Commonwealth Bank of Australia
Annual Report 2010

Plain-text annual report

Determined to be better than we’ve ever been. C o m m o n w e a l t h B a n k o f A u s t r a l i a A N N U A L R E P O R T 2 0 0 9 Annual Report 2010 Back to be updated The text pages of the Annual Report are printed on Terrapress Silk produced in Kabel, Germany. Stora Enso Kabel is certified under ISO 9001, ISO 14001 and EMAS (Eco Management and Audit System). All virgin fibre used by Stora Enso products originates from well managed forests and controlled sources. www.commbank.com.au CBA1421 010908 Commonwealth Bank of Australia ACN 123 123 124 Chairman‟s Statement Chief Executive Officer‟s Statement Presentation of Financial Information Highlights Group Performance Analysis Asset Quality Retail Banking Services Business and Private Banking Institutional Banking and Markets Wealth Management New Zealand Bankwest Other Divisions Investment Experience Risk Management Capital Management Description of Business Environment Sustainability Corporate Governance Directors‟ Report Five Year Financial Summary Financial Statements Income Statements Statements of Comprehensive Income Balance Sheets Statements of Changes in Equity Statements of Cash Flows Notes to the Financial Statements Directors‟ Declaration Independent Auditor‟s Report Shareholding Information International Representation Contact Us Corporate Directory Contents 2 4 7 8 13 19 20 22 24 26 30 34 36 38 39 44 50 53 57 63 91 93 94 95 96 97 99 101 232 233 235 239 240 241 Chairman‟s Statement Introduction This is my first Statement to you as Chairman of the Commonwealth Bank of Australia (”the Group”). It was a great honour to be offered the position and to take over from John Schubert on his retirement in February this year. the Group‟s business The Group is a strong organisation and the resilience and strength of franchise was well demonstrated by its financial and operating performance through the global financial crisis which continued into the 2010 financial year in which the Group has delivered another good result. Although the outlook for the 2011 financial year is somewhat uncertain I am confident that the Group will continue to perform well as we pursue our vision of becoming Australia‟s finest financial services organisation through excelling in customer service. Results The Group‟s statutory net profit after tax for the full year ended 30 June 2010 was $5,664 million, which represents a 20% increase on the prior reported year. Cash net profit after tax for the full year was $6,101 million, which represents an increase of 42% on the prior year. This result was achieved in a better macroeconomic environment than 2009, but the outlook still remains uncertain, mainly due to volatility in international markets, and doubts about the speed of recovery of the United States and European economies. Key financial performance highlights for the year included: Net interest income growth of 11% on the prior year which reflected solid retail lending and deposit growth; Other banking income was 3% down on the prior year and was impacted by lower credit card loyalty, exception and ATM fee income, combined with lower trading income from reduced financial markets volatility; Funds management income increased by 4% on the prior year due to improved investment markets returns driving higher average Funds Under Management and Funds Under Administration; and Insurance income increased by 2% on the prior year, as a result of solid inforce premium growth, partially offset by higher claims experience. Cash Return on Equity for the year ended 30 June 2010 was a healthy 18.7%, up 370 basis points due to increasing profitability and effective capital management. The final dividend declared was $1.70 per share, an increase of 48% on the prior year. The total dividend for the year to 30 June 2010 was $2.90, taking the dividend payout ratio to 73.9%. Retail Banking Services cash net profit after tax was $2,461 million, which represented an increase of 17% on the prior year. This result reflects strong volume growth and continued focus on cost efficiency. Business and Private Banking delivered a strong performance, achieving 21% growth in cash net profit after tax to $893 million. This result reflected continued momentum across all businesses with operating performance growth of 19% and total banking income up by 11%. Institutional Banking and Markets achieved a cash net profit after tax of $1,182 million, a significant increase on the prior year. Lower impairment charges were the main driver of the result supported by growth in operating income in line with improved market conditions. 2 Commonwealth Bank of Australia Annual Report 2010 Underlying profit after tax for the Wealth Management business increased 15% on the prior year to $592 million. Cash net profit after tax for the Wealth Management business was significantly higher compared with the prior year at $718 million. Cash net profit after tax for our New Zealand based ASB and Sovereign was NZ$461 million, a decrease of 14% on the prior year. The result reflected the impact of tightening credit markets, which in turn led to increased funding costs along with the recession in New Zealand. Bankwest cash net profit after tax for the year ended 30 June 2010 was $60 million, up from the pro forma profit of $3 million last year. The result reflected a strong operating performance, partly offset by higher loan impairment expense. Cash net profit after tax for our Asian banking businesses was $45 million, an increase of 50% on the prior year. The result was underpinned by strong income growth from the Chinese retail banks and Indonesian life insurance business, partially offset by an increase in impairment expense. Global Banking Regulation Following the problems experienced by the United States and European banking systems during the global financial crisis we have seen global regulators looking to introduce changes to banking regulation aimed at preventing similar problems from arising again. Broadly they have focused on proposals that banks carry higher levels of capital and more liquidity. While regulators in some jurisdictions clearly need to address the adequacy of their regulatory regime post the global financial crisis, it is important that we, in Australia, think carefully before adopting a “one size fits all” approach. There are at least three reasons why we should be cautious: Firstly, the major Australian banks came through the global financial crisis relatively unscathed which is largely due to the fact that we were well capitalised and had put in place rigorous internal processes as a result of the adoption of advanced accreditation under Basel lI; Secondly, we, unlike some countries, already have a strong regulatory environment and a good oversight system; and, Finally there is a danger that higher capital and/or liquidity levels could significantly increase the cost of, or reduce the availability of, credit to our customers. So, rather than rush in and adopt a “global solution” we will continue to work closely with Government and our own regulators on sensible policy initiatives that don‟t impact negatively on our customers, our shareholders and the Australian economy. Dividends and Capital The final dividend of 170 cents per share, which is fully franked, will be paid on 1 October 2010. The Group will satisfy the Dividend Reinvestment Plan for the 2010 financial year through the full or partial on-market purchase and transfer of shares. During the year dividend and interest payments were also made to the holders of the Group‟s various capital securities: PERLS III, PERLS IV, PERLS V, 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 capital ratios remaining well in excess of both APRA minimum capital adequacy requirements and the Board‟s approved minimum target at all times throughout the period. Tier One Capital and Total Capital ratios as at 30 June 2010 were 9.15% and 11.49% respectively. The following significant initiatives were undertaken during the financial year to actively manage the Group‟s Tier One Capital: The allocation of $685 million ordinary shares in order to satisfy the DRP in respect of the final dividend for the 2008/2009 financial year, representing a DRP participation rate of 39%, inclusive of DRP discount of 1.5%; The allocation of $772 million of ordinary shares in order to satisfy the DRP, in respect of the interim dividend for the 2009/2010 financial year, representing a participation rate of 42%, inclusive of DRP discount of 1.5%; and The Group issued $2 billion ($1,964 million net of issue costs) PERLS V securities in October 2009 which qualify as Non-Innovative Tier One Capital. The strength of the Group‟s capital position continues to be reflected in its long-term credit ratings as illustrated on page 10. Corporate Governance and Board Performance We employed an external firm to assist with an assessment of the performance of the Board as a whole and of individual Directors. The report and feedback was positive and gave us confidence that the direction, oversight and strategic direction of the Group, by the Board, is sound. In recognition of the continuing uncertain economic environment, the Board Risk Committee, which is chaired by Harrison Young, continues to comprise all members of your Board. This reflects the critical importance that the Board places on the management of risk in the current environment. In April this year, Reg Clairs retired from the Board after 11 years of service as a Director. Reg has made a significant contribution to the Group during his time as a Director and his experience in retailing was of particular value to the Board. Reg also chaired the People and Remuneration Committee. Jane Hemstritch, who joined the Board in 2008, and was a member of the People and Remuneration Committee, has succeeded Reg as its Chair and will bring all her experience to bear on this important Board Committee. John Schubert retired as Chairman and Director on 10 February 2010. John had been on the Board for 18 years and oversaw considerable change in the development of the Group during his tenure as a Director and Chairman. His commitment was unswerving and his great skills admired by all his colleagues. I would like, on behalf of the Board, to thank both John Schubert and Reg Clairs for all they have done for the Commonwealth Bank of Australia and wish them both health and happiness in the pursuit of their future interests. Finally, I would like to thank my fellow Directors for their hard work and support. Outlook Despite some improvement, the global recovery remains uneven with the concerns about advanced economies balanced out by some strength in the emerging economies. The Australian economy remains well placed relative to most other developed countries. However, recent uncertainty over the pace of recovery in the United States and Europe highlight the downside risks still in play. These risks have not helped domestic business and consumer confidence both of which Chairman‟s Statement remain fragile. This fragility manifested itself in a slowing in the underlying momentum in our business at the end of the 2010 financial year. As a result it is appropriate to maintain a degree of caution about the prospects for our business for the coming year. We intend to the retain conservative capital and foreseeable future so that we are able to provide support to our customers in these uncertain times. liquidity settings for Conclusion 2010 has been another successful year for the Group in a number of respects. The result demonstrates that the Group is in a strong financial position with a robust and sustainable business model. We are also seeing the disciplined execution of the Group‟s strategy focussed on customers, people and technology. Our Australian business is continuing to support its customers in difficult times while consistently delivering better results. This performance is a tribute to the strength of the Group business model and the enormous commitment and hard work of our people who are delivering good results for our customers and shareholders. While the outlook for the coming year is uncertain, the recent performance of the Group and the commitment to the pursuit of our vision of becoming Australia‟s finest financial services organisation through excelling in customer services, give me great confidence in the Group‟s ability to continue to deliver superior returns for our shareholders. Finally, I would like to thank our customers and shareholders for their continuing support for the Commonwealth Bank of Australia and of course all the staff of the Group on whom we depend for our success. David Turner Chairman 11 August 2010 Commonwealth Bank of Australia Annual Report 2010 3 Chief Executive Officer‟s Statement Introduction Having emerged from the challenging 2009 financial year in a strong financial position, the Group continued to strengthen its business franchise and support its customers through the 2010 financial year. The Group‟s ongoing commitment to, and disciplined execution of, its five strategic priorities underpinned another healthy operating and financial result. While global and domestic economies improved during the year, the pathway to a sustainable global economic recovery is uncertain. As a result, the Group remains cautious, retaining conservative capital and liquidity settings. However, our strong financial position will enable us to continue investing in our business to ensure that we achieve our vision of being through finest Australia‟s excelling in customer service. financial services organisation Operating Environment At the beginning of the financial year the outlook for both the domestic and global economies was reasonably positive with Australia appearing to be on the road to a sustainable economic recovery. However, as the year progressed the level of uncertainty around the pace of recovery of the United States and European economies grew and domestic business and consumer confidence became increasingly fragile. As a result the stronger growth which we experienced in the first half was tempered in the second as our customers reacted cautiously to the less certain economic outlook. This uncertainty also had an adverse impact on global financial markets, placing additional upward pressure on the Group‟s wholesale funding costs. Despite these challenges the Group is well funded and in a strong financial position enabling us to: Remain one of only a handful of global banks to retain a AA credit rating; Continue to support our customers with new loans and advances to customers over the period in excess of $100 billion; Support the 45,000 people we employ in Australia and the communities in which they live and work; Pay $4.5 billion of dividends to shareholders with over 80% going to Australian residents; Pay $2.9 billion in government tax, levies and stamp duty; and Invest over $1 billion in our strategic initiatives, such as Core Banking Modernisation, building the business for the future. In the current uncertain economic climate, the Group recognises the importance of maintaining a strong capital base, high levels of liquidity and conservative provisioning. Strategic Priorities Since early 2006, the Group has consistently pursued a simple, clear strategy, with the objective of becoming Australia‟s finest financial services organisation, through excelling in customer service. To achieve this goal we have focused our energies on delivering our five core strategic priorities – Customer Service, Business Banking, Technology and Operational Excellence, Trust and Team Spirit and Profitable Growth. The result is that today, the Group is a significantly stronger and more dynamic organisation than it was four years ago. The cornerstone of our strategy has been Customer Service, and from a position of being a clear last three years ago, we are now seeing consistent improvement across every sector of our business. This can be attributed to a relentless focus on a number of key activities which include: 4 Commonwealth Bank of Australia Annual Report 2010 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; 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. Improvements in customer satisfaction are translating into stronger market shares in all of our key markets. In home lending, three years ago our market share was in long term decline. Today, we are consistently growing well above system. In business lending, the acquisition of Bankwest has boosted our underweight position, and there remains significant upside potential in this part of our business. In deposits, we have further strengthened our market leading position, with our entire suite of retail deposits and transaction accounts now rated 5 Star by CANSTAR CANNEX. On the technology front, our systems