to deliver ordinary shares in exchange
for the trust preferred securities by either delivering the
applicable number of ordinary shares or by arranging for the
sale of the trust preferred securities at par and delivering the
proceeds to the holder. Subject to the approval of APRA,
holders may exchange trust preferred securities for the Bank’s
ordinary shares earlier than June 30, 2015 if, prior to that date, a
takeover bid or scheme of arrangement in relation to a takeover
has occurred.
If CBA Capital Trust is liquidated, dissolved or wound up and its
assets are distributed, for each trust preferred security owned,
the holder is entitled to receive the stated liquidation amount of
U.S. $1,000, plus the accrued but unpaid distribution for the then
current distribution period. Holders may not receive the full
amount payable on liquidation if CBA Capital Trust does not
have enough funds.
The trustees of CBA Capital Trust can elect to dissolve CBA
Capital Trust and distribute the funding preferred securities if at
any time certain changes in tax law or other tax-related events or
the specified changes in U.S. investment Company law occur.
Neither the trust preferred securities nor the funding preferred
securities can be redeemed at the option of their holders. Other
than in connection with an acceleration of the principal of the
convertible notes upon the occurrence of an event of default,
neither the trust preferred securities nor the funding preferred
securities are repayable in cash unless the Bank’s New Zealand
branch, at its sole option, redeems the convertible notes.
Commonwealth Bank of Australia Annual Report 2008 161
Notes to the Financial Statements
Note 31 Loan Capital (continued)
The Bank’s New Zealand branch may redeem the convertible
notes for cash: before 30 June 2015, in whole, but not in part,
and only if the specified changes in tax law or other tax-related
events, the specified changes in U.S. investment Company law
and‚ changes in the "Tier One'' regulatory capital treatment of
the convertible notes, or certain corporate transactions involving
a takeover bid or a scheme of arrangement in relation to a
takeover described in this offering memorandum occur; and at
any time on or after 30 June 2015. The Bank’s New Zealand
branch must first obtain the approval of APRA to redeem the
convertible notes for cash.
CBA guarantees:
• Semi-annual distributions on the funding preferred securities
by CBA Funding Trust to CBA Capital Trust to the extent
CBA Funding Trust has funds available for distribution;
• Semi-annual distributions on the trust preferred securities by
CBA Capital Trust to the extent CBA Capital Trust has funds
available for distribution;
• The redemption amount due to CBA Capital Trust if CBA
Funding Trust is obligated to redeem the funding preferred
securities for cash and to the extent CBA Funding Trust has
funds available for payment;
• The redemption amount due if CBA Capital Trust is obligated
to redeem the trust preferred securities for cash and to the
extent CBA Capital Trust has funds available for payment;
• The delivery of ADSs to CBA Capital Trust by CBA Funding
Trust if CBA Funding Trust is obligated to redeem the
funding preferred securities for ADSs and to the extent that
CBA Funding Trust has ADSs available for that redemption;
• The delivery of ADSs by CBA Capital Trust if CBA Capital
Trust is obligated to redeem the trust preferred securities for
ADSs and to the extent that CBA Capital Trust has ADSs
available for that redemption;
• The delivery of funding preferred securities by CBA Capital
Trust upon dissolution of CBA Capital Trust as a result of a
tax event or an event giving rise to a more than insubstantial
risk that CBA Capital Trust is or will be considered an
investment Company which is required to be registered
under the Investment Company Act;
• The payment of the liquidation amount of the funding
preferred securities if CBA Funding Trust is liquidated, to the
extent that CBA Funding Trust has funds available after
payment of its creditors; and
• The liquidation amount of the trust preferred securities if CBA
Capital Trust is liquidated, to the extent that CBA Capital
Trust has funds available after payment of its creditors.
The CBA guarantee does not cover the non-payment of
distributions on the funding preferred securities to the extent that
CBA Funding Trust does not have sufficient funds available to
pay distributions on the funding preferred securities.
Trust preferred securities have limited voting rights.
Trust preferred securities have the right to bring a direct action
against the Bank if:
• The Bank’s New Zealand branch does not pay interest on or
the redemption price of the convertible notes to CBA Funding
Trust in accordance with their terms;
• The Bank’s New Zealand branch does not deliver ADSs
representing CBA preference shares to CBA Funding Trust
in accordance with the terms of the convertible notes;
162 Commonwealth Bank of Australia Annual Report 2008
• The Bank does not perform its obligations under its
guarantees with respect to the trust preferred securities and
the funding preferred securities; or
• The Bank does not deliver cash or ordinary shares on 30
June 2015.
(6) 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 (“CMIL”) issued $750 million of
Perpetual Exchangeable Resettable Listed Securities (“PERLS
II”). These securities qualify as innovative residual Tier One
capital of the Bank. These securities are units in a registered
managed investments scheme, perpetual in nature, offering a
non-cumulative floating rate distribution payable quarterly. The
Distributions paid to PERLS II Holders are sourced from interest
paid on the Convertible Notes issued by the Bank (through its
New Zealand Branch) to CMIL.
The Distribution Rate is a floating rate calculated as the Bank Bill
Swap Rate plus a margin of 0.95% multiplied by (1- Australian
corporate tax rate).
The Bank expects Distributions to be fully franked. If CMIL gives
notice that a Distribution in any Distribution Period will not be
fully franked, PERLS II Holders may elect to exchange their
PERLS II on the next Distribution Date.
If any Distribution is not paid in full within 20 Business Days after
a Distribution Date, the Bank must not pay any interest, declare
or pay any dividend or distribution from the income or capital of
the Bank, return any capital or undertake any Buy-backs,
redemptions or repurchases in relation to any securities of the
Bank that rank equally for interest payments or distributions with,
or junior to, any Capital Securities of the Bank that rank equally
with PERLS II unless and until either:
• Four consecutive Distributions are paid in full;
• The Bank (with the approval of APRA) and CMIL have paid
PERLS II Holders an amount or amounts (in aggregate)
equal to their full distribution entitlements for four consecutive
Distribution Periods; or
• PERLS II Holders pass a Special Resolution approving the
payment, dividend, distribution, capital return, Buy-back,
redemption or repurchase.
The first Rollover Date will be 15 March 2009. On this date and
each subsequent Rollover Date, the Bank can reset some of the
terms of its Convertible Notes including the Margin over BBSW.
PERLS II Holders may request that their PERLS II be
exchanged on the Rollover Date. PERLS II Holders who do not
request exchange will be deemed to have accepted the new
terms offered.
In addition to exchange on a rollover date, PERLS II Holders
may request that each PERLS II be exchanged:
• Upon the occurrence of a Change of Control Event; or
•
If CMIL gives notice that a Distribution will not be fully franked
for any Distribution Period.
On exchange, at the Bank’s election, PERLS II Holders will
receive for their PERLS II, one or a combination of the following
alternatives:
• The number of Ordinary Shares determined as set out
below; or
• $200 cash (subject to APRA approval).
Note 31 Loan Capital (continued)
The Bank, subject to APRA approval, may exchange some or all
of the PERLS II, at its election, for Ordinary Shares or $200 cash
for each PERLS II:
(i) On a Rollover Date;
(ii) If a Regulatory Event or Tax Event occurs;
(iii) If the Responsible Entity is removed or retires as responsible
entity of the Trust and the Bank has not given its consent to the
change of the responsible entity;
(iv) If PERLS II Holders requisition a meeting to approve an
amendment to the Constitution or to remove the Responsible
Entity as responsible entity of the Trust and the Bank has not
given its consent to such amendment or change of responsible
entity;
(v) If the ability of the Responsible Entity to redeem PERLS II is
impaired or removed; or
(vi) If the aggregate Face Value of PERLS II is less than $50
million.
PERLS II will automatically exchange for Ordinary Shares if:
• A Default Event occurs; or
• An APRA Event occurs.
PERLS II Holders will be entitled to vote at any meeting of
Unitholders of the Trust. PERLS II do not have voting rights at
any meeting of the Bank.
(7) PERLS III
On 6 April 2006 a wholly owned entity of the Bank (Preferred
Capital Limited)
issued $1,166 million of Perpetual
Exchangeable Repurchaseable Listed Shares (PERLS III).
PERLS III are preference shares in a special purpose Company,
(the ordinary shares of which are held by the Bank), perpetual in
nature, offering a non-cumulative floating rate distribution
payable quarterly. The shares qualify as innovative residual Tier
One capital of the Bank.
The Dividends paid to PERLS III Holders will be primarily
sourced from interest paid on the Convertible Notes issued by
CBA NZ to PCL. The payment of interest on the underlying
Convertible Notes and Dividends on PERLS III are not
guaranteed and are subject to a number of conditions including
the availability of profits and the Board (of the Bank in relation to
Convertible Note interest, or of PCL in relation to PERLS III
Dividends) resolving to make the payment.
The Dividend Rate is a floating rate calculated for each Dividend
Period as the sum of the Margin per annum plus the Market
Rate per annum multiplied by (One – Tax Rate). The Initial
Margin is 1.05% over Bank Bill Swap Rate and the Step-up
Margin, effective from the “Step-up Date” on 6 April 2016, is the
Initial Margin plus 1.00% per annum.
If each PERLS III Holder is not paid a dividend in full within 20
Business Days of the Dividend Payment Date, the Bank is
prevented from paying any interest, dividends or distributions, or
undertaking certain other transactions, in relation to any
securities of the Bank that rank for interest payments or
distributions equally with, or junior to, the Convertible Notes or
Bank PERLS III Preference Shares. This Dividend Stopper
applies until an amount in aggregate equal to the full dividend on
PERLS III for four consecutive dividend periods has been paid to
PERLS III Holders.
PERLS III will automatically exchange for Bank PERLS III
Preference Shares:
• On a failure by PCL to pay a Dividend;
Notes to the Financial Statements
• At any time at the Bank’s discretion; or
• 10 Business Days before the Conversion Date
Subject to APRA approval, PCL may elect to exchange PERLS
III for the Conversion Number of Bank Ordinary Shares or $200
cash for each PERLS III:
• On the Step-up Date or any Dividend Payment Date after the
Step-up Date; or
•
If a Regulatory Event or Tax Event occurs
PERLS III will automatically exchange for Bank Ordinary Shares
if:
• An APRA Event occurs;
• A Default Event occurs; or
• A Change of Control Event occurs.
PERLS III will be automatically exchanged for Bank PERLS III
Preference Shares no later than 10 Business Days prior to 6
April 2046 (if they have not been exchanged before that date).
Holders are not entitled to request exchange or redemption of
PERLS III or Bank PERLS III Preference Shares.
Holders of PERLS III are entitled to vote at a general meeting of
PCL on certain issues. PERLS III holders have no rights at any
meeting of the Bank.
(8) PERLS IV
On 12 July 2007 the Bank issued $1,465 million of Perpetual
Exchangeable Resalable Listed Securities (PERLS IV). PERLS
IV are stapled securities comprising an unsecured subordinated
note issued by the Bank’s New York branch and a convertible
preference share issued by the Bank. These securities are
perpetual in nature, offer a non-cumulative floating distribution
rate payable quarterly, and qualify as non-innovative residual
Tier One capital of the Bank.
The payment of interest on the underlying convertible notes and
dividends on PERLS IV are not guaranteed and are subject to a
number of conditions including the availability of profits and the
ability of the Board to stop payments.
The distribution rate is a floating rate calculated for each
distribution period as the sum of the Bank Bill Swap Rate plus
1.05% per annum, multiplied by (1 – Tax Rate).
Distributions paid to holders will be interest on notes until an
Assignment Event, and dividends on preference shares after the
Assignment Event. Upon an Assignment Event, the notes are
de-stapled from the preference shares and are assigned to the
Bank and investors continue to hold preference shares.
If distributions on PERLS IV are not paid in full within 20
business days of the payment date, an Assignment Event will
occur and the Bank is prevented from paying any interest,
dividends or distributions in relation to any securities of the Bank
that rank equally with or junior to the preference shares. This
“dividend stopper” applies until:
• A Special Resolution of Holders authorising the payment,
capital return, buy-back, redemption or repurchase
is
approved, and APRA does not otherwise object;
• An Optional Dividend of an amount in aggregate equal to the
four consecutive
unpaid amount
Distribution Periods has been paid to Holders;
the preceding
for
• Four consecutive Dividends scheduled to be payable on
PERLS IV thereafter have been paid in full; or
Commonwealth Bank of Australia Annual Report 2008 163
Notes to the Financial Statements
Note 31 Loan Capital (continued)
• All PERLS IV have been exchanged.
PERLS IV are expected to be exchanged for cash or converted
into ordinary shares of the Bank on 31 October 2012. However,
exchange may not occur if certain conditions are not met. On 31
October 2012;
• The Bank may arrange a resale by requiring all Holders to
sell their PERLS IV to a third party for $200 (the face value);
•
•
•
If the Bank does not arrange a resale, an Assignment Event
will occur and PERLS IV will convert into a variable number
of ordinary shares of the Bank subject to some conditions
relating to the ordinary share price at the time;
If these conversion conditions are not satisfied on that date,
then the conversion date moves to the next distribution
payment date on which they are satisfied; and
In certain circumstances, where the conversion conditions
are not satisfied, the Bank may (subject to APRA’s prior
approval) elect to repurchase all PERLS IV for $200 each.
The Bank may, subject to APRA’s prior approval, elect to
exchange all PERLS IV for cash and/or ordinary shares if any of
the following occurs:
• Tax Event;
• Regulatory Event; and
• Non-Operating Holding Company (NOHC) Event.
The Bank’s ability to convert PERLS IV on the occurrence of any
of these events is subject to same conversion conditions as
mentioned above.
If a change of control event occurs, Holders will receive cash for
all of their PERLS IV (subject to APRA’s approval).
Holders are not entitled to request exchange or redemption of
PERLS IV.
Holders of PERLS IV have no right to vote at any meeting of the
Bank except in the following specific circumstances:
• during a period during which a Dividend (or part of a
Dividend) in respect of the Preference Shares is in arrears;
• on a proposal to reduce the Bank’s share capital;
• on a proposal that affects rights attached to Preference
Shares;
• on a resolution to approve the terms of a buy-back
agreement;
• 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; and
• during the winding-up of the Bank.
(9) TPS 2006
On 15 March 2006 a wholly owned entity of the Bank issued
USD 700 million (AUD 942 million) of perpetual non-call 10 year
trust preferred securities into U.S. Capital Markets.
Each trust preferred security represents a preferred beneficial
ownership interest in the assets of CBA Capital Trust II. The
trust preferred securities are guaranteed by CBA. The trust
preferred securities form part of the Bank’s innovative residual
Tier One capital.
164 Commonwealth Bank of Australia Annual Report 2008
CBA Capital Trust II is a statutory trust established under
Delaware law that exists for the purpose of issuing the trust
preferred securities, acquiring and holding the subordinated
notes issued by a CBA NZ subsidiary, the subordinated notes
guarantee and the CBA preference shares.
Cash distributions on the trust preferred securities are at the
fixed rate of 6.024% payable semi-annually to 15 March 2016.
Cash distributions on the trust preferred securities will accrue at
the rate of LIBOR plus 1.740% per annum payable quarterly in
arrears after that date.
Cash distributions on the trust preferred securities will be limited
to the interest CBA NZ Subsidiary pays on the subordinated
notes, payments in respect of interest on the subordinated notes
by CBA NZ Branch as guarantor under the subordinated notes
guarantee and, after 15 March 2016, the dividends CBA pays on
the CBA preference shares. Payments in respect of cash
distributions will be guaranteed on a subordinated basis by CBA,
as guarantor, but only to extent CBA Capital Trust II has funds
sufficient for the payment.
There are restrictions on CBA NZ Subsidiary’s ability to make
payments on the subordinated notes, CBA NZ Branch’s ability to
make payments on the CBA NZ Branch notes and the
subordinated notes guarantee and CBA’s ability to make
payments on the CBA preference shares. Distributions on the
trust preferred securities are not cumulative.
Failure to pay in full a distribution within 21 business days will
result in the distribution to holders of one CBA preference share
for each trust preferred security held in redemption of the trust
preferred securities.
If CBA Capital Trust II is liquidated, dissolved or wound up and
its assets are distributed, for each trust preferred security,
holders are entitled to receive the stated liquidation amount of
USD 1,000, plus the accrued but unpaid distribution for the then
current distribution payment period, after it has paid liabilities it
owes to its creditors.
The trust preferred securities are subject to redemption for cash,
qualifying Tier One securities or CBA preference shares if CBA
redeems or varies the terms of the CBA preference shares. The
trust preferred securities are also subject to redemption if any
other Assignment Event occurs.
If the CBA preference shares are redeemed for qualifying Tier
One securities or the terms thereof are varied, holders will
receive one CBA preference share or USD 1,000 liquidation
amount or similar amount of qualifying Tier One securities for
each trust preferred security held.
Holders of trust preferred securities generally will not have any
voting rights except in limited circumstances.
The holders of a majority in liquidation amount of the trust
preferred securities, acting together as a single class, however,
have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the property trustee
of CBA Capital Trust II or direct the exercise of any trust or
power conferred upon the property trustee of CBA Capital Trust
II, as holder of the subordinated notes and the CBA preference
shares.
Note 31 Loan Capital (continued)
Trust preferred securities holders have the right to bring a direct
action against:
• CBA NZ Subsidiary if CBA NZ Subsidiary does not pay when
due, interest on the subordinated notes or certain other
amounts payable under the subordinated notes to CBA
Capital Trust II in accordance with their terms;
• The Bank if it does not perform its obligations under the trust
guarantee; and
• CBA NZ Branch or the Bank if CBA NZ Branch does not
the subordinated notes
perform
guarantee or under the CBA NZ Branch notes.
its obligations under
The Bank will guarantee the trust preferred securities:
• Cash distributions on the trust preferred securities by CBA
Capital Trust II to holders of trust preferred securities on
distribution payment dates, to the extent CBA Capital Trust II
has funds available for distribution;
• The cash redemption amount due to holders of trust
preferred securities if CBA Capital Trust II is obligated to
redeem the trust preferred securities for cash, to the extent
CBA Capital Trust II has funds available for distribution;
• The delivery of CBA preference shares or qualifying Tier One
securities to holders of trust preferred securities if CBA
Capital Trust II is obligated to redeem the trust preferred
securities for CBA preference shares or qualifying Tier One
securities, to the extent CBA Capital Trust II has or is entitled
to receive such securities available for distribution; and
• The payment of the liquidation amount of the trust preferred
securities if CBA Capital Trust II is liquidated, to the extent
that CBA Capital Trust II has funds available for distribution.
trust guarantee does not cover
The
to pay
distributions or make other payments or distributions on the trust
preferred securities to the extent that CBA Capital Trust II does
not have sufficient funds available to pay distributions or make
other payments or deliveries on the trust preferred securities.
failure
the
Upon the occurrence of an Assignment Event, with respect to
the subordinated notes comprising a part of the units CBA
Capital Trust II holds to which such Assignment Event applies:
• The subordinated notes will detach from the CBA preference
shares that are part of those units and automatically be
transferred to CBA;
•
•
If the Assignment Event is the cash redemption of CBA
preference shares, upon receipt, CBA Capital Trust II will pay
to the holders of the trust preferred securities called for
redemption the cash redemption price for those CBA
preference shares and the accrued and unpaid interest on
the subordinated notes that were part of the units with those
CBA preference shares; and
If the Assignment Event is not the cash redemption of CBA
preference shares, CBA Capital Trust II will deliver to all
holders of trust preferred securities in redemption thereof one
CBA preference share for each USD 1,000 liquidation
preference of trust preferred securities to be redeemed or, if
qualifying Tier One securities are delivered, USD 1,000
liquidation amount or similar amount of qualifying Tier One
securities for each USD 1,000 liquidation amount of trust
preferred securities to be redeemed, and the CBA preference
shares or qualifying Tier One securities will accrue non-
cumulative dividends or similar amounts at the rate of
6.024% per annum to but excluding March 15, 2016 and at
the rate of LIBOR plus 1.740% per annum thereafter.
Notes to the Financial Statements
If the Bank is liquidated, holders of CBA preference shares will
be entitled to receive an amount equal to a liquidation
preference out of surplus assets of USD 1,000 per CBA
preference share plus accrued and unpaid dividends for the then
current dividend payment period plus any other dividends or
other amounts to which the holder is entitled under the
Constitution.
Subject to APRA’s prior approval, prior to the occurrence of an
Assignment Event that applies to all of the subordinated notes,
the Bank may pay an optional dividend on the CBA preference
shares if CBA NZ Subsidiary or CBA NZ Branch, as guarantor,
has failed to pay in full interest on the subordinated notes or the
Bank has failed to pay in full dividends on the CBA preference
shares on any interest payment date and/or dividend payment
date.
On or after 15 March 2016, the Bank may redeem the CBA
preference shares for cash, in whole or in part, on any date
selected by us at a redemption price equal to USD 1,000 per
share plus any accrued and unpaid dividends for the then
current dividend payment period, if any.
Prior to 15 March 2016, the Bank may redeem the CBA
preference shares for cash, vary the terms of the CBA
preference shares or redeem the CBA preference shares for
qualifying Tier One securities, in whole but not in part, on any
date selected by the Bank:
•
•
If the CBA preference shares are held by CBA Capital Trust
II, upon the occurrence of a trust preferred securities tax
event, an adverse tax event, an investment Company event
or a regulatory event; or
If the CBA preference shares are not held by CBA Capital
Trust II, upon the occurrence of a preference share
withholding tax event, an adverse tax event or a regulatory
event.
Holders of CBA preference shares will be entitled to vote
together with the holders of our ordinary shares on the basis of
one vote for each CBA preference share:
• During a period in which a dividend (or part of a dividend) in
respect of the CBA preference shares is in arrears;
• On a proposal to reduce share capital;
• On a proposal that affects rights attached to the CBA
preference shares;
• On a resolution to approve the terms of a Buy-back
agreement;
• On a proposal for the disposal of the whole of the Group’s
property, business and undertaking; and
• On a proposal to wind up and during the winding up of the
Group.
The rights attached to the CBA preference shares may not be
changed except with any required regulatory approvals and with
the consent in writing of the holders of at least 75% of the CBA
preference shares.
the
CBA NZ Subsidiary may not make payments on
subordinated notes, CBA NZ Branch may not make payments
on the subordinated notes guarantee or the CBA NZ Branch
notes and CBA may not make payments on the CBA preference
shares if an APRA condition exists; if a CBA stopper resolution
has been passed and not been rescinded or if CBA NZ
Subsidiary, CBA NZ branch or CBA, as the case may be, is
prohibited from making such a payment by instruments or other
obligations of CBA.
Commonwealth Bank of Australia Annual Report 2008 165
(10) AUD denominated Tier Two Loan Capital issuances
• AUD 275 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. The
Agreement provides for the Bank to issue either fully paid
ordinary shares to the Commonwealth of Australia or (with the
consent of the Commonwealth of Australia) rights to all
shareholders to subscribe for fully paid ordinary shares up to an
amount equal to the outstanding principal value of the note issue
plus any interest paid in respect of the notes for the most recent
financial year and accrued interest. The issue price will be
determined by reference to the prevailing market price for the
Bank’s shares.
Any one or more of the following events will trigger the issue of
shares to the Commonwealth of Australia or a rights issue:
• A relevant event of default occurs in respect of the note issue
and, where applicable, the Trustee of the notes gives notice
of such to the Bank;
• 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 trigger
the issue of shares to the Commonwealth of Australia to the
value of such payment.
Original issue size was $300 million; $25 million matured in
December 2004.
• AUD 25 million subordinated FRN, issued April 1999, due
April 2029.
• AUD 130 million subordinated notes comprised as follows:
AUD 10 million fixed rate notes issued 12 December 1995,
matured 12 December 2005. AUD 110 million floating rate
notes issued 12 December 1995, matured 12 December
2005. AUD five million fixed rate notes issued 17 December
1996, matured 12 December 2005. AUD five million floating
rate notes issued 17 December 1996, matured 12 December
2005.
• AUD 500 million subordinated notes, issued February 2004,
due February 2014; split into AUD 300 million fixed rate
notes and AUD 200 million floating rate notes.
• AUD 300 million subordinated floating rate notes, issued
February 2005, due February 2015.
• AUD 300 million subordinated floating rate notes, issued
November 2005, due November 2015.
• AUD 200 million subordinated floating rate notes, issued
September 2006, due September 2016.
• AUD 500 million subordinated notes, issued May 2007, due
May 2017; split into AUD 150 million fixed rate notes and
AUD 350 million floating rate notes.