are significantly more customer friendly, have much greater functionality and are materially more reliable than they were four years ago. Investment in our back-office processing has yielded significant improvements in processing times, productivity levels and customer service rates. The extent of this transformation is testimony to the drive, energy and engagement of our people. It is pleasing that we have been able to improve our level of employee engagement to the point where we are now rated in the top 25 percent of all companies in the Gallup world-wide database. The strong momentum which we have built up behind these strategic initiatives over the last four years has continued into 2010 and it is particularly satisfying that we have again been rewarded with the accolade of 2010 Money Magazine “Bank of the Year Award” along with similar awards from a number of local and international organisations. Tangible measures of our success in delivering great Customer Service in the 2010 year include: In the Retail Bank ongoing focus on customer satisfaction has resulted in continued improvement on 14 year record high customer satisfaction scores; The Retail Bank‟s progress was also recognised through a number of awards including: - Money Magazine “Money Minder of the Year 2010”, cash transaction, and saving recognising management products; Third Party Banking awarded “Lender of the Year 2010” by the Mortgage and Finance Association of Australia for the second year running; “Australian Financial Institution of the Year (Retail)” at the 2010 Australian Banking and Finance Awards; and CANSTAR CANNEX awarding a 5-Star rating to the entire rated Retail Deposit product suite and an innovation award for Travel Money Card. - - - the East and Partners‟ semi-annual In Business and Private Banking the Group was the only one of the four major banks to improve customer satisfaction between June 2009 and June 2010; In “Australian Institutional Banking & Markets”, Institutional Banking and Markets was reported as best in market for the fifth year running for “Loyalty to Relationship” and “Understanding of Customer‟s Business”; Chief Executive Officer‟s Statement At Bankwest, customer satisfaction scores improved and six products received gold awards in Money Magazine‟s 2010 “Best of the Best” Awards, including Best Everyday Branch Access account and Best Kid‟s Savings account; First State Investments was named Asia Asset Management winner in the 2009 “Best of the Best” Awards, in the category of “Best Performance in Global Emerging Markets” (3 and 5 year periods); CFS won “Best Fund Manager” service level award from Wealth Insights for the 3rd year running and CFS FirstWrap platform ranked 2nd in the annual Investment Trends platform benchmarking survey; and In Indonesia, PT Bank Commonwealth maintained its number one ranking among foreign banks for customer service as rated by Synovate. Improving our competitive position in Business Banking remains a strategic priority, with key progress and outcomes during 2010 including: times and reduce queues A market leading contactless card payment facility was launched in October 2009 which is designed to speed up transaction for business customers in service-based industries with over 12,000 terminals already rolled out; A range of additional features were launched within CommBiz to help business customers conduct their transactions faster, including enhanced screen design and self-service capability; new online statement functionality; and reduced application turnaround times; and Private Bank was recognised in the Australian Private Banking Council Awards for 2010, winning Outstanding Private Banking Institution of the Year in the $1m to $10m category for the second year running. Technology and Operational Excellence initiatives designed to deliver greater efficiency across the Group as well as providing competitive leverage through innovative processes and systems during the year included: Core Banking Modernisation, remains on schedule at its half way stage and will achieve a number of key milestones this year including migration of all deposit and transaction accounts to the new system; Within the Retail Bank: - - - - Successful migration of over one million term deposit accounts to our new Core Banking platform, enabling real time banking, allowing 24 hour, 7 days a week account opening, funding and transaction processing; Continued NetBank enhancements benefiting over five million online customers, including free SMS services and new auto pay functionality; Continued investment in Australia‟s leading ATM network, improving security and functionality; and Increased efficiency and the through introduction of a paperless end to end Home Loan process. flexibility CommBiz was awarded “Best in Class” in the Banking category in the 2009 Interactive Media Awards. The last five years have also demonstrated how strongly people engagement is linked to customer satisfaction. We know that our improvement in customer satisfaction has come about because our people are significantly more engaged and more satisfied with the Group as a place to work. Progress this year towards fostering a culture of Trust and Team Spirit across the Group includes: Continued best-practice people engagement results; ASB won a Gallup Great Workplace Award for the third year in a row; Refresh of the Diversity Strategy, including establishment of a goal to increase the representation of women in leadership in senior management levels from 26% to 35% by December 2014; Significant progress on our commitment to employ an additional 350 Indigenous Australians, with 130 new Indigenous staff employed under our Indigenous Employment Strategy; Extensive staff participation in volunteering activities in the community, including student mentoring, environmental projects and supporting elderly and homeless people; and Recognised for our commitment to customers and the community through a number of awards including 2009 Australian Business Award for Community Contribution, 2010 Reconciliation Awards for Business and the 2009 Australian Sustainability Awards‟ Special Award for Labour Relations/Human Capital Management. 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: A strategic partnership (15% ownership) with Vietnam International Bank in April 2010; A new strategic partnership (37.5% ownership) with Bank of Communications (China‟s fifth largest bank) for our life insurance joint venture in Shanghai; The Group‟s first branch in India was opened in Mumbai in April 2010; and Continued focus on improving Group-wide cross-sell and referral rates, designed to better leverage the significant opportunities with our existing customers. Sustainability and contribution to the community The Group continued to focus on sustainability during 2009-10, initiatives which range of sustainability implementing a complement our strategic priorities and objectives. Our sustainability program demonstrates our long-term commitment to our five sustainability foundations of customers, people, governance, community and environment. We enhanced to our communication of our sustainability performance stakeholders with the release of our first Sustainability Report in October 2009. We will continue this commitment with the publication of a Sustainability Report each year, available at www.commbank.com.au/sustainability. A summary of the Group‟s progress to date, future plans and key sustainability metrics are contained in pages 53 to 56 of this Annual Report. Conclusion I am pleased with the financial performance of the Group in 2010. We have 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. While the 2010 year was a better year for the Australian economy and for the Group it has not been without its challenges which intensified in the second half. While I am optimistic about the medium term outlook for the Australian economy, I suspect the strength of the recovery will be slower than anticipated 12 months ago. In this environment the Group remains cautious and will continue to maintain its conservative approach to capital, funding, liquidity and provisioning. At the same time the Group is well placed to continue to strengthen its Commonwealth Bank of Australia Annual Report 2010 5 Chief Executive Officer‟s Statement business franchise and improve its financial performance and returns to shareholders. The ability to deliver the strong performance we have seen over the past financial year 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 the organisation and continue to be enormously impressed with the quality and skills of our people. 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. Thank you. Ralph Norris Managing Director and Chief Executive Officer 11 August 2010 6 Commonwealth Bank of Australia Annual Report 2010 Presentation of Financial Information Definitions Reported and Pro Forma Comparatives On 19 December 2008, the Group acquired 100% of the share capital of Bank of Western Australia Ltd (“Bankwest”) and St Andrew‟s Australia Pty Ltd (“St Andrew‟s”). To enhance the understanding and comparability of financial information between reporting periods, prior period “Pro forma” comparatives have been provided in addition to previously reported results outside the financial statements. The below terms are used to describe the respective comparatives disclosed in this report: incorporate “Reported” comparatives results of Bankwest and St Andrew‟s from, and including, 19 December 2008, and reflect information prepared on the same basis as the Group‟s Annual Report for the financial year ended 30 June 2009; and the “Pro forma” comparatives are prepared for the year ended 30 June 2009. This assumes the Bankwest and St Andrew‟s businesses formed part of the consolidated Group from 1 July 2008. The pro forma comparatives are based on the aggregation of the results for the Group, Bankwest and St Andrew‟s. Pro forma comparatives are disclosed to facilitate a like-for-like comparison of the Group‟s financial performance for the year ended 30 June 2010 and 30 June 2009. Commentary on the Group‟s the Group Performance and Divisional Performance sections of this report are relative to the pro forma comparatives, unless otherwise stated. financial performance included in In this Annual Report, the Group presents its profit from ordinary activities after tax on a “statutory basis”, which is calculated in accordance with 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 non- controlling interests, before Bankwest significant items, tax on New Zealand structured finance transactions, treasury shares valuation adjustment, unrealised gains and losses related to hedging and AIFRS volatility, loss on disposal of controlled entities/investments and other non-cash one-off expenses. 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 Bankwest significant items, tax on New Zealand structured finance transactions, changes in the treasury shares valuation adjustment, unrealised gains and losses related to hedging and AIFRS volatility, loss on disposal of controlled entities/investments and other non-cash one-off expenses. "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”, excluding investment experience. "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 on shareholder funds in Wealth Management businesses. "Underlying" productivity ratios: Exclude Investment experience from funds management and life insurance income; and Exclude policyholder tax from the funds management income and life insurance income lines. "Underlying" productivity ratios have been presented to provide what management believes to be a more 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 2010 7 Highlights Group Performance Highlights The Group‟s net profit after tax (“statutory basis”) for the full year ended 30 June 2010 was $5,664 million, which represents a 20% increase on the prior reported year. Net profit after tax (“cash basis”) for the full year was $6,101 million, which represents an increase of 42% on the prior year. This result was achieved in a market environment that has improved over the last 12 months, but still remains uncertain, mainly due to volatility in international markets. Domestically, credit growth has moderated, average funding costs continue to increase and competition for deposits remains intense. Cash earnings per share increased 34% on the prior year to 395.5 cents per share. Return on Equity (“cash basis”) for the year ended 30 June 2010 was 18.7%, up 370 basis points due to increasing profitability and effective capital management. The Group‟s net profit after tax (“underlying basis”) was $5,923 million, representing a 32% increase on the prior year. Despite the challenging environment, the Group‟s operating performance has been healthy. Operating income growth of 6% and operating expense growth of 5% has resulted in a 70 basis point improvement in the expense to income ratio to 45.7%. Drivers of the Group‟s financial performance were: Net interest income growth of 11% on the prior year reflected solid retail lending and deposit balance growth and a five basis point improvement in the full year net interest margin to 2.13%; Other banking income declined 3% on the prior year, impacted by lower credit card loyalty fees, exception and ATM fee income, combined with lower trading income; Funds management income increased by 4% on the prior year due to improved investment market returns driving higher average Funds Under Management and Funds Under Administration, partly offset by lower performance fees and dividends from infrastructure assets; Insurance income increased by 2% on the prior year, driven by solid inforce premium growth, partially offset by higher claims experience including significant weather events; and Operating expense growth of 5% on the prior year reflects the Group‟s continued focus on people, customers and technology, while maintaining a disciplined approach to expense management. In addition to the healthy operating performance, there was a significant reduction in impairment expense on the prior year to $2,075 million. This was mainly due to the non-recurrence of a small number of single name corporate exposures experienced in the prior year and improved corporate portfolio credit quality. This was partly offset by additional impairment expense in Bankwest, particularly to east coast property development exposures. in relation 8 Commonwealth Bank of Australia Annual Report 2010 For the half year ended 30 June 2010, the Group‟s net profit after tax (“cash basis”) was $3,158 million, up 7% on the prior half. While impairment expense was significantly lower than the prior half, the Group‟s operating performance was impacted by a ten basis point decline in net interest margin to 2.08% together with three less calendar days, lower CommSec trading volumes and retail exception fees. Other performance highlights relating to strategic priorities that position the Group well for the medium to long term include: Retail, business and wealth customer satisfaction levels have increased; Successful migration of over one million term deposit accounts to the new Core Banking platform, enabling real time visibility and improved functionality for customers; “Bank of the Year” in the 2010 Money Magazine Awards; “Australian Financial Institution of the Year (Retail)” at the 2010 Australian Banking and Finance Awards; “Money Minder of the Year” in the 2010 Money Magazine Awards; and CFS won “Best Fund Manager” service level award from Wealth Insights for the 3rd year running. Capital The Group maintained its cautious and conservative approach in the current economic environment by maintaining a strong capital position. This was reflected in a Tier One capital ratio of 9.15% at 30 June 2010. The Bank continues to be AA rated. Dividends The final dividend declared was $1.70 per share, an increase of 48% on the prior year. The total dividend for the year to 30 June 2010 was $2.90, taking the dividend payout ratio (“cash basis”) to 73.9%. The final dividend payment will be fully franked and will be paid on 1 October 2010 to owners of ordinary shares on the register at the close of business on 20 August 2010 (“record date”). Shares will be quoted ex–dividend on 16 August 2010. The Bank issued $772 million of shares to satisfy shareholder participation in the Dividend Reinvestment Plan (“DRP”) in respect of the interim dividend for 2009/10. Outlook Despite some improvement, the global recovery remains uneven with the concerns about the advanced economies balanced out by some strength in the emerging economies. The Australian economy remains well placed relative to most other developed countries and we are optimistic about the medium-term outlook for Australia and for the Group‟s ability to deliver superior returns for our shareholders. However, recent uncertainty over the pace of recovery in the United States and Europe highlight the downside risks still in play. These risks have not helped domestic business and consumer confidence, both of which remain fragile. This fragility manifested itself in a slowing in the underlying momentum in our business at the end of the 2010 financial year. As a result, it is appropriate to maintain a degree of caution about the prospects for our business for the coming year. The Group intends to retain conservative capital and liquidity settings for the foreseeable future in order to provide support to our customers in these uncertain times. Full Year EndedProAsNet Profitformareportedafter30/06/1030/06/0930/06/1031/12/0930/06/09Income Tax$M$M$M$M$MStatutory basis5,664n/a2,7502,9144,723Cash basis6,1014,3083,1582,9434,415Underlying basis5,9234,5013,0892,8344,611Full Year EndedHalf Year Ended Highlights (1) For purposes of presentation, Policyholder tax expense/(benefit) components of Corporate tax expense are shown on a net basis for the years ended 30 June 2010: $130 million, 30 June 2009: ($164) million and for the half years ended 30 June 2010: ($9) million and 31 December 2009: $139 million. (2) Non-controlling interests include preference dividends paid to holders of preference shares in ASB Capital. (3) Refer to Group Performance Analysis for further details on non-cash items. Commonwealth Bank of Australia Annual Report 2010 9 Full Year EndedPro formaJun 10 vsJun 10 vsAs reportedGroup Performance30/06/1030/06/09Jun 0930/06/1031/12/09Dec 0930/06/09Summary$M$M %$M$M%$MNet interest income11,86810,716115,8066,062(4)10,186Other banking income4,1124,259(3)2,0342,078(2)4,176Total banking income15,98014,97577,8408,140(4)14,362Funds management income1,8981,8234951947-1,813Insurance income94593124824634910Total operating income18,82317,72969,2739,550(3)17,085Investment experience236(263)large94142(34)(267)Total income19,05917,46699,3679,692(3)16,818Operating expenses(8,601)(8,222)5(4,333)(4,268)2(7,765)Impairment expense(2,075)(3,392)(39)(692)(1,383)(50)(3,048)Net profit before tax8,3835,852434,3424,04176,005Corporate tax expense (1)(2,266)(1,514)50(1,177)(1,089)8(1,560)Non-controlling interests (2)(16)(30)(47)(7)(9)(22)(30)Net profit after tax ("cash basis")6,1014,308423,1582,94374,415Hedging and AIFRS volatility17n/an/a(160)177large(245)Bankwest non-cash items(216)n/an/a(264)48large614Tax on NZ structured finance transactions(171)n/an/a-(171)large-Other non-cash items (3)(67)n/an/a16(83)large(61)Net profit after tax ("statutory basis")5,664n/an/a2,7502,914(6)4,723Represented by: Retail Banking Services2,4612,107171,2161,245(2)2,107Business and Private Banking893736214534403736Institutional Banking and Markets1,182166large63754517166Wealth Management718289large339379(11)286New Zealand388438(11)22716141438Bankwest603large(4)64large113Other399569(30)290109large569Net profit after tax ("cash basis")6,1014,308423,1582,94374,415Investment experience - after tax(178)193large(69)(109)(37)196Net profit after tax ("underlying basis")5,9234,501323,0892,83494,611Full Year EndedHalf Year Ended Highlights (1) Fully diluted EPS and weighted average number of shares (fully diluted) are disclosed in Note 7. (1) Lending assets comprise Loans, Bills Discounted, and Other Receivables (gross of provisions for impairment and excluding securitisation) and Bank acceptances of customers. Credit Ratings Fitch Ratings Moody‟s Investor Services Standard & Poor's Long–term Short–term AA Aa1 AA F1+ P-1 A-1+ Outlook Stable Negative Stable 10 Commonwealth Bank of Australia Annual Report 2010 Full Year EndedPro formaJun 10 vsJun 10 vsAs reportedShareholder Summary30/06/1030/06/09Jun 09 %30/06/1031/12/09Dec 09 %30/06/09Dividends per share - fully franked (cents) 290n/an/a17012042228Dividend cover - cash (times)1. 4n/an/a1. 21. 6(25)1. 3Earnings per share (cents)Statutory basis - basic 367. 9n/an/a177. 6190. 3(7)328. 5Cash basis - basic 395. 5294. 934203. 7191. 76305. 6Dividend payout ratio (%)Statutory basis79. 7n/an/a96. 663. 7large73. 1Cash basis73. 9n/an/a84. 063. 1large78. 2Weighted average no. of shares - statutory basic (M)1,527n/an/a1,5351,51811,420Weighted average no. of shares - cash basic (M) (1)1,5311,44261,5391,52311,426Return on equity - cash (%)18. 715. 0370 bpts18. 918. 540 bpts15. 8Full Year EndedHalf Year Ended30/06/1031/12/0930/06/09Jun 10 vsJun 10 vsBalance Sheet Summary$M$M$MDec 09 %Jun 09 %Lending assets (1)500,760487,339473,71536Total assets646,330625,476620,37234Total liabilities610,760591,893588,93034Shareholders' Equity35,57033,58331,442613Assets held and Funds Under Administration (FUA)On Balance Sheet:Banking assets623,398601,560596,91944Insurance Funds Under Administration14,20115,53715,407(9)(8)Other insurance and internal funds management assets8,7318,3798,04649646,330625,476620,37234Off Balance Sheet:Funds Under Administration 172,784177,224159,927(3)8Total assets held and FUA819,114802,700780,29925As at Highlights (1) Prior periods have been restated in line with market updates. (2) As at 31 May 2010. (3) Personal lending market share includes personal loans and margin loans. (4) During the year ended 30 June 2009, Bankwest market share was impacted by a reclassification of balances from personal lending to home loans. The 30 June 2009 comparative has not been restated. (5) In accordance with RBA guidelines, these measures include some products relating to both the Retail and Corporate segments. (6) As at 31 March 2010. Commonwealth Bank of Australia Annual Report 2010 11 30/06/1031/12/0930/06/09Market Share Percentage%%%Home loans (1)26. 226. 125. 2Credit cards (1) (2)22. 522. 321. 6Personal lending (APRA and other Household) (3) (4)14. 615. 015. 7Household deposits31. 331. 332. 3Retail deposits (1) (5)27. 326. 626. 5Business Lending - APRA (1)19. 518. 819. 4Business Lending - RBA (1)17. 617. 717. 4Business Deposits - APRA (1)22. 921. 720. 7Asset Finance14. 314. 313. 6Equities trading (CommSec)6. 36. 76. 2Australian Retail - administrator view (6)14. 714. 714. 4FirstChoice Platform (1) (6)10. 710. 510. 2Australia (total risk) (1) (6)13. 813. 815. 7Australia (individual risk) (1) (6)14. 614. 614. 7NZ Lending for housing23. 023. 323. 3NZ Retail Deposits21. 621. 421. 2NZ Lending to business9. 39. 28. 8NZ Retail FUM (1)17. 418. 018. 8NZ Annual inforce premiums31. 031. 331. 7As at Highlights (1) Cash net profit after tax less Investment experience after tax. (2) Average interest earning assets and average interest bearing liabilities have been adjusted to remove the impact of securitisation. Refer to Average Balances and Related Interest in Note 4. (3) Net operating income represents total operating income less volume expenses. 12 Commonwealth Bank of Australia Annual Report 2010 Full Year EndedPro formaJun 10 vsJun 10 vsAs reportedKey Performance Indicators30/06/1030/06/09Jun 09 %30/06/1031/12/09Dec 09 %30/06/09GroupUnderlying profit after tax ($M) (1)5,9234,501323,0892,83494,611Net interest margin (%)2. 132. 085 bpts2. 082. 18(10)bpts2. 10Average interest earning assets ($M) (2)553,735511,4108560,197547,3792481,248Average interest bearing liabilities ($M) (2)521,338482,7908529,676513,1363454,258Funds management income to average FUA (%) 1. 021. 05(3)bpts1. 021. 011 bpt 1. 04Funds Under Administration (FUA) - average ($M) 186,641174,2667188,765185,3922173,872Insurance income to average inforce premiums (%) 47. 151. 0(390)bpts49. 047. 0200 bpts50. 6Average inforce premiums ($M) 2,0051,825101,9831,95321,798Operating expenses to total operating income (%)45. 746. 4(70)bpts46. 744. 7200 bpts45. 4Effective corporate tax rate (%) 27. 025. 9110 bpts27. 126. 920 bpts26. 0Retail Banking ServicesCash net profit after tax ($M)2,4612,107171,2161,245(2)2,107Operating expenses to total banking income (%)39. 642. 9(330)bpts40. 638. 6200 bpts42. 9Business and Private BankingCash net profit after tax ($M)893736214534403736Operating expenses to total banking income (%)45. 348. 8(350)bpts46. 544. 1240 bpts48. 8Institutional Banking and MarketsCash net profit after tax ($M)1,182166large63754517166Operating expenses to total banking income (%)30. 928. 3260 bpts33. 428. 6480 bpts28. 3Wealth ManagementUnderlying profit after tax ($M) (1)592514152972951514FUA - average ($M)179,802168,0717181,709178,7382167,677Average inforce premiums ($M) 1,5721,432101,5411,52911,405Funds management income to average FUA (%)1. 011. 04(3)bpts1. 021. 011 bpt 1. 03Insurance income to average inforce premiums (%)43. 545. 9(240)bpts43. 345. 8(250)bpts45. 3Operating expenses to net operating income (%) (3)60. 162. 5(240)bpts60. 859. 4140 bpts62. 0New ZealandUnderlying profit after tax ($M) (1)387438(12)22416337438FUA - average ($M) 6,8396,195107,0566,65466,195Average inforce premiums ($M)433393104424244393Funds management income to average FUA (%) 0. 670. 79(12)bpts0. 600. 75(15)bpts0. 79Insurance income to average inforce premiums (%)49. 252. 7(350)bpts57. 940. 2large52. 7Operating expenses to total operating income (%)53. 245. 8large55. 351. 3400 bpts45. 8BankwestCash net profit after tax ($M)603large(4)64large113Operating expenses to total banking income (%)51. 266. 3large50. 152. 2(210)bpts63. 6Capital Adequacy Tier One (%)9. 15n/an/a9. 159. 105 bpts8. 07Total (%)11. 49n/an/a11. 4911. 63(14)bpts10. 42Full Year EndedHalf Year Ended Outstanding items: Capital – due from Paul Bridge on XXX Dividends - – due from Paul Bridge on XXX Outlook – due from Warwick Bryan on XX Financial Performance and Business Review The Group‟s net profit after tax (“cash basis”) for the full year ended 30 June 2010 was $6,101 million, which represents a 42% increase on the prior year. The performance during the year was underpinned by: Solid growth in retail lending and deposit balances, with home lending up 11% to $324 billion and domestic deposits up 3% to $335 billion. Business and corporate lending was down 3% to $155 billion mainly due to deleveraging by institutional clients while small business lending remained strong; Full year net interest margin improved by five basis points to 2.13%; Higher funds management income due to 7% growth in average Funds Under Administration to $187 billion at 30 June 2010 driven by improved investment market returns. This was partly offset by lower performance fees and dividends from infrastructure assets; Higher insurance income driven by solid volume growth, partially offset by higher claims experience including significant weather events; Operating expense growth of 5%, reflecting continued investment in people, customers, technology and projects to support strategic priorities and drive Group wide productivity; Significantly lower impairment expense due to the non- recurrence of a small number of single name corporate exposures experienced in the prior year and improved corporate portfolio credit quality, partly offset by additional impairment expense in Bankwest, particularly in relation to east coast property development exposures; and Significantly higher investment experience mainly as a result of the unwinding of unrealised mark to market losses in the Guaranteed Annuities portfolio. The Group‟s net profit after tax (“cash basis”) for the half year ended 30 June 2010 was $3,158 million, up 7% on the prior half. While impairment expense was significantly lower than the prior half, the Group‟s operating performance was impacted by a ten basis point decline in net interest margin to 2.08% together with three less calendar days, lower CommSec trading volumes and retail exception fees. More comprehensive disclosure of performance highlights by key business segments is contained on pages 20-38. Net Interest Income Net interest income increased by 11% on the prior year to $11,868 million. The increase was a result of solid growth in average interest earning assets of 8%, together with a five basis point improvement in net interest margin to 2.13%. Net interest income decreased by 4% on the prior half to $5,806 million. The decrease was driven by three less calendar days compared to the first half and a ten basis point reduction in net interest margin to 2.08%, partly offset by 2% growth in average interest earning assets. Average Interest Earning Assets Average interest earning assets increased by $42 billion on the prior year to $554 billion, reflecting a $45 billion increase in average lending interest earning assets partly offset by a slight decrease in average non-lending interest earning assets. Average home impact of loan balances, excluding securitisation, increased by $46 billion since 30 June 2009 to $298 billion, driven by above market volume growth despite tightening credit standards. the Group Performance Analysis Average balances for business and corporate lending decreased by $2 billion since 30 June 2009 to $159 billion primarily driven by institutional clients deleveraging in response to the current economic environment. Average non-lending interest earning assets declined $2 billion compared to the prior year due to higher levels of liquid assets held in the prior year to fund the Bankwest operations upon acquisition. Average Interest Earning Assets ($M) Net Interest Margin The net interest margin improved five basis points on the prior year to 2.13% with the key drivers including: Deposit pricing: Deposit margins decreased ten basis points primarily driven by increased competition on savings and investment products together with the decline in average cash rates (2010: 3.7%; 2009: 4.8%). Asset pricing: Overall increase in margin of nine basis points, reflecting the impact of repricing on home loans (two basis points), personal lending (three basis points) and business lending (four basis points) in response to higher average funding costs and increased credit risk. Mix: Overall decrease in margin of two basis points as a result of strong growth in relatively lower margin home loans. Replicating Portfolio: Increased five basis points, acting as a “buffer” to the declining deposit margins. Treasury: Increased earnings benefiting from higher average capital (four basis points). Other: Decrease of one basis point driven by lower margins in offshore businesses (three basis points), partly offset by a higher Bankwest margin (two basis points). NIM movement since June 2009 Commonwealth Bank of Australia Annual Report 2010 13 432,282476,86979,12876,866Jun 09(Pro forma)Jun 10Lending Interest Earning AssetsNon-Lending Interest Earning Assets511,4108%553,7352.08%(0.10%)0.09%(0.02%)0.05%0.04%(0.01%)2.13%1.80%1.90%2.00%2.10%2.20%Jun 09Deposit PricingAsset PricingMixReplicating PortfolioTreasuryOtherJun 10 Group Performance Analysis Net Interest Margin (continued) Funds Management Income Net interest margin decreased ten basis points compared to the prior half to 2.08%. This result was mainly impacted by intense deposit competition, lower replicating portfolio (six basis points) and balance sheet positioning (four basis points) which is consistent with the current environment. Other Banking Income Funds management income increased by 4% on the prior year to $1,898 million. The growth was attributable to a 7% increase in average Funds Under Administration to $187 billion reflecting improved investment market returns, partly offset by lower performance fees and dividends from infrastructure assets. Funds management income to average FUA was relatively stable over the prior year. In the half year ended 30 June 2010, funds management income was substantially in line with the prior half. (1) This reclassification from Net interest income to Other banking income relates to certain economic hedges which do not qualify for AIFRS hedge accounting. Insurance Income Excluding the impact of AIFRS reclassification of net swap costs, Other banking income decreased 4% on the prior year to $4,371 million. Factors impacting Other banking income were: Commissions: decreased by 3% on the prior year to $2,006 million. This was primarily driven by a decrease in credit card loyalty reward income, ATM direct charging income and dishonour exception fees ($53 million). This was partly offset by increased brokerage commissions following higher trading volumes in CommSec. Lending fees: were up slightly compared to the prior year to $1,435 million. Institutional commitment and lending fees increased together with Commercial Bill fees, following solid volume growth and improved margins. These were offset by declines in overdrawn exception fees ($97 million) and early repayment fees, after reaching highs in the prior year following rapid and significant reductions in official cash rates. Trading income: decreased by 19% on the prior year to $597 million. This outcome was impacted by a strong trading result in the prior year due to increased financial market volatility at that time. In the current year, counterparty fair value mark to market valuations have benefited from narrowing credit spreads. Other income: increased by 12% on the prior year to $333 million. This includes gains from asset sales in Institutional Banking and Markets. Excluding the impact of AIFRS reclassification of net swap costs, other banking income decreased 1% on the prior half to $2,170 million. This was driven by a decrease in brokerage fee income following lower trading volumes in CommSec, and lower exception fee income. 