Notes to the Financial Statements
Note 31 Loan Capital (continued)
If distributions, interest or dividends are not paid in full on a
payment date; the redemption price is not paid or securities are
not delivered in full on a redemption date for the trust preferred
securities or the CBA preference shares, then the Bank may not
pay any interest; declare or pay any dividends or distributions
from the income or capital of CBA, or return any capital or
undertake any buy-backs, redemptions or repurchases of
existing capital securities or any securities, or instruments of
CBA that by their terms rank or are expressed to rank equally
with or junior to the CBA NZ Branch notes or the CBA
preference shares for payment of interest, dividends or similar
amounts unless and until,
•
•
•
In the case of any non-payment of distributions on the trust
preferred securities on any distribution payment date, on or
within 21 business days after any distribution payment date,
CBA Capital Trust II or CBA, as guarantor, has paid in full to
the holders of the trust preferred securities any distributions
owing in respect of that distribution payment date through the
date of actual payment in full;
In the case of any non-payment of a dividend on the CBA
preference shares on any dividend payment date, CBA has
paid (A) that dividend in full on or within 21 business days
after that dividend payment date, (B) an optional dividend
equal to the unpaid amount of scheduled dividends for the 12
consecutive calendar months prior to the payment of such
dividend or (C) dividends on the CBA preference shares in
full on each dividend payment date during a 12 consecutive
month period;
interest on
the case of any non-payment of
In
the
subordinated notes on any interest payment date, (A) on or
within 21 business days after any interest payment date, (i)
CBA NZ Subsidiary or CBA NZ Branch, as guarantor, has
paid in full to the holders of the subordinated notes any
interest and other amounts owing in respect of that interest
payment date (excluding defaulted note interest) through the
date of actual payment in full or (ii) with the prior approval of
APRA, CBA has paid in full to holders of the subordinated
notes an assignment prevention optional dividend in an
amount equal to such interest and any other amounts, or (B)
CBA has paid dividends on the CBA preference shares in full
on each dividend payment date during a 12 consecutive
month period; and
•
In the case of any non-payment of the redemption price or
non-delivery of the securities payable or deliverable with
respect to CBA preference shares or the trust preferred
securities, such redemption price or securities have been
paid or delivered in full, as applicable.
then there are restrictions on the Bank paying any interest on
equal ranking or junior securities.
166 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 31 Loan Capital (continued)
(11) USD denominated Tier Two Loan Capital issuances
(13) GBP denominated Tier Two Loan Capital issuances
• GBP 200 million subordinated EMTN, issued March 1996,
• USD 300 million subordinated notes, issued June 2000, due
matured December 2007.
June 2010.
• GBP 150 million subordinated EMTN, issued June 2003, due
• USD 400 million subordinated EMTN, issued June 1996,
December 2023.
matured July 2006.
(14) Other currencies Tier Two Loan Capital issuances
• USD 350 million subordinated fixed rate note, issued June
• EUR 300 million subordinated EMTN, issued March 2005,
2003, due June 2018.
due March 2015.
• USD 500 million subordinated EMTN issued June 2004
(USD 250 million) and August 2004 (USD 250 million), due
August 2014.
• USD 100 million subordinated EMTN, issued March 2005,
due March 2025. Partial redemption of USD 39.5 million in
September 2005.
• CAD 300 million subordinated notes, issued November 2005,
due November 2015.
• CAD 300 million subordinated notes, issued October 2007,
due October 2017.
• NZD 350 million subordinated notes, issued May 2005, due
April 2015.
• USD 200 million subordinated notes, issued June 2006, due
• NZD 183 million subordinated notes issued June 2006, due
July 2016.
June 2016.
• USD 300 million subordinated floating rate notes, issued
September 2006, due September 2016.
• USD 650 million subordinated floating rate notes, issued
December 2007, due December 2016.
(12) JPY denominated Tier Two Loan Capital issuances
• JPY 20 billion perpetual subordinated EMTN,
issued
February 1999.
• JPY 30 billion subordinated EMTN, issued October 1995 due
October 2015.
• JPY 10 billion subordinated EMTN, issued May 2004, due
May 2034.
• JPY 10 billion subordinated notes, issued November 2005,
due November 2015.
• JPY 5 billion subordinated loan, issued March 2006, due
March 2018.
Commonwealth Bank of Australia Annual Report 2008 167
Notes to the Financial Statements
Note 32 Detailed Statements of Changes in Equity
Equity Reconciliations
Ordinary Share Capital
Opening balance
Issue of shares
Dividend reinvestment plan
Exercise of executive options under employee share ownership schemes
(Purchase)/sale and vesting of treasury shares (1)
Closing balance
Other Equity Instruments
Opening balance
Closing balance
Retained Profits
Opening balance
Loyalty program adjustment
Restated opening balance
Actuarial (losses)/gains from defined benefit superannuation plans
Realised gains and dividend income on treasury shares held within the Group’s
life insurance statutory funds (1)
Operating profit attributable to Equity holders of the Bank
Total available for appropriation
Transfers (to)/from general reserve
Transfers from general reserve for credit losses
Interim dividend – cash component (2)
Interim dividend – dividend reinvestment plan
Final dividend – cash component
Final dividend – dividend reinvestment plan
Other dividends
Closing balance
2008
$M
14,483
141
1,109
3
(9)
15,727
939
939
6,367
(5)
6,362
(240)
26
4,791
10,939
(85)
350
(1,087)
(400)
(1,229)
(709)
(32)
7,747
Group
2007
$M
13,505
-
818
19
141
14,483
939
939
4,487
-
4,487
414
45
4,470
9,416
54
-
(862)
(518)
(1,368)
(300)
(55)
6,367
2008
$M
14,691
141
1,109
3
(17)
15,927
1,895
1,895
6,315
(5)
6,310
(240)
-
4,358
10,428
-
350
(1,087)
(400)
(1,229)
(709)
-
7,353
Bank
2007
$M
13,766
-
818
19
88
14,691
1,895
1,895
4,472
-
4,472
414
-
4,477
9,363
-
-
(862)
(518)
(1,368)
(300)
-
6,315
(1) Relates to movement in treasury shares held within life insurance statutory funds and the employee share scheme trust.
(2) Includes $98 million of shares purchased on-market to partly satisfy the Dividend Reinvestment Plan.
168 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 32 Detailed Statements of Changes in Equity (continued)
Reserves
General Reserve
Opening balance
Appropriation from/(to) retained profits
Closing balance
Capital Reserve
Opening balance
Revaluation surplus on sale of property
Closing balance
Asset Revaluation Reserve
Opening balance
Revaluation of properties
Transfers on sale of properties
Tax on revaluation of properties
Closing balance
Foreign Currency Translation Reserve
Opening balance
Currency translation adjustments of foreign operations
Currency translation on net investment hedge
Tax on translation adjustments
Tax on net investment hedge movement
Closing balance
Cash Flow Hedge Reserve
Opening balance
Gains and losses on cash flow hedging instruments:
Recognised in equity
Transferred to Income Statement
Interest income
Interest expense
Tax on cash flow hedging instruments
Closing balance
Employee Compensation Reserve
Opening balance
Current period movement
Closing balance
General Reserve for Credit Losses (1)
Opening balance
Transfer to retained profits
Closing balance
Available-for-Sale Investments Reserve
Opening balance
Net gains and losses on revaluation of available-for-sale investments
Net gains and losses on available-for-sale investments transferred to Income
Statement on disposal
Tax on available-for-sale investments
Closing balance
Total reserves
Shareholders’ equity attributable to Equity holders of the Bank
Shareholders’ equity attributable to minority interests
Total Shareholders’ equity
2008
$M
1,167
85
1,252
287
6
293
185
20
(6)
(4)
195
(200)
(555)
(93)
23
30
(795)
440
422
88
(661)
52
341
(51)
12
(39)
350
(350)
-
(35)
262
Group
2007
$M
1,221
(54)
1,167
285
2
287
131
79
(2)
(23)
185
(241)
54
-
(13)
-
(200)
59
429
67
53
(168)
440
34
(85)
(51)
350
-
350
65
28
2008
$M
570
-
570
1,538
6
1,544
157
19
(6)
(4)
166
(126)
(103)
-
1
-
(228)
211
426
86
(404)
(27)
292
(51)
12
(39)
350
(350)
-
(27)
240
Bank
2007
$M
570
-
570
1,536
2
1,538
107
75
(2)
(23)
157
(6)
(119)
-
(1)
-
(126)
6
125
88
79
(87)
211
34
(85)
(51)
350
-
350
60
18
(312)
44
(41)
1,206
25,619
518
26,137
(138)
10
(35)
2,143
23,932
512
24,444
(272)
7
(52)
2,253
27,428
-
27,428
(119)
14
(27)
2,622
25,523
-
25,523
(1) The Group was previously required to maintain a Prudential General Reserve for Credit Losses (“GRCL”), however, as this is no longer required it has been returned to
Retained Profits.
Commonwealth Bank of Australia Annual Report 2008 169
Notes to the Financial Statements
Note 32 Detailed Statements of Changes in Equity (continued)
The following table shows the gross amount of deferred gains/(losses) in relation to cash flow hedges.
Cash Flow Hedges – Deferred Gains/(Losses)
Within 6 months
Within 6 months – 1 year
Within 1 – 2 years
Within 2 – 5 years
After 5 years
Net deferred gains
Within 6 months
Within 6 months – 1 year
Within 1 – 2 years
Within 2 – 5 years
After 5 years
Net deferred gains/(losses)
Exchange Rate
Related Contracts
Interest Rate
Related Contracts
2008
$M
59
-
-
-
1
60
2007
$M
39
-
-
-
-
39
2008
$M
43
30
72
137
144
426
2007
$M
10
228
123
199
38
598
Exchange Rate
Related Contracts
Interest Rate
Related Contracts
2008
$M
34
-
-
-
(8)
26
2007
$M
(4)
-
-
-
(13)
(17)
2008
$M
31
16
65
132
142
386
2007
$M
2
200
59
22
36
319
Group
Total
2007
$M
49
228
123
199
38
637
Bank
Total
2007
$M
(2)
200
59
22
23
302
2008
$M
102
30
72
137
145
486
2008
$M
65
16
65
132
134
412
170 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 33 Share Capital
Issued and Paid Up Ordinary Capital
Ordinary Share Capital
Opening balance (excluding Treasury Shares deduction)
Dividend reinvestment plan: Final dividend prior year
Dividend reinvestment plan: Interim dividend
Share Issue – IWL acquisition
Exercise of executive options under employee share ownership schemes
Closing balance (excluding Treasury Shares deduction)
Less: Treasury Shares
Closing balance
Shares on Issue
Opening balance (excluding Treasury Shares deduction)
Dividend reinvestment plan issues:
2005/2006 Final dividend fully paid ordinary shares at $45.24
2006/2007 Interim dividend fully paid ordinary shares at $50.02
2006/2007 Final dividend fully paid ordinary shares at $54.80
2007/2008 Interim dividend fully paid ordinary shares at $39.44
Share Issue – IWL acquisition
Exercise of executive options under employee share ownership schemes
Closing balance (excluding Treasury Shares deduction)
Less: Treasury Shares
Closing balance
Terms and Conditions of Ordinary Share Capital
2008
$M
14,738
709
400
141
3
15,991
(264)
15,727
Group
2007
$M
13,901
300
518
-
19
14,738
(255)
14,483
2008
$M
14,738
709
400
141
3
15,991
(64)
15,927
Bank
2007
$M
13,901
300
518
-
19
14,738
(47)
14,691
Shares
Shares
Shares
Shares
1,300,583,376 1,282,904,909 1,300,583,376 1,282,904,909
-
-
12,938,969
10,156,101
2,327,431
125,000
6,638,553
10,343,514
-
-
-
696,400
6,638,553
10,343,514
-
-
-
696,400
1,326,130,877 1,300,583,376 1,326,130,877 1,300,583,376
(1,198,015)
1,318,142,864 1,292,971,632 1,324,343,431 1,299,385,361
-
-
12,938,969
10,156,101
2,327,431
125,000
(7,611,744)
(7,988,013)
(1,787,446)
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.
Other Equity Instruments
Other equity instruments issued and paid up
2008
$M
939
Group
2007
$M
939
2008
$M
1,895
Bank
2007
$M
1,895
Shares
700,000
Shares
700,000
Shares
1,400,000
Shares
1,400,000
Trust Preferred Securities 2006
On 15 March 2006 the Bank issued USD 700 million ($947 million) of trust preferred securities into the U.S. capital markets. These
securities offer a non-cumulative fixed rate of distribution of 6.024% per annum payable semi-annually. These securities qualify as Tier
One Capital of the Bank. A related instrument was issued by the Bank to a subsidiary for $956 million and eliminates on consolidation.
Commonwealth Bank of Australia Annual Report 2008 171
Notes to the Financial Statements
Note 33 Share Capital (continued)
Changes Since 2007
Dividends
The Directors have declared a fully franked final dividend of 153
cents per share amounting to $2,029 million. The dividend will
be payable on 1 October 2008 to shareholders on the register at
5pm on 22 August 2008.
The Board determines the dividends per share based on net
profit after tax (“cash basis”) per share, having regard to a range
of factors including:
• Current and expected rates of business growth and the mix
of business;
As a result of the Group’s long term incentive arrangements in
2007, the ERP has ceased to operate.
To strengthen the alignment between Shareholder interests and
executives who previously participated in the ERP, one third of
their short term incentive payments will be deferred into Bank
shares for three years under the Leadership Incentive Share
Plan (LISP). The first deferral commenced on 1 July 2007. The
LISP arrangement is governed by the Rules of the EPP.
From 1 July 2007 the CEO and Group Executives received long
term incentives under the new Group Leadership Share Plan
• Capital needs to support economic, regulatory and credit
(GLSP). The GLSP provides participants with the opportunity to
ratings requirements;
• The rate of return on assets;
•
Investments and/or divestments
development;
share in a pool of performance rights at the end of the three year
measurement period subject to satisfaction of performance
to support business
hurdles.
Employee Share Acquisition Plan (“ESAP”)
The ESAP was introduced in 1996 and provides employees with
the opportunity to receive up to $1,000 worth of free shares each
year if the Group meets the required performance target. 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. On 29 August
2007, 455,094 shares were granted
to 25,283 eligible
employees in respect of the 2007 ESAP grant.
The Issue Price for the offer is equal to the volume weighted
average of the prices at which the CBA shares were traded on
the ASX during the 5 trading day period up to and including the
grant date. For the 2007 grant, this was $54.78.
The Group has determined to modify the allocation to each
eligible employee in respect of the 2008 grant. The grant value
will be differentiated based on individual performance ratings for
the 2008 financial year for eligible employees. Accordingly, it is
estimated that $12 million worth of shares will be purchased on-
market at the prevailing market price.
• Competitors comparison and market expectation; and
• Earnings per share growth.
Dividends paid since the end of the previous financial
year:
As declared in the 31 December 2007 Profit Announcement, a
fully franked interim dividend of 113 cents per share amounting
to $1,487 million was paid on 2 April 2008. The payment
comprised cash disbursements of $989 million with $498 million
the Dividend
being
Reinvestment Plan, of which $98 million of shares were provided
by an on-market purchase.
reinvested by participants
through
Dividend Reinvestment Plan
The Bank expects to issue around $609 million of shares in
respect of the Dividend Reinvestment Plan for the final dividend
for the 2008 financial year.
Record date
The register closed for determination of dividend entitlement and
for participation in the dividend reinvestment plan at 5pm on 22
August 2008 at Link Market Services Limited, Locked Bag A14,
Sydney South, 1235.
Ex-dividend Date
The ex-dividend date was 18 August 2008.
Employee Share Plans
The Group had the following employee share plans in place
during the year ended 30 June 2008:
• Commonwealth Bank Employee Share Acquisition Plan
(“ESAP”);
• Commonwealth Bank Equity Participation Plan (“EPP”);
• Commonwealth Bank Group Leadership Share Plan
(“GLSP”);
• Commonwealth Bank Equity Reward Plan (“ERP”); and
• Commonwealth Bank Non-Executive Directors Share Plan
(“NEDSP”).
The current ESAP and ERP arrangements were each approved
by Shareholders at the Annual General Meeting (“AGM”) on 26
October 2000. The GLSP was approved by Shareholders at the
AGM on 7 November 2007. Shareholders’ consent was not
required for either the EPP or NEDSP but details were included
in the Explanatory Memorandum to the 2000 meeting to ensure
Shareholders were fully informed.
172 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
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.
Shares acquired under the EPP are expensed. In the current
year, $17 million was expensed to reflect the cost of allocations
under the Plan. This current year expense is higher than last
year’s due to the inclusion of the LISP grant since July 2007.
All shares acquired by employees under the EPP are purchased
on-market at the current market price. A total number of
9,008,053 shares have been acquired under the EPP since the
plan commenced in 2001.
For a limited number of executives a cash-based LISP replicator
scheme is operated by way of grants of Performance Units – the
Leadership Incentive (Performance Unit) Plan (“LIPUP”). A
Performance Unit is a monetary unit with a value linked to the
share price of Commonwealth Bank shares. Performance Units
granted under LIPUP are subject to the same vesting conditions
as the LISP. On meeting the vesting condition, a cash payment
is made to executives, the value of which is determined based
on the Group’s share price upon vesting plus an accrued
dividend value.
A total of $0.7 million for the LIPUP has been expensed in
respect of the year ended 30 June 2008.
Note 33 Share Capital (continued)
Equity Participation Plan (“EPP”)
The EPP comprises a voluntary and a mandatory component.
The voluntary component facilitates the voluntary sacrifice of
both fixed remuneration and annual short term incentives (STI)
to be applied in the acquisition of shares. The sacrifice of one
third of STI payments for executives under the Leadership
Incentive Plan (“LISP”) forms the mandatory part of the EPP.
The LISP was introduced on 1 July 2007.
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 Group, whichever is
earlier. Shares purchased under the voluntary component of the
EPP carry full dividend entitlements, voting rights and there are
no forfeiture or vesting conditions attached to the shares.
Under the mandatory component of the EPP, fully paid ordinary
shares are purchased and held in trust until such time as the
vesting conditions have been met. The vesting condition
attached to the shares specifies that participants must generally
remain employees of the Group until the vesting date. Shares
previously granted under the mandatory component of the EPP
remain subject to their vesting conditions.
Each participant in 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 in the trust during the vesting period are paid to
participants.
Details of purchases under the EPP from 1 July 2007 to 30 June 2008 were as follows:
Allotment Date
20 August 2007
3 September 2007
7 September 2007
4 March 2008
Participants
60
81
298
74
Shares Purchased
8,279
57,488
652,055
19,284
Average Purchase Price
$52.81
$55.19
$55.06
$39.85
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 (no.)
Shares allocated during year (no.)
Shares vested during year (no.)
Shares forfeited during year (no.)
Shares held under the Plan at end of year (no.)
July 07 – June 08
63,444
652,055
(21,148)
(80,322)
614,029
July 06 – June 07
823,084
-
(759,640)
-
63,444
Commonwealth Bank of Australia Annual Report 2008 173
Notes to the Financial Statements
Note 33 Share Capital (continued)
Group Leadership Share Plan (GLSP)
Effective 1 July 2007, the GLSP is the Group’s long term
incentive plan for the CEO and Group Executives.
Under the GLSP, participants will share in a pool that may vest
at the end of the three year performance period subject to
satisfaction of the performance conditions.
For grants made in 2007/08, participants will share in a pool to
the value of 2.2% of the growth in the Group’s Net Profit after
Capital Charge (PACC), capped at a maximum pool of $34
million subject to performance against both of the following
performance hurdles:
• The Group’s NPAT growth over the three year period must
be above the average of NPAT growth of the peer group
(ANZ, NAB, St George and Westpac); and
• The Group’s customer satisfaction relative to the peer group.
The current GLSP grant is measured from 1 July 2007 and may
vest depending on performance to 1 July 2010.
In order to determine the Group’s level of achievement against
the customer satisfaction performance hurdle, scores are taken
for both the Group and the peer group from independent
external surveys. A ranking is then determined and a vesting
scale applied.
If the Bank’s NPAT is below the average of the peer group, then
nothing will vest regardless of the Bank’s customer satisfaction
ranking.
The GLSP will provide reward shares to the participants if and
when grants vest. The number of reward shares to vest will be
determined by the value of the pool that vests at the end of the
performance period and the share price at the end of the
relevant performance period. As the GLSP commenced on 1
July 2007, no share grants have been made in 2007/08.
A total of $3.7 million has been expensed in respect of the year
ended 30 June 2008.
Further details of the GLSP are available in the Remuneration
Report.
Equity Reward Plan (ERP)
The ERP was the Group’s previous long term incentive
arrangement for executives, which has since been replaced by
the GLSP and LISP arrangements. No grants were made under
the ERP during the 2008 financial year. The last allocation under
the ERP and ERPUP was made in July 2006. These shares are
due to be tested for vesting in July 2009. No further grants will
be made under the ERP. The Board 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, where recipients pay a set exercise price to
convert each option to one CBA share once the option has
vested, and grants of shares, where no exercise price is payable
for participants to receive CBA shares upon vesting. Since
2001/02, no options have been issued under the ERP. From
2002/03, Reward Shares have only been issued under this plan.
The exercise of previously granted options and the vesting of
employee legal title to the shares are conditional on the Group
achieving a prescribed performance hurdle. The ERP
performance hurdle is based on relative Total Shareholder
Return (TSR) with
the Group’s TSR performance being
measured against a comparator group of companies. TSR is
calculated by combining the reinvestment of dividends and
share price movements over the period.
174 Commonwealth Bank of Australia Annual Report 2008
For Reward Shares granted from 2002/03 to 2005/06 inclusive,
a tiered vesting scale was applied so that 50% of the allocated
shares vest if the Group’s TSR return is equal to the 50th
percentile, 75% vest at the 67th percentile and 100% when the
Group’s return is in the top quartile. The minimum vesting period
is three years. There are then four retesting opportunities until
the maximum five year vesting period concludes. All unvested
Reward Shares remaining in the Plan at the end of the vesting
period are forfeited. Employees who exit the Group before the
grant vests forfeit their allocation.
Where the performance rating is at least at the 50th percentile
on the third anniversary of the grant, the shares will vest at a
time nominated by the executive, within the trading windows,
over the next two years. The vesting percentage will be at least
that achieved on the third anniversary of the grant and the
executive will be able to delay vesting until a subsequent half
yearly window prior to the fifth anniversary of the grant. The
vesting percentage will be calculated by reference to the rating
at that time.
Where the rating is below the 50th percentile on the third
anniversary of grant, the shares can still vest if the rating
reaches the 50th percentile prior to the fifth anniversary, but the
maximum vesting will be 50%.
For Reward Shares granted in 2006/07 a straight line vesting
scale is applied, with 50% vesting at the 51st percentile, through
to 100% vesting at the 75th percentile. The minimum vesting
period for these grants is three years. Further retesting is
restricted to one occasion, 12 months after initial testing, giving a
maximum vesting period of four years. All unvested Reward
Shares remaining in the Plan at the end of the vesting period are
forfeited. Employees who exit the Group before the grant vests
forfeit their allocation.
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. If 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.
Reward Shares acquired under the share component of the
ERP are purchased on-market at the current market price. In the
current year, a total of $13 million has been expensed. The
current year expense is lower than last year’s due the inclusion
last year of an additional cost of $12 million incurred from the
modification to the performance hurdle of the Plan in 2005/06.
The fair value of shares allocated under the ERP is expensed
over three to five years, reflecting the expected vesting period.
(Performance Unit) Plan
For a limited number of executives a cash-based ERP replicator
scheme is operated by way of grants of Performance Units – the
(ERPUP). A
Equity Reward
Performance Unit is a monetary unit with a value linked to the
share price of Commonwealth Bank shares. Performance Unit
grants are subject to the same vesting conditions as the ERP.
On meeting the vesting condition, a cash payment is made to
executives the value of which is determined based on the
Group’s share price on vesting plus an accrued dividend value.
A total of $11 million for the ERPUP has been expensed in
respect of the year ended 30 June 2008. The current year
expense is lower than last year’s due to the inclusion of an
additional cost last year of $18.7 million incurred from the
modification to the Plan in 2007.
Executive options issued up to September 2001 have not been
recorded as an expense by the Group.
Notes to the Financial Statements
Note 33 Share Capital (continued)
Details of movements in ERP options and shares are as follows:
Options – Details of Movements
Year of Grant
Exercise Price (1) (2)
July 2007 – June 2008
(4)
(3)
July 2006 – June 2007
(4)
(3)
2001
$30.12
2000
$26.97
2001
$30.12
2000
$26.97
Held by participants at the start of the year (no.)
Granted during year (no.)
Exercised during year (no.)
Lapsed during year (no.)
Outstanding at the end of year (no.)
Total consideration paid due to exercises to date of report (5)
97,500
-
-
-
97,500
-
426,600
-
(112,500)
-
314,100
$3,388,500
137,500
-
(40,000)
-
97,500
$1,078,800
753,500
-
(326,900)
-
426,600
$9,846,228
(1) The Exercise Price is the 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. This is the average exercise price.
(2) The premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.
(3) Performance hurdle was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.
(4) Performance hurdle was satisfied on 3 October 2004 and options may be exercised up to 3 September 2011.
(5) No amount is unpaid in respect of the shares issued upon exercise of options during the above period.
Reward Shares – Details of Movements
Year of Grant -Total Reward Shares
Held by participants at the start of year (no.)
Allocated during year (no.) (1)
Vested during year (no.)
Lapsed during year (no.)
Outstanding at the end of year (no.)
(4)
2004
297,395
282,645
(540,290)
(39,750)
-
July 2007 – June 2008
(6)
(5)
2005
411,937
-
-
(66,363)
345,574
2006
440,854
-
-
(66,090)
374,764
(2)
2002
241,850
-
(219,500)
(22,350)
-
(3)
2003
348,650
321,150
(639,300)
(30,500)
-
(4)
2004
423,685
-
-
(126,290)
297,395
2005
522,748
13,117
-
(123,928)
411,937
2006
-
505,574
-
(64,720)
440,854
July 2006 – June 2007
(6)
(5)
(1) The total number of shares allocated during the year represents the number of shares allocated and may not represent the total number that may vest at a later date.
The Group purchases 50% of the maximum number of shares a participant may receive. Additional shares are purchased if required to fulfil the Group’s obligations to
vest shares in participants once the performance of the ERP grant is known.
(2) Performance hurdle was satisfied on 2 October 2006 when 50% of the maximum allocation of this grant vested.