14 Commonwealth Bank of Australia Annual Report 2010 Insurance income increased by 2% on the prior year to $945 million. The increase was driven by solid growth in inforce premiums, partially offset by higher claims experience including significant weather events. In the half year ended 30 June 2010, insurance income increased 4% compared to the prior half to $482 million. This was mainly due to improved claims experience and the deferred tax revaluation on policy liabilities in New Zealand. Full YearEndedProAsformareported30/06/1030/06/0930/06/1031/12/0930/06/09$M$M$M$M$MCommissions2,0062,0749721,0342,027Lending fees1,4351,4287167191,396Trading income597735306291741Other income3332971761572874,3714,5342,1702,2014,451AIFRS reclassification of net swap costs (1)(259)(275)(136)(123)(275)Other banking income4,1124,2592,0342,0784,176Half Year EndedFull Year EndedFull YearEndedProAsformareported30/06/1030/06/0930/06/1031/12/0930/06/09$M$M$M$M$MCFS GAM789773399390773Colonial First State811712410401703CommInsure224260107117259New Zealand and Other7478353978Funds management income1,8981,8239519471,813Full Year EndedHalf Year EndedFull YearEndedProAsformareported30/06/1030/06/0930/06/1031/12/0930/06/09$M$M$M$M$MCommInsure 684657331353636New Zealand and Other261274151110274Insurance income945931482463910Full Year EndedHalf Year Ended Operating Expenses Operating expenses increased by 5% over the prior year to $8,601 million. The increase was driven by: Higher staff costs reflecting an out of cycle 2% pay rise; technology and projects to Continued support strategic priorities and drive Group wide productivity; and investment in The unfavourable impact of investment markets on the Group‟s defined benefit superannuation fund resulting in a $103 million expense for the current year (2009: $14 million non-cash expense). Gross investment spend remains strong at $1,036 million. The primary focus is again on Core Banking Modernisation, with additional investment on the upgrade of Risk Management systems. In the half year ended 30 June 2010, operating expenses increased 2% compared to the prior half to $4,333 million which included higher information technology expenses and an out of cycle 2% pay rise. Expense to Income Ratios The Group‟s expense to income ratio improved by 70 basis points over the prior year to 45.7%. The improvement reflects the Group‟s strong income growth, combined with a continued focus on technological and operational efficiencies. Impairment Expense Impairment expense for the year was $2,075 million, down significantly compared to the prior year. The reduction was driven by the non-recurrence of a small number of single name the prior year. Loan corporate exposures impairment expense the corporate portfolio has also decreased following improved economic conditions and credit ratings. that in impacted Retail loan impairment expense however, has increased as a result of solid consumer finance volume growth and the Group continuing times. Tightening of credit policies and investment in the credit decisioning and collections capabilities have seen some improvement in arrears rates over the prior half. to support customers through difficult Bankwest loan impairment expense has also increased as a result of deterioration of the pre-acquisition business lending portfolio. Group Performance Analysis Since the initial review of the Bankwest portfolio, further detailed work has been undertaken into the Bankwest business banking portfolio. This comprehensive review identified pre-acquisition loans reflecting poor asset quality, high loan to value ratios and insufficient covenant coverage. This resulted in significant risk grade reassessments and security revaluations with provisioning increasing $304 million. These loans are confined to the pre- acquisition business banking portfolio. Given the one off nature of the impairment and the fact it relates to an understatement of provisioning in the pre-acquisition portfolio, this additional amount of loan impairment expense has been recorded as a non-cash item. This is consistent with the treatment of the gain on acquisition of Bankwest. Gross impaired assets increased to $5,216 million at 30 June 2010, a 24% increase over the prior year, including the impact of the Bankwest business banking review. Impairment Expense (“cash basis”) as a % of Average Gross Loans and Acceptances Provisions for Impairment The Group maintains a prudent and conservative approach to provisioning, with total provisions for impairment losses including Bankwest at 30 June 2010 of $5,453 million. This represents a $179 million increase since December 2009 and $499 million increase since June 2009. The current level reflects: Increased individual and collective provisioning to cover specific pre-acquisition exposures in the Bankwest loan book; Reduced credit exposure in the corporate portfolio; Growth and higher arrears rates over the year in the retail portfolios; and A management overlay of $1,192 million to cover the impact of economic conditions and other risks. Taxation Expense The corporate tax expense for the year was $2,266 million, representing an effective tax rate of 27%. The effective tax rate is below the Australian company tax rate of 30% primarily as a result of: The benefit received from investment allowance tax credits associated with the structured asset finance leasing business; and The profit earned by the offshore banking unit and offshore jurisdictions that have lower corporate tax rates. Commonwealth Bank of Australia Annual Report 2010 15 46.4%45.7%41.9%41.4%Jun 09(Pro forma)Jun 10Group expense to income ratioBanking expense to income ratio0.360.260.350.170.090.080.100.150.130.180.100.07-0.07Jun 09FY(Pro forma)Jun 10FYDec 09HYJun 10HYBaseSingle NamesABC NotesBankwestOverlay0.730.550.410.28 Group Performance Analysis Other non-cash items included in statutory profit Treasury shares valuation adjustment Non-cash items are excluded from net profit after tax (“cash basis”), which is Management‟s preferred measure of the Group„s financial performance, as they tend to be non-recurring in nature or not considered representative of the Group‟s ongoing financial performance. The impact of these items on the Group‟s net profit after tax (“statutory basis”) are outlined below. Hedging and AIFRS volatility Hedging and AIFRS volatility includes unrealised fair value gains or losses on economic hedges that do not qualify for hedge accounting under AIFRS, primarily including: cross currency currency denominated debt issues; and interest rate swaps hedging foreign foreign exchange hedges relating to future New Zealand earnings. Hedging and AIFRS volatility also includes unrealised fair value gains or losses on the ineffective portion of economic hedges that qualify for hedge accounting under AIFRS. Fair value gains or losses on all these economic hedges are excluded from cash profit since the asymmetric recognition of the gains or losses does not affect the Group‟s performance over the life of the hedge. A $17 million gain was recognised in the year ended 30 June 2010 (2009: $245 million loss). Bankwest non-cash items Gain on acquisition: A $612 million after tax gain on the acquisition of Bankwest was recognised in the year ended 30 June 2009. This acquisition gain was measured in accordance with AIFRS purchase price accounting requirements. The gain represents the excess of the fair value of net assets acquired over the consideration paid (net of issue costs). Loan impairment: In the year ended 30 June 2010, a $212 million after tax loan impairment expense was recognised relating to pre-acquisition loans. Refer to impairment expense commentary on page 15 for further details. Merger related amortisation: The acquisition of Bankwest resulted in the recognition of fair value adjustments on certain financial instruments, core deposits and brand name intangible assets that will be amortised over their useful lives. A $25 million after tax gain was recognised in the year ended 30 June 2010 (2009: $80 million gain). Integration expenses: As part of the acquisition of Bankwest, the Group expects to incur integration expenses over three years to 2012. A $29 million after tax expense was recognised in the year ended 30 June 2010 (2009: $78 million expense). These items are not recognised in cash profit as they are not representative of the Group‟s expected ongoing financial performance. Tax on NZ structured finance transactions A $171 million tax expense on New Zealand structured finance transactions was recognised in the year ended 30 June 2010 representing a significant one-off impact of an adverse tax ruling between ASB Bank and the New Zealand Commissioner of Inland Revenue settled in December 2009. The settlement represented 80% of the amount of tax and interest in dispute. Loss on disposal of controlled entities/investments The net loss on disposal of the Group‟s Fiji operations and Visa shares are not included in cash profit as the disposals are one- off in nature and outside the Group‟s ordinary operations. A $23 million after tax loss was recognised in the year ended 30 June 2010 (2009: $nil). 16 Commonwealth Bank of Australia Annual Report 2010 in cash profit Under AIFRS, CBA shares held by the Group in the managed funds and life insurance businesses are defined as treasury shares and are held at cost. Unrealised gains or losses are recognised the underlying performance of the asset portfolio attributable to the wealth and life insurance businesses. These unrealised gains or losses are reversed as a non-cash item for statutory reporting purposes. A $44 million after tax gain was included in cash profit in the year ended 30 June 2010 (2009: $28 million gain). representing Policyholder tax for statutory reporting purposes. This Policyholder tax is included in the Wealth Management business results includes recognising tax expense of $130 million, funds management income of $50 million and insurance income of $80 million for the year ended 30 June 2010. The gross up of these items are excluded from cash profit as they do not reflect the underlying performance of the business which is measured on a net of policyholder tax basis. Integration Progress – Bankwest and St Andrew‟s The integration of the Bankwest and St Andrew‟s businesses into the Group continues to progress smoothly, focused on operational alignment through a range of initiatives, including organisational Group property/procurement opportunities and driving operational efficiencies through process automation. One of the key initiatives was the provision of fee free reciprocal ATM access to Commonwealth Bank and Bankwest customers. restructuring, maximising The St Andrew‟s insurance business was sold on 1 July 2010. investments, The sale did not include financial planning superannuation, retirement businesses which continue to be integrated into the Group‟s Wealth Management business. The integration of St Andrew‟s remaining businesses will enable existing customers to benefit from a wide range of investment platforms and product offerings. the St Andrew‟s income and The total integration expenditure estimate has been revised down from $313 million to $286 million following the sale of the St Andrew‟s insurance business. The expenditure will continue to be incurred over three years to 2012. Integration expenditure incurred since the acquisition totals $152 million. Targeted cost synergies of $240 million (annualised run rate by 2012) are expected, down from the $250 million indicated at the last reporting date due to the sale of the St Andrew‟s insurance business. Annualised run rate synergies already achieved since acquisition total approximately $178 million, including the benefits associated with restructuring and the cessation of the Bankwest east coast branch rollout. Further IT and property synergies are currently being pursued. 30/06/10TotalIntegration Expenditure$M$MRestructuring-16Property613Operations2347IT expenditure969Other27Total40152 Review of Group Assets and Liabilities Interest bearing deposits Group Performance Analysis Interest bearing deposits increased by $6 billion to $366 billion as at 30 June 2010, a 2% increase on the prior year. The increase occurred predominantly in the second half of the year, driven by targeted campaigns in a highly competitive market delivering solid growth in both investment and transaction products. This was partially offset by a $18 billion decrease in certificates of deposits (included in other demand deposits) following the Group‟s strategy to reduce the share of short term wholesale funding. Excluding certificates of deposit, total retail and business deposits increased 8% compared to the prior year. Debt issues Debt issues have increased $32 billion to $121 billion as at 30 June 2010, a 35% increase on the prior year. The increase in term funding was driven by growth in lending assets and the Group‟s strategy to increase the share of long term wholesale funding and lengthen the tenor of the long term debt portfolio. Growth slowed in the second half in line with lower asset growth. Refer to Note 24 for further information on debt programs and issuance for the year ended 30 June 2010. Other interest bearing liabilities Other interest bearing liabilities including loan capital, liabilities at fair value through the income statement and amounts due to other financial institutions, decreased $2 billion to $41 billion as at 30 June 2010, a 5% decrease on the prior year due to lower amounts held on deposit from other financial institutions at year end. Non-interest bearing liabilities Non-interest bearing liabilities including derivative liabilities, insurance policy liabilities and bank acceptances, decreased $10 billion to $73 billion as at 30 June 2010, a 12% decrease on the prior year. This was driven predominantly by foreign exchange volatility impacting derivative liabilities hedging term debt and lower levels of bank acceptances. Movements through the second half of the year are consistent with derivative asset movements. Asset growth of $26 billion or 4% over the prior year, was driven mainly by home lending growth of $31 billion or 11%, partly offset by lower business and corporate lending balances as a result of institutional clients deleveraging, while small business lending remained strong. Asset growth was funded by an increase in customer deposits which now represents 58% of total funding at 30 June 2010 (2009: 56%). Whilst total wholesale funding was relatively stable over the prior year, the Group has increased the share of long term wholesale funding and lengthened the tenor of the long term portfolio to 3.8 years at 30 June 2010 (2009: 3.6 years). Home loans excluding securitisation Home loans excluding securitisation experienced strong growth through the year with balances increasing $34 billion to $314 billion as at 30 June 2010, a 12% increase on the prior year. Domestic volume growth and market share gains benefited from competitive customer rates, improved customer retention and strong growth in the first home buyer market. Growth has moderated slightly in the second half of the year in line with lower market demand for credit following recent monetary policy tightening by the RBA. Personal loans Personal loans including credit cards, margin lending and other personal loans increased $1 billion to $21 billion as at 30 June 2010, a 7% increase on the prior year. Growth was driven predominantly by an increase in credit card balances following the success of the Amex companion card release and targeted limit lending balances also increased, up 4% on the prior year to $5 billion partly due to the recovery in equity markets. Personal loan growth was relatively flat in the second half of the year including reduced margin lending balances in line with the recent volatility in equity markets. increase campaigns. Margin Business and corporate loans Business and corporate loans declined by $5 billion to $155 billion as at 30 June 2010, a 3% decrease on the prior year. This was impacted mainly by institutional clients deleveraging as a result of the economic environment (particularly in the first half of the year). This was partially offset by strong growth and market share gains in Business and Private Banking, particularly in loans to small business customers. Non-lending interest earning assets Non-lending interest earning assets increased $2 billion to $75 billion as at 30 June 2010 a 3% increase on the prior year, mainly driven by an increase in available for sale assets. Other assets for including bank acceptances of customers, Other assets derivative assets, provisions impairment, securitisation assets, insurance assets and intangibles, decreased $6 billion to $83 billion as at 30 June 2010, a 7% decrease on the prior year. lower securitisation and bank This was acceptances balances driven by lower market demand for these products. Other assets increased by 9% over the prior half due to higher derivative asset balances as a result of volatility in rate markets, with a interest foreign exchange and corresponding impact in derivative liabilities. impacted by Commonwealth Bank of Australia Annual Report 2010 17 Group Performance Analysis (1) Gross of provisions for impairment which are included in Other assets. (2) Comparative liability balances have been restated following alignment of Bankwest product classifications with the Group. (3) Comparative information has been restated to conform with presentation in the current period. 