(3) Performance hurdle was satisfied on 3 October 2006 when 100% of the maximum allocation of this grant vested.
(4) Performance hurdle was satisfied on 23 September 2007 when 100% of the maximum allocation of this grant vested.
(5) This grant will be tested for vesting on 15 July 2008. If performance is below the 75th percentile, retests will be conducted each six months until 15 July 2010.
(6) This grant will be tested for vesting on 14 July 2009. If performance is below the 75th percentile, one retest will be conducted 12 months later on 15 July 2010.
Non-Executive Directors Share Plan (NEDSP)
The NEDSP provides for the acquisition of shares by Non-
Executive Directors through the mandatory sacrifice of 20% of
their annual fees (paid on a quarterly basis). Shares purchased
are restricted for sale for 10 years or when the Director leaves the
Board, whichever is earlier. In addition, Non-Executive Directors
can voluntarily elect to sacrifice up to a further 80% of their fees
for the acquisition of shares.
Shares are purchased on-market at the current market price and
a total of 70,763 shares have been purchased under the NEDSP
since the plan commenced in 2001. Since March 2005, shares
are acquired under the plan on a six monthly basis.
Shares acquired under the plan receive full dividend entitlements
and voting rights and there are no forfeiture or vesting conditions
attached to the shares granted under the NEDSP.
For the current year, $527,811 was expensed through the profit
and loss reflecting shares purchased and allocated under the
NEDSP.
Grants made under the NEDSP from 1 July 2007 to 30 June 2008
Period
1 January to 30 June 2008
1 July to 31 December 2007
Total Fees Sacrificed
$279,896
$247,915
Participants
11
9
Shares Purchased Average Purchase Price
$52.81
$39.85
5,298
6,223
Commonwealth Bank of Australia Annual Report 2008 175
Notes to the Financial Statements
Note 33 Share Capital (continued)
Executive Option Plan (EOP)
This plan was discontinued in 2000/01.
Under the EOP, the Bank granted options to purchase fully paid
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 Group
achieving a prescribed performance hurdle. The option plan did
not grant rights to the option holders to participate in a share
issue of any other body corporate.
The performance hurdle is the same TSR comparator hurdle as
outlined above for the Equity Reward Plan (ERP) grants prior to
2002/03.
The EOP was discontinued in 2000/2001 and no options have
been granted under the plan since the last grant in September
2000. The performance hurdles for the August 1999 grant and
the September 2000 grant were met in 2004.
Under the Group’s EOP and ERP an option holder generally has
no right to participate in any new issue of securities of the Group
or of a related body corporate as a result of holding the option.
The only exception is when there is a pro rata issue of shares to
the Group’s Shareholders by way of a bonus issue involving
capitalisation (other than in place of dividends or by way of
dividend reinvestment). In this case an option holder is entitled to
receive additional shares upon exercise of the options of 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.
Details of movements for in EOP options are as follows:
Options – Details of Movements
Year of Grant
Exercise Price (1) (2)
July 2007 – June 2008
(4)
2000
$26.97
July 2006 – June 2007
(4)
(3)
1999
$23.84
2000
$26.97
Held by participants at the start of year (no.)
Granted during year (no.)
Exercised during year (no.)
Lapsed during year (no.)
Outstanding at the end of year (no.)
Total consideration paid due to exercises to date of report (5)
36,900
-
(12,500)
-
24,400
$337,125
190,600
-
(165,600)
(25,000)
-
$3,947,904
225,800
-
(163,900)
(25,000)
36,900
$4,420,383
(1) The Exercise Price is the 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. This is the average exercise price.
(2) The premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.
(3) Performance hurdle was satisfied on 28 February 2004 and options may be exercised up to 24 August 2009.
(4) Performance hurdle was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.
(5) No amount is unpaid in respect of the shares issued upon exercise of options during the above period.
176 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 34 Minority Interests
Controlled entities:
Share capital (1)
Total minority interests
2008
$M
518
518
Group
2007
$M
512
512
(1) Comprises predominantly New Zealand Perpetual Preference Shares - $505 million. On 10 December 2002, ASB Capital Limited, a New Zealand subsidiary, issued
NZD 200 million (AUD 182 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 NZD 350 million (AUD 323 million) of perpetual preference
shares. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly and are non-cumulative.
Commonwealth Bank of Australia Annual Report 2008 177
Notes to the Financial Statements
Note 35 Capital Adequacy
Regulatory Capital
The Bank is an Authorised Deposit-taking Institution (“ADI”) and
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 International Convergence of
Capital Measurement and Capital Standards: A Revised
Framework (“Basel II”) issued by the Basel Committee on
(“The Basel Committee”). These
Banking Supervision
requirements define what is acceptable as capital and provide
for methods of measuring the risks incurred by the Bank.
The regulatory capital requirements are measured for the
Extended Licence Entity Group (known as “Level One”
comprising the Bank and APRA approved subsidiaries) and for
the Bank and all of its banking subsidiaries (known as “Level
Two” or the “Group”).
All entities which are consolidated for accounting purposes are
included within the Group capital adequacy calculations except
for;
• The insurance and funds management operations; and
• The entities through which securitisation of Bank assets are
conducted.
Regulatory capital is divided into Tier One and Tier Two Capital.
Tier One Capital primarily consists of Shareholders’ Equity plus
other capital instruments acceptable to APRA, less goodwill and
other prescribed deductions. Tier Two Capital is comprised
primarily of hybrid and debt instruments acceptable to APRA
less any prescribed deductions. Total Capital is the aggregate of
Tier One and Tier Two Capital.
The tangible component of the investment in the insurance and
funds management operations are deducted from capital, 50%
from Tier One and 50% from Tier Two.
Capital adequacy is measured by means of a risk based capital
ratio. The capital ratios reflect capital (Tier One, Tier Two or
Total Capital) as a percentage of total Risk Weighted Assets
(“RWA”). RWA represents an allocation of risks associated with
the Group’s assets and other related exposures.
its capital
the
The Group actively manages
requirements of various stakeholders
rating
agencies and shareholders). This is achieved by optimising the
mix of capital while maintaining adequate capital ratios
throughout the financial year.
to balance
(regulators,
The Group has a range of instruments and methodologies
available to effectively manage capital including share issues
and buybacks, dividend and dividend reinvestment plan policies,
hybrid capital raising and dated and undated subordinated debt
issues. All major capital related initiatives require approval of the
Board.
The Group’s capital position is monitored on a continuous basis
and reported monthly to senior management. Three year capital
forecasts are undertaken on a quarterly basis and a detailed
capital and strategy plan is presented to the Board annually.
During the 2007 and 2008 financial years the Group complied
with APRA’s prescribed minimum capital requirements at all
times.
178 Commonwealth Bank of Australia Annual Report 2008
The Bank is required to inform APRA immediately of any breach
or potential breach of
the minimum capital adequacy
requirements, including details of remedial action taken or
planned to be taken.
The Group’s capital ratios throughout the 2007 and 2008
Financial Years were in compliance with both APRA minimum
capital adequacy requirements (Tier One Capital 4% and Total
Capital 8%) and the Board approved target ranges of Tier One
Capital 6.5 to 7% and Total Capital 10 to 12%).
The Total Capital target range was amended in 2008 from a
range of 9 to 11% to a range of 10 to 12% in order to align with
the Bank’s strategy to apply for U.S. Financial Holding Company
(FHC) status. FHC status requires the Bank to maintain
minimum Tier One Capital of 6% and Total Capital at 10% at all
times.
Economic Capital
The Group uses an “Economic Capital” model to drive delivery
of “shareholder-value-added” (“SVA”) results. Measures are
applied to link the cost of the Bank’s physical capital to the profit
required
turn
from different business segments. This
facilitates:
in
• Pricing of products based on appropriate charges for use of
capital; and
•
Internal measurement of performance on a risk adjusted
basis.
Economic Capital provides an estimate of capital required to
cover the financial impact of unlikely events, at a level of
confidence consistent with the Board’s target debt rating. As
such, the level of Economic Capital and physical capital is
aligned to the Board’s overall risk appetite.
The Group calculates Economic Capital in accordance with the
following key principles:
• Consistent application
to all material risk
types and
businesses across the Group;
• Measurement of potential financial impacts over a time
period reflecting elimination of the risk under assumed
adverse conditions;
• Use of a confidence level aligned with the Group’s target
debt rating; and
• Aggregation of Economic Capital by individual risk type.
Economic Capital provides a tool for evaluating which of the
Group’s products and businesses provide the best return relative
to the credit, market, operational, strategic business, insurance
and other risks taken in achieving that return. These risk types
are defined in the Basel II Capital Framework, and influence the
level of capital held by the Bank.
SVA is maximised through the use of two measures of risk-
adjusted performance – known as Profit After Capital Charge
(PACC) and Return on Target Equity (ROTE) – which are used
internally to measure business performance. These measures of
profit and return reflect the amount of Economic Capital used in
achieving these outcomes.
Business Unit segments are required to achieve minimum
returns on their allocated risk-based capital equal to a uniform
“Cost of Capital” which is set from time to time based on market
conditions.
The development of Economic Capital measures and the use of
risk adjusted return metrics within Business Unit segments is an
evolving area both within the Group and across the industry.
Notes to the Financial Statements
Note 36 Financial Reporting by Segments
Description of segments
The principal activities of the Group are carried out in the
business segments shown below. These segments are based on
the types of products and services provided to customers.
The primary sources of revenue are interest and fee income
(Retail Banking Services, Premium Business Services and
International Financial Services) and insurance premium and
funds management income (Wealth Management).
Business Segment Information
Income Statement
Interest income
Insurance premium and related revenue
Other income
Total revenue
Equity accounted earnings
Revenue from external customers
Revenue from other operating segments
Interest expense
Segment result before income tax
Income tax expense
Segment result after income tax
Minority interests
Segment result after income tax and minority
interests
Less: Non-Cash items (1)
Net profit after tax (“cash basis”) (1)
Non–Cash Expenses
Intangible asset amortisation
Loan impairment expense
Depreciation
Defined benefit superannuation plan
(income)/expense
Investment & restructuring
Other
Retail
Banking
Services
$M
14,651
-
1,257
15,908
Premium
Business
Services
$M
9,204
-
1,965
11,169
Wealth
Management
$M
-
994
2,840
3,834
International
Financial
Services
$M
4,061
379
458
4,898
-
15,896
12
5,306
2,675
(801)
1,874
-
1,874
(30)
1,904
19
331
19
-
41
28
-
10,622
547
6,701
1,865
(402)
1,463
-
1,463
(17)
1,480
53
426
45
3
22
17
60
3,774
-
87
986
(186)
800
-
800
60
740
-
-
4
-
-
11
32
4,773
93
3,081
777
(179)
598
(2)
596
7
589
12
43
39
-
14
6
Group
Year Ended 30 June 2008
Other
$M
1,318
-
(73)
1,245
-
1,897
(652)
6,152
(48)
135
87
(29)
58
38
20
19
130
118
(17)
300
28
Total
$M
29,234
1,373
6,447
37,054
92
36,962
-
21,327
6,255
(1,433)
4,822
(31)
4,791
58
4,733
103
930
225
(14)
377
90
Balance Sheet
Total assets
Acquisition of property, plant & equipment, intangibles
and other non–current assets
Investments in associates
Total liabilities
200,289
173,370
24,318
51,634
37,961
487,572
15
-
122,332
547
17
166,386
8
724
20,857
71
165
42,750
321
-
109,110
962
906
461,435
(1) Business segments are managed on the basis of Net profit after income tax (“cash basis”) which is defined by management as net profit after tax and minority
interested, before the gain on Visa Initial Public Offering, Provisions for investment and restructuring, defined benefit superannuation plan (income)/expense, treasury
shares valuation adjustment and unrealised gains and losses related to hedging and AIFRS volatility. Management use “cash basis” performance and it provides the
basis for the determination of the Bank’s dividends.
Commonwealth Bank of Australia Annual Report 2008 179
Notes to the Financial Statements
Note 36 Financial Reporting by Segments (continued)
Business Segment Information
Income Statement
Interest income
Insurance premium and related revenue
Other income
Total revenue
Equity accounted earnings
Revenue from external customers
Revenue from other operating segments
Interest expense
Segment result before income tax
Income tax expense
Segment result after income tax
Minority interests
Segment result after income tax and minority
interests
Less: Non-Cash items (1)
Net profit after tax (“cash basis”) (1)
Non–Cash Expenses
Intangible asset amortisation
Loan impairment expense
Depreciation
Defined benefit superannuation plan
(income)/expense
Other
Retail
Banking
Services
$M
12,007
-
1,291
13,298
Premium
Business
Services
$M
7,230
-
1,744
8,974
Wealth
Management
$M
-
830
4,590
5,420
International
Financial
Services
$M
3,425
279
677
4,381
-
13,279
19
3,890
2,522
(756)
1,766
-
1,766
-
1,766
14
349
20
-
26
1
8,650
323
5,200
1,905
(463)
1,442
-
1,442
(3)
1,445
35
75
33
5
14
16
5,384
20
33
1,090
(538)
552
-
552
(75)
627
-
-
4
-
49
36
4,404
(59)
2,617
678
(153)
525
-
525
47
478
8
20
39
-
3
Group
Year Ended 30 June 2007
Other
$M
1,200
8
(112)
1,096
-
1,399
(303)
5,086
343
(131)
212
(27)
185
(26)
211
13
(10)
104
(13)
9
Total
$M
23,862
1,117
8,190
33,169
53
33,116
-
16,826
6,538
(2,041)
4,497
(27)
4,470
(57)
4,527
70
434
200
(8)
101
Balance Sheet
Total assets (2)
Acquisition of property, plant & equipment, intangibles
and other non–current assets
Investments in associates
Total liabilities (2)
174,261
159,424
27,553
52,591
26,328
440,157
45
-
103,958
139
1
172,754
6
691
22,732
89
143
43,801
171
1
72,468
450
836
415,713
(1) Business segments are managed on the basis of Net profit after income tax (“cash basis”) which is defined by management as net profit after tax and minority
interested, before the gain on Visa Initial Public Offering, Provisions for investment and restructuring, defined benefit superannuation plan income/expense, treasury
shares valuation adjustment and unrealised gains and losses related to hedging and AIFRS volatility. Management use “cash basis” performance and it provides the
basis for the determination of the Bank’s dividends.
(2) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
180 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 36 Financial Reporting by Segments (continued)
Business Segment Information
Income Statement
Interest income
Insurance premium and related revenue
Other income
Total revenue
Equity accounted earnings
Revenue from external customers
Revenue from other operating segments
Interest expense
Segment result before income tax
Income tax expense
Segment result after income tax
Minority interests
Segment result after income tax and minority
interests
Less: Non-Cash items (1)
Net profit after tax (“cash basis”) (1)
Non–Cash Expenses
Intangible asset amortisation
Loan impairment expense
Depreciation
Defined benefit superannuation plan expense
Other
Balance Sheet
Total assets (2)
Acquisition of property, plant & equipment,
intangibles and other non–current assets
Investments in associates
Total liabilities (2)
Retail
Banking
Services
$M
10,404
-
1,189
11,593
Premium
Business
Services
$M
5,581
-
1,512
7,093
Wealth
Management
$M
-
739
4,144
4,883
International
Financial
Services
$M
2,948
284
945
4,177
-
11,599
(6)
2,352
2,252
(676)
1,576
-
1,576
-
1,576
13
354
13
-
24
2
6,435
656
4,625
1,554
(422)
1,132
-
1,132
(6)
1,138
12
68
16
7
13
2
4,858
23
26
798
(394)
404
-
404
(100)
504
-
-
7
-
8
1
4,190
(14)
2,192
839
(241)
598
-
598
8
590
7
22
33
-
4
Group
Year Ended 30 June 2006
Other
$M
825
29
(36)
818
2
1,475
(659)
4,049
416
(167)
249
(31)
218
(60)
278
17
(46)
95
28
17
Total
$M
19,758
1,052
7,754
28,564
7
28,557
-
13,244
5,859
(1,900)
3,959
(31)
3,928
(158)
4,086
49
398
164
35
66
157,302
134,229
27,549
40,926
22,844
382,850
40
-
78,320
227
3
151,257
113
72
23,605
46
102
33,658
186
13
74,667
612
190
361,507
(1) Business segments are managed on the basis of Net profit after income tax (“cash basis”) which is defined by management as net profit after tax and minority
interested, before the gain on Visa Initial Public Offering, Provisions for investment and restructuring, defined benefit superannuation plan income/expense, treasury
shares valuation adjustment and unrealised gains and losses related to hedging and AIFRS volatility. Management use “cash basis” performance and it provides the
basis for the determination of the Bank’s dividends.
(2) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
Geographical Information
Financial Performance & position
Revenue
Australia
New Zealand
Other locations (1)
Non-Current Assets
Australia
New Zealand
Other locations (1)
Group
Year Ended 30 June
2008
$M
29,131
4,922
3,001
37,054
9,929
1,129
265
11,323
%
78. 6
13. 3
8. 1
100. 0
87. 7
10. 0
2. 3
100. 0
2007
$M
26,350
4,517
2,302
33,169
9,260
1,133
496
10,889
%
79. 5
13. 6
6. 9
100. 0
85. 0
10. 4
4. 6
100. 0
2006
$M
22,802
4,021
1,741
28,564
8,169
771
360
9,300
%
79. 8
14. 1
6. 1
100. 0
87. 8
8. 3
3. 9
100. 0
(1) Other locations were: United Kingdom, United States of America, Japan, Singapore, Malta, Hong Kong, Grand Cayman, Fiji, Indonesia, China and Vietnam.
The geographical information represents the location in which the transaction was booked.
Commonwealth Bank of Australia Annual Report 2008 181
Notes to the Financial Statements
Note 37 Life Insurance Business
The following information is provided to disclose the statutory life
insurance business
the Group
Financial Statements and
the underlying methods and
assumptions used in their calculations.
transactions contained
in
All financial assets within the life statutory funds have been
determined to support either life insurance or life investment
contracts. Also refer to Note 1 (hh). The insurance segment
result is prepared on a business segment basis, refer to Note
36.
Life Insurance
Contracts
Life Investment
Contracts
Summarised Income Statement
Premium and related revenue
Outward reinsurance premiums expense
Claims expense
Reinsurance recoveries
Investment revenue (excluding investments in
subsidiaries):
Equity securities
Debt securities
Property
Other
Increase/(decrease) in contract liabilities
Operating income
Acquisition expenses
Maintenance expenses
Management expenses
Other expense
Net profit before income tax
Income tax (benefit)/expense attributable to
operating profit
Net profit after income tax
Sources of Life Insurance Net Profit
The net profit after income tax is represented
by:
Emergence of planned profit margins
Difference between actual and planned
experience
Effects of changes to underlying assumptions
Reversal of previously recognised losses or loss
recognition on Groups of related products
Investment earnings on assets in excess of
policyholder liabilities
Other movements
Net profit after income tax
Life insurance premiums received and
receivable
Life insurance claims paid and payable
2008
$M
1,412
(234)
(865)
173
(246)
227
(37)
81
198
709
190
240
14
39
226
(13)
239
2007
$M
1,182
(207)
(786)
145
418
147
70
52
(133)
888
158
235
16
9
470
174
296
190
178
2
3
-
25
19
239
-
-
41
(5)
(2)
78
6
296
-
-
2008
$M
292
-
(1)
-
(852)
419
(108)
(102)
574
222
21
138
7
53
3
(48)
51
98
(57)
-
-
10
-
51
-
-
2007
$M
257
-
-
-
1,323
444
324
294
(2,111)
531
22
197
8
58
246
205
41
87
(53)
-
-
8
(1)
41
-
-
2008
$M
1,704
(234)
(866)
173
(1,098)
646
(145)
(21)
772
931
211
378
21
92
229
(61)
290
288
(55)
3
-
35
19
290
Group
2007
$M
1,439
(207)
(786)
145
1,741
591
394
346
(2,244)
1,419
180
432
24
67
716
379
337
265
(12)
(5)
(2)
86
5
337
2,664
3,068
2,749
5,306
The disclosure of the components of operating profit after income tax expense are required to be separated between policyholders’
and shareholders’ interests. As policyholder profits are an expense of the Group and not attributable to shareholders, no such
disclosure is required.
182 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 37 Life Insurance Business (continued)
Reconciliation of Movements in Policy
Liabilities
Contract policy liabilities
Gross policy liabilities opening balance
Net (decrease)/increase in contract liabilities
reflected in the summarised Income Statement
Contract contributions recognised in policy
liabilities
Contract withdrawals recognised in policy
liabilities
Non-cash movements
FX translation adjustment
Gross policy liabilities closing balance
Liabilities ceded under reinsurance
Opening balance
Decrease/(increase) in reinsurance assets
reflected in the summarised Income Statement
Closing balance
Net policy liabilities at 30 June
Expected to be realised within 12 months
Expected to be realised in more than 12
months
Total net insurance policy liabilities
Life Insurance
Contracts
Life Investment
Contracts
2008
$M
2007
$M
2008
$M
2007
$M
2008
$M
Group
2007
$M
4,801
4,589
16,970
17,784
21,771
22,373
(198)
7
(131)
(216)
(141)
4,122
(158)
13
(145)
504
3,473
3,977
142
188
(202)
-
84
4,801
(148)
(10)
(158)
(574)
1,050
(2,940)
10
(143)
14,373
-
-
-
2,112
1,291
(4,338)
-
121
16,970
-
-
-
(772)
2,254
1,057
1,479
(3,071)
(206)
(284)
18,495
(158)
13
(145)
(4,540)
-
205
21,771
(148)
(10)
(158)
415
2,352
3,182
2,856
3,597
4,228
4,643
12,021
14,373
13,788
16,970
15,494
18,350
18,016
21,613
Commonwealth Bank of Australia Annual Report 2008 183
Notes to the Financial Statements
Note 37 Life Insurance Business (continued)
Sensitivity Analysis
The Group conducts sensitivity analyses
the
exposure to risk of changes in the key underlying variables such
as interest rate, equity prices, mortality, morbidity and inflation.
to quantify
The valuations included in the reported results and the Group’s
best estimate of future performance are calculated using certain
assumptions about these variables.
The movement in any key variable will impact the performance
and net assets of the Group and as such represents a risk.
Variable
Expense risk
Interest rate risk
Mortality rates
Morbidity rates
Discontinuance
Market Risk
Impact of movement in underlying variable
An increase in the level or inflationary growth of expenses over assumed levels will decrease
profit and shareholders’ equity.
The impact of changes in interest rates on profit and shareholders’ equity depends on the
relative profiles and matching of assets and liabilities. The Group is exposed to changes in
interest rates on fixed interest assets backing shareholders’ equity.
For insurance contracts that pay a death benefit, higher rates of mortality will increase the
claims cost and therefore reduce both profit and shareholders’ equity. For lifetime annuity
contracts, lower mortality rates will increase the duration of annuity payments and therefore
reduce both profit and shareholders’ equity.
The cost of health-related claims depends on both the incidence of policyholders becoming ill
and the duration of the illness. Higher than expected incidence and duration will increase the
claims costs, reducing profit and shareholders’ equity.
The impact of the discontinuance rate assumption depends on a range of factors including
the type of contract, the surrender value basis (where applicable) and the duration inforce. An
increase in discontinuance rates will usually reduce profit and shareholders’ equity
For contracts where benefit payments depend on the value of underlying assets, market risk
is borne by policyholders. However, as the Group derives fee income based on the value of
the underlying funds, a fall in market value will reduce fees, profit and shareholders’ equity.
The Group is exposed to market risk on assets backing shareholders’ equity.
The table below shows the sensitivity of insurance contract liabilities (gross and net of reinsurance), current year profits and
shareholders’ equity to changes in assumptions on key variables. The sensitivity of the insurance contract liability to changes in
assumptions will be dependent on whether the product is (or remains) in loss recognition after the assumptions change and whether
the change is made to an economic assumption. The Group’s sensitivity to changes in market risk (including interest rates) is shown in
Note 42, Risk Management.
Result of change in assumptions (1)
Mortality and morbidity on lump sum products – 10%
increase in total costs
Annuitant mortality – 20% increase in rate of future mortality
improvement
Morbidity on Income Protection – 10% increase in total cost
Expenses – 10% increase in maintenance expenses
assumption
(1) Represents impact of Australia only.
Gross (before reinsurance)
Net (after reinsurance)
Profit/(loss)
2008
$M
Policy
Liabilities
2008
$M
Profit/(loss)
2008
$M
Policy
Liabilities
2008
$M
Shareholders’
Equity
2008
$M
(14. 3)
(9. 1)
(9. 3)
(0. 4)
20. 4
13. 0
13. 3
0. 6
(8. 8)
(9. 1)
(6. 7)
(0. 4)
12. 6
13. 0
9. 5
0. 6
(8. 8)
(9. 1)
(6. 7)
(0. 4)
184 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 37 Life Insurance Business (continued)
Life Insurance Contract Liabilities
Life Investment Contract Liabilities
Investment contracts include unit linked contracts and term
certain annuities. They consist of a financial instrument, which is
measured at fair value, and a management services element.
For unit linked contracts, the resulting liability to policyholders is
closely linked to the performance and the value of the assets
(after tax) that support those liabilities. The fair value of such
liabilities is the same as the fair value of those assets, after
allowing for tax.
Appropriately qualified actuaries have been appointed for each
life insurance entity and they have reviewed and satisfied
themselves as to the accuracy of the contract liabilities included
in this financial report, including compliance with the regulations
of the Life Insurance Act (Life Act) 1995 where appropriate.
Details are set out in the various statutory returns of these life
insurance entities.
Components of Life Insurance Contract Liabilities
Future policy benefits (1)
Future bonuses
Future expenses
Future shareholder profit margins
Future shareholder tax on profit margins
Future charges for acquisition expenses
Balance of future premiums
Provisions for bonuses not allocated to participating policyholders
Total net life insurance contract liabilities
(1) Including bonuses credited to policyholders in prior years.
Life Insurance Contracts
2008
$M
7,235
1,182
2,472
1,611
284
(581)
(8,330)
104
3,977
2007
$M
6,962
1,301
2,216
1,430
225
(507)
(7,096)
112
4,643
Taxation
Actuarial Methods and Assumptions
Taxation has been allowed for in the determination of policy
liabilities in accordance with the relevant legislation applicable in
each market.
Insurance contract policy liabilities have been calculated in
accordance with AASB 1038 (Life Insurance Contracts) and the
Margin on Services (“MoS”) methodology as set out in
Prudential Standard LPS 1.04 – Valuation of Policy Liabilities
(“LPS 1.04”) issued by APRA. The principal methods and profit
carriers used for particular product groups were as follows:
Product Type
Individual
Conventional
Investment account
Lump sum risk
Income stream risk
Lifetime annuities
Group
Investment account
Lump sum risk
Income stream risk
Method
Projection
Projection
Projection
Projection
Projection
Profit Carrier
Bonuses or expected claim payment
Bonuses or funds under management
Premiums/expected claim payment
Expected claim payments
Annuity payments
Projection
Accumulation/Projection
Accumulation/Projection
Bonuses or funds under management
Expected claim payments
Expected claim payments
The “Projection Method” measures the present values of
estimated future policy cash flows to calculate policy liabilities.
income,
The policy cash
premiums, expenses, redemptions and benefit payments.
incorporate
investment
flows
Bonuses are amounts added, at the discretion of the life insurer,
to the benefits currently payable under Participating Business.
Under the Life Act, bonuses are a distribution to policyholders of
profits and may take a number of forms including reversionary
bonuses, interest credits and terminal bonuses (payable on the
termination of the policy).
Commonwealth Bank of Australia Annual Report 2008 185
Notes to the Financial Statements
Note 37 Life Insurance Business (continued)
Actuarial Assumptions
Set out below is a summary of the material assumptions used in the calculation of policy liabilities.
Discount Rates
Discount rates are used to discount future cash flows in the
determination of policy liabilities. Where insurance contract
benefits are linked to the performance of the underlying assets,
the discount rates are based on the expected earnings rate on
the assets held (Traditional and Investment Account contracts).
For all other insurance contracts, the discount rates are based
on risk free rates of return. Allowance is made for taxation where
relevant and for the nature and term of the liabilities.
Class of Business (1)
Traditional – ordinary business (after tax)
Traditional – superannuation business (after tax)
Annuity – term and lifetime (exempt from tax)
Term insurance – (before tax)
Income protection business (before tax)
Investment account – ordinary (after tax)
Investment account – superannuation (after tax)
Investment account – annuities (exempt from tax)
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.
June 2008
Rate Range %
4. 52 – 6. 74
5. 48 – 8. 24
6. 31 – 8. 17
6. 44 – 7. 25
6. 44 – 7. 25
4. 79 – 5. 35
5. 83 – 6. 52
6. 79 – 7. 53
June 2007
Rate Range %
4. 38 – 6. 34
5. 32 – 7. 75
6. 52 – 7. 09
6. 25 – 6. 46
6. 25 – 6. 46
4. 55
5. 53
6. 46
(1) For New Zealand, investment earning rates assumed were 3.9% to 5.6% net of tax.
Bonuses
Taxation
The taxation basis and rates assumed vary by market and
product type. There has been no significant change to the
taxation basis.
Voluntary Discontinuance
Discontinuance rates are based on recent company and industry
experience and vary by market, product, age and duration
inforce. Overall discontinuance rates have been reduced.
Surrender Values
Current surrender value bases are assumed to apply in the
future. There have been no significant changes to these bases.
Mortality and Morbidity
Rates vary by sex, age, product type and smoker status. Rates
are based on standard mortality tables applicable to each
market e.g. IA95-97 in Australia for risk, IM/IF80 for annuities,
adjusted for recent Company experience where appropriate.
There has been no significant change to mortality assumptions.
Claim termination assumptions on disability income business
have been reduced and incidence assumptions on trauma
business have been increased to reflect recent experience.
The valuation assumes that the long term supportable bonuses
will be paid, which is in line with company bonus philosophy.
Favourable investment performance over recent years has led
to increases in long term supportable bonus rates.
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.
To be consistent with other legal entities within the Group, from
1 July 2008, Group overheads will no longer be allocated to the
life company and accordingly, no allowance
for Group
overheads
the expense assumptions. For
participating businesses, expenses continue on the previous
charging basis with adjustments for actual experience, and are
inflation each year.
assumed
Maintenance expenses have increased on some products.
line with
increase
included
to
in
in
is
Investment Management Expenses
Investment management expense assumptions vary by asset
classes and are based on investment fees as set out in Fund
Management Agreements. There has been no significant
change to overall investment fees.
Inflation
The inflation assumption is consistent with the investment
earning assumptions.
Benefit Indexation
The indexation rates are based on an analysis of past
experience and estimated long term inflation and vary by
business and product type. There have been no significant
changes to these assumptions.
186 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 37 Life Insurance Business (continued)
Impact of changes in assumptions
The following table shows that the impacts of changes in assumptions from 30 June 2007 to 30 June 2008 in respect of life insurance
contracts:
Assumption change (1)
Base results (2008 results using 2007 non-economic assumptions)
Mortality and morbidity
Discontinuance rates
Maintenance expenses
Other assumption changes
Total future profit margins/life insurance contract
(1) Relates to Australian profit assumptions only
The policy liabilities for life insurance contracts are calculated in
a way that allows for the systematic release of planned profit
margins as services are provided to policyholders and premiums
are received. Where sufficient planned margins exist, this
method allows for the absorption of changes to assumptions
(excluding the discount rate) into the future profit margin,
resulting in no change to the contract liability in the current
period. Where the assumption changes result in the level of
planned profit margins being exhausted, the resulting losses are
recognised during the year via a change in the contract liability.
Where a change is made to the discount rate or related
economic assumptions, the impact is not absorbed into planned
profit margins and the level of contract liability will change.
These outcomes of the Margin on Services methodology are
reflected in the above table.
Changes in
future profit
margins $M
880
(67)
95
4
(1)
911
Changes in
life insurance
contract
liabilities $M
3,040
-
-
(2)
-
3,038
Impact of changes in assumptions
Assumption changes on Australian business increased profit
margins by $31 million (from $880 million to $911 million).
Changes to future claims assumptions on risk business reduced
margins by $67 million, mainly from: increases to trauma claims
assumptions, reductions in disability income claims recovery
assumptions and increases to masterfund claims assumptions.
Reductions in discontinuance assumptions (mainly on retail risk
business) increased future profit margins by $95 million.
Increases to maintenance expense assumptions reduced profit
margins but were broadly offset by the impact of removing
Group overheads from future expense assumptions.
Commonwealth Bank of Australia Annual Report 2008 187
Notes to the Financial Statements
Note 37 Life Insurance Business (continued)
Risk Management Policies and Procedures
The financial condition and operating results of the Life
Insurance Business in the Group are affected by a number of
key financial and non-financial risks. The objectives and policies
in respect of managing these risks are set out below.
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 are
greater than the best estimate assumptions used to determine
the policy liabilities 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.
identify potential
Insurance risk is controlled by ensuring underwriting standards
adequately
in
accordance with policy wordings, 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 is reviewed annually.
risk, managing claims
Terms and Conditions of Insurance Contracts
The nature of the terms of the insurance contracts written is
such that certain external variables can be identified on which
related cash flows for claim payments depend. The tables
below provide an overview of the key variables upon which the
related cash flows are dependent.
Nature of compensation for
claims
Benefits, defined by the insurance
contracts, are determined by the
contract. They are not directly
affected by the performance of
underlying assets or the
performance of the contracts as a
whole.
Key variables that affect the
timing and uncertainty of
future cash flows
Mortality
Morbidity
Discontinuance rates
Expenses
Benefits arising from the
discretionary participation feature
are based on the performance of a
specified pool of contracts or a
specified type of contract.
Market earnings rates
Mortality
Discontinuance rates
Expenses
Managed Assets and Fiduciary Activities
Arrangements are in place to ensure that asset management
and other
fiduciary activities of controlled entities are
independent of the life insurance funds and other activities of the
Group.
Disaggregated Information
in Australia and overseas. Under
Life insurance business is conducted through a number of life
insurance entities
the
Australian Life Insurance Act 1995, life insurance business is
conducted within one or more separate statutory funds, which
are distinguished from each other and from the shareholders’
funds. The Financial Statements of Australian life insurers
prepared in accordance with AASB 1038 (and which are lodged
with
regulators) show all major
components of the Financial Statements disaggregated between
the various life insurance statutory funds and their shareholder
funds and as well as between investment linked business and
those relating to non-investment linked businesses.
relevant Australian
the
Type of Contract
Detail of contract workings
Non-participating life insurance
contracts with guaranteed terms
(Term Life, Trauma, Disability and
Lifetime Annuities)
Guaranteed benefits paid on death,
ill health or survival that are fixed
and not at the discretion of the
issuer.
Life insurance contracts with
discretionary participating benefits
(e.g. endowment and whole of life)
These policies include a clearly
defined initial guaranteed sum
assured which is payable on death
or maturity. The guaranteed
amount is increased throughout the
duration of the policy by the
addition of regular annual bonuses
which, once added, are not
removed. Bonuses are also added
on some products at maturity.
Solvency
Australian Life Insurers
to support solvency
Australian life insurers are required to hold prudential reserves in
excess of the amount of policy liabilities. These reserves are
required
requirements and provide
protection against adverse experience. Prudential Standard LPS
2.04 – “Solvency Standard” prescribes a minimum solvency
requirement and the minimum level of assets required to be held
in each statutory fund. All controlled Australian insurance entities
complied with the solvency requirements of LPS 2.04. 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
is
local requirements. Further
available from the individual statutory returns of subsidiary life
insurers.
information
188 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 38 Remuneration of Auditors
a) Audit services
PricewaterhouseCoopers Australian firm
Related practice of PricewaterhouseCoopers Australian firm
Ernst & Young Australian firm
Related practice of Ernst & Young Australian firm
Other Auditors
Total remuneration for audit services
b) Non-audit services
Audit related services
PricewaterhouseCoopers Australian firm
Related practice of PricewaterhouseCoopers Australian firm
Ernst & Young Australian firm
Related practice of Ernst & Young Australian firm
Total remuneration for audit related services
Taxation services
PricewaterhouseCoopers Australian firm
Related practice of PricewaterhouseCoopers Australian firm
Total remuneration for tax related services
Advisory
Related practice of PricewaterhouseCoopers Australian firm
Ernst & Young Australian firm
Related practice of Ernst & Young Australian firm
Total remuneration for advisory services
Total remuneration for non-audit services
Total remuneration for audit and non-audit services
2008
$’000
9,711
4,330
-
-
-
14,041
3,066
695
-
-
3,761
909
1,102
2,011
123
-
-
123
5,895
19,936
Group
2007
$’000
-
-
10,179
2,189
90
12,458
-
-
1,750
770
2,520
-
-
-
-
239
17
256
2,776
15,234
2008
$’000
7,111
571
-
-
-
7,682
2,544
28
-
-
2,572
909
440
1,349
38
-
-
38
3,959
11,641
Bank
2007
$’000
-
-
8,652
1,861
-
10,513
-
-
-
16
16
-
-
-
-
-
-
-
16
10,529
(1) An additional amount of $5,877,085 was paid to PricewaterhouseCoopers (2007: $4,948,000 paid to Ernst & Young) by way of fees for entities not consolidated into
the Financial Statements. Of this amount $4,527,545 (2007: $4,532,000) relates to statutory audits.
All other fees principally include transaction support services
related to potential and actual acquisition and disposition
transactions and advice regarding implementation of revised
compliance and regulatory requirements.
The Audit Committee has considered the non-audit services
provided by PricewaterhouseCoopers and is satisfied that the
services and the level of fees are compatible with maintaining
auditors’ independence. All such services were approved by the
Audit Committee in accordance with pre-approved policies and
procedures.
Audit related fees principally include audit of the Group’s U.S.
disclosures for U.S. investors, 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.
Note 39 Commitments for Capital Expenditure Not Provided for
Not later than one year
Total commitments for capital expenditure not provided for
2008
$M
45
45
Group
2007
$M
34
34
2008
$M
41
41
Bank
2007
$M
27
27
Commonwealth Bank of Australia Annual Report 2008 189
Notes to the Financial Statements
Note 40 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
2008
$M
347
850
419
1,616
Group
2007
$M
313
778
264
1,355
2008
$M
314
756
357
1,427
2008
$M
2
3
2
7
Bank
2007
$M
284
697
236
1,217
Group
2007
$M
2
3
3
8
The Group as lessee has no purchase options over premises
occupied. In a small number of cases, the Group as lessee has
a right of first refusal if the premises are to be sold.
There are no restrictions imposed on the Group’s lease of space
other
lease
forming part of
arrangements for each specific premise.
the negotiated
those
than
Group’s share of lease commitments of associated entities due:
No later than one year
Later than one year but not later than five years
Later than five years
Total lease commitments – property, plant and equipment
Lease Arrangements
Leases entered into by the Group are for the purpose of
accommodating the business needs. Leases may be over retail,
commercial, industrial and residential premises and reflect the
needs of the occupying business and market conditions. All
leases are negotiated using either
internal or external
professional property resources acting for the Group.
Rental payments are determined in terms of relevant lease
requirements, usually reflecting market rentals.
190 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 41 Contingent Liabilities, Assets and Commitments
The Group is involved in a range of transactions that give rise to
contingent and/or future liabilities which are distinct from
transactions and other events that result in the recognition of
liabilities. These transactions meet the financing requirements of
customers and include endorsed bills of exchange, letters of
credit, guarantees and commitments to provide credit. For
further details on these items refer Note 1 (gg).
These transactions combine varying levels of credit, interest
rate, foreign exchange and liquidity risk. In accordance with
Bank policy, exposure to any of these transactions is not carried
at a level that would have a material adverse effect on the
financial condition of the Bank and its controlled entities.
Details of contingent liabilities and off-balance sheet business are:
Credit risk related instruments (1)
Guarantees
Standby letters of credit
Bill endorsements
Documentary letters of credit
Performance related contingents
Commitments to provide credit
Other commitments
Total credit risk related instruments
Face Value
2008
$M
2007
$M
2,802
142
61
53
1,870
97,304
8,846
111,078
2,851
335
84
87
2,046
85,431
10,888
101,722
Group
Credit Equivalent
2008
$M
2,802
142
61
53
1,870
83,499
672
89,099
2007
$M
2,851
335
84
17
1,023
16,888
960
22,158
(1) Differences between 2008 and 2007 credit equivalent amounts relate to adopting Basel II advanced internal ratings based approach for credit risk (previously
calculated in accordance with Basel I). See below for more detail.
Guarantees represent unconditional undertakings by the Group
to support the obligations of its customers to third parties.
Standby letters of credit are undertakings by the Group to pay,
against production of documents, an obligation in the event of a
default by a customer.
Bill endorsements relate to bills of exchange that have been
endorsed by the Group and represent liabilities in the event of
default by the acceptor and the drawer of the bill.
Documentary letters of credit represent an undertaking to pay or
accept drafts drawn by an overseas supplier of goods against
production of documents in the event of payment default by a
customer.
Performance related contingents involve undertakings by the
Group to pay third parties if a customer fails to fulfil a contractual
non-monetary obligation.
Commitments to provide credit include all obligations on the part
of the Group to provide credit facilities. These credit facilities are
both fixed and variable.
Fixed rate or fixed spread commitments extended to customers
that allow net settlement of the change in the value of the
commitment are written options and are recorded at fair value
(Refer to Note 11 Derivative Assets and Liabilities).
Other commitments include the Group’s obligations under sale
and repurchase agreements, outright forward purchases and
forward deposits and underwriting facilities. Other commitments
also include obligations not otherwise disclosed above to extend
credit, that are irrevocable because they cannot be withdrawn at
the discretion of the Bank without the risk of incurring significant
penalty or expense. In addition commitments to purchase or sell
loans are included in other commitments.
transactions are categorised and credit equivalents
The
risk based
calculated under APRA guidelines
measurement of capital adequacy. The credit equivalent
amounts are a measure of the potential loss to the Group in the
event of non-performance by the counterparty.
the
for
Under Basel I 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, nature and certainty of the
contractual undertaking to provide the facility. The amounts
reflected assume that the amounts may be fully advanced. The
contractual amount of these instruments is the maximum
amount at risk if the customer fails to meet its obligations. The
risk is similar to the risk involved in extending loan facilities.
Under the Basel II advanced internal ratings approach for credit
risk, the credit equivalent amount is the face value of the
transaction, on the basis that at default the exposure is the
amount fully advanced. Only where approved by APRA may an
exposure less than the fully advanced amount be used as the
credit equivalent exposure.
As the potential loss depends on counterparty performance, the
Group utilises the same credit policies and assessment criteria
for off-balance sheet business as for on-balance sheet business
and if deemed necessary, collateral is obtained based on
management’s credit evaluation of the counterparty. If an event
has occurred that gives rise to a present obligation and it is
probable a loss will eventuate then provisions are raised.
Contingent Assets
The credit risk related contingent liabilities of $111,078 million
represent
(2007: $101,722 million) detailed above also
contingent assets of the Group, which may in the normal course
convert to loans and other assets of the Group.
Litigation
Neither the Bank nor any of its controlled entities are 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 Bank or any of its controlled entities. Where some loss is
probable and can be reliably estimated an appropriate provision
has been made.
Commonwealth Bank of Australia Annual Report 2008 191
Notes to the Financial Statements
Note 41 Contingent Liabilities, Assets and Commitments (continued)
Fiduciary Activities
The Group and its associated entities conduct investment management and other fiduciary activities as responsible entity, trustee,
custodian or manager for numerous 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:
2008
$M
2007
$M
133,980
20,632
8,959
10,389
173,960
115,954
20,036
11,349
9,918
157,257
In 2005, the Bank entered into lease agreements for a fully
refurbished existing building at 150 George Street Parramatta,
with Perpetual Nominees Limited (as a custodian for the
Colonial First State Commercial Property Trust) and a newly
constructed building at 101 George Street Parramatta, with
Commonwealth Custodial Services Limited, relating to the
provision of accommodation. Both buildings have an average
lease term of 10 years.
In 2000, the Bank entered into a long term agreement with
TCNZ Australia Pty Ltd for the provision of telecommunications
services. This agreement is due to expire in February 2009.
Failure to Settle Risk
The Bank is subject to a credit risk exposure in the event that
another financial institution fails to settle for its payments
clearing activities, in accordance with the regulations and
procedures of the following clearing systems of the Australian
Payments Clearing Association Limited: The Australian Paper
Clearing System (“Clearing Stream One”), The Bulk Electronic
Clearing System (“Clearing Stream Two”), The Consumer
Electronic Clearing System ("Clearing Stream Three") and the
High Value Clearing System (“Clearing Stream Four”, only if
operating in “bypass mode”). This credit risk exposure is
unquantifiable in advance, but is well understood, and is
extinguished upon settlement at 9am each business day.
Service Agreements
The maximum contingent liability for termination benefits in
respect of service agreements with the Chief Executive Officer
and other Group Key Management Personnel at 30 June 2008
was $13.6 million (2007: $5.1 million).
Funds Under Administration
Australia
United Kingdom
New Zealand
Asia
Total
Certain entities within the Group act as responsible entity or
investment schemes
trustee of virtually all managed
(“schemes”), wholesale and retail trusts (“trusts”) managed by
the Group in Australia, the 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 10)
where an entity within the Group may act as a trustee. Where
entities within the Group act as responsible entity of managed
investment schemes, obligations may exist under the relevant
constitutions whereby upon request from a scheme member, the
responsible entity has an obligation to redeem units from the
assets of those schemes. 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 2008. The Bank does
not provide a general guarantee of the performance or
obligations of its subsidiaries.
Long Term Contracts
In April 2008, the Bank signed agreements with SAP Australia
Pty Limited and Accenture Australia Limited for its Core Banking
Modernisation.
In December 2007, the Bank entered into separate agreements
with each of Tata Consultancy Services Ltd, HCL Technologies
Ltd and IBM Australia Ltd for the provision of application
software related services. As part of entering into these
contracts, the Bank terminated certain parts of the previous long
term agreement with EDS (Australia) Pty Ltd relating to
application software services. The remaining parts of the
contract with EDS (Australia) Pty Ltd - related to mainframe,
midrange, end user technology and cards-related services -
continue until 2012.
In November 2007, the Bank signed a lease agreement with
DPT Operator Pty Ltd and DPPT Operator Pty Ltd for
accommodating 5,000 employees. The lease term for Darling
Park Tower 1 at 201 Sussex Street is for a term of 12 years.
In July 2006, the Bank entered into a lease agreement with
Colonial First State Property Limited as trustee for both the Site
6 Homebush Bay Trust, and for the Site 7 Homebush Bay Trust
relating to the provision of accommodation. The development is
a campus style multi-building facility at Sydney Olympic Park to
accommodate around 3,500 employees. The average lease
term is 12 years.
192 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 41 Contingent Liabilities, Assets and Commitments (continued)
Collateral
The Group has entered into a range of transactions with counterparties which require lodgement of collateral subject to agreed market
valuation movement thresholds. Where these thresholds are exceeded, the Group may be required to either pledge assets to, or be
entiled to receive pledged assets from, the counterparty to secure these transactions. The assets pledged or received are primarily in
the form of cash and bonds.
The Group has the right to sell, repledge, or otherwise use collateral received from the pledgor, including any equity or right of
redemption by the pledgor.
Collateral held
Cash
Assets at fair value through Income Statement
Collateral held
No securities have been repledged.
2008
$M
1,055
2,532
3,587
Group
2007
$M
379
3,649
4,028
2008
$M
1,031
2,017
3,048
Bank
2007
$M
379
3,271
3,650
The Group has secured liabilities of $4,143 million (2007: $5,516 million). The table below sets out the assets pledged to secure these
liabilities.
Assets pledged
Cash
Assets at fair value through Income Statement (1)
Assets pledged
2008
$M
40
2,035
2,075
Group
2007
$M
2,069
3,537
5,606
2008
$M
40
2,027
2,067
Bank
2007
$M
2,069
3,525
5,594
Thereof can be repledged or resold by counterparty
1,435
3,525
1,427
3,525
(1) These balances include assets sold under repurchase agreements. The liabilities related to these repurchase agreements are disclosed in Note 23 Deposits and
Other Public Borrowings.
Commonwealth Bank of Australia Annual Report 2008 193
Credit Risk
Credit risk is the potential of loss arising from failure of a debtor
or counterparty to meet their contractual obligations. It arises
primarily in the Group’s 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 Group has clearly defined policies, procedures and
standards (approved and governed by the Risk Committee of
the Board) for the approval and management of credit risk.
The measurement of credit risk is based on an internal credit risk
rating system, which uses analytical tools to estimate expected
and unexpected loss for the credit portfolio.
This includes consideration of the probability of default (PD), the
exposure at default (EAD) and the loss given default (LGD).
Various risks are considered when calculating PD, EAD and
LGD. Considerations include the potential for default by a
borrower due to economic, management, industry, economic or
other risks and include the mitigating benefits of collateral.
The Group provides for credit impairment whenever there is
objective evidence that impairment exists and in amounts
adequate to cover assessed credit related losses. Credit losses
arise primarily from loans but also from other credit instruments
such as bank acceptances, contingent liabilities, guarantees and
other financial instruments and assets acquired through security
enforcement.
Further information on the Group’s credit risk management and
measurement is included in Note 15, Credit Risk Management.
Notes to the Financial Statements
Note 42 Risk Management
Risk Management
The Risk Committee of the Board oversees credit, market
(traded and non-traded), funding and liquidity, operational and
strategic business, business continuity, compliance and security
risks assumed by the Group in the course of carrying on its
business. Further information of the role and function of the Risk
Committee is discussed in the Corporate Governance section of
this report.
The Group has in place an integrated risk management
framework to identify, assess, manage and report risks and risk
adjusted returns on a consistent and reliable basis. This
framework requires each Business Unit to manage the outcome
of its risk-taking activities, and enjoy the resulting risk adjusted
returns. Risk management professionals employed in each
Business Unit measure risks and provide advice on what risks
might be taken for better returns. These risk professionals report
to the Group Chief Risk Officer, who in turn reports to the CEO
and has direct reporting requirements to the Risk Committee of
the Board.
Independent review of the risk management framework is
carried out through Group Audit.
Basel II
On 10 December 2007, the Group was one of the first major
banking groups in Australia to gain approval from the Australian
Prudential Regulation Authority (APRA) to use the advanced
internal ratings-based approach for credit risk and the advanced
measurement approach for operational risk for the purposes of
assessing risk weighted assets and regulatory capital. These
approvals took effect from 1 January 2008.
APRA gave approval to the Group to use an internal model
approach for assessing capital required for interest rate risk in
the banking book on 30 June 2008. This approval took effect
from 1 July 2008.
The measurement of market risk for traded assets remains
unchanged from the original Basel I approach.