18 Commonwealth Bank of Australia Annual Report 2010 30/06/1031/12/0930/06/09Jun 10 vsJun 10 vsTotal Group Assets & Liabilities$M$M$MDec 09 % Jun 09 % Interest earning assetsHome loans including securitisation323,573310,822292,206411Less: securitisation(9,696)(10,884)(12,568)(11)(23)Home loans excluding securitisation313,877299,938279,638512Personal loans20,57220,55219,260-7Business and corporate loans154,742155,889160,089(1)(3)Loans, bills discounted and other receivables (1)489,191476,379458,98737Provisions for loan impairment(5,428)(5,244)(4,924)410Net loans, bills discounted and other receivables483,763471,135454,06337Non-lending interest earning assets74,61073,28672,68823Total interest earning assets563,801549,665531,67536Other assets82,52975,81188,6979(7)Total assets646,330625,476620,37234Interest bearing liabilitiesTransaction deposits (2)71,99969,36766,59948Saving deposits (2)78,70477,55477,49612Investment deposits (2)159,219145,506139,395914Other demand deposits (2)55,94769,28076,615(19)(27)Total interest bearing deposits365,869361,707360,10512Deposits not bearing interest8,7948,4608,61642Deposits and other public borrowings374,663370,167368,72112Debt issues (3)121,438109,19689,8681135Other interest bearing liabilities41,46143,85843,744(5)(5)Total interest bearing liabilities528,768514,761493,71737Securitisation debt issues (3)8,77210,01111,951(12)(27)Non-interest bearing liabilities73,22067,12183,2629(12)Total liabilities610,760591,893588,93034Provisions for impairment lossesCollective provision3,4613,4523,225-7Individually assessed provisions1,9921,8221,729915Total provisions for impairment losses5,4535,2744,954310Less off balance sheet provisions(25)(30)(30)(17)(17)Total provisions for loan impairment5,4285,2444,924410As at Asset Quality (1) Impairment expense annualised as a percentage of average RWA – Basel II including the Bankwest non-cash loan impairment expense of $304 million was 0.81% for the year ended 30 June 2010 and 0.68% for the half year ended 30 June 2010. (2) Impairment expense annualised as a percentage of average gross loans and acceptances including the Bankwest non-cash loan impairment expense of $304 million was 0.48% for the year ended 30 June 2010 and 0.40% for the half year ended 30 June 2010. (3) Impairment expense annualised as a percentage of average gross loans and acceptances prepared on a pro forma basis as at 30 June 2009 was 0.73%. Commonwealth Bank of Australia Annual Report 2010 19 30/06/1030/06/09Jun 10 vs30/06/1031/12/09Jun 10 vsAsset QualityJun 09 %Dec 09 %Gross loans and acceptances ($M)512,838488,5005512,838500,6442Risk weighted assets ("RWA") - Basel II ($M)290,821288,8361290,821297,449(2)Credit risk weighted assets ($M)256,763258,453(1)256,763258,466(1)Gross impaired assets ($M)5,2164,210245,2164,8238Net impaired assets ($M)3,2242,481303,2243,0017Collective provision as a % of risk weighted assets - Basel II1. 191. 127 bpts1. 191. 163 bptsCollective provision as a % of credit risk weighted assets - Basel II1. 351. 2510 bpts1. 351. 341 bpt Collective provision as a % of gross loans and acceptances0. 670. 661 bpt 0. 670. 69(2)bptsIndividually assessed provisions for impairment as a % of gross impaired assets38. 241. 1(290)bpts38. 237. 840 bptsImpairment expense annualised as a % of average RWA - Basel II - cash basis (1)0. 711. 25(54)bpts0. 470. 94(47)bptsImpairment expense annualised as a % of average gross loans and acceptances - cash basis (2) (3)0. 410. 68(27)bpts0. 280. 55(27)bptsFull Year EndedHalf Year Ended Retail Banking Services Financial Performance and Business Review Consumer Finance Consumer Finance income increased 8% on the prior year to $1,560 million, with continued focus on quality account acquisition and pricing to reflect the current risk environment. The success of the Amex companion card and targeted limit increase campaigns have driven 11% growth in Credit Card balances. Personal Loan balances increased 2% on the prior year. Other banking income decreased by 14% on the prior year, due to lower Credit Card loyalty income (offset in expenses). Excluding loyalty income, other banking income increased by 12% on the prior year largely due to volume growth. Retail Deposits Deposit income decreased by 9% on the prior year to $2,797 million. This result was significantly impacted following the introduction of ATM direct charging in March 2009, the reduction in exception fees ($137 million) from October 2009 and continued margin compression in a very competitive market. Volume growth remained robust with a 10% increase in balances on the prior year. The Group maintained its number one market share position in deposits and continued to maintain a significant gap to the nearest competitor. Distribution Income associated with the sale of foreign exchange products, and commissions received from the distribution of business banking and wealth management products through the retail distribution network increased by 29% on the prior year. Growth was driven by improved cross-sell performance and new product offerings such as Travel Money Card, particularly in the second half. The Group now holds the highest number of products per customer(2) of the main Australian banks. Operating Expenses Expenses remained flat on the prior year at $2,794 million. Excluding the impact of credit card related loyalty expenses, expenses increased by 5%. This reflects continuing investment in technology, marketing, risk management and collections. Efficiency gains have enabled a reduction in the expense to income ratio to 39.6%, down from 42.9% in 2009. Impairment Expense Impairment expense increased 5% on the prior year to $736 million, due to consumer finance volume growth, and increased arrears levels in the current economic environment. Impairment expense fell by 12% over the prior half, as the effects of tighter credit policies, and results of the Group‟s investment in credit decisioning and collections capabilities flow into improving arrears and loss rates. Current arrears and provisioning levels reflect the Group‟s commitment to supporting customers through difficult times with customer assistance programs. (1) Roy Morgan Research six months rolling average Main Financial Institution score. (2) Roy Morgan Research, Australians 14+, Banking and Finance products per Banking and Finance customers, 6 months rolling average. Retail Banking Services cash net profit after tax for the year ended 30 June 2010 was $2,461 million, which represents an increase of 17% on the prior year. This result reflects strong volume growth and a continued focus on cost efficiency, partially offset by a decrease in net interest margin. The ongoing focus on customer satisfaction has resulted in improvements to 14 year record high Main Financial Institution (“MFI”) customer satisfaction scores(1). Key highlights for the year include: Successful migration of over one million term deposit accounts to the new Core Banking platform, enabling real time visibility and improved functionality for customers; Continued NetBank enhancements benefiting over five million online customers, including free SMS services and new auto pay functionality; The introduction of Customer Service Deposit Specialists across Australia‟s largest branch network; Continued investment in Australia‟s leading ATM network, improving security and functionality; Increased efficiency and flexibility through the introduction of a paperless end to end Home Loan process; The launch of the market leading American Express companion card and a new low fee/low rate Gold Card; Continued service innovation including Online Credit Card activation, limit increase, applications and statements; and Supporting over 2,500 schools throughout Australia with reinvigorated School Banking and Financial Literacy programs. Progress has been recognised through a number of awards including: Money Magazine “Money Minder of the Year 2010”, recognising transaction, saving and cash management products; Third Party Banking awarded “Lender of the Year 2010” by the Mortgage and Finance Association of Australia for the second year running; “Australian Financial Institution of the Year (Retail)” at the 2010 Australian Banking and Finance Awards; and CANSTAR CANNEX awarding a 5-Star rating to the entire rated Retail Deposit product suite and an innovation award for Travel Money Card. In addition, people engagement measures remain high. Despite solid momentum in underlying business performance cash net profit after tax for the six months to 30 June 2010 of $1,216 million decreased 2% on the prior half. The result was impacted by the reduction in exception fees (since October 2009), margin compression from continued competition for deposits and three less calendar days compared to the first half. Home Loans Home Loans income increased 38% on the prior year to $2,405 million, benefiting from strong average volume growth of 18% and improved margins. Margins benefitted from a shift in portfolio mix as fixed rate loans written at historically low margins rolled off together with an increased proportion of loans written through proprietary channels. Volume growth was driven by competitive customer rates and strong growth in the first home buyer market. Margins were relatively stable in the second half, with volume growth slowing in line with the market demand for credit. The focus remains on profitable growth through quality new business. 20 Commonwealth Bank of Australia Annual Report 2010 Retail Banking Services (1) Consumer Finance includes personal loans and credit cards. Commonwealth Bank of Australia Annual Report 2010 21 ConsumerRetailHome Loans Finance (1) DepositsDistributionTotal$M$M$M$M$MNet interest income2,2131,1432,340-5,696Other banking income1924174572901,356Total banking income2,4051,5602,7972907,052Operating expenses(2,794)Impairment expense(736)Net profit before tax3,522Corporate tax expense(1,061)Cash net profit after tax2,461Full Year Ended 30 June 2010ConsumerRetailHome Loans Finance (1) DepositsDistributionTotal$M$M$M$M$MNet interest income1,5759582,392-4,925Other banking income1674836772241,551Total banking income1,7421,4413,0692246,476Operating expenses(2,781)Impairment expense(699)Net profit before tax2,996Corporate tax expense(889)Cash net profit after tax2,107Full Year Ended 30 June 2009ConsumerRetailHome Loans Finance (1) DepositsDistributionTotal$M$M$M$M$MNet interest income1,1225941,092-2,808Other banking income93205209166673Total banking income1,2157991,3011663,481Operating expenses(1,414)Impairment expense(345)Net profit before tax1,722Corporate tax expense(506)Cash net profit after tax1,216Half Year Ended 30 June 201030/06/1031/12/0930/06/09Jun 10 vsJun 10 vsMajor Balance Sheet Items $M$M$M Dec 09 % Jun 09 %Home loans (including securitisation)250,428240,515226,457411Consumer finance (1)12,96112,81212,06417Total assets263,389253,327238,521410Home loans (net of securitisation)243,695233,006217,855512Transaction deposits19,05020,81420,335(8)(6)Savings deposits59,20655,80655,33467Investments and other deposits71,71964,87560,8171118Deposits not bearing interest2,8402,9002,858(2)(1)Total liabilities152,815144,395139,344610As at Business and Private Banking Financial Performance and Business Review Regional and Agribusiness Banking Business and Private Banking delivered a strong performance, achieving 21% growth in cash net profit after tax to $893 million for the year ended 30 June 2010. This result reflects continued momentum across all businesses with operating performance growth of 19% and total banking income growing 11%. The revenue performance was driven by strong growth in business lending balances, stable margins and improved equities trading volumes within CommSec. Performance highlights during the past year included: Customer satisfaction remained a key strategic priority and the business has very strong momentum. According to the TNS Business Finance Monitor, the gap to the number one peer bank(1) has reduced to 3.3% in June 2010, down from 5.3% at June 2009(2). CBA has grown business customer satisfaction faster than any other peer bank during the past six months, and was the only one of the four major banks to improve customer satisfaction between June 2009 and June 2010. Further reinforcing the strong progress, in the recent DBM Business Financial Services Monitor(3) survey, CBA was recognised as the number one major bank across all business banking segments; A range of additional features were launched within CommBiz to help business customers conduct their transactions faster, including enhanced screen design and self-service capability; new online statement functionality; and reduced application turnaround times. CommBiz was also awarded “Best in Class” in the Banking category in the 2009 Interactive Media Awards; Private Bank was recognised in the Australian Private Banking Council Awards for 2010, winning Outstanding Private Banking Institution of the Year in the $1m to $10m category for the second year running; A market leading contactless card payment facility was launched in October 2009. This product is designed to speed up transaction times and reduce queues for business customers in service-based industries with over 12,000 terminals already rolled out; and CommSec was awarded several major industry accolades including a five star rating by CANSTAR CANNEX for both its online share trading and IRESS products, together with the AFR Smart Investor Blue Ribbon Award for “Online Broker of the Year” and “Margin Lender of the Year” in Money Magazine‟s Bank of The Year awards 2010. Compared to the prior half, cash net profit after tax increased 3%, with the first half of the year benefiting from higher equities trading volumes within CommSec and three more calendar days. Corporate Financial Services Corporate Financial Services income increased 11% on the prior year to $1,034 million. This was driven by business lending growth of 10%, while margins also improved. The benefit from increasing deposit balances was offset by lower deposit margins due to the impact of competitive pricing. Continued investment in people, systems and processes, including targeted customer contact campaigns, contributed to this segment of the business achieving number one in customer satisfaction(4) among the four major banks. Specific initiatives include the establishment of a telephony-based customer service model aimed at servicing emerging commercial customers, and the newly formed Acquisition Finance and Advisory team, which provides a business wealth transition proposition to corporate customers. 