Further detail on the Group’s assessment of regulatory capital
required under the new Basel II framework is discussed in Note
35 Capital Adequacy.
APRA has requested that the Group defer the release of its
Basel II Pillar 3 disclosures until the last quarter of 2008, when
the other major Australian banks release their disclosures, to aid
in comparative analysis.
The following sections describe the components of the Group’s
integrated risk management framework.
194 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 42 Risk Management (continued)
Traded and Non-traded Market Risk
For the purposes of market risk management, the Group makes
a distinction between traded and non-traded market risks.
Traded market risks arise from the Group’s trading book
activities within the PBS, Institutional Banking and Global
Markets business.
The predominant non-traded market risk is interest rate risk in
the Bank’s balance sheet. Other non-traded market risks are
liquidity risk, funding risk, structural foreign exchange risk arising
from capital investments in offshore operations, non-traded
equity price risk, market risk arising from the insurance business,
and residual value risk. These risks are considered separately
below.
Market Risk Measurement
The Group uses Value-at-Risk (VaR) as one of the measures of
traded and non-traded market risk. VaR measures potential loss
using historically observed market volatility and correlation
between different markets. The measured VaR for traded
market risk uses two years of daily market movements. The
same approach is used to measure VaR for non-traded risk
based on 6 years of daily movements.
VaR is modelled at a 97.5% confidence level over a 1-day
holding period for trading book positions and over a 20-day
holding period for banking book interest rate risk and insurance
business market risk.
Because VaR is not an estimate of the maximum economic loss
that the Group could experience from an extreme market event,
management uses stress testing to measure the potential for
economic loss at significantly higher confidence levels than
97.5%. Management then uses these results in decisions made
to manage the economic impact on market risk positions.
The following table provides a summary of VaR, where
applicable, for all market risks across the Group.
Total Market Risk
VaR (1-day 97.5%
confidence)
Traded Market Risk
Non-Traded Interest
Rate Risk
Structural FX Risk (1)
Non-Traded Equity
Price Risk (1)
Non-Traded Insurance
Market Risk
Residual Value Risk (1)
Defined Benefit
Superannuation Risk (1)
Average
VaR
June
2008
$M
Average
VaR
Dec
2007
$M
Average
VaR
June
2007
$M
Average
VaR
Dec
2006
$M
10. 85
9. 12
7. 98
10. 33
28. 50
n/a
15. 65
n/a
17. 20
n/a
10. 38
n/a
n/a
n/a
n/a
n/a
9. 30
n/a
8. 45
n/a
8. 44
n/a
8. 77
n/a
n/a
n/a
n/a
n/a
(1) Certain types of risk exposure are not suitable for VaR measurement.
Traded Market Risk
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:
• Provide
risk management products and services
to
customers;
• Efficiently assist in managing the Group’s own market risks;
and
• Conduct profitable trading within a controlled framework,
leveraging off the Group’s market presence and expertise.
The Group maintains access to markets by quoting bid and offer
prices with other market makers and carries an inventory of
treasury, capital market and risk management instruments,
including a broad range of securities and derivatives.
interest
The Group is a participant in all major markets across foreign
exchange and
rate products, debt, equity and
commodities products as required to provide treasury, capital
markets and
institutional,
risk management services
corporate, middle market and retail customers.
to
Income is earned from spreads achieved through market making
and from taking market risk. All trading positions are valued at
fair value and taken to profit and loss on a mark to market basis.
Market liquidity risk is controlled by concentrating trading activity
in highly liquid markets.
Trading assets at fair value through Income Statement are
detailed in Note 10. Trading liabilities at fair value through
Income Statement are in Note 25. Note 2 details the income
contribution of trading activities to the income of the Group.
Traded market risk is managed under a market risk policy and
limit structure approved by the Risk Committee of the Board.
Risk is monitored by an independent Market Risk Management
function.
Commonwealth Bank of Australia Annual Report 2008 195
Notes to the Financial Statements
Note 42 Risk Management (continued)
The following table provides a summary of VaR for the trading
book of the Group. The VaR for ASB is shown separately; all
other data relates to the Bank and is split by risk type.
The figures in the following table represent the potential
unfavourable change to the Bank’s net interest earnings during
the year based on a 100 basis point parallel rate shock
(increase) and the expected unfavourable net change in price of
assets and liabilities held for purposes other than trading.
Traded Market
Risk VaR (1-day
97.5%
confidence)
Risk Type
Interest rate risk
Exchange rate risk
Implied volatility risk
Equities risk
Commodities risk
Credit spread risk (1)
Diversification
benefit (1)
Total general
market risk
Undiversified risk (1)
ASB Bank
Total
Average
VaR
June
2008
$M
Average
VaR
Dec
2007
$M
Average
VaR
June
2007
$M
Average
VaR
Dec
2006
$M
3. 88
1. 34
1. 04
0. 45
0. 92
4. 65
3. 92
0. 99
0. 86
0. 35
0. 74
4. 00
3. 61
0. 78
0. 69
0. 15
0. 65
4. 22
3. 08
0. 54
0. 57
0. 14
0. 71
-
(5. 62)
(4. 80)
(4. 17)
(1. 73)
6. 66
3. 08
1. 11
10. 85
6. 06
2. 33
0. 73
9. 12
5. 93
1. 60
0. 45
7. 98
3. 31
6. 75
0. 27
10. 33
(1) In the half year to 30 June 2007, the Group implemented a new methodology
for the measurement of credit spread VaR. The new methodology now captures
the diversification benefit between credit spread risk and other risk types. Prior
periods’ credit spread risk are reported in undiversified risk.
Non-Traded Market Risk
Non-traded market risk activities are governed by the Group
market risk framework approved by the Risk Committee of the
Board. Implementation of the policy, procedures and limits for
the Bank is the responsibility of the Group Executive of the
associated Business Unit with senior management oversight by
the Group’s Asset and Liability Committee.
Independent
management of the non-traded market risk activities of offshore
banking subsidiaries is delegated to the CEO of each entity with
oversight by the local Asset and Liability Committee.
Interest Rate Risk in the Balance Sheet
Interest rate risk in the Bank’s Balance Sheet is the risk of
adverse changes in expected net interest earnings in current
and future years from changes in interest rates on mismatched
assets and liabilities in the banking book. The objective is to
manage interest rate risk to achieve stable and sustainable net
interest earnings in the long term.
The Group measures and manages Balance Sheet interest rate
risk in two ways:
(a) Next 12 months’ earnings
The risk to net interest earnings over the next 12 months from
changes in interest rates is measured on a monthly basis. Risk
is measured assuming an instantaneous 100 basis point parallel
movement in interest rates across the yield curve. 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 Group) are measured by taking into account both the
manner in which the products have repriced in the past as well
as the expected change in price based on the current
competitive market environment.
196 Commonwealth Bank of Australia Annual Report 2008
Net Interest
Earnings At Risk
Average monthly
exposure
High monthly
exposure
Low monthly
exposure
30/06/08
$M
28. 1
15. 6
70. 0
24. 3
0. 4
3. 9
AUD
NZD
AUD
NZD
AUD
NZD
31/12/07
$M
45. 0
6. 9
57. 5
12. 9
29. 0
3. 1
30/06/07
$M
67. 7
4. 4
101. 3
6. 1
44. 0
1. 9
31/12/06
$M
75. 4
6. 7
122. 1
8. 2
27. 6
5. 0
(b) Economic Value
A 20-day 97.5% VaR measure is used to capture the economic
impact of adverse changes in interest rates on all banking book
assets and liabilities. 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 Group are based on the expected repricing characteristics of
those products.
The figures in the following table represent the net present value
of the expected change in the Group’s future earnings in all
future periods for the remaining term of all existing assets and
liabilities.
Non-Traded
Interest Rate VaR
(20 day 97.5%
confidence) (1) (2)
Average
VaR
June
2008
$M
Average
VaR
Dec
2007
$M
Average
VaR
June
2007
$M
Average
VaR
Dec
2006
$M
AUD Interest rate risk
NZD Interest rate risk
123. 6
3. 8
65. 8
4. 2
74. 2
2. 7
43. 9
2. 5
(1) ASB data (expressed in NZD) is for the month end date.
(2) VaR is only for entities that have material risk exposure.
Structural Foreign Exchange Risk
Foreign exchange risk is the risk to earnings and value caused
by a change in foreign exchange rates. Structural, Balance
Sheet, foreign exchange risk is managed in accordance with
principles approved by the Risk Committee of the Board.
Hedging strategies are based on the source of the funds and the
expected life of the investments. The Group principally hedges
Balance Sheet foreign exchange risks except for long term
investments in offshore branches and subsidiaries. The Group’s
only significant structural foreign exchange exposure is within
ASB.
Non-traded Equity Price Risk
The Group retains non-traded equity price risk through strategic
investments and business development activities in divisions
including PBS, IFS and Wealth Management. This activity is
subject to governance arrangements approved by the Risk
Committee of the Board, and is monitored on a centralised basis
within the Market Risk Management function. The impact of a
10% change in fair value on the total non-traded equity price risk
exposure at 30 June 2008 is $180 million.
Notes to the Financial Statements
Note 42 Risk Management (continued)
Residual Value Risk
rail, aircraft, marine
The Group takes residual value risk on assets such as industrial
and mining equipment,
technology,
healthcare and other equipment. A residual value guarantee
exposes the business to the movement in second hand asset
prices. The residual value risk within the Group is controlled
through a risk management framework approved by the Risk
Committee of the Board. The framework includes asset,
geographic and maturity concentration limits and stress testing
independent Market Risk
the
which
Management function.
is performed by
Market Risk in Insurance Businesses
A significant component of the Group's non-traded market risk
activities result from the holding of assets related to the
insurance business.
All financial assets within the life statutory funds directly support
either the Group's life insurance or life investment contracts. The
Group retains market risk on contracts with guaranteed liabilities.
The Group manages this risk by the monthly monitoring and
rebalancing of assets to contract liabilities. A small portion of
financial assets held within the insurance business relate to
shareholder funds; the majority of these are debt securities for
which the interest rate risk is included within the Group's
measurement of interest rate risk.
In addition, 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 easily hedged through matching assets. Wherever possible,
the Group segregates policyholders’ funds from Shareholders’
funds and sets investment mandates that are appropriate for
each.
Market risk arises when market movements reduce funds under
administration and resulting fee income on investment-linked
policies. Market risk also arises on returns obtained from
investing life company Shareholders’ capital.
As at 30 June 2008, Shareholders’ funds in the life insurance
business are invested 78% in income assets (cash and fixed
interest) and 22% in growth assets (shares and property) with
the asset mix varying from company to company. Policyholder
funds are invested to meet the objectives of the policies in force.
The ability to match asset characteristics with policy obligations
may be constrained by a number of factors including regulatory
constraints, the lack of suitable investments as well as by the
nature of the policy liabilities themselves.
A
for
large proportion of policyholders’ assets are held
investment linked policies where the policyholder takes the risk
of falls in the market value of the assets.
A smaller proportion of policyholders’ assets are held to support
policies where life companies have guaranteed either the
principal
investment return (“guaranteed
policies’”) where investment mandates for these classes of
policies emphasise lower volatility assets such as cash and fixed
interest.
invested or
the
As at 30 June 2008, if credit spreads were to widen by 50 basis
points, the impact on the Australian life insurance business
would have been a loss of approximately $24 million before tax.
Liquidity risk is not a significant issue in life insurance
companies. The life insurance companies in the Group hold
substantial investments in highly liquid assets such as listed
shares, government bonds and bank deposits. Furthermore,
processing time for claims and redemptions enables each
company to forecast and manage its liquidity needs.
Further information on the insurance business can be found in
Note 37, Life Insurance Business.
Commonwealth Bank of Australia Annual Report 2008 197
Notes to the Financial Statements
Note 42 Risk Management (continued)
The following table represents the Group’s contractual interest
rate sensitivity for repricing mismatches as at 30 June 2008 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
Australia
Assets
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through Income
Statement:
Trading
Insurance
Other
Derivative assets
Available-for-sale investments
Loans, advances and other
receivables
Bank acceptances of customers
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Assets held for sale
Total assets
Liabilities
Deposits and other public
borrowings
Payables due to other financial
institutions
Liabilities at fair value through
Income Statement
Derivative liabilities
Bank acceptances
Current tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Managed funds units on issue
Bills payable and other liabilities
Loan capital
Total liabilities
Shareholders’ equity
Share capital and other equity
Minority interests
Total Shareholders’ equity
Derivatives
Net mismatch
Cumulative mismatch
Balance
Sheet
Total
$M
0 to 1
month
$M
1 to 3
months
$M
3 to 6
months
$M
6 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Not
Interest
Bearing
$M
Weighted
Average
Rate
%
Repricing Period at 30 June 2008
4,841
4,042
-
4,880
4,097
461
18,457
18,676
295
16,339
7,164
305,475
18,278
1,449
906
7,618
33
5,402
412
410,225
18,210
1,503
274
-
2,131
215,054
-
-
-
-
-
-
-
245,311
70
1,301
-
-
466
14,716
-
-
-
-
-
-
-
17,014
-
91
-
42
-
-
412
7,660
-
-
-
-
-
-
-
8,205
-
-
37
465
-
-
-
15,069
-
-
-
-
-
-
-
15,571
-
-
-
-
799
6. 74
231
3. 90
112
2,961
21
-
3,584
50,434
-
-
-
-
-
-
-
57,112
28
2,769
-
-
251
3,801
-
-
-
-
-
-
140
6,989
-
9,635
-
16,339
320
(1,259)
18,278
1,449
906
7,618
33
5,402
272
60,023
7. 81
7. 86
7. 98
-
8. 85
7. 83
-
-
-
-
-
-
10. 00
(3)
233,934
162,993
38,687
15,268
7,817
3,005
22
6,142
6. 81
4,390
4,146
240
-
4
-
-
-
5. 33
2,915
16,893
18,278
696
1,129
16,594
67,119
1,109
6,532
369,589
9,085
378,674
24,542
1
24,543
(2)
(2)
(2)
1,871
-
-
-
-
-
22,722
-
-
191,732
2,261
193,993
15
-
-
-
-
-
12,559
-
-
51,501
3,970
55,471
18
-
-
-
-
-
4,266
-
-
19,552
-
19,552
56
-
-
-
-
-
5,195
-
-
13,072
300
13,372
698
-
-
-
-
-
20,969
-
-
24,672
1,385
26,057
257
-
-
-
-
-
1,408
-
-
1,687
1,169
2,856
-
16,893
18,278
696
1,129
16,594(1)
-
1,109
6,532
67,373
-
67,373
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
24,542
1
24,543
(22,559)
(4,501)
7,999
17,976
2,251
(1,166)
-
28,759
28,759
(42,958)
(14,199)
(3,348)
(17,547)
20,175
2,628
33,306
35,934
2,967
38,901
(31,893)
7,008
6. 86
-
-
-
-
-
5. 92
-
-
5. 95
(3)
-
-
(3)
(3)
(3)
(1) Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates, particularly with
investment linked policies.
(2) No Balance Sheet amount applicable.
(3) No rate applicable.
198 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 42 Risk Management (continued)
Interest Rate Risk Sensitivity
Repricing Period at 30 June 2008
Balance
Sheet
Total
$M
0 to 1
month
$M
1 to 3
months
$M
3 to 6
months
$M
6 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Not
Interest
Bearing
$M
Weighted
Average
Rate
%
Overseas
Assets
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through Income
Statement:
Trading
Insurance
Other
Derivative assets
Available-for-sale investments
Loans, advances and other
receivables
Property, plant and equipment
Intangible assets
Deferred tax assets
Other assets
Assets held for sale
Total assets
Liabilities
Deposits and other public
borrowings
Payables due to other financial
institutions
Liabilities at fair value through
Income Statement
Derivative liabilities
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Bills payable and other liabilities
Loan capital
Total liabilities
Shareholders’ equity
Share capital and other equity
Minority interests
Total Shareholders’ equity
Derivatives
Net mismatch
Cumulative mismatch
12,611
2,648
72
266
45
1,901
18,698
992
80,287
2,474
82,761
1,077
517
1,594
(2)
(2)
(2)
2,895
2,764
40
-
2,104
1,249
467
216
3,219
1,974
2,971
1,893
4,324
55,807
191
640
43
1,090
196
77,347
569
644
1,079
-
1,061
15,312
-
-
-
-
-
22,678
1,676
12
793
-
165
7,485
-
-
-
-
-
10,638
166
17
87
-
1,269
5,655
-
-
-
-
-
7,410
3
47
5
5
291
-
1,226
6,610
-
-
-
-
-
8,187
-
-
667
25
701
-
567
19,667
-
-
-
-
-
21,627
-
-
88
4. 19
125
3. 55
134
167
-
-
3
1,165
-
-
-
-
51
1,520
2
1,104
20
1,893
33
(87)
191
640
43
1,090
145
5,287
7. 80
3. 41
5. 28
-
4. 34
8. 16
-
-
-
-
10. 00
(3)
29,772
16,057
5,713
3,353
2,487
676
18
1,468
5. 85
13,282
11,226
1,740
315
1
-
-
3. 00
1,635
-
-
-
-
-
6,436
-
35,354
1,442
36,796
4,218
-
-
-
-
-
9,723
-
21,394
-
21,394
-
-
-
-
-
-
2,768
-
-
-
-
-
1,031
-
7,467
-
7,467
-
-
-
1,262
-
-
-
-
-
858
-
4,608
-
4,608
-
-
-
2,712
-
-
-
-
-
498
-
3,886
455
4,341
-
-
-
-
16
-
-
-
-
-
152
-
186
577
763
-
2,648
72
266
45
1,901(1)
-
992
7,392
-
7,392
-
-
-
1,077
517
1,594
6. 34
-
-
-
-
-
3. 69
-
7. 98
(3)
-
-
(3)
(3)
(3)
2,662
13,353
(1,604)
(599)
(13,543)
(269)
-
(11,456)
(11,456)
2,597
(8,859)
(1,661)
(10,520)
2,980
(7,540)
3,743
(3,797)
488
(3,309)
(3,699)
(7,008)
(1) Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates, particularly with
investment linked policies.
(2) No Balance Sheet amount applicable.
(3) No rate applicable.
Commonwealth Bank of Australia Annual Report 2008 199
Notes to the Financial Statements
Note 42 Risk Management (continued)
Interest Rate Risk Sensitivity (4)
Repricing Period at 30 June 2007
Balance
Sheet
Total
$M
0 to 1
month
$M
1 to 3
months
$M
3 to 6
months
$M
6 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Not
Interest
Bearing
$M
Weighted
Average
Rate
%
Australia
Assets
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through Income
Statement:
Trading
Insurance
Other
Derivative assets
Available-for-sale investments
Loans, advances and other
receivables
Bank acceptances of customers
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Assets held for sale
Total assets
Liabilities
Deposits and other public
borrowings
Payables due to other financial
institutions
Liabilities at fair value through
Income Statement
Derivative liabilities
Bank acceptances
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Managed funds units on issue
Bills payable and other liabilities
Loan capital
Total liabilities
Shareholders’ equity
Share capital and other equity
Minority interests
Total Shareholders’ equity
Derivatives
Net mismatch
Cumulative mismatch
5,984
5,173
2
2,809
2,375
288
19,011
20,820
423
8,974
5,445
262,251
18,721
1,229
836
7,254
146
5,982
303
360,188
18,935
-
401
-
569
170,149
-
-
-
-
-
-
-
197,602
50
2,801
-
-
392
15,785
-
-
-
-
-
-
-
19,318
-
33
-
112
-
-
348
6,930
-
-
-
-
-
-
-
7,423
-
-
-
169
-
-
392
14,298
-
-
-
-
-
-
-
14,859
-
-
-
-
809
5. 44
113
4. 78
-
3,403
22
-
2,273
52,217
-
-
-
-
-
-
-
57,915
-
3,492
-
-
683
3,813
-
-
-
-
-
-
-
7,988
26
10,843
-
8,974
788
(941)
18,721
1,229
836
7,254
146
5,982
303
55,083
5. 64
6. 94
6. 42
-
6. 44
7. 43
-
-
-
-
-
-
-
(3)
190,718
131,732
23,700
14,529
11,927
1,644
524
6,662
5. 71
4,208
3,681
120
111
296
-
-
-
5. 59
4,133
13,140
18,721
866
556
842
19,079
70,944
310
7,295
330,812
9,195
340,007
23,536
7
23,543
(2)
(2)
(2)
3,856
-
-
-
-
-
-
11,357
-
-
150,626
525
151,151
-
-
-
-
-
-
-
20,771
-
-
44,591
3,892
48,483
68
-
-
-
-
-
-
5,304
-
-
20,012
119
20,131
37
-
-
-
-
-
-
6,818
-
-
19,078
-
19,078
150
-
-
-
-
-
-
18,503
-
-
20,297
1,307
21,604
22
-
-
-
-
-
-
8,191
-
-
8,737
3,352
12,089
-
13,140
18,721
866
556
842
19,079(1)
-
310
7,295
67,471
-
67,471
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
23,536
7
23,543
13,671
(7,646)
(14,440)
12,238
(3,331)
(492)
-
60,122
60,122
(36,811)
23,311
(27,148)
(3,837)
8,019
4,182
32,980
37,162
(4,593)
32,569
(35,931)
(3,362)
6. 21
-
-
-
-
-
-
6. 33
-
-
5. 88
(3)
-
-
(3)
(3)
(3)
(1) Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates, particularly with
investment linked policies.
(2) No Balance Sheet amount applicable.
(3) No rate applicable.
(4) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
200 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 42 Risk Management (continued)
Interest Rate Risk Sensitivity (4)
Repricing Period at 30 June 2007
Balance
Sheet
Total
$M
0 to 1
month
$M
1 to 3
months
$M
3 to 6
months
$M
6 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Overseas
Assets
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through Income
Statement:
Trading
Insurance
Other
Derivative assets
Available-for-sale investments
Loans, advances and other
receivables
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Assets held for sale
Total assets
Liabilities
Deposits and other public
borrowings
Payables due to other financial
institutions
Liabilities at fair value through
Income Statement
Derivative liabilities
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Bills payable and other liabilities
Loan capital
Total liabilities
Shareholders’ equity
Share capital and other equity
Minority interests
Total Shareholders’ equity
Derivatives
Net mismatch
Cumulative mismatch
4,124
3,681
2,686
734
358
979
2,458
2,699
3,650
3,769
4,227
53,214
207
-
581
108
1,175
1,071
79,969
390
1,043
426
-
480
16,674
-
-
-
-
-
-
23,428
1,296
1
2,520
-
2,025
6,842
-
-
-
-
-
-
14,021
41
82
153
1
74
-
714
3,893
-
-
-
-
-
-
4,958
8
-
132
-
333
-
580
5,348
-
-
-
-
-
-
6,401
-
-
367
26
253
-
417
19,583
-
-
-
-
-
-
20,646
28,350
16,174
4,126
2,992
2,307
933
10,178
7,895
1,292
572
419
-
95
-
-
-
-
-
872
-
25,036
-
25,036
6,262
-
-
-
-
-
6,260
-
17,940
-
17,940
-
-
-
-
-
-
1,577
-
-
-
-
-
1,297
-
6,438
-
6,438
-
-
-
1,199
-
-
-
-
-
7,872
-
11,797
-
11,797
-
-
-
3,120
-
-
-
-
-
1,280
-
5,333
182
5,515
-
-
-
12,263
3,540
16
352
36
2,534
17,581
51
74,901
805
75,706
396
505
901
(2)
(2)
(2)
Not
Interest
Bearing
$M
Weighted
Average
Rate
%
36
6. 96
865
5. 21
-
1,556
21
3,769
3
(93)
207
-
581
108
1,175
765
8,993
7. 58
2. 33
7. 50
-
5. 39
7. 96
-
-
-
-
-
10. 00
(3)
1,818
6. 51
-
4. 75
-
3,540
16
352
36
2,534(1)
-
51
8,347
-
8,347
396
505
901
5. 69
-
-
-
-
-
5. 30
-
5. 73
(3)
-
-
(3)
(3)
(3)
-
26
120
72
23
-
8
967
-
-
-
-
-
306
1,522
-
-
10
-
-
-
-
-
-
-
10
623
633
-
-
-
(1,857)
19,777
32
(2,668)
(16,801)
1,517
(3,465)
(3,465)
15,858
12,393
(1,448)
10,945
(8,064)
2,881
(1,670)
1,211
2,406
3,617
(255)
3,362
(1) Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates, particularly with
investment linked policies.
(2) No Balance Sheet amount applicable.
(3) No rate applicable.
(4) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
Commonwealth Bank of Australia Annual Report 2008 201
Notes to the Financial Statements
Note 42 Risk Management (continued)
Liquidity and Funding Risk
Overview
Balance Sheet liquidity risk is the risk of being unable to meet
financial obligations as they fall due. The Group manages
liquidity requirements by currency and by geographical location
of its operations. Subsidiaries are also included in the Group’s
liquidity policy framework.
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 requirements are integrated into the Group’s liquidity
and funding policy with its aim to ensure the Group has a stable
diversified funding base without over-reliance on any one market
sector.
The Group’s liquidity and funding policies are designed to
ensure it will meet its obligations as and when they fall due, by
ensuring it is able to borrow funds on an unsecured basis, or has
sufficient quality assets to borrow against on a secured basis, or
has sufficient quality liquid assets to sell to raise immediate
funds without adversely affecting the Group’s net asset value.
The Group’s funding policies and risk management framework
complement the Group’s liquidity policies by ensuring an optimal
liability structure to finance the Group’s businesses. The long
term stability and security of the Group’s funding is also
designed to protect its liquidity position in the event of a crisis
specific to the Group.
The Group’s liquidity policies are designed to ensure it maintains
sufficient cash balances and liquid asset holdings to meet its
obligations to customers, in both ordinary market conditions and
during periods of extreme stress. These policies are intended to
protect the value of the Group’s operations during periods of
unfavourable market conditions, such as have been experienced
since August 2007.
The Group’s funding policies are designed to achieve diversified
sources of funding by product, term, maturity date, investor type,
investor location, jurisdiction, currency and concentration, on a
cost-effective basis. This objective applies to the Group’s
wholesale and retail funding activities. The Group’s retail funding
base formed approximately 57% of its total funding requirements
as at 30 June 2008.
The Risk Management Framework for Liquidity and
Funding
The Group’s liquidity and funding policies are approved by the
Board and agreed with the Australian Prudential Regulation
Authority (“APRA”). The Group has an Asset and Liability
Committee whose charter includes reviewing the management
of assets and liabilities, reviewing liquidity and funding policies
and strategies, as well as regularly monitoring compliance with
those policies across the Group. The Group Treasury division
manages
in
accordance with the Group’s liquidity policy, including monitoring
and satisfying the liquidity needs of the Group and its
subsidiaries.
funding positions
liquidity and
the Group’s
Larger domestic subsidiaries, such as CBFC Limited and
subsidiaries within the Colonial Group, also apply their own
liquidity and funding methods to address their specific needs.
The Group’s New Zealand banking subsidiary, ASB Bank
Limited (“ASB”), manages its own domestic liquidity and funding
needs in accordance with its own liquidity policies and the
policies of the Group. ASB’s liquidity policy is also overseen by
the Reserve Bank of New Zealand.
202 Commonwealth Bank of Australia Annual Report 2008
The Group also has relatively small banking subsidiaries in
Indonesia and Fiji that manage their liquidity and funding on a
similar basis.
The Group’s Financial Services and Risk Management divisions
provide prudential oversight of the Group’s liquidity and funding
risk and manage the Group’s relationship with prudential
regulators.
Liquidity and Funding Policies and Management
The Group’s liquidity and funding policies provide that:
• Balance sheet assets that cannot be liquidated quickly are
funded with deposits or term borrowings that meet minimum
maturity requirements with appropriate liquidity buffers;
• Short and long term wholesale funding limits are established
and reviewed regularly based on surveys and analysis of
market capacity;
• A minimum level of assets are retained in highly liquid form;
• The level of liquid assets complies with crisis scenario
assumptions related to “worst case” wholesale and retail
market conditions; is adequate to meet known funding
obligations over certain timeframes; and are allocated across
Australian dollar and foreign currency denominated securities
in accordance with specific calculations;
• Certain levels of liquid assets are held to provide for the risk
of the Group’s committed but un-drawn lending obligations
being drawn by customers, as calculated based on draw
down estimates and forecasts; and
• The Group maintains certain
levels of
liquid assets
categories within its liquid assets portfolio. The first category
includes negotiable certificates of deposit of Australian
banks, bank bills, Commonwealth of Australia Government
and Australian state and semi-government bonds and supra-
national bonds eligible for repurchase by the Reserve Bank
of Australia (“RBA”) at any time. The second category is AAA
and A-1+ rated Australian residential mortgage backed
securities that meet certain minimum requirements.
At 30 June 2008 around 98% of the Group’s Australian dollar
liquid assets qualified for repurchase by the RBA at any time.
The Group’s key liquidity tools include:
• A liquidity management model similar to a “cash flow ladder”
or “maturity gap analysis”, that allows forecasting of liquidity
needs on a daily basis;
• An additional liquidity management model that implements
the agreed prudential liquidity policies. This model is
calibrated with a series of “worst case” liquidity crisis
scenarios, incorporating both systemic and “name” crisis
assumptions, such that the Group will have sufficient liquid
assets available to ensure it meets all of its obligations as
and when they fall due;
• The RBA’s repurchase agreement facilities provide the
Group with the ability to borrow funds on a secured basis,
even when normal funding markets are unavailable; and
• The Group’s various short term funding programmes are
supplemented by the Interbank Deposit Agreement between
the four major Australian banks. This agreement is similar to
a standby liquidity facility that allows the Group to access
funding in various crisis circumstances.
Notes to the Financial Statements
Note 42 Risk Management (continued)
Recent Market Environment
Although the cost of liquidity and funding has increased
significantly since July 2007 due to unfavourable market
conditions, the Group’s liquidity and funding policies have
remained unchanged throughout this period, as they have
proven to be effective.
The Group has managed its liquidity to avoid concentrations
such as dependence on single sources of funding and has
taken advantage of its diversified funding base and significant
funding capacity in the global unsecured debt markets.
In October 2007, the RBA expanded the range of eligible
securities to include highly rated Australian residential mortgage
backed securitisation utilising its own prime mortgages that
could provide up to $12.25 billion of additional funding from the
RBA should markets significantly deteriorate.
Details of the Group’s regulatory capital position and capital
management activities are disclosed in Note 35 Capital
Adequacy.
Liquidity and Funding Risk (continued)
The Group’s key funding tools include:
•
•
•
Its consumer, small business and institutional deposit base;
transaction accounts,
Its consumer retail funding base includes a wide range of
term
retail
deposits and retirement style accounts
individual
consumers; and
investment accounts,
for
international and domestic
funding
Its wholesale
programmes which includes its: Australian dollar Negotiable
Certificates of Deposit programme; Transferable Certificate
of Deposit programme; Australian dollar bank bill
programme; Australian, U.S. and Euro Commercial Paper
programmes; U.S. Extendible Notes programme; Australian
dollar domestic borrowing programme; U.S. Medium Term
Note Programme; Euro Medium Term Note Programme and
its Medallion “Regulation AB” securitisation programme.
The chart below illustrates the liquidity profile of the Group’s
outstanding wholesale debt liabilities at 30 June 2008, broken
down by type of debt instrument and maturity.
n
o
i
l
l
i
b
$
25
20
15
10
5
-
Q1
Q2
Q3
Q4
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019+
Financial Year
Domestic Offshore
Securitisation
Structured
Commonwealth Bank of Australia Annual Report 2008 203
Notes to the Financial Statements
Note 42 Risk Management (continued)
Maturity Analysis of Monetary Liabilities
Liabilities
Deposits and other public borrowings (1)
Payables to other financial institutions
Liabilities at fair value through Income Statement
Derivative liabilities (2)
Bank acceptances
Insurance policy liabilities
Debt issues and loan capital
Managed funds units on issue
Other monetary liabilities
Total monetary liabilities
At call
$M
135,763
1,893
-
-
-
-
-
-
747
138,403
0 to 3
months
$M
3 to 12
months
$M
76,884
15,436
7,990
16,909
18,041
-
24,008
-
2,170
161,438
50,896
419
4,271
159
237
-
16,794
-
1,199
73,975
1 to 5
years
$M
4,537
-
2,834
3,746
-
-
43,924
-
506
55,547
Group
Maturity Period At 30 June 2008
Over 5
years
$M
Not
Specified
$M
62
-
1,984
2,927
-
-
33,533
-
-
38,506
-
-
-
-
-
18,495
-
1,109
542
20,146
Total
$M
268,142
17,748
17,079
23,741
18,278
18,495
118,259
1,109
5,164
488,015
(1) Includes substantial “core” deposits that are contractually at call customer savings and cheque accounts. Historical experience is that such accounts provide a stable
source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table.
(2) Gross payable amounts on cross currency swaps have been reported in derivative liabilities. The Group has corresponding receivables on these cross currency
swaps that have not been reported, in accordance with the requirements of AASB 7 Financial Instruments Disclosures. The terms of the cross currency swap agreement
entered into by the Group allow for net settlement in the event of certain specific circumstances including default of the counter parties.
Liabilities
Deposits and other public borrowings (1)
Payables to other financial institutions
Liabilities at fair value through Income Statement
Derivative liabilities (2)
Bank acceptances
Insurance policy liabilities
Debt issues and loan capital
Managed funds units on issue
Other monetary liabilities
Total monetary liabilities
At call
$M
132,180
2,855
-
-
-
-
-
-
642
135,677
0 to 3
months
$M
3 to 12
months
$M
56,338
10,049
8,436
14,770
18,413
-
11,778
-
3,774
123,558
30,357
1,623
3,806
2,012
308
-
22,365
-
296
60,767
1 to 5
years
$M
3,622
-
3,011
4,629
-
-
50,560
-
208
62,030
Group
Maturity Period At 30 June 2007
Over 5
years
$M
Not
Specified
$M
68
-
2,191
2,327
-
-
39,886
-
-
44,472
-
-
-
-
-
21,613
-
310
995
22,918
Total
$M
222,565
14,527
17,444
23,738
18,721
21,613
124,589
310
5,915
449,422
(1) Includes substantial “core” deposits that are contractually at call customer savings and cheque accounts. Historical experience is that such accounts provide a stable
source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table.
(2) Gross payable amounts on cross currency swaps have been reported in derivative liabilities. The Group has corresponding receivables on these cross currency
swaps that have not been reported, in accordance with the requirements of AASB 7 Financial Instruments Disclosures. The terms of the cross currency swap
agreement entered into by the Group allow for net settlement in the event of certain specific circumstances including default of the counter parties.
204 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 42 Risk Management (continued)
Maturity Analysis of Monetary Liabilities
Amounts shown in the tables below are based on contractual undiscounted cash flows for the remaining contractual maturities.
Liabilities
Deposits and other public borrowings (1)
Payables to other financial institutions
Liabilities at fair value through Income Statement
Derivative liabilities (2)
Bank acceptances
Debt issues and loan capital
Due to controlled entities
Other monetary liabilities
Total monetary liabilities
At call
$M
126,725
1,845
-
-
-
-
-
48
128,618
0 to 3
months
$M
3 to 12
months
$M
72,993
15,436
221
17,243
18,041
8,718
25,981
2,513
161,146
41,533
419
176
150
237
11,650
7,642
1,055
62,862
1 to 5
years
$M
3,126
-
1,912
3,708
-
33,688
23,366
407
66,207
Bank
Maturity Period At 30 June 2008
Over 5
years
$M
Not
Specified
$M
62
-
1,975
2,927
-
34,224
1,508
-
40,696
-
-
-
-
-
-
-
256
256
Total
$M
244,439
17,700
4,284
24,028
18,278
88,280
58,497
4,279
459,785
(1) Includes substantial “core” deposits that are contractually at call customer savings and cheque accounts. Historical experience is that such accounts provide a stable
source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table.
(2) Gross payable amounts on cross currency swaps have been reported in derivative liabilities. The Group has corresponding receivables on these cross currency swaps
that have not been reported, in accordance with the requirements of AASB 7 Financial Instruments Disclosures. The terms of the cross currency swap agreement entered
into by the Group allow for net settlement in the event of certain specific circumstances including default of the counter parties.
Liabilities
Deposits and other public borrowings (1)
Payables to other financial institutions
Liabilities at fair value through Income Statement
Derivative liabilities (2)
Bank acceptances
Debt issues and loan capital
Due to controlled entities
Other monetary liabilities
Total monetary liabilities
At call
$M
121,087
2,790
-
-
-
-
-
102
123,979
0 to 3
months
$M
3 to 12
months
$M
49,256
10,050
1,189
14,101
18,413
6,637
18,668
3,909
122,223
24,330
1,623
608
342
308
8,105
9,432
250
44,998
1 to 5
years
$M
2,773
-
2,377
2,137
-
35,416
19,292
163
62,158
Bank
Maturity Period At 30 June 2007
Over 5
years
$M
Not
Specified
$M
48
-
2,179
2,327
-
25,614
3,229
-
33,397
-
-
-
-
-
-
-
741
741
Total
$M
197,494
14,463
6,353
18,907
18,721
75,772
50,621
5,165
387,496
(1) Includes substantial “core” deposits that are contractually at call customer savings and cheque accounts. Historical experience is that such accounts provide a stable
source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table.
(2) Gross payable amounts on cross currency swaps have been reported in derivative liabilities. The Group has corresponding receivables on these cross currency swaps
that have not been reported, in accordance with the requirements of AASB 7 Financial Instruments Disclosures. The terms of the cross currency swap agreement
entered into by the Group allow for net settlement in the event of certain specific circumstances including default of the counter parties.
Commonwealth Bank of Australia Annual Report 2008 205
Notes to the Financial Statements
Note 43 Retirement Benefit Obligations
Name of Plan
Officers’ Superannuation Fund
(“OSF”)
Commonwealth Bank of Australia
(UK) Staff Benefits Scheme
(“CBA(UK)SBS”)
Type
Defined Benefits (1) and
Accumulation
Defined Benefits (1) and
Accumulation
Form of Benefit
Indexed pension and
lump sum
Indexed pension and
lump sum
Date of Last Actuarial
Assessment of the Fund
30 June 2006
1 July 2005 (2)
(1) The defined benefit formulae are generally comprised of final superannuation salary, or final average superannuation salary, and service.
(2) An actuarial assessment of the CBA(UK)SBS at 30 June 2007 is currently in progress.
the
rates. These
An actuarial assessment of the CBA(UK)SBS, as at 1 July
2005, revealed a deficit of GBP 32 million (AUD 66 million at the
30 June 2008 exchange rate). Following from this assessment,
fund actuary’s
to contribute at
the Bank agreed
recommended contribution
included
rates
amounts
future accruals of defined benefits
(contributions estimated at AUD 3 million per annum at the 30
June 2008 exchange rate) and additional contributions of GBP
3.24 million per annum (AUD 7 million per annum at the 30
June 2008 exchange rate) payable over 14 years to finance the
fund deficit. An actuarial assessment of the CBA(UK)SBS at 30
June 2007 is currently in progress.
finance
to
Contributions
Entities of the Group contribute to the plans listed in the above
table 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 2006, was
completed during the year ended 30 June 2007. In line with the
actuarial advice contained in the assessment, the Bank does
not intend to make contributions to the OSF until further
consideration of the next actuarial assessment of the OSF as at
30 June 2009.
206 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 43 Retirement Benefit Obligations (continued)
Defined Benefit Superannuation Plans
The amounts reported in the Balance Sheet are reconciled as follows:
Present value of funded obligations
Fair value of plan assets
Total pension assets as at 30 June
Present value of unfunded obligations
Unrecognised past service cost
Unrecognised actuarial gains/(losses)
Asset/(liability) in Balance Sheet as at 30 June
Amounts in the Balance Sheet:
Liabilities (Note 30)
Assets (Note 21)
Net asset
The amounts recognised in the Income Statement
are as follows:
Current service cost
Interest cost
Expected return on plan assets
Past service cost
Employer financed benefits within Accumulation
Division
Gains/(losses) on curtailment and settlements
Actuarial gains/(losses) recognised in Income
Statement
Total included in defined benefit superannuation
plan expense
Actual return on plan assets
Changes in the present value of the defined benefit
obligation are as follows:
Opening defined benefit obligation
Current service cost
Interest cost
Member contributions
Actuarial gains/(losses)
(Losses)/gains on curtailments
Liabilities extinguished on settlements
Liabilities assumed in a business combination
Benefits paid
Exchange differences on foreign plans
Closing defined benefit obligation
Changes in the fair value of plan assets are as
follows:
Opening fair value of plan assets
Expected return
Experience (losses)/gains
Assets distributed on settlements
Total contributions
Assets acquired in a business combination
Exchange differences on foreign plans
Benefits and expenses paid
Employer financial benefits within Accumulation
Division
Closing fair value of plan assets
2008
$M
(2,892)
4,428
1,536
-
-
-
1,536
-
1,536
1,536
(26)
(194)
400
-
(163)
-
-
17
(120)
(3,094)
(24)
(194)
(13)
226
-
-
-
207
-
(2,892)
4,907
400
(520)
-
13
-
-
(209)
(163)
4,428
OSF
2007
$M
(3,094)
4,907
1,813
-
-
-
1,813
-
1,813
1,813
(30)
(188)
368
-
(137)
-
-
13
650
(3,388)
(27)
(188)
(13)
290
-
-
-
232
-
(3,094)
4,616
368
282
-
13
-
-
(235)
(137)
4,907
CBA(UK)SBS
2007
$M
(401)
372
(29)
-
-
-
(29)
(29)
-
(29)
(5)
(21)
21
-
-
-
-
(5)
19
(430)
(5)
(21)
-
22
-
-
-
15
18
(401)
365
21
(2)
-
18
-
(15)
(15)
-
372
2008
$M
(386)
321
(65)
-
-
-
(65)
(65)
-
(65)
(3)
(20)
20
-
-
-
-
(3)
(1)
(401)
(3)
(20)
-
(26)
-
-
-
14
50
(386)
372
20
(21)
-
10
-
(46)
(14)
-
321
2008
$M
(3,278)
4,749
1,471
-
-
-
1,471
(65)
1,536
1,471
(29)
(214)
420
-
(163)
-
-
14
(121)
(3,495)
(27)
(214)
(13)
200
-
-
-
221
50
(3,278)
5,279
420
(541)
-
23
-
(46)
(223)
(163)
4,749
Total
2007
$M
(3,495)
5,279
1,784
-
-
-
1,784
(29)
1,813
1,784
(35)
(209)
389
-
(137)
-
-
8
669
(3,818)
(32)
(209)
(13)
312
-
-
-
247
18
(3,495)
4,981
389
280
-
31
-
(15)
(250)
(137)
5,279
Commonwealth Bank of Australia Annual Report 2008 207
Notes to the Financial Statements
Note 43 Retirement Benefit Obligations (continued)
Defined Benefit Superannuation Plans (continued)
Experience (losses)/gains on plan liabilities
Experience (losses)/gains on plan assets
Gains/(losses) from changes in actuarial
assumptions
Total net actuarial (losses)/gains
2008
$M
134
(520)
92
(294)
OSF
2007
$M
31
282
259
572
CBA(UK)SBS
2007
$M
(3)
(2)
25
20
2008
$M
6
(21)
(32)
(47)
2008
$M
140
(541)
60
(341)
Total
2007
$M
28
280
284
592
Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments arising from changes
in actuarial assumptions. Total net actuarial gains recognised in equity from commencement of AIFRS to 30 June 2008 were $950
million.
Economic Assumptions
The above calculations were based on the following economic assumptions:
Discount rate at 30 June (gross of tax)
Expected return on plan assets at 30 June
Expected rate salary increases at 30 June (per annum) (1)
2008
%
6. 50
8. 75
4. 50
OSF
2007
%
6. 30
8. 50
4. 75
CBA(UK)SBS
2007
%
5. 80
6. 30
4. 30
2008
%
6. 20
6. 50
4. 90
(1) For the OSF, additional age related allowances were made for the expected salary increases from future promotions. At 30 June 2007 and 30 June 2008, these
assumptions were broadly between 1.6% and 2.6% per annum for full-time employees and 1.0% per annum for part time employees.
The return on asset assumption for the OSF is determined as
the weighted average of the long term expected returns of each
asset class where the weighting is the benchmark asset
allocations of the assets backing the defined benefit risks. The
long term expected returns of each asset class are determined
following receipt of actuarial advice. The discount rate (gross of
tax) assumption for the OSF is based on the yield on 10 year
Australian government securities.
Expected Life Expectancies for Pensioners
Male pensioners currently aged 60
Male pensioners currently aged 65
Female pensioners currently aged 60
Female pensioners currently aged 65
Further, the proportion of the retiring members of the main OSF
defined benefit division electing to take pensions instead of lump
sums may materially impact the defined benefit obligations.
Of these retiring members 30% were assumed to take pension
benefits, increasing to 50% in 2020.
Australian and UK legislation requires that superannuation
(pension) benefits be provided through trusts. These trusts
(including their investments) are managed by trustees who are
legally independent of the employer. The investment objective
of the OSF (the Bank’s major superannuation (pension) plan) is
“to maximise the long term rate of return subject to net returns
over rolling five year periods exceeding the growth in Average
Weekly Ordinary Time Earnings 80% of the time”.
In addition to financial assumptions, the mortality assumptions
for pensioners can materially impact the defined benefit
obligations. These assumptions are age related and allowances
are made for future improvement in mortality. The expected life
expectancies for pensioners are set out below:
2008
Years
30. 4
25. 6
33. 8
28. 7
OSF
2007
Years
30. 2
25. 4
33. 6
28. 5
CBA(UK)SBS
2007
Years
23. 2
18. 7
26. 2
21. 6
2008
Years
26. 8
22. 0
29. 7
24. 9
To meet this investment objective, the OSF Trustee invests a
large part of the OSF’s assets in growth assets, such as shares
and property. These assets have historically earned higher
rates of return than other assets, but they also carry higher
risks, especially in the short term. To manage these risks, the
Trustee has adopted a strategy of spreading the OSF’s
investments over a number of asset classes and investment
managers.
As at 30 June 2008, the benchmark asset allocations and
actual asset allocations for the assets backing the defined
benefit portion of the OSF are as follows:
Asset Allocations
Australian Equities
Overseas Equities
Real Estate
Fixed Interest Securities
Cash
Other (1)
Benchmark Allocation
%
27. 5
21. 0
15. 0
25. 5
5. 0
6. 0
Actual Allocation
%
27. 6
17. 4
18. 9
25. 8
3. 2
7. 1
(1) These are assets which are not included in the traditional asset classes of equities, fixed interest securities, real estate and cash. They include infrastructure
investments as well as high yield and emerging market debt.
The value of the OSF’s equity holding in the Group as at 30 June 2008 was $77 million (2007: $105 million). Amounts on deposit with
the Bank at 30 June 2008 totalled $26 million (2007: $23 million). Other financial instruments with the Group at 30 June 2008 totalled
$13 million (2007: nil).
208 Commonwealth Bank of Australia Annual Report 2008
Note 44 Controlled Entities
Entity Name
Australia
(a) Banking
Commonwealth Bank of Australia
Controlled Entities:
CBA Investments Limited
Luca Limited Partnership
CBCL Australia Limited
CBFC Limited
Collateral Leasing Pty Limited
Commonwealth Securities Limited
Homepath Pty Limited
Sparad (No. 24) Pty Limited
Colonial Finance Limited
PERLS III Trust (formally Preferred Capital Limited)
PERLS II Trust
Fringe Pty Ltd
Lily Pty Ltd
Greenwood Lending Pty Ltd
Series 2001-IG Medallion Trust
Series 2002-IG Medallion Trust
Medallion Trust Series 2003-1G
Medallion Trust Series 2004-1G
Medallion Trust Series 2005-1G
Medallion Trust Series 2005-2G
Hemisphere Lane Pty Ltd
Medallion Trust Series 2006 1G
Medallion Trust Series 2007 4P
Medallion Trust Series 2007 5P
Medallion Trust Series 2007-1G
SHIELD Series 50
GT Operating No.2 Pty Limited
Crystal Avenue Pty Limited
GT Funding No6 Ltd Partnership
GT Operating No4 Pty Ltd
Securitisation Advisory Services Pty Ltd
Prime Investment Entity Limited
MIS Funding No1 Pty Limited
IWL Limited
CBFC Leasing Pty Limited
Share Investments Pty Limited
Loft No 3 Pty Ltd
eCommlegal Pty Ltd
Harboard Beach Pty Ltd
Copacabana Beach Pty Ltd
SHIELD Series 21
Padang Pty Ltd
M-Land Pty Ltd
Group Treasury Services NZ Limited
GT Investments No 3 Pty Ltd
Medallion Trust Series 2008-1R
Notes to the Financial Statements
Extent of Beneficial
Interest if not 100%
Incorporated in
99.9%
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Commonwealth Bank of Australia Annual Report 2008 209
Notes to the Financial Statements
Note 44 Controlled Entities (continued)
Entity Name
(b) Insurance and Funds Management
Commonwealth Insurance Limited
Colonial Holding Company Limited
Commonwealth Insurance Holdings Limited
Commonwealth Managed Investments Limited
Colonial AFS Services Pty Limited
Colonial First State Group Limited
Colonial First State Investments Limited
Avanteos Pty Limited
Avanteos Investments Ltd
Colonial First State Property Limited
Colonial First State Property Retail Trust
Jacques Martin Administration and Consulting Pty Limited
Colonial First State Property Management Pty Ltd
Commonwealth Financial Planning Limited
Financial Wisdom Limited
First State Investment Managers (Asia) Limited
Colonial First State Asset Management (Australia) Limited
CFS Managed Property Limited
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
210 Commonwealth Bank of Australia Annual Report 2008
Note 44 Controlled Entities (continued)
Entity Name
New Zealand
(a) Banking
ASB Holdings Limited
ASB Bank Limited
CBA Funding (NZ) Limited
ASB Capital No. 2 Limited
ASB Capital Limited
CBA USD Funding Limited
CBA NZ Holding Limited
(b) Insurance and Funds Management
ASB Group (Life) Limited
Sovereign Group Limited
Sovereign Limited
Colonial First State Investments (NZ) Limited
Kiwi Income Properties Limited
Kiwi Property Management Limited
Other Overseas
(a) Banking
CBA Asia Limited
CTB Australia Limited
PT Bank Commonwealth
National Bank of Fiji Limited
CBA (Delaware) Finance Incorporated
CBA Capital Trust 1
CBA Funding Trust 1
CBA Capital Trust II
CBA (Europe) Finance Limited
Pontoon (Funding) PLC
Burdekin Investments Limited
Pavillion and Park Limited
Newport Limited
CommInternational Limited
CommCapital S.a.r.l
CommBank Europe Limited
CommBank Management Consulting (Asia) Co Ltd
CommTrading Limited
Watermark Limited
D Compartment ABI Lux Co
(b) Insurance and Funds Management
CMG Asia Life Holdings Limited
Colonial Fiji Life Limited
Colonial First State (UK) Holdings Limited
First State (HK) LLC
First State Investment Holdings (Singapore) Ltd
First State Investments (Cayman) Limited
PT Astra CMG Life
FS Investments (Bermuda) Ltd
Notes to the Financial Statements
Extent of Beneficial
Interest if not 100%
Incorporated in
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
Singapore
Hong Kong
Indonesia
Fiji
Delaware USA
Delaware USA
Delaware USA
Delaware USA
United Kingdom
United Kingdom
Cayman Islands
United Kingdom
Malta
Malta
Luxembourg
Malta
Hong Kong
Malta
Hong Kong
Luxembourg
Bermuda
Fiji
United Kingdom
United States
Singapore
Cayman Islands
Indonesia
Bermuda
97%
80%
Non-operating and minor operating controlled entities and investment vehicles holding policyholder assets are excluded from the above
list.