22 Commonwealth Bank of Australia Annual Report 2010 Regional and Agribusiness Banking income increased 11% on the prior year to $374 million. This reflected a 9% increase in lending balances and improved margins. Growth in asset finance volumes also contributed to this result, partly offset by the impact of competitive pricing on deposit margins, particularly in the second half of the year. Continued focus on enhancing customer advocacy resulted in the implementation of a number of specific initiatives in the areas of product innovation, simplified lending processes and targeted customer contact campaigns. Local Business Banking Local Business Banking income increased 10% on the prior year to $685 million. This was driven by growth in lending balances of 14%, with deposit income flat reflecting higher balances offset by the impact of competitive pricing on margins. The business has continued to leverage its unique service model, based on a personalised 24 hour, 7 days a week support centre while undertaking a number of online enhancements designed to improve customer experience. In addition, the business has further embedded business bankers within the retail branch network and has performed a financial health check on more than 38,000 individual businesses. Private Bank Private Bank income increased 10% on the prior year to $238 million. This was driven by growth in the lending book together with increased cross sell of financial advisory services. Deposit income remained flat year on year reflecting competitive term deposit pricing, particularly in the second half of the year. Equities and Margin Lending Equities and Margin Lending income increased 14% on the prior year to $471 million. This was due to growth in both retail and wholesale brokerage, with CommSec daily trades increasing 20% on the prior year. Due to market volatility experienced in the first three months of the financial year, CommSec daily trading volumes were 11% higher in the first half resulting in lower second half income. Margin lending balances increased 4% on the prior year partly due to the recovery in equity markets. CommSec cash management income increased 20% driven by continued balance growth. Operating Expenses Operating expenses of $1,310 million represented an increase of 3% on the prior year. This reflected a disciplined approach to expense management and ongoing productivity improvements which allowed continued investment across the business. Impairment Expense Impairment expense of $326 million increased 6% on the prior year, and decreased 32% on the prior half. The improving trend reflects the strong credit quality of the business lending portfolio and the ongoing initiatives introduced to further enhance the culture of proactive risk management among frontline staff. (1) Peer banks include NAB, ANZ, WBC and St George. (2) TNS Business Finance Monitor measured all businesses with annual turnover to $100 million (excluding agribusinesses), 6 months rolling average. (3) DBM Business Financial Services Monitor, measured micro business with turnover up to $1 million, small business with turnover of $1 million up to $5 million, medium business with turnover of $5 million up to $50 million and large business with turnover of over $50 million, 5 month data to May 2010. (4) TNS Business Finance Monitor, measured businesses with annual turnover between $10 and $100 million (excluding agribusinesses), 12 months rolling average. Business and Private Banking (1) Prior year comparatives have been restated for the impact of client resegmentations. (2) Other assets include intangible assets and Other non-interest bearing liabilities include bank acceptances. (3) Includes deposits relating to both Institutional Banking and Markets as well as Business and Private Banking customers. Commonwealth Bank of Australia Annual Report 2010 23 CorporateRegional & LocalEquities & > 0 = Error in calculationFinancialAgri-BusinessPrivateMarginServicesbusinessBankingBankLendingOtherTotal$M$M$M$M$M$M$MNet interest income548236457123216631,643Other banking income486138228115255271,249Total banking income1,034374685238471902,892Operating expenses(1,310)Impairment expense(326)Net profit before tax1,256Corporate tax expense(363)Cash net profit after tax893Full Year Ended 30 June 2010CorporateRegional & LocalEquities &FinancialAgri-BusinessPrivateMarginServicesbusinessBankingBankLendingOtherTotal$M$M$M$M$M$M$MNet interest income545220383107194761,525Other banking income385118238109218121,080Total banking income930338621216412882,605Operating expenses(1,272)Impairment expense(309)Net profit before tax1,024Corporate tax expense(288)Cash net profit after tax736Full Year Ended 30 June 2009 (1)CorporateRegional & LocalEquities &FinancialAgri-BusinessPrivateMarginServicesbusinessBankingBankLendingOtherTotal$M$M$M$M$M$M$MNet interest income2691162426110825821Other banking income255681125811317623Total banking income524184354119221421,444Operating expenses(671)Impairment expense(132)Net profit before tax641Corporate tax expense(188)Cash net profit after tax453Half Year Ended 30 June 201030/06/1031/12/0930/06/09Jun 10 vsJun 10 vsMajor Balance Sheet Items $M$M$M Dec 09 % Jun 09 %Interest earning lending assets (excluding margin loans)63,13260,07355,042515Bank acceptances of customers10,1559,36712,0998(16)Non-lending interest earning assets2953311,311(11)(77)Margin loans4,7715,0324,569(5)4Other assets (2)4484591,794(2)(75)Total assets78,80175,26274,81555Transaction deposits45,02641,53039,379814Savings deposits4,7444,8324,982(2)(5)Investment deposits37,14732,97230,2431323Certificates of deposit and other162173172(6)(6)Due to other financial institutions8954142,101large(57)Other non-interest bearing liabilities (2)15,32414,18117,9228(14)Total liabilities (3)103,29894,10294,799109As at Institutional Banking and Markets Financial Performance and Business Review Institutional Banking and Markets services the Group‟s major corporate, institutional and government clients using a relationship management model based on industry expertise and local insights. The Group‟s Total Capital Solutions offering includes debt and equity capital raising, financial and commodity price risk management and transaction banking capabilities. Institutional Banking and Markets has international operations in London, Malta, New York, New Zealand, Singapore, Hong Kong, Japan and Shanghai. Institutional Banking and Markets achieved a cash net profit after tax of $1,182 million for the year ended 30 June 2010, which represented a significant increase on the prior year. The result was driven by moderate growth in operating income and a substantial decline in impairment expense, partly offset by higher staff expenses. Operating income increased by 7% on the prior year to $2,567 million, reflecting: A solid 16% increase in Institutional Banking operating income as a result of good activity levels and disciplined pricing strategies, along with enhanced focus and performance in Transaction Banking including Payments and Deposits. Margins improved across the lending portfolio, of which 63% has been repriced since 1 July 2008. Operating income was impacted by a decline in Institutional lending balances of 17% as a result of the deleveraging of corporations during the year. The rate of decline in lending balances moderated through the year and had stabilised by year end; and Markets operating income declined by 10% following the exceptional growth of the prior year and also reflecting the strategic decision to withdraw from certain Structured Finance activities. Operating income for the six months to 30 June 2010 decreased 11% on the prior half to $1,212 million primarily due to the impact of favourable counterparty fair value mark to market valuations recognised in the prior half and lower markets trading income. The business continues to invest for the future, building its capacity in the Institutional Equities and Debt Capital Markets foreign exchange platform renewal and driving business, enhancements technology improved capabilities to enrich customer experience. Customer service continues to be a key focus with Institutional Banking and Markets, reflected in: information through for running “Loyalty East and Partners‟ semi-annual “Australian Institutional Banking & Markets” lists CBA as best in market for the fifth year to Relationship” and “Understanding of Customer‟s Business”(1); Peter Lee Relationship Banking Survey “Best in Customer Service” for 2009, rated Institutional Banking and Markets as the “Number one for overall Customer Satisfaction among clients where they have a Lead Relationship with CBA”; and IFR Magazine and IFR Asia awarded “Asian Securitisation Deal of the Year 2009” for the joint lead manager role and swap provider for the Members Equity Bank RMBS transaction. Performance highlights in relation to providing Total Capital Solutions to customers during the period include: Euromoney FX Survey 2010 recognised CBA for achieving the highest market share gain in the Australia region amongst its major competitors; 24 Commonwealth Bank of Australia Annual Report 2010 financing arrangement entered Euromoney awarded the Corporate Finance team the 2009 Public Private Partnership Project Finance (Asia) award for the the Queensland Department of Education and Training to finance, design, facilities maintenance for seven new schools; and construct and provide into with Mandated as Joint Lead Arranger on a number of ASX200 Initial Public Offerings and equity raisings, demonstrating increasing expertise in this product segment. Institutional Banking Net interest income increased 6% on the prior year to $1,127 million driven by higher margins whilst maintaining strong asset quality as well as focusing on innovative solutions to meet customer needs. In line with the broader market, lending balances have continued to decline as customers deleverage. This resulted in a 17% reduction in Institutional Lending balances compared to the prior year. Other banking income increased by 34% on the prior year to $718 million driven by higher fee income and sale of equity investments, partly offset by the costs associated with hedging exposures. Markets Net interest income decreased by 47% on the prior year to $207 million, primarily from margin compression in offshore branches as market liquidity gradually improved. This trend continued into the second half of the year with net interest income decreasing by 18% on the prior half. Other banking income increased by 24% on the prior year to $515 million, as the unfavourable impact of traded market instruments and the counterparty fair value mark to market valuations taken in the prior year was not repeated. In addition, the Institutional Equities and Debt Capital Markets division continued to contribute positively to the result with stronger client flows. Other banking income decreased by 49% on the prior half due to the favourable impact of counterparty fair value mark to market valuations recognised in the prior half and lower trading income. Operating Expenses Operating expenses increased 17% on the prior year to $792 million. The increase is predominantly due to higher staff expenses, additional operating lease depreciation expense and the continued investment in information technology. The expense to income ratio was 30.9%, up from 28.3% in 2009. Impairment Expense Impairment expense decreased significantly on the prior year to $249 million. This outcome benefitted from the improved operating environment reflected in improving customer credit ratings and the non-recurrence of a small number of large single name exposures which impacted the prior year. The decline in lending balances also led to lower levels of collective provisions. Corporate Tax Expense The corporate tax expense for the year ended 30 June 2010 was $344 million. The effective tax rate of 22.5% benefitted from investment allowance tax credits associated with the structured asset finance leasing business, in addition to profit generated in offshore jurisdictions that have lower corporate tax rates. (1) Source: East & Partners Australian Institutional Banking Markets 2006, 2007, 2008, 2009 and April 2010 Reports. Institutional Banking and Markets (1) Prior year comparatives have been restated for the impact of business resegmentation. (2) Other assets include intangible assets and derivative assets, and Other non-interest bearing liabilities include derivative liabilities. (3) 30 June 2009 comparative balances have been restated following the transfer of balances to Group Treasury. Commonwealth Bank of Australia Annual Report 2010 25 Institutional BankingMarketsTotal$M$M$MNet interest income1,1272071,334Other banking income7185151,233Total banking income1,8457222,567Operating expenses(792)Impairment expense(249)Net profit before tax1,526Corporate tax expense(344)Cash net profit after tax1,182Full Year Ended 30 June 2010Institutional Banking (1)Markets (1)Total$M$M$MNet interest income1,0623911,453Other banking income535414949Total banking income1,5978052,402Operating expenses(679)Impairment expense(1,708)Net profit before tax15Corporate tax expense151Cash net profit after tax166Full Year Ended 30 June 2009Institutional BankingMarketsTotal$M$M$MNet interest income55893651Other banking income388173561Total banking income9462661,212Operating expenses(405)Impairment expense72Net profit before tax879Corporate tax expense(242)Cash net profit after tax637Half Year Ended 30 June 201030/06/1031/12/0930/06/09Jun 10 vsJun 10 vsMajor Balance Sheet Items$M$M$M Dec 09 % Jun 09 %Interest earning lending assets54,89258,38767,213(6)(18)Bank acceptances of customers1,4141,5922,629(11)(46)Non-lending interest earning assets29,43429,15430,8581(5)Other assets (2)8,7553,56712,500large(30)Total assets94,49592,700113,2002(17)Certificates of deposit and other12,83413,06712,725(2)1Investment deposits5,0826,2899,008(19)(44)Due to other financial institutions10,05510,24311,627(2)(14)Liabilities at fair value through Income Statement3,9742,6222,5985253Debt issues (3)2,5062,6313,413(5)(27)Loan capital6276126442(3)Other non-interest bearing liabilities (2)23,82020,66333,86315(30)Total liabilities58,89856,12773,8785(20)As at Wealth Management Financial Performance and Business Review Underlying profit after tax increased 15% on the prior year to $592 million. The result was driven by solid growth in underlying volumes and improved investment markets. Funds under Administration increased 6% on the prior year to $180 billion as at 30 June 2010. Net outflows of $3 billion for the year were impacted by the outflow of short-term cash mandates from institutional investors. Cash net profit after tax for the Wealth Management business was up significantly on the prior year to $718 million. This outcome was driven by improved investment experience due to improved investment markets, unwinding of unrealised mark to market losses in the Guaranteed Annuities portfolio and the non- recurrence of impairments encountered in the prior year. Cash net profit after tax in the second half decreased 11% to $339 million impacted by General Insurance weather events and stabilising credit spreads. CFS Global Asset Management (CFS GAM) CFS Global Asset Management provides asset management services to wholesale and institutional investors. Underlying profit after tax of $236 million was up 14% on the prior year, reflecting strong investment performance and higher base fee contribution partially offset by a strengthening Australian dollar, lower performance from infrastructure assets. fees and dividends received Funds under Management as at 30 June 2010 was $144 billion, up 4% on the prior year. The impact of improved conditions in equity markets was partially offset by outflows in short term cash mandates. Investment performance remains solid with 75%, 67% and 76% of funds outperforming benchmark over one, three and five year periods respectively, reflecting the success of CFS GAM‟s research-based investment philosophy. Highlights include: First State Investments named Asia Asset Management winner in the 2009 Best of the Best Awards, in the category of “Best Performance in Global Emerging Markets” (3 and 5 year periods); CFS Retail Property Trust (CFX) was named “A-REIT of the year” by Property Investment Research (PIR); The continuing success of the First State European Diversified Infrastructure Fund (EDIF), which raised €365 million from investors; Launch of the first Global Agribusiness Funds to be managed by CFS GAM‟s Global Resources team; and First State Investments won Specialist Group of the year, Best Global Single the global Country/Specialist Regional Portfolio at Investment Week‟s Fund Manager of the Year Awards 2010. Resources Fund, and Cash net profit after tax of $266 million was up significantly on the prior year due to improved performance and market conditions. Cash net profit after tax of $129 million in the second half was down 6% due to increased strategic investment spend. Colonial First State Colonial First State provides product packaging, administration, distribution and advice to retail customers. Underlying profit after tax increased 69% on the prior year to $147 million, driven by improved net flows and market conditions. of $3 billion for the year ended 30 June 2010. FirstChoice retained the number two Flagship platform position with a market share of 10.7% and captured 20.9% of net flows for the year ended March 2010(1). Highlights include: in the annual CFS won “Best Fund Manager” service level award from Wealth Insights for the 3rd year running; CFS FirstWrap platform ranked 2nd Investment Trends platform benchmarking survey; won Super FirstChoice Wholesale “Superannuation Platform of the Year” and FirstChoice Defensive was the winner of “Conservative Retail Multi- sector Funds” in the AFR Blue Ribbon Awards 2009; Realindex Fundamental Index fund has raised $1.6 billion in the eighteen months since inception; and Term Deposit and Cash accounts held with CBA exceed $3 billion. Personal Cash net profit after tax was up 67% on the prior year to $144 million and up 44% in the second half to $85 million reflecting increased volumes and the full impact of margin increases experienced in the first half. CommInsure CommInsure is a provider of life and general insurance in Australia. Underlying profit after tax declined 6% on the prior year to $299 million. CommInsure‟s strategy during the year focussed on improving service, streamlining processes and enhancing core business profitability. insurance businesses will continue to be the core focus, in order to offset the declining contribution from the legacy funds management business, which is in long term run-off. the profitability of Increasing the Retail Life insurance business performance was relatively stable over the prior year, including strong inforce premium growth of 12%, offset by higher claims experience. Wholesale Life insurance business performance improved, despite a reduction in inforce premiums, due to improved claims management and sustainable pricing. General Insurance business performance improved over the prior year, experiencing strong growth in inforce premiums, up 13% to $408 million, and improved loss ratios despite major weather events. Highlights include: Awarded “Life Company of the Year” by Plan for Life; Awarded the Association of Financial Advisers “Service Quality Award 2009”, recognising excellence in new business/underwriting and claims services; Awarded “Outstanding Value for Home and Contents Insurance” by CANSTAR CANNEX; and Sale of the St Andrew‟s insurance business to the Bank of Queensland effective, 1 July 2010. Cash net profit after tax was up significantly on the prior year to $396 million driven by positive investment experience due to improved investment markets and the unwinding of unrealised mark to market losses in the Guaranteed Annuities portfolio. Cash net profit after tax decreased 26% in the second half, impacted by weather events and stabilising credit spreads. Operating Expenses Total operating expenses of $1,210 million increased 1% on the prior year. Expenses have been managed in line with current market conditions, while maintaining strategic investment spend. The FirstChoice platform performed well with positive net flows 1) Most recent market data available from Plan for Life quarterly market report. 26 Commonwealth Bank of Australia Annual Report 2010 Wealth Management (1) Prior year comparative has been restated for the resegmentation of St Andrew‟s. Commonwealth Bank of Australia Annual Report 2010 27 ColonialCFS GAMFirst StateCommInsureOtherTotal$M$M$M$M$MFunds management income789811226(2)1,824Insurance income--684-684Total operating income789811910(2)2,508Volume expenses(126)(160)(209)(1)(496)Net operating income663651701(3)2,012Operating expenses(358)(444)(281)(127)(1,210)Net profit before tax305207420(130)802Corporate tax expense(69)(60)(121)40(210)Underlying profit after tax236147299(90)592Investment experience after tax30(3)972126Cash net profit after tax266144396(88)718Full Year Ended 30 June 2010ColonialCFS GAMFirst State (1)CommInsure (1)Other (1)Total$M$M$M$M$MFunds management income773712260-1,745Insurance income--657-657Total operating income773712917-2,402Volume expenses(134)(154)(195)-(483)Net operating income639558722-1,919Operating expenses(353)(435)(283)(129)(1,200)Net profit before tax286123439(129)719Corporate tax expense(79)(36)(120)30(205)Underlying profit after tax20787319(99)514Investment experience after tax(114)(1)(128)18(225)Cash net profit after tax9386191(81)289Full Year Ended 30 June 2009 (Pro forma)ColonialCFS GAMFirst StateCommInsureOtherTotal$M$M$M$M$MFunds management income399410108(1)916Insurance income--331-331Total operating income399410439(1)1,247Volume expenses(66)(77)(102)(1)(246)Net operating income333333337(2)1,001Operating expenses(188)(213)(143)(65)(609)Net profit before tax145120194(67)392Corporate tax expense(30)(34)(54)23(95)Underlying profit after tax11586140(44)297Investment experience after tax14(1)28142Cash net profit after tax12985168(43)339Half Year Ended 30 June 2010 Wealth Management (1) FUM & FUA do not include the Group's interest in the China Cinda JV. (2) This asset class includes Wholesale and Listed property trusts as well as indirect Listed Property Securities funds which are traded through the ASX. (3) Inforce premiums relate to risk business. (4) St Andrew's balances are included on a pro forma basis in 2009. (5) Lapses include a $130 million reduction as a result of the loss of the wholesale portfolio for the Australian Super business. 28 Commonwealth Bank of Australia Annual Report 2010 Pro forma30/06/1030/06/09Jun 10 vs30/06/1031/12/09Jun 10 vsSummary$M$M Jun 09 %$M$M Dec 09 %Funds under administration - average (1)179,802168,0717181,709178,7382Funds under administration - spot (1)179,614169,2106179,614185,699(3)Funds under management - average (1)144,624136,6046145,469144,4071Funds under management - spot (1)144,298138,2044144,298149,025(3)Retail Net funds flows (Australian Retail)246(1,301)large(126)372largeFull Year EndedHalf Year EndedPro forma30/06/1030/06/09Jun 10 vs30/06/1031/12/09Jun 10 vsFunds Under Management (FUM) (1)$M$M Jun 09 %$M$M Dec 09 %Australian equities21,49917,7412121,49923,009(7)Global equities45,68535,7052845,68542,7257Cash and fixed interest54,18061,395(12)54,18059,193(8)Property and Infrastructure (2)22,93423,363(2)22,93424,098(5)Total144,298138,2044144,298149,025(3)Full Year EndedHalf Year EndedPro forma30/06/1030/06/09Jun 10 vs30/06/1031/12/09Jun 10 vsSources of Profit from CommInsure$M$M Jun 09 %$M$M Dec 09 %Life insurance operating marginsPlanned profit margins166159486808Experience variations614(57)(4)10largeFunds management operating margins120154(22)6060-General insurance operating margins7(8)large(2)9largeOperating margins299319(6)140159(12)Investment experience after tax97(128)large2869(59)Cash net profit after tax396191large168228(26)Full Year EndedHalf Year EndedOpeningClosingBalanceSales/NewBalance30/06/09 BusinessLapses30/06/10Annual Inforce Premiums (3)$M$M$M$MRetail life765223(135)853Wholesale life (5)43566(178)323General insurance360107(59)408Total1,560396(372)1,584Full Year Ended 30 June 2010OpeningClosingBalanceSales/NewBalance30/06/08 BusinessLapses30/06/09Annual Inforce Premiums (3)$M$M$M$MRetail life (4)658239(132)765Wholesale life366103(34)435General insurance279136(55)360Total1,303478(221)1,560Full Year Ended 30 June 2009 (Pro forma)OpeningClosingBalanceSales/NewBalance31/12/09 BusinessLapses30/06/10Annual Inforce Premiums (3)$M$M$M$MRetail life810106(63)853Wholesale life29749(23)323General insurance39149(32)408Total1,498204(118)1,584Half Year Ended 30 June 2010 Wealth Management (1) Custom Solutions includes the FirstWrap product. (2) Includes cash management trusts. (3) This is an estimate of the Retail Funds that align to Plan for Life market share releases. (4) Includes regular premium plans. These retail products are not reported in market share data. (5) Includes life company assets sourced from retail investors but not attributable to a funds management product. (6) Includes foreign exchange gains and losses from translation of internationally sourced business. Commonwealth Bank of Australia Annual Report 2010 29 OpeningInvestmentClosingBalanceIncome &Balance30/06/09InflowsOutflowsNet FlowsOther (6)30/06/10Funds Under Administration$M$M$M$M$M$MFirstChoice35,95512,418(9,019)3,3994,28643,640Custom Solutions (1)5,3411,713(1,497)2165576,114Standalone (including Legacy) (2)24,9504,021(7,303)(3,282)1,27422,942Retail products (3)66,24618,152(17,819)3336,11772,696Other retail (4)1,15442(129)(87)861,153Australian retail67,40018,194(17,948)2466,20373,849Wholesale45,09217,638(24,631)(6,993)2,95141,050Property18,722955(1,759)(804)(751)17,167Other (5)3,23636(145)(109)(94)3,033Domestically sourced134,45036,823(44,483)(7,660)8,309135,099Internationally sourced34,76011,748(7,275)4,4735,28244,515Total Wealth Management169,21048,571(51,758)(3,187)13,591179,614Full Year Ended 30 June 2010OpeningInvestmentClosingBalanceIncome &Balance30/06/08InflowsOutflowsNet FlowsOther (6)30/06/09Funds Under Administration$M$M$M$M$M$MFirstChoice38,70710,862(8,617)2,245(4,997)35,955Custom Solutions (1)6,2572,176(2,165)11(927)5,341Standalone (including Legacy) (2)30,7744,686(8,089)(3,403)(2,421)24,950Retail products (3)75,73817,724(18,871)(1,147)(8,345)66,246Other retail (4)1,36654(208)(154)(58)1,154Australian retail77,10417,778(19,079)(1,301)(8,403)67,400Wholesale52,37621,457(27,089)(5,632)(1,652)45,092Property20,2101,281(2,336)(1,055)(433)18,722Other (5)3,248508(165)343(355)3,236Domestically sourced152,93841,024(48,669)(7,645)(10,843)134,450Internationally sourced32,7309,588(8,728)8601,17034,760Total Wealth Management185,66850,612(57,397)(6,785)(9,673)169,210Full Year Ended 30 June 2009 (Pro forma)OpeningInvestmentClosingBalanceIncome &Balance31/12/09InflowsOutflowsNet FlowsOther (6)30/06/10Funds Under Administration$M$M$M$M$M$MFirstChoice43,1796,267(4,693)1,574(1,113)43,640Custom Solutions (1)6,147910(746)164(197)6,114Standalone (including Legacy) (2)26,1061,937(3,758)(1,821)(1,343)22,942Retail products (3)75,4329,114(9,197)(83)(2,653)72,696Other retail (4)1,22221(64)(43)(26)1,153Australian retail76,6549,135(9,261)(126)(2,679)73,849Wholesale47,3727,262(13,039)(5,777)(545)41,050Property17,924115(821)(706)(51)17,167Other (5)3,06818(70)(52)173,033Domestically sourced145,01816,530(23,191)(6,661)(3,258)135,099Internationally sourced40,6815,614(3,728)1,8861,94844,515Total Wealth Management185,69922,144(26,919)(4,775)(1,310)179,614Half Year Ended 30 June 2010 New Zealand Financial Performance and Business Review Sovereign Insurance Sovereign‟s cash net profit after tax(1) for the full year ended 30 June 2010 was NZ$103 million, a decrease of 13% on the prior year. The key drivers of the Sovereign underlying result were: Claims volumes increased significantly in the current year, particularly in the first half, primarily in the health, trauma and disability income areas; One-off NZ$18 million gain recognised in the second half of the year due to the revaluation of deferred tax on policy liabilities driven by the reduction in New Zealand corporate tax rate from 30% to 28% on 1 July 2011; Valuation gains on policy liabilities were recognised in the prior year, driven by lower New Zealand bond rates. This gain has partially reversed this year as bond rates recovered; Inforce premiums increased by 7% over the prior year with market share of 31%(2) and persistency remaining superior to the rest of the New Zealand market; and Despite a fall in share of new business sales to 27%(2), Sovereign continues to lead the market in new business sales. Sovereign‟s cash net profit after tax(1) for the half year ended 30 June 2010 was NZ$76 million, significantly up on the first half result of NZ$27 million due to improved claims experience and the deferred tax revaluation on policy liabilities. (1) Includes the underlying ASB and Sovereign results, capital charges and other costs allocated to ASB and Sovereign. (2) As at 31 March 2010. New Zealand cash net profit after tax(1) for the year ended 30 June 2010 was NZ$461 million, a decrease of 14% on the prior year. The result reflects the impact of tightening credit markets, which has led to increased funding costs, along with the recession in New Zealand impacting the banking and insurance businesses. New Zealand cash net profit after tax(1) for the half year ended 30 June 2010 was NZ$275 million, a 48% increase on the prior half driven mainly by lower impairment expense in ASB and improved claims experience and deferred tax revaluation on policy liabilities in Sovereign. ASB Bank ASB Bank cash net profit after tax (1) for the year ended 30 June 2010 was NZ$354 million, a decrease of 13% on the prior year. This was achieved in a very challenging environment for the New Zealand banking industry. The key drivers of the ASB underlying result for the year were: A continued change in portfolio mix from fixed rate to higher margin floating rate home loans, offset by lower margins on deposits in an extremely competitive market; Retail deposits grew 3% to NZ$31 billion as at 30 June 2010 as ASB offered competitive term investments rates to customers, as part of its strategy to grow local funding and reduce reliance on the wholesale funding market. Market share for retail deposits improved slightly to 21.6% over the prior year; Home loan market share decreased marginally to 23.0% with a 2% increase in balances over the prior year to NZ$38 billion; Business lending market share increased to 9.3% with a decline of 1% in balances over the prior year; Other banking income decreased 33% on the prior year to NZ$342 million reflecting reduced trading income as markets stabilised during the year. In addition, early repayment adjustment fees relating to customers breaking fixed rate mortgages decreased compared to the prior year. Early repayment adjustment fees have continued to decline in the second half of the year to more normal levels; and Impairment expense has decreased 47% on the prior year due to a continuing improvement in the underlying economy, including lower unemployment and stronger business sentiment. There has also been a focus on collections and recoveries procedures. ASB Bank cash net profit after tax(1) for the half year ended 30 June 2010 was NZ$197 million, a 25% increase on the prior half driven mainly by lower impairment expense. An amount of NZ$209 million in relation to the settlement of tax on New Zealand structured finance transactions has been included in the Group‟s statutory net profit after tax in the first half. 30 Commonwealth Bank of Australia Annual Report 2010 New Zealand (1) Other includes ASB and Sovereign funding entities and elimination entries between Sovereign and ASB. (2) Total Other banking income disclosed in AUD includes realised gains or losses associated with the hedge of the New Zealand operations. Commonwealth Bank of Australia Annual Report 2010 31 ASBSovereignOther (1)TotalTotalNZ$MNZ$MNZ$MNZ$MA$MNet interest income908-(9)899716Other banking income (2)342-(31)311278Total banking income1,250-(40)1,210994Funds management income61-(3)5846Insurance income-25115266213Total operating income1,311251(28)1,5341,253Operating expenses(666)(205)42(829)(667)Impairment expense(125)--(125)(100)Net profit before tax5204614580486Corporate tax expense(166)451(120)(99)Underlying profit after tax3549115460387Investment experience after tax-12(11)11Cash net profit after tax3541034461388Full Year Ended 30 June 2010ASBSovereignOther (1)TotalTotalNZ$MNZ$MNZ$MNZ$MA$MNet interest income905-24929756Other banking income (2)509-(16)493404Total banking income1,414-81,4221,160Funds management income65-(5)6049Insurance income-269(15)254207Total operating income1,479269(12)1,7361,416Operating expenses(634)(200)41(793)(649)Impairment expense(238)--(238)(194)Net profit before tax6076929705573Corporate tax expense(200)274(169)(135)Underlying profit after tax4079633536438Investment experience after tax-22(22)--Cash net profit after tax40711811536438Full Year Ended 30 June 2009ASBSovereignOther (1)TotalTotalNZ$MNZ$MNZ$MNZ$MA$MNet interest income468-(5)463365Other banking income (2)135-(16)119106Total banking income603-(21)582471Funds management income28-(2)2621Insurance income-15010160127Total operating income631150(13)768619Operating expenses(343)(105)20(428)(342)Impairment expense2--22Net profit before tax290457342279Corporate tax expense(93)221(70)(55)Underlying profit after tax197678272224Investment experience after tax-9(6)33Cash net profit after tax197762275227Half Year Ended 30 June 2010 New Zealand (1) Includes deposits due to Group companies. (1) Prior year comparatives have been restated to conform to the presentation in Wealth Management business. 