Commonwealth Bank of Australia Annual Report 2008 211
Notes to the Financial Statements
Note 45 Investments in Associated Entities and Joint Ventures
Acadian Asset Management (Australia) Limited
CMG CH China Funds Management Limited
Equion Health (Barts) Limited
Equigroup Pty Limited
Sandalwood Pte Ltd
China Life CMG Life Assurance Company Limited
First State Cinda Fund Management Company
Limited
Healthcare Support (Newcastle) Limited
International Private Equity Real Estate Fund
AMTD Group Company Limited
452 Capital Pty Limited
Bank of Hangzhou Co. Ltd. (1)
CFS Retail Property Trust (2)
Commonwealth Property Office Fund (3)
Total
(1) Formerly Hangzhou City Commercial Bank Co. Limited.
2008
$M
2
1
1
15
1
11
13
1
5
1
44
164
438
209
906
2007
$M
-
1
1
-
-
11
6
-
-
1
44
143
437
192
836
Extent of
Ownership
Interest % Principal Activities
Country of
Incorporation
Balance
Date
Group
50
50
50
50
50
49
46
40
33
30
30
19. 9
9. 7
9. 8
Investment Management Australia
Investment Management Australia
Financial Services
Leasing
Property Management
Life Insurance
30 Jun
31 Mar
United Kingdom 31 Dec
30 Jun
Australia
31 Dec
Singapore
31 Dec
China
Funds Management
Financial Services
Funds Management
Financial Services
Investment Management Australia
Commercial Banking
Funds Management
Funds Management
China
31 Dec
United Kingdom 31 Dec
30 Jun
Australia
31 Dec
Virgin Islands
30 Jun
31 Dec
30 Jun
30 Jun
China
Australia
Australia
(2) The value for CFS Retail Property Trust based on published quoted prices as at 30 June 2008 is $407 million (2007: $472 million).
(3) The value for Commonwealth Property Office Fund based on published quoted prices as at 30 June 2008 is $196 million (2007: $242 million).
Share of Associates’ profits/(losses)
Operating profits/(losses) before income tax
Income tax expense
Operating profits/(losses) after income tax
Carrying amount of investments in associated entities
Financial Information of Associates
Assets
Liabilities
Revenues
Expenses
Financial Information of Joint Ventures
Assets
Liabilities
Revenues
Expenses
2008
$M
98
(6)
92
Group
2007
$M
70
(17)
53
906
836
2008
$M
25,610
17,967
2,213
1,436
2008
$M
359
63
231
78
Group
2007
$M
17,936
13,163
1,753
1,162
Group
2007
$M
118
85
53
57
Note 46 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 Company has applied the exemption under AASB 124 Related Party
Disclosures which exempts listed companies from providing remuneration disclosures in relation to their key management personnel in
their Annual Financial Reports. These remuneration disclosures are provided in the Remuneration Report of the Directors’ Report on
pages 56 to 76 and are designated as audited.
212 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 46 Director and Executive Disclosures (continued)
Key Management Personnel Compensation
Short Term Benefits
Post-employment Benefits
Share-based Payments
Termination benefits
Long term benefits
Note 47 Related Party Disclosures
2008
$M
28
1
9
1
-
39
Group
2007
$M
21
6
10
-
-
37
2008
$M
28
1
9
1
-
39
Bank
2007
$M
21
6
10
-
-
37
The Group is controlled by the Commonwealth Bank of Australia, the ultimate parent, which is incorporated in Australia.
A number of banking transactions are entered into with related parties in the normal course of business.
These include loans, deposits and foreign currency transactions, upon which some fees and commissions may be earned. The table
below indicates the values of such transactions for the financial year ended 30 June 2008.
Group
Interest and dividend income
Interest expense
Fees and commissions for services provided
Fees and commissions for services received
Loans, advances and equity contributions
Other assets
Deposits
Derivative liabilities
Other liabilities
Bank
Interest and dividend income
Interest expense
Fees and commissions for services provided
Fees and commissions for services received
Available-for-sale securities
Loans, advances and equity contributions
Derivative assets
Other assets
Deposits
Derivative liabilities
Debt issues and loan capital
Other liabilities
For the Year Ended and as at 30 June 2008
Associates
$M
86
3
87
74
111
31
31
283
1
Joint
Ventures
$M
6
-
10
-
387
8
-
-
6
Total
$M
92
3
97
74
498
39
31
283
7
For the Year Ended and as at 30 June 2008
Subsidiaries
$M
3,110
2,974
755
333
Associates
$M
76
2
5
72
Joint
Ventures
$M
6
-
9
-
16,380
37,472
1,724
1,884
54,711
528
3,501
1,221
-
110
-
-
31
283
-
1
-
380
-
8
-
-
-
6
Total
$M
3,192
2,976
769
405
16,380
37,962
1,724
1,892
54,742
811
3,501
1,228
Commonwealth Bank of Australia Annual Report 2008 213
Notes to the Financial Statements
Note 47 Related Party Disclosures (continued)
Group
Interest and dividend income
Interest expense
Fees and commissions for services provided
Fees and commissions for services received
Loans, advances and equity contributions
Other assets
Deposits
Derivative liabilities
Other liabilities
Bank
Interest and dividend income
Interest expense
Fees and commissions for services provided
Fees and commissions for services received
Available-for-sale securities
Loans, advances and equity contributions
Derivative assets
Other assets
Deposits
Derivative liabilities
Debt issues and loan capital
Other liabilities
For the Year Ended and as at 30 June 2007
Associates
$M
120
1
93
116
Joint
Ventures
$M
-
-
7
-
217
-
18
-
-
12
-
2
-
-
Total
$M
120
1
100
116
229
-
20
-
-
For the Year Ended and as at 30 June 2007
Subsidiaries
$M
2,777
2,607
764
274
Associates
$M
65
1
17
5
Joint
Ventures
$M
-
-
-
-
824
37,512
1,859
1,483
48,286
837
3,336
2,316
-
319
-
-
18
-
-
-
-
-
-
-
-
-
-
-
Total
$M
2,842
2,608
781
279
824
37,831
1,859
1,483
48,304
837
3,336
2,316
Details of controlled entities are disclosed in Note 44.
The Bank’s aggregate investment in and loans to controlled entities are disclosed in Note 17.
Amounts due to controlled entities are disclosed in the Balance Sheet of the Bank.
Details of amounts paid to or received from related parties, in the form of dividends or interest, are set out in Note 2.
All transactions between Group entities are eliminated on consolidation.
214 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 47 Related Party Disclosures (continued)
Equity Holdings of Key Management Personnel
Shareholdings
All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Directors’ Share Plan.
Shares awarded under the Equity Reward Plan and the mandatory component of the Equity Participation Plan are registered in the
name of the Trustee. For further details of the Non-Executive Directors’ Share Plan, previous Equity Reward Plan, previous Executive
Option Plan and Equity Participation Plan refer to Note 33 Share Capital.
Details of shareholdings of Key Management Personnel (or close family members or entities controlled, jointly controlled, or significantly
influenced by them, or any entity over which any of the aforementioned hold significant voting power) are as follows:
Shares held by Directors
Name
Directors
J M Schubert
R J Norris
J A Anderson
R J Clairs
C R Galbraith
J S Hemstritch
S C H Kay
F D Ryan
D J Turner
H H Young
W G Kent (3)
F J Swan (3)
Total For Directors
Class
Ordinary
Ordinary
Reward Shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Reward Shares
Balance
1 July 2007
Acquired/Granted as
Remuneration
(1)
On Exercise of
Options
Net Change
(2)
Other
24,418
10,000
191,238
10,000
17,886
11,404
15,565
5,901
9,196
301
20,000
17,070
8,181
149,922
191,238
2,890
-
-
773
1,014
992
926
1,036
1,146
940
866
441
497
11,521
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
792
-
658
-
2,100
5,000
-
1,131
1,689
-
11,370
-
Balance
30 June 2008
27,308
10,000
191,238
11,565
18,900
13,054
16,491
9,037
15,342
1,241
21,997
19,200
8,678
172,813
191,238
(1) For Non-Executive Directors, represents shares acquired under NEDSP on 20 August 2007 and 4 March 2008 by mandatory sacrifice of fees. All shares acquired
through NEDSP are subject to a 10 year trading restriction (shares will be tradeable earlier if the Director leaves the Board). For Mr Norris this represents Reward
Shares granted under the ERP subject to performance hurdles. For the ERP, the first possible date for meeting the performance hurdle is 14 July 2009 with the last
possible date for vesting being 14 July 2010. See Note 33 to the Financial Statements for further details on the NEDSP and ERP.
(2) “Net Change Other” incorporates changes resulting from purchases and sales during the year.
(3) Mr Kent and Mr Swan retired at the 2007 Annual General Meeting on 7 November 2007.
Commonwealth Bank of Australia Annual Report 2008 215
Notes to the Financial Statements
Note 47 Related Party Disclosures (continued)
Shares held by Key Management Personnel
Name
Executives
B J Chapman
D Cohen (4)
D P Craig
S I Grimshaw
M R Harte
G L Mackrell
R M McEwan
J K O’Sullivan (5)
G A Petersen
A Toevs (6)
Class (1)
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Ordinary
Reward Shares
Deferred Shares
Other Executives
W Negus
Total for Key
Management
Personnel
Ordinary
Reward Shares
Ordinary
Reward Shares
Deferred Shares
Balance
1 July 2007
Acquired/Granted
as
Remuneration
On Exercise of
Options
Reward
Shares
(2)
Vested
Net Change
(3)
Other
-
17,046
-
-
-
22,728
29,999
105,140
-
14,318
39,808
80,018
-
-
45,767
69,770
14,652
64,780
-
-
-
3,680
40,500
133,906
414,300
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
37,784
-
-
-
-
37,784
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(37,500)
-
-
-
(28,130)
-
-
-
(25,940)
-
(19,500)
-
-
-
-
-
-
(111,070)
-
450
-
-
-
6,000
-
-
-
-
-
2,388
-
-
-
25,940
(43,830)
(1,287)
-
-
-
-
-
-
33,491
(43,830)
-
Balance
30 June 2008
450
17,046
-
-
6,000
22,728
29,999
67,640
-
14,318
42,196
51,888
-
-
71,707
-
13,365
45,280
-
-
37,784
3,680
40,500
167,397
259,400
37,784
(1) Reward Shares represents shares granted under the Equity Reward Plan (ERP) and are subject to a performance hurdle. The last possible date for vesting is 14
July 2010. See Note 33 to the Financial Statements for further details on the ERP.
(2) Reward Shares become ordinary shares upon vesting.
(3) “Net Change Other” incorporates changes resulting from purchases, sales and forfeitures during the year.
(4) Mr Cohen commenced employment on 16 June 2008.
(5) Mr O’Sullivan ceased employment on 31 January 2008.
(6) Mr Toevs commenced employment on 23 June 2008.
216 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 47 Related Party Disclosures (continued)
Loans to Key Management Personnel
All loans to Key Management Personnel (or close family members or entities controlled, jointly controlled or significantly influenced by
them or any entity over which any of the aforementioned hold significant voting power) 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).
Total Loans to Key Management Personnel
Year Ended
30 June
Balance
1 July
$000s
Interest
Charged
$000s
Interest Not
Charged
$000s
Write-off
$000s
Balance
30 June
$000s
Number in
Group at
30 June
1
1
9
6
10
7
1
1
11
8
Highest
Balance
in Period
$000s
3,181
2,852
936
215
100
3,544
647
748
3,874
2,702
Directors
Executives
Total for Key
Management
Personnel
Other Executives
Total
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
3,648
464
6,103
9,178
9,751
9,642
1,442
554
11,193
10,196
258
21
781
425
1,039
446
68
35
1,107
481
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,795
464
12,369
5,965
15,164
6,429
1,335
443
16,499
6,872
Individual Loans above $100,000 to Key Management Personnel
Balance
1 July 2007
$000s
Interest
Charged
$000s
Interest Not
Charged
$000s
Write-off
$000s
Balance
30 June 2008
$000s
Directors
R J Norris (1)
Executives
B J Chapman (1)
D Cohen
D P Craig
S I Grimshaw
M R Harte
G L Mackrell
R M McEwan (1)
J K O’Sullivan (2)
G A Petersen
Total for Key
Management Personnel
Other Executives
W Negus
Total for Other Executives
Total for Key Management
Personnel & Other Executives
3,648
-
936
-
-
-
647
279
3,599
642
9,751
1,442
1,442
258
153
75
5
-
218
1
39
200
90
1,039
68
68
11,193
1,107
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,795
2,679
936
213
50
3,394
647
460
3,013
977
15,164
18,799
1,335
1,335
1,845
1,845
16,499
20,644
(1) Balance declared in NZD for Mr Norris, Ms Chapman and Mr McEwan. Exchange rates are taken from Forex as at 30 June 2008 for interest charged, 30 June 2008
balances and highest balance in period. The exchange rate as at 30 June 2007 has been used for the 1 July 2007 balances.
(2) Mr O’Sullivan ceased employment on 31 January 2008.
Commonwealth Bank of Australia Annual Report 2008 217
Notes to the Financial Statements
Note 48 Notes to the Statements of Cash Flows
Note 48(a) Reconciliation of Net Profit after Income Tax to Net Cash Provided by/(used in) Operating Activities (1)
Net profit after income tax
Net decrease/(increase) in interest receivable
Increase in interest payable
Net decrease/(increase) in assets at fair value through Income
Statement (excluding life insurance)
Net (gain)/loss on sale of investments
Net (gain)/loss on sale of controlled entities and associates
Net (increase)/decrease in derivative assets
Net loss/(gain) on sale property plant and equipment
Net (gain) on sale of Visa Initial Public Offering
Loan impairment expense
Depreciation and amortisation (including asset write downs)
(Decrease)/increase in liabilities at fair value through Income
Statement (excluding life insurance)
Increase/(decrease) in derivative liabilities
Increase/(decrease) in other provisions
Increase/(decrease) in income taxes payable
(Decrease)/increase in deferred income taxes payable
Decrease/(increase) in deferred tax assets
(Increase)/decrease in accrued fees/reimbursements receivable
(Decrease)/increase in accrued fees and other items payable
Increase/(decrease) in life insurance contract policy liabilities
(Decrease)/increase in cash flow hedge reserve
Dividend received from controlled entities
Changes in operating assets and liabilities arising from cash flow
movements
Other
Net cash (used in)/provided by operating activities
2008
$M
4,822
187
449
196
(1)
-
(5,459)
15
(127)
930
423
(884)
4,622
296
29
(643)
178
(153)
(575)
184
(150)
-
(6,124)
(290)
(2,075)
2007
$M
4,497
(745)
362
(7,272)
-
-
(3,068)
16
-
434
270
5,799
5,860
57
297
175
(272)
(163)
386
(1,460)
547
-
(560)
481
5,641
Group
2006
$M
3,959
(99)
784
(53)
-
(163)
128
(4)
-
398
213
1,870
(445)
(92)
(455)
182
184
(88)
133
(1,211)
31
-
(3,954)
(156)
1,162
Year Ended 30 June
Bank
2008
$M
4,358
(174)
451
1,324
1
-
(5,654)
14
(111)
902
330
(2,286)
4,149
250
(111)
(72)
(97)
193
(1,011)
(10)
106
(1,667)
2007
$M
4,477
(564)
303
(6,038)
-
-
(3,923)
13
-
390
205
3,016
5,831
43
364
175
(408)
(196)
265
10
295
(1,881)
(11,062)
(118)
(10,295)
(15,008)
53
(12,578)
(1) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
Note 48(b) Reconciliation of Cash
For the purposes of the Statements of Cash Flows, cash includes cash, money at short call, at call deposits with other financial institutions
and settlement account balances with other banks.
Notes, coins and cash at banks
Other short term liquid assets
Receivables due from other financial institutions – at call (1)
Payables due to other financial institutions – at call (1)
Cash and cash equivalents at end of year
2008
$M
2,476
1,309
3,357
(4,877)
2,265
2007
$M
4,557
967
4,607
(6,047)
4,084
Group
2006
$M
1,703
491
4,657
(4,813)
2,038
Year Ended 30 June
2008
$M
1,344
1,118
2,672
(4,797)
337
Bank
2007
$M
1,377
894
3,837
(5,980)
128
(1) At call includes certain receivables and payables due from and to financial institutions within three months.
218 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 48 Notes to the Statements of Cash Flows (continued)
Note 48(c) Disposal of Controlled Entities
Fair value of net tangible assets disposed
Cash and liquid assets
Assets at fair value through Income Statement:
Insurance
Other assets
Life Insurance policy liabilities
Bills payable and other liabilities
Profit on sale
Cash consideration received
Less cash and cash equivalents disposed
Net cash inflow on disposal
2008
$M
2007
$M
-
-
1
-
-
1
2
-
2
-
-
-
-
-
-
-
-
-
2006
$M
55
2,297
148
(1,996)
(41)
145
608
(55)
553
Note 48(d) Non-cash Financing and Investing Activities
Shares issued under the Dividend Reinvestment Plan for 2008 amounted to $1,109 million (2007: $818 million).
Note 48(e) Acquisition of Controlled Entities
Fair value of net assets acquired
Cash and liquid assets
Minority interests
Goodwill (including discount on acquisition)
Other intangible assets
Loans, advances and other receivables
Investments
Other assets
Payables due to other financial institutions
Deposits and other public borrowings
Other liabilities
Cash consideration paid
Less cash and cash equivalents acquired
Less: Non-cash consideration
Net cash outflow on acquisition
Carrying value
at acquisition
2008
$M
2008
$M
2007
$M
2006
$M
24
-
50
4
241
112
11
(130)
(202)
(11)
24
-
316
64
241
112
11
(130)
(202)
(30)
406
(24)
382
(141)
241
-
4
3
-
-
-
-
-
-
-
7
-
7
-
7
-
126
7
122
-
-
167
-
-
(8)
414
-
414
-
414
Details of equity instruments issued as part of business combinations
Number of equity instruments issued
Fair value of equity issued ($)
2008
2007
2006
2,327,431
140,952,360
-
-
-
-
The above information relates to acquisitions that took place during the financial year and were considered individually immaterial. On
26 July 2007, PT Commonwealth Bank acquired 83% of Arta Niaga Kencana (ANK) Bank in Indonesia. The merger was completed on
31 December 2007 and thereafter the Group owned 97% of the merged entities. On 27 November 2007, the Group completed the
100% acquisition of IWL Limited, an online broking business.
The profit of IWL Limited since acquisition for the year ended 30 June 2008 was $0.4 million and for the full year was also $0.4 million.
The revenue of IWL Limited for the full year was $102.1 million. ANK is now accounted for as part of the International Financial Services
segment. As a result revenues and profits are unavailable at the individual entity level.
Note 48(f) Financing Facilities
Standby funding lines are considered immaterial.
Commonwealth Bank of Australia Annual Report 2008 219
Notes to the Financial Statements
Note 49 Disclosures about Fair Value of Financial Instruments
49(a) Fair Value of Financial Assets and Financial
Liabilities
the
These amounts represent estimates of the fair values of the
Group’s financial assets and financial liabilities at Balance Sheet
date based on
following valuation methods and
assumptions. Fair value is the amount for which an asset could
be exchanged, or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction. Quoted market
prices are used to determine fair value where an active market
(such as a recognised stock exchange) exists, as it is the best
evidence of the fair value of a financial instrument. Quoted
market prices are not, however, available for a significant
number of the financial assets and liabilities held and issued by
the Group. Therefore, for financial instruments where no quoted
market price is available, the fair values presented in the
following table have been estimated using present value or other
valuation techniques based on market conditions existing at
Balance Sheet dates. These valuation techniques rely on market
observable inputs wherever possible, or in a limited number of
instances, rely on inputs which are reasonable assumptions
based on market conditions at balance date.
While the fair value amounts are designed to represent
estimates at which these instruments could be exchanged in a
current transaction between willing parties, many of the Group’s
financial instruments lack an available trading market as
characterised by willing parties engaging in an exchange
transaction.
Assets (1)
Cash and liquid assets
Receivables due from other financial institutions
Assets at fair value through Income Statement:
Trading
Insurance
Other
Derivative assets
Available-for-sale investments
Loans, advances and other receivables
Bank acceptances of customers
Other assets
Liabilities (1)
Deposits and other public borrowings
Payables due to other financial institutions
Liabilities at fair value through Income Statement
Derivative liabilities
Bank acceptances
Insurance policy liabilities
Debt issues
Managed fund units on issue
Bills payable and other liabilities
Loan capital
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
fair values shown would be realised in a current transaction.
liabilities
that are not considered
The estimated fair values disclosed do not reflect the value of
assets and
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 considered 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
fair value
information with that of other financial institutions. It is important
that the many uncertainties discussed above be considered
when using the estimated fair value disclosures and to realise
that because of these uncertainties, the aggregate fair value
amount should in no way be construed as representative of the
underlying value of the Commonwealth Bank of Australia.
the Bank’s
Group 2008
Group 2007
Carrying
Value
$M
7,736
6,984
21,676
20,650
3,266
18,232
11,488
361,282
18,278
17,296
263,706
17,672
15,526
19,541
18,278
18,495
85,817
1,109
7,524
11,559
Fair
Value
$M
7,736
6,984
21,676
20,650
3,266
18,232
11,488
357,618
18,278
17,296
262,832
17,672
15,526
19,541
18,278
18,495
84,979
1,109
7,521
11,724
Carrying
Value
$M
10,108
5,495
21,469
23,519
4,073
12,743
9,672
315,465
18,721
17,264
219,068
14,386
16,396
16,680
18,721
21,613
88,525
310
7,346
10,000
Fair
Value
$M
10,108
5,495
21,469
23,519
4,073
12,743
9,672
313,694
18,721
17,264
218,472
14,386
16,396
16,680
18,721
21,613
88,619
310
7,346
10,120
(1) Comparative information has been restated to conform to presentation in the current period. Refer to Note 1 (b).
220 Commonwealth Bank of Australia Annual Report 2008
Notes to the Financial Statements
Note 49 Disclosures about Fair Value of Financial Instruments (continued)
49(a) Fair Value of Financial Assets and Financial
Liabilities (continued)
The 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 from
other financial institutions and bank acceptances of customers
approximate their fair value as they are short term in nature or
are receivable on demand.
Receivables due from other financial institutions also includes
statutory deposits with central banks. The 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.
Assets at Fair Value through Income Statement
Assets at fair value through Income Statement are carried at fair
value determined using quoted market prices or valuation
techniques including discounted cash flow models using market
observable and non-market observable inputs. Discount rates
have been adjusted for changes in customer credit ratings,
where appropriate.
Available-for-sale investments
Assets available-for-sale are measured at fair value determined
using quoted market prices. For shares in companies, the
estimated fair values are estimated based on market price
inputs.
Loans, advances and other receivables
The carrying value of loans, advances and other receivables is
net of accumulated collective and
individually assessed
provisions for impairment. Customers credit worthiness is
regularly reviewed in line with the Group’s credit policies and
where necessary, pricing is adjusted in accordance with
individual credit contracts.
For variable rate loans, excluding impaired loans, the carrying
amount is a reasonable estimate of fair value. The 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,
in customer credit ratings, where
adjusted
appropriate.
for changes
The fair value of impaired loans was calculated by discounting
estimated future cash flows using the loan’s original effective
interest rate.
Retirement benefit surplus
The fair value of the retirement benefit surplus is the carrying
value at Balance Sheet date determined using a present value
calculation based on assumptions that are outlined in Note 43.
All other financial assets
Included in this category are interest and fees receivable,
unrealised income, and investments in associates of $906
million (2007: $836 million), where the carrying amount is
considered to be a reasonable estimate of fair value. Other
financial assets are net of goodwill and other intangibles, future
income tax benefits and prepayments/unamortised payments,
as these do not constitute financial instruments.
Deposits and other public borrowings
The carrying value of non-interest bearing, call and variable rate
deposits, and fixed rate deposits repricing within six months,
approximate their value as they are short term in nature or are
payable on demand. Discounted cash flow models based upon
deposit type and related maturity, were used to calculate the fair
value of other term deposits.
Short term liabilities
The carrying value of payables to other financial institutions and
bank acceptances approximate their fair value as they are short
term in nature and reprice frequently.
Debt issues and loan capital
The fair values of debt issues and loan capital were calculated
using quoted market price at Balance Sheet date. 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 and adjusted for any change in the
Group’s applicable credit rating.
Liabilities at Fair Value through Income Statement
Liabilities at Fair Value through Income Statement are carried at
fair value determined using quoted market prices, or valuation
techniques including discounted cash flow models using market
observable inputs. Discount rates have been adjusted for any
changes in the Group’s applicable credit rating.
Derivative Assets and Liabilities
The fair value of trading and hedging derivative contracts, were
obtained from quoted market prices, discounted cash flow
models or option pricing models that used market based and
non-market based inputs.
The fair value of these instruments is disclosed in Note 11.
Life Insurance Policy Holder Liabilities
Life insurance policyholder liabilities are measured on a net
present value basis using assumptions outlined in Note 37. This
treatment is in accordance with AASB 1038: Life Insurance
Business.
All other financial liabilities
includes
This category
interest payable and unrealised
expenses payable for which the carrying amount is considered
to be a reasonable estimate of net fair value. For liabilities that
are long term, 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.
Commonwealth Bank of Australia Annual Report 2008 221
Notes to the Financial Statements
Note 49 Disclosures about Fair Value of Financial Instruments (continued)
49(a) Fair Value of Financial Assets and Financial
Liabilities (continued)
Commitments to extend credit, letters of credit, guarantees,
warranties and indemnities issued
The fair value of these items was not calculated as estimated fair
values are not readily ascertainable. These financial instruments
generally relate to credit risk and attract fees in line with market
prices for similar arrangements. They are not presently sold or
traded. The items generally do not involve cash payments other
than in the event of default. The fee pricing is set as part of the
broader customer credit process and reflects the probability of
default. The fair value may be represented by the present value
of fees expected to be received, less associated costs, however
the overall level of fees involved is not material.
49(b) The Impact of Fair Values Calculated Using Non-
market Observable Assumptions
The Group’s exposure to financial instruments measured at fair
value based in full or in part on non-market observable inputs is
restricted to short term loans and margins on trading securities
where pricing is counterparty specific.
These financial instruments comprise a small component of the
portfolios they are part of and have short tenor, such that any
change in the assumptions used to value the instruments to a
reasonably possible alternative do not have a material effect on
the portfolio balance or the Group’s result.
222 Commonwealth Bank of Australia Annual Report 2008
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 of the Bank and the Group, and the additional disclosures included in the Directors’
Report designated as audited, comply with Accounting Standards and in their opinion are in accordance with the Corporations Act
2001;
(b) 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
2008 and of their performance for the year ended on that date;
(c) 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 2008.
Signed in accordance with a resolution of the Directors.
J M Schubert
Chairman
13 August 2008
R J Norris
Managing Director and Chief Executive Officer
13 August 2008
Commonwealth Bank of Australia Annual Report 2008 223
Independent auditor’s report to the members of Commonwealth Bank of Australia
Report on the financial report
We have audited the accompanying financial report of Commonwealth Bank of Australia (the company), which comprises the balance
sheet as at 30 June 2008, and the income statement, statement of recognised income and expense and cash flow statement for the
year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for both
Commonwealth Bank of Australia and the Group. The consolidated entity comprises the Commonwealth Bank of Australia and the
entities it controlled at the year's end or from time to time during the financial year.
Directors’ responsibility for the financial report
The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with
Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility
includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free
from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making
accounting estimates that are reasonable in the circumstances. In Note 1 (a), the directors also state, in accordance with Accounting
Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial
Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International
Financial Reporting Standards.
Auditor’s responsibility
Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with
Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit
engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The
procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial
report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as
evaluating the overall presentation of the financial report.
Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies
with the financial report.
For further explanation of an audit, visit our website http://www.pwc.com/au/financialstatementaudit.
Our audit did not involve an analysis of the prudence of business decisions made by directors or management.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.
224 Commonwealth Bank of Australia Annual Report 2008
Independent auditor’s report to the members of Commonwealth Bank of Australia (continued)
Independence
In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.
Auditor’s opinion
In our opinion:
(a) the financial report of Commonwealth Bank of Australia is in accordance with the Corporations Act 2001, including:
(i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2008 and of their
performance for the year ended on that date; and
(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the
Corporations Regulations 2001; and
(b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1 (a).
Report on the Remuneration Report
We have audited the Remuneration Report included in pages 56 to 75 of the directors’ report for the year ended 30 June 2008. The
directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section
300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit
conducted in accordance with Australian Auditing Standards.
Auditor’s opinion
In our opinion, the Remuneration Report of Commonwealth Bank of Australia for the year ended 30 June 2008, complies with section
300A of the Corporations Act 2001.
Matters relating to the electronic presentation of the audited financial report
This auditor’s report relates to the financial report and remuneration report of Commonwealth Bank of Australia (the company) for the
year ended 30 June 2008 included on Commonwealth Bank of Australia web site. The company’s directors are responsible for the
integrity of the Commonwealth Bank of Australia web site. We have not been engaged to report on the integrity of this web site. The
auditor’s report refers only to the financial report and remuneration report named above. It does not provide an opinion on any other
information which may have been hyperlinked to/from these statements or the remuneration report. 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 and remuneration report to confirm the information included in the audited financial report and remuneration report presented on
this web site.
PricewaterhouseCoopers
Rahoul Chowdry
Partner
13 August 2008
Commonwealth Bank of Australia Annual Report 2008 225
Shareholding Information
Top 20 Holders of Fully Paid Ordinary Shares as at 8 August 2008
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Name of Holder
HSBC Custody Nominees (Australia) Limited
J P Morgan Nominees Australia Limited
National Nominees Pty Limited
Citicorp Nominees Pty Limited
RBC Dexia Investor Services Australia Nominees Pty Limited
ANZ Nominees Limited
Cogent Nominees Pty Limited
Queensland Investment Corporation
AMP Life Limited
Australian Foundation Investments Company Limited
UBS Wealth Management Australia Nominees Pty Ltd
UBS Nominees Pty Limited
Bond Street Custodians Limited
Invia Custodian Pty Limited
Perpetual Trustee Co Limited (Hunter)
Milton Corporation Limited
Merrill Lynch (Australia) Nominees Pty Limited
Suncorp Custodian Services Pty Limited
Australian Reward Investment Alliance
Argo Investments Limited
Number of Shares
134,930,729
102,911,926
92,124,605
68,172,560
31,525,878
29,621,673
18,927,257
13,776,470
9,372,231
7,975,245
7,725,788
6,041,971
5,791,346
2,901,020
2,756,096
2,064,293
1,906,386
1,888,611
1,882,519
1,858,306
%
10. 17
7. 76
6. 95
5. 14
2. 38
2. 23
1. 43
1. 04
0. 71
0. 60
0. 58
0. 45
0. 44
0. 22
0. 21
0. 16
0. 14
0. 14
0. 14
0. 14
The top 20 shareholders hold 544,154,910 shares which is equal to 41.03% of the total shares on issue.
Stock Exchange Listing
The shares of the Commonwealth Bank of Australia are listed on
the Australian Securities Exchange under the trade symbol
CBA, with Sydney being the home exchange.
trading activity are published
Details of
in most daily
newspapers, generally under the abbreviation of CBA or
C’wealth Bank. The Bank does not have a current on-market
buy-back of its shares.
Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 8 August 2008
Number of
Shareholders
558,925
161,896
14,925
6,175
269
742,190
14,051
Percentage
Shareholders
75. 31
21. 81
2. 01
0. 83
0. 04
100. 00
1. 89
Number of
Shares
188,676,186
330,963,180
102,991,631
118,233,135
585,266,745
1,326,130,877
71,035
Percentage
Issued Capital
14. 23
24. 96
7. 77
8. 91
44. 13
100. 00
0. 01
• On a poll only one official representative may exercise the
Equity holder’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 Equity holder’s voting rights, not
exceeding in aggregate 100%.
If an Equity holder appoints two proxies and both are present at
the meeting:
•
If the appointment does not specify the proportion or number
of the Equity holder’s votes each proxy may exercise, then
on a poll each proxy may exercise one half of the Equity
holder’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.
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
Under the Bank’s Constitution, each person who is a voting
Equity holder and who is present at a general meeting of the
Bank in person or by proxy, attorney or official representative is
entitled:
• 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
Equity holder, on a show of hands the person is entitled to one
vote even though he or she represents more than one Equity
holder.
If an Equity holder is present in person and votes on a
resolution, any proxy or attorney of that Equity holder is not
entitled to vote.
If more than one official representative or attorney is present for
an Equity holder:
• None of them is entitled to vote on a show of hands; and
226 Commonwealth Bank of Australia Annual Report 2008
Top 20 Holders of Perpetual Exchangeable Resettable Listed Securities II (“PERLS II”) as at 8 August 2008
Shareholding Information
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Name of Holder
J P Morgan Nominees Australia Limited
Citicorp Nominees Pty Limited
UBS Nominees Pty Limited
National Nominees Limited
Questor Financial Services Limited
UBS Warburg Private Clients Nominees Pty Limited
HSBC Custody Nominees (Australia) Limited
RBC Dexia Investor Services Australia Nominees Pty Limited
Invia Custodian Pty Limited
ANZ Nominees Limited
Tenix Pty Limited
The Australian National University Investment Section
Gordon Merchant No 2 Pty Limited
Equitas Nominees Pty Limited
Tynong Pastoral Co Pty Limited
Cryton Investments No 9 Pty Limited
Israelite House of David
Lutovi Investments Pty Limited
Bond Street Custodians Limited
NSF Nominees Pty Limited
Number of Units
235,086
210,162
140,174
123,085
86,732
83,767
78,661
75,052
46,523
32,433
26,050
25,000
24,440
21,925
17,450
17,100
15,000
15,000
14,601
12,400
%
6. 27
5. 60
3. 74
3. 28
2. 31
2. 23
2. 10
2. 00
1. 24
0. 87
0. 69
0. 67
0. 65
0. 58
0. 47
0. 46
0. 40
0. 40
0. 39
0. 33
The top 20 PERLS II unitholders hold 1,300,641 units which is equal to 34.68% of the total units on issue.
Stock Exchange Listing
PERLS II are units in a registered managed investment scheme of which Commonwealth Managed Investments Limited is the
responsible entity and are listed on the Australian Securities Exchange under the trade symbol PCBPA, with Sydney being the home
exchange. Details of trading activity are published in most daily newspapers.
Range of Units (PERLS II): 8 August 2008
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
Unitholders
9,415
286
32
23
3
9,759
1
Percentage
Unitholders
96. 48
2. 93
0. 33
0. 23
0. 03
100. 00
-
Number of
Units
1,660,176
597,676
236,717
757,086
498,345
3,750,000
2
Percentage
Issued Units
44. 27
15. 94
6. 31
20. 19
13. 29
100. 00
-
Voting Rights
• During the winding up of the Bank; or
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 Bank’s ordinary shares will be as set out on
page 226 and the voting rights of the preference shares will be
as set out below.
• 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
preference share as
those conferred on ordinary
shareholders in respect of each ordinary share.
The holders will not be entitled to vote at a general meeting of
the Bank except in the following circumstances:
At a general meeting of the Bank, holders of preference shares
are entitled:
•
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 the preference
shares;
• 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;
• 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 preference share.
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.
Commonwealth Bank of Australia Annual Report 2008 227
Shareholding Information
Top 20 Holders of Perpetual Exchangeable Repurchaseable Listed Shares III (“PERLS III”) as at 8 August 2008
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Name of Holder
AMP Life Limited
RBC Dexia Investor Services Australia Nominees Pty Limited
UBS Wealth Management Australia Nominees Pty Limited
J P Morgan Nominees Australia Limited
Mr Walter Lawton and Mrs Jan Rynette Lawton
Citicorp Nominees Pty Limited
ANZ Executors & Trustee Company Limited
The Australian National University Investment Section
Mr John Stuart Walker & Mr Ralph Lane
Catholic Education Office Diocese of Parramatta
Questor Financial Services Limited
Bond Custodians Limited
Truckmate (Australia) Pty Limited
Avanteos Investments Limited
Kerlon Pty Limited
Mifare Pty Limited
UCA Cash Management Fund Limited
Equity Trustees Limited
Fleischmann Holdings Pty Limited
Henry Kendall Group Holdings Pty Limited
Number of Shares
191,591
175,183
166,235
156,836
75,482
71,089
59,246
51,282
50,000
49,750
46,349
43,770
35,000
31,635
30,000
25,000
25,000
24,938
22,500
20,964
%
3. 29
3. 00
2. 85
2. 69
1. 29
1. 22
1. 02
0. 88
0. 86
0. 85
0. 79
0. 75
0. 60
0. 54
0. 51
0. 43
0. 43
0. 43
0. 39
0. 36
The top 20 PERLS III shareholders hold 1,351,850 shares which is equal to 23.18% of the total shares on issue.
Stock Exchange Listing
PERLS III are preference shares issued by Preferred Capital Limited (a wholly-owned subsidiary of the Bank) and are listed on the
Australian Securities Exchange under the trade symbol PCAPA, with Sydney being the home exchange. Details of trading activity
are published in most daily newspapers.
Range of Shares (PERLS III): 8 August 2008
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
Number of
Shareholders
17,340
523
43
37
4
17,947
21
Percentage
Shareholders
96. 62
2. 91
0. 24
0. 21
0. 02
100. 00
0. 12
Number of
Shares
2,903,942
1,058,417
334,160
875,825
659,937
5,832,281
41
Percentage
Issued Capital
49. 79
18. 15
5. 73
15. 02
11. 31
100. 00
-
PERLS III 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 226 and 227 respectively for the Bank’s ordinary shares and preference shares.
228 Commonwealth Bank of Australia Annual Report 2008
Top 20 Holders of Perpetual Exchangeable Resaleable Listed Securities IV (“PERLS IV”) as at 8 August 2008
Shareholding Information
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Name of Holder
AMP Life Limited
J P Morgan Nominees Australia Limited
Citicorp Nominees Pty Limited
UBS Wealth Management Australia Nominees Pty Limited
RBC Dexia Investor Services Australia Nominees Pty Limited
Goldman Sachs JB Were Capital Markets Limited
Cogent Nominees Pty Limited
Suncorp General Insurance Limited
Suncorp Custodian Services Pty Limited
National Nominees Limited
Questor Financial Services Limited
ANZ Nominees Limited
GIO General Limited
Invia Custodian Pty Limited
UCA Cash Management Fund Limited
Eastcode Pty Limited
Avanteos Investments Limited
Westpearl Pty Limited
Bond Street Custodians Limited
The Australian National University Investment Section
Number of Shares
425,000
314,276
168,984
168,912
153,285
150,752
141,049
118,000
109,353
106,740
97,729
95,594
92,403
76,715
68,735
50,000
47,593
40,000
36,784
30,000
%
5. 80
4. 29
2. 31
2. 31
2. 09
2. 06
1. 93
1. 61
1. 49
1. 46
1. 33
1. 31
1. 26
1. 05
0. 94
0. 68
0. 65
0. 55
0. 50
0. 41
The top 20 PERLS IV shareholders hold 2,491,904 shares which is equal to 34.02% of the total shares on issue.
Stock Exchange Listing
PERLS IV are stapled securities issued by The Commonwealth Bank of Australia and are listed on the Australian Securities
Exchange under the trade symbol CBAPB, with Sydney being the home exchange. Details of trading activity are published in most
daily newspapers.
Range of Shares (PERLS IV): 8 August 2008
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 IV confer voting rights in the Bank in the following limited
circumstances:
• When dividend payments on the preference shares are in
arrears;
• On proposals to reduce the Bank’s Share Capital;
• On a proposal that affects rights attached to preference
shares;
• On a resolution to approve the terms of a buy-back
agreement;
• 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; and
• During the winding-up of the Bank.
Further more if PERLS IV convert into ordinary shares of the
Bank in accordance with their terms of issue, the voting rights of
the ordinary shares will be as set out on pages 226 and 227.
At a general meeting of the Bank, holders of PERLS IV are
entitled:
Number of
Shareholders
11,941
692
44
39
8
12,724
1
Percentage
Shareholders
93. 85
5. 44
0. 34
0. 31
0. 06
100. 00
-
Number of
Shares
2,712,504
1,537,821
360,673
1,221,121
1,492,881
7,325,000
2
Percentage
Issued Capital
37. 03
21. 00
4. 92
16. 67
20. 38
100. 00
-
• On a show of hands, to exercise one vote when entitled to
vote on the matters listed above; and
• On a poll, to exercise one vote for each preference share.
The holders will be entitled to the same rights as the holders of
the Bank’s ordinary shares in relation to receiving notices,
reports and financial statements and attending and being heard
at all general meetings of the Bank.
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.
700,000 Trust Preferred Securities were issued on 15 March
2006. 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 226 and 227 for the Bank’s ordinary shares and
preference shares.
Commonwealth Bank of Australia Annual Report 2008 229
International Representation
Australia
Head Office
Commonwealth Bank of Australia
48 Martin Place,
Sydney NSW 1155
Telephone: (61 2) 9378 2000
New Zealand
ASB Bank Limited
Level 28 ASB Bank Centre
135 Albert Street, Auckland
Telephone: (64 9) 377 8930
Facsimile: (64 9) 358 3511
Managing Director
Hugh Burrett
Sovereign Group Limited
33-45 Hurstmere Road
Takapuna, Auckland
Telephone: (64 9) 487 9000
Facsimile: (64 9) 486 1913
Managing Director
Simon Blair
Asia Pacific
Fiji Islands
Colonial Fiji
Colonial Life Limited
Level 12, Suva Central
Telephone: (67 9) 3214 400
Facsimile: (67 9) 3303 448
Managing Director
Laurie Mellsop
China
CBA Representative Office
2909 China World Towers 1
1 Jian Guo Men Wai Avenue
Beijing 100004
Telephone: (86 10) 6505 5350
Facsimile: (86 10) 6505 5354
China Chief Representative
Paul Au
CommFinance
Level 7
Zhong Ya Building
458 Wulumugi (N) Road
Shanghai
Telephone: (86 21) 6249 9659
Facsimile: (86 21) 6249 9682
Chief Executive Officer
Guo-Xiong Jiang
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
Alan Wood
CBA Representative Office
Room 4007 Bund Center
222 Yan An Road East
Shanghai 200002
Telephone: (86 21) 6335 1686
Facsimile: (86 21) 6335 1766
Shanghai Chief Representative
Guo Wei
First State Cinda Fund Management Co. Ltd.
24F China Merchants Bank Building
No 7088, Shen Nan Road
Shenzhen 518040
Telephone: (852) 2846 7555
Facsimile: (852) 2868 4742/4783
Regional Head Asia
Lindsay Mann
Hong Kong
Level 15
1501-5, Chater House
8 Connaught Road,
Central
Hong Kong
Telephone: (852) 2844 7501
Facsimile: (852) 2801 6916
Regional General Manager Asia
Stephen Poon
Hong Kong Commonwealth Bank of Australia
Room 1307-1308, Chater House
8 Connaught Road
Central
Hong Kong
Telephone: (852) 3667 8900
Facsimile: (852) 3667 8939
Executive General Manager
Peter Fancke
First State Investments (Hong Kong) Limited
Level 6, Three Exchange Square
Central
Hong Kong
Telephone: (852) 2846 7555
Facsimile: (852) 2868 4742/4783
Regional Head Asia
Lindsay Mann
India
CBA Representative Office
Unit 201, Level 2 (front portion) of Embassy
Classic
No. 11, Vittal Mallya Road
Bangalore 560001
Telephone: (91 80) 2210 7413
Fascimile: (91 80) 5112 1462
Chief Representative
Ravi Kushan
Indonesia
PT Bank Commonwealth
Level 3A, Wisma Metropolitan II
Jl. Jendral Sudirman Kav. 29-31
Jakarta 12920
Telephone: (62 21) 5296 1222
Facsimile: (62 21) 5296 2293
President Director
Neorsing Neorini
PT Commonwealth Life
11/F Sentra Mulia
Jl. H.R. Rason Said, Kav X-6 No 8
Jakarta 12940
Telephone: (62 21) 250 0385
Facsimile: (62 21) 250 0389
President Director
Simon Bennett
PT First State Investments Indonesia
29th Floor, Gedung Artha Graha
Sudirman Central Business District
Jl. Jend. Sudirman Kav. 52-53
Jakarta 12190
Telephone: (62 21) 515 0088
Facsimile: (62 21) 515 0033
CEO
Hario Soeprobo
Japan
CBA Branch Office
8th Floor
Toranomon Waiko Building
5-12-1 Toranomon
Minato-ku, Tokyo 105-0001
Telephone: (81 3) 5400 7280
Facsimile: (81 3) 5400 7288
General Manager Japan
Richard Harris
Singapore
CBA Branch Office
Level 17 Millenia Tower
1 Temasek Avenue
Singapore 039192
Telephone: (65) 6349 7001
Facsimile: (65) 6224 5812
Country Head
Brian McGovern
First State Investments (Singapore)
1 Temasek Avenue
#17-01 Millenia Tower
Singapore 039192
Telephone: (65) 6538 0008
Facsimile: (65) 6538 0800
Regional Head Asia
Lindsay 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
Hahn Nuygen
CBA HCMC Branch office
Ground Floor
Han Nam Building
65 Nguyen Du St., Dist. 1
Ho Chi Min City
Telephone: (84) 8824 1525
Facsimilie: (84) 8824 2703
General Director
Danny Armstrong
Americas
United States of America
CBA Branch Office
Level 17, 599 Lexington Avenue
New York NY 10022
Telephone: (1 212) 848 9391
Facsimile: (1 212) 336 7772
General Manager, Americas
Ian Phillips
Europe
United Kingdom
CBA Branch Office
Senator House
85 Queen Victoria Street
London EC4V 4HA
Telephone: (44 20) 7710 3934
Facsimile: (44 20) 7329 6611
Regional General Manager Europe
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
CEO
Charlie Metcalf
Edinburgh
23 St Andrew Square
Edinburgh EH2 1BB
Telephone: (44 131) 473 2200
Facsimile: (44 131) 473 2222
Managing Partners
Stuart Paul & Angus Tulloch
230 Commonwealth Bank of Australia Annual Report 2008
132 221 General Enquiries
131 709 CommSec Margin Loan
Contact Us
For your everyday banking including paying bills using BPAY®
our automated service is available 24 hours a day, 7 days a
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Lost or Stolen Cards
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From overseas call +61 132 221. Operator assistance is
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® Registered to BPAY Pty Ltd ABN 69 079 137 518
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To apply for a new home loan/investment home loan or to
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week.
131 431 Personal Loan Sales
To apply for a new personal loan.
Available from 8am to 8pm, 7 days a week.
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You can apply for a home loan, credit card, personal loan, term
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Do your everyday banking on our internet banking service
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Customers who are hearing or speech impaired can contact us
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•
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131 519 CommSec (Commonwealth Securities)
Available from 8am to 8pm (Sydney Time), Monday to Friday,
with after hours assistance available from 8pm to 8am for lost
and stolen cards, including weekends.
CommSec provides the information and tools to make smart
investment easy, accessible and affordable for all Australians, by
phone or Internet at www.commsec.com.au
Enables you to expand your portfolio by borrowing against your
existing shares and managed funds. To find out more simply call
131 709 8am to 5pm (Sydney Time) Monday to Friday or visit
www.commsec.com.au.
1800 019 910 Corporate Financial Services
For a full range of financial solutions for medium-size and larger
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131 998 Local Business Banking
A dedicated team of Business Banking Specialists, supporting a
network of branch business bankers, will help you with your
financial needs.
Available 24 hours a day, 7 days a week or visit
www.commbank.com.au/lbb
1300 245 463 (1300 AGLINE) AgriLine
A dedicated team of Agribusiness Specialists will help you with
your financial needs. With many of our Business Banking team
living in regional and rural Australia, they understand the
challenges you face. Available from 7am to 7pm, Monday to
Friday (Sydney time).
Colonial First State
Existing investors can call 131 336 from 8am to 7pm (Sydney
Time) Monday to Friday.
New investors without a financial adviser can call 1300 360 645.
Financial advisers can call 131 836.
Alternatively, visit www.colonialfirststate.com.au
CommBiz
Enables you to perform online business transactional banking
from an Internet-connected computer, anywhere in the world, 24
hours a day, 7 days a week on www.commbiz.com.au
1300 362 081 Commonwealth Private Bank
A highly personalised service for clients with significant financial
resources and complex financial needs. For a confidential
discussion about how Commonwealth Private Bank can help
you, call 1300 362 081 between 8am to 5:30pm (Sydney time),
Monday to Friday or visit www.commonwealthprivate.com.au
132 015 Commonwealth Financial Services
For enquires on retirement and superannuation products, or
managed investments. Available from 8.30am to 6pm (Sydney
Time), Monday to Friday.
Unit prices are available 24 hours a day, 7 days a week.
CommInsure
For all your general insurance needs call 132 423 8am to 8pm
(Sydney Time), 7 days a week.
For all your life insurance needs call 131 056 8am to 8pm
(Sydney Time), Monday to Friday.
Alternatively, visit www.comminsure.com.au
Commonwealth Bank of Australia Annual Report 2008 231
Corporate Directory
Registered Office
Level 7, 48 Martin Place
Sydney NSW 1155
Telephone (02) 9378 2000
Facsimile (02) 9378 2400
Company Secretary
JD Hatton
Shareholder Information
www.commbank.com.au/Shareholder
Share Registrar
Link Market Services Limited
Locked Bag A14
SYDNEY SOUTH NSW 1235
Telephone: (02) 8280 7199
Facsimile: (02) 9287 0303
Freecall: 1800 022 440
Internet
www.linkmarketservices.com.au
Email
registrars@linkmarketservices.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 Link Market
Services on 1800 022 440 or email them at
registrars@linkmarketservices.com.au
Electronic versions of Commonwealth Bank’s past and current
Annual Reports are available on
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232 Commonwealth Bank of Australia Annual Report 2008
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