32 Commonwealth Bank of Australia Annual Report 2010 30/06/1031/12/0930/06/09Jun 10 vsJun 10 vsMajor Balance Sheet ItemsNZ$MNZ$MNZ$M Dec 09 % Jun 09 %Home lending 37,77837,59336,991-2Assets at fair value through Income Statement5,8155,6007,4294(22)Other lending assets15,96016,18816,327(1)(2)Non-lending interest earning assets1,5432,8551,522(46)1Other assets4,7234,7125,198-(9)Total assets65,81966,94867,467(2)(2)Deposits30,88930,44929,89213Liabilities at fair value through Income Statement13,26115,22216,535(13)(20)Debt issues3,8053,6703,56447Due to other financial institutions (1)6,4886,5005,048-29Other liabilities6,6406,6608,066-(18)Total liabilities61,08362,50163,105(2)(3)AssetsASB Bank63,55764,64865,230(2)(3)Other2,2622,3002,237(2)1Total assets65,81966,94867,467(2)(2)LiabilitiesASB Bank60,01061,32762,072(2)(3)Other1,0731,1741,033(9)4Total liabilities61,08362,50163,105(2)(3)As atSources of Profit from Insurance30/06/1030/06/09Jun 10 vs30/06/1031/12/09Jun 10 vsActivitiesNZ$MNZ$M Jun 09 %NZ$MNZ$M Dec 09 %The Margin on Services profit from ordinaryactivities after income tax is represented by:Planned profit margins8184(4)483345Experience variations1012(17)19(9)largeOperating margins9196(5)6724largeInvestment experience after tax1222(45)93largeCash net profit after tax103118(13)7627largeFull Year EndedHalf Year EndedNew Zealand - Funds Under 30/06/1030/06/09Jun 10 vs30/06/1031/12/09Jun 10 vsAdministrationNZ$MNZ$M Jun 09 %NZ$MNZ$M Dec 09 %Opening balance7,6118,001(5)8,7177,61115Inflows3,3392,173541,7771,56214Outflows(2,462)(1,925)28(1,338)(1,124)19Net Flows877248large439438-Investment income & other590(638)large(78)668largeClosing balance9,0787,611199,0788,7174Full Year EndedHalf Year EndedNew Zealand - Annual Inforce30/06/1030/06/09Jun 10 vs30/06/1031/12/09Jun 10 vsPremiumsNZ$MNZ$M Jun 09 %NZ$MNZ$M Dec 09 %Opening balance516468105355164Sales/New business (1)97100(3)4849(2)Lapses (1)(59)(52)13(28)(31)(10)Other movements (1)---(1)1largeClosing balance55451675545354Half Year EndedFull Year Ended This page has been intentionally left blank Commonwealth Bank of Australia Annual Report 2010 33 Bankwest Financial Performance and Business Review Retail Bankwest cash net profit after tax for the year ended 30 June 2010 was $60 million, up from the pro forma profit of $3 million in the prior year. The result reflected a strong operating performance, partly offset by higher loan impairment expense. Key highlights of the operating performance were: Home loan balances increased 19% on the prior year to $42 billion, driven by improved customer retention rates, competitive loan rates and an increased number of branches on the East Coast. Margins improved in the first half due to repricing for the current risk environment and increasing funding costs. Banking income increased by 25% to $1,720 million, supported by strong retail lending volume growth and higher margins; Retail deposit balances decreased 9% on the prior year and margins the highly remained competitive market. relatively stable reflecting Operating expenses decreased by 3% to $880 million, driven by efficiency gains and a continued focus on discretionary expenditure; and Other banking income decreased 3% on the prior year. The reduction in ATM and exception fees was partially offset by higher activity fees from increased credit card usage. The expense to income ratio decreased from 66% to 51%. Business The cash net profit after tax was unfavourably impacted by loan impairment expense of $754 million, up 65% on the prior year. The increase in impairment expense was mainly due to property related exposures, primarily in Queensland and New South Wales. Deposit balances increased 9% over the prior year in a highly competitive market, with more pronounced growth in the second half driven by attractive product offerings and a strong focus on sales. Lending balances increased 10% over the prior year, driven by growth in home loans, with lending growth moderating in the second half. Bankwest retains an absolute focus on customer satisfaction, with a commitment to value, innovation and service. A number of initiatives have been implemented during the year to meet this vision. These include: The introduction of e-statements for Retail Customers, with over 140,000 customers converting from paper to e-statements in the four months since the initiative was launched in February 2010; Continuing to introduce late night and weekend trading across the branch network, particularly to stores located in metropolitan, high density areas; A re-invigoration of the brand in Western Australia to embed the market leading position on the West Coast; and Continued investment in the customer network, which now includes 138 branches, 742 ATMs and phone and internet banking platforms. The success of the above initiatives has been reflected in: An improvement in customer satisfaction scores, up 2.7% from June 2009 to 78.9% at June 2010(1); An increase in home loan market share, up 0.45% to 3.62% as at 30 June 2010; Six products receiving gold awards in Money Magazine‟s 2010 Best of the Best Awards, including Best Everyday Branch Access account and Best Kid‟s Savings account; and Three retail deposits receiving a five star rating from CANSTAR CANNEX. In addition, the annual Gallup People & Culture Survey was completed in February with results showing a significant increase in the level of staff engagement across the business. Business lending balances decreased 3% on the prior year to $24 billion due to weaker market demand and a strategic shift in focus away from the property sector. Lending margins were broadly in line with the prior year. Business deposits increased 19% on the prior year due to strong demand for money market products and a focus on sales. This compares to system growth of 2%. Business deposit margins increased due to a focus on profitable growth. Other banking income decreased 10% on the prior year as lower capital markets volatility resulted in less client demand for trading and risk products. Operating Expenses Operating expenses decreased 3% over the prior year to $880 million. Expense management remains a key focus, with numerous expense containment and initiatives currently in progress. integration Impairment Expense Impairment expense for the year was $754 million, up 65% from the prior year. The increase in impairment expense was mainly due to property related exposures, primarily in Queensland and New South Wales. Arrears levels have improved during the year, with greater than 90 day rates declining across the entire retail portfolio, in particular credit cards. The Group has also included $304 million of loan impairment expense as a non-cash item which relates specifically to the Bankwest pre-acquisition loan portfolio. Since the initial review of the Bankwest portfolio, further detailed work has been undertaken into the Bankwest business banking portfolio. This comprehensive review identified many pre- acquisition loans reflecting poor asset quality, high loan to value ratios and insufficient covenant coverage. This resulted in significant risk grade reassessments and security revaluations with loan impairment expense increasing $304 million. These loans are confined to the pre-acquisition business banking book. Given the one off nature of the impairment and the fact it relates to an understatement of the provisioning on the pre-acquisition portfolio, this additional amount of loan impairment expense has been recorded as a non-cash item. This is consistent with the treatment of the gain on acquisition of Bankwest. (1) Source: Roy Morgan Research satisfaction with Main Financial Institution. 34 Commonwealth Bank of Australia Annual Report 2010 Bankwest (1) Includes amounts due to Group companies (30 June 2010: $15.4 billion, 31 December 2009: $16.7 billion, 30 June 2009: $19.1 billion). (2) 30 June 2009 comparative liability balances have been restated following alignment of product classifications with the Group. Commonwealth Bank of Australia Annual Report 2010 35 Pro forma30/06/1030/06/0930/06/1031/12/09$M$M$M$MNet interest income1,4871,121760727Other banking income233251112121Total banking income1,7201,372872848Operating expenses(880)(909)(437)(443)Impairment expense(754)(457)(441)(313)Net profit before tax866(6)92Corporate tax expense(26)(3)2(28)Cash net profit after tax603(4)64Half Year EndedFull Year Ended30/06/1031/12/0930/06/09Jun 10 vsJun 10 vsMajor Balance Sheet Items$M$M$M Dec 09 % Jun 09 %Home lending (including securitisation)41,68139,13135,048719Other lending assets25,97526,21426,366(1)(1)Assets at fair value through Income Statement21348(85)(96)Other assets7,0267,0836,865(1)2Total assets74,68472,44168,32739Transaction deposits4,8544,6194,80351Savings deposits7,5148,2048,708(8)(14)Investment deposits29,10625,88224,6391218Certificates of deposit and other13051157large(17)Debt issues10,2118,8434,90315largeDue to other financial institutions (1)15,38217,70019,119(13)(20)Other liabilities2,6712,0892,0592830Total liabilities (2)69,86867,38864,38849As at Other Divisions Financial Performance and Business Review Corporate Centre Corporate Centre includes the results of unallocated Group support functions such as Investor Relations, Group Strategy, Secretariat and Treasury. Operating income in the Corporate Centre represents the business activities of the Group‟s Treasury function. Treasury is primarily focussed on the management of the Group‟s interest rate risk, funding and liquidity requirements, and management of the Group‟s capital. The Treasury function includes: Asset & Liability Management: manages the interest rate risk of the Group‟s non-traded balance sheet using transfer pricing to consolidate risk into Treasury and hedging the residual mismatch between assets and liabilities using swaps, futures and options; Liquidity Operations: manages the Group‟s short term wholesale funding and prudential liquidity requirements; Group Funding: manages the Group‟s long term wholesale funding requirements; and Capital Management: manages requirements. the Group‟s capital Corporate Centre cash net profit after tax for the year ended 30 June 2010 was $445 million, a 31% decrease on the prior year. Total banking income decreased 6% to $884 million driven by: Lower Asset & Liability Management income from the management of short dated interest rate risk exposures; partially offset by Increased Capital Management income due to the benefit of higher earnings on capital following capital raisings in the prior year. Operating expenses increased significantly to $276 million due to the unfavourable impact of investment market performance on the Group‟s defined benefit superannuation fund ($103 million) and an increase in Group provisions for staff costs. Corporate Centre cash profit after tax for the half year ended 30 June 2010 was $231 million, an 8% increase on the prior half. The increase was driven by lower defined benefit superannuation fund expense. Eliminations/Unallocated Eliminations/Unallocated includes intra-group elimination entries arising on consolidation, centrally raised provisions and other unallocated revenue and expenses. Eliminations/Unallocated cash net profit after tax for the year ended 30 June 2010 was a $97 million loss, representing a $14 million improvement on the prior year. The result included the release of central impairment provisions. IFS Asia International Financial Services Asia (“IFS Asia”) incorporates the Asian retail banking operations (Indonesia, Vietnam, India and Japan) investments in Chinese retail banks and the joint venture life in Indonesia. It does not include the Business and Private Banking, Institutional Banking and Markets, and Colonial First State Global Asset Management businesses in Asia. insurance business and insurance operations life IFS Asia cash net profit after tax for the year ended 30 June 2010 was $45 million, an increase of 50% over the prior year. The result was underpinned by strong income growth from the Chinese retail banks and Indonesian life insurance business, partially offset by an increase in impairment expense. IFS Asia cash net profit after tax for the half year ended 30 June 2010 was $23 million, an increase of 5% over the prior half driven by strong banking income, offset by increased impairment expense. The key activities in IFS Asia during the year were: The Group entered into a strategic partnership (15% ownership) with Vietnam International Bank (VIB) in April 2010 and settlement is anticipated post year end. The Group‟s Ho Chi Minh City branch which opened in August 2008 has had strong customer growth over the year and opened 19 ATM‟s across the City; The Group entered into a new strategic partnership (38% ownership) with Bank of Communications (BoCom) for the life insurance joint venture in Shanghai. BoCom is China‟s fifth largest bank. The life insurance joint venture was renamed to BoCommLife Insurance Company Limited and commenced operations in January 2010. BoCommLife was ranked 1st of 14 foreign and joint venture companies for Bancassurance new business premium in Shanghai in quarter one 2010; The Group‟s first branches in India and Shanghai were opened in the second half of the year; Participated in the Bank of Hangzhou and Qilu Bank equity raisings to maintain the Group‟s 20% shareholding in each of the Banks. The equity raisings were to strengthen capital ratios and support growth. Bank of Hangzhou was ranked number one among all City Commercial Banks in a review by Chinese Banker magazine; PT Bank Commonwealth in Indonesia maintained its number one ranking among foreign banks for customer service as rated by Synovate and opened 20 new branches; and Development of the Bancassurance model between PT Bank Commonwealth and PT Commonwealth Life in in PT Indonesia. 27% of new business sales Commonwealth Life for the period were sourced via the PT Bank Commonwealth branch network (increased from 3% last year). Fiji Fiji cash net profit after tax until the date of disposal on 15 December 2009 was $6 million, up from $2 million in the prior year. A loss on sale of $30 million, which includes realised structural foreign exchange losses, has been recorded as a non- cash item. 36 Commonwealth Bank of Australia Annual Report 2010 Other Divisions (1) Excludes the impact of the 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 (June 2010: $259 million; June 2009: $275 million; half year to 30 June 2010: $136 million). Commonwealth Bank of Australia Annual Report 2010 37 CorporateEliminations/IFS AsiaFiji Centre UnallocatedTotal$M$M$M$M$MNet interest income (1)629883(221)733Other banking income (1)12431(106)22Total banking income18612884(327)755Funds management income---2828Insurance income406-248Total operating income22618884(297)831Operating expenses(164)(12)(276)-(452)Impairment expense(11)1-10090Net profit before tax517608(197)469Corporate tax expense(7)(1)(163)66(105)Non-controlling interests(2)--(14)(16)Underlying profit after tax426445(145)348Investment experience after tax3--4851Cash net profit after tax456445(97)399Full Year Ended 30 June 2010CorporateEliminations/IFS AsiaFiji Centre UnallocatedTotal$M$M$M$M$MNet interest income (1)5933710(141)661Other banking income (1)102-230(33)299Total banking income16133940(174)960Funds management income---2929Insurance income3717-1367Total operating income19850940(132)1,056Operating expenses(157)(37)(55)-(249)Impairment expense(4)(4)-(17)(25)Net profit before tax379885(149)782Corporate tax expense(7)(7)(237)36(215)Non-controlling interests(3)--(27)(30)Underlying profit after tax272648(140)537Investment experience after tax3--2932Cash net profit after tax302648(111)569Full Year Ended 30 June 2009CorporateEliminations/IFS AsiaFiji Centre UnallocatedTotal$M$M$M$M$MNet interest income (1)32-370(137)265Other banking income (1)66-67(38)95Total banking income98-437(175)360Funds management income---1414Insurance income21--324Total operating income119-437(158)398Operating expenses(85)-(124)-(209)Impairment expense(8)--160152Net profit before tax26-3132341Corporate tax expense(4)-(82)18(68)Non-controlling interests(1)--(6)(7)Underlying profit after tax21-23114266Investment experience after tax2--2224Cash net profit after tax23-23136290Half Year Ended 30 June 2010 Investment Experience (1) Includes Shareholders‟ funds in the CFS Global Asset Management, Colonial First State and CommInsure businesses. 38 Commonwealth Bank of Australia Annual Report 2010 Full Year EndedPro formaAs reported30/06/1030/06/09Jun 10 vs30/06/1031/12/09Jun 10 vs30/06/09Investment Experience$M$M Jun 09 %$M$M Dec 09 %$MWealth Management183(313)large66117(44)(317)New Zealand16(83)3(2)large8Other5244182527(7)42Investment experience before tax236(263)large94142(34)(267)Corporate tax expense(58)70large(25)(33)(24)71Investment experience after tax178(193)large69109(37)(196)Full Year EndedHalf Year EndedAustralia (1)New ZealandAsia TotalShareholder Investment Asset Mix (%)%%%%Local equities1--1International equities-1--Property14-210Sub-total151211Fixed interest24519732Cash6148157Sub-total85999889Total100100100100As at 30 June 2010Australia (1)New ZealandAsia TotalShareholder Investment Asset Mix ($M)$M$M$M$MLocal equities111-12International equities-1-1Property268-2270Sub-total27922283Fixed interest46228377822Cash1,20126611,468Sub-total1,663549782,290Total1,942551802,573As at 30 June 2010 Risk Governance The Board and its Risk Committee operate as the highest level of the Group‟s risk governance and under the direction of their respective charters. Risk Management encourage employees to raise issues they believe reveal weaknesses in the Group‟s risk undertakings. Further risk governance and management is included in Note 38 to the Financial Statements. information on financial The Board Charter stipulates amongst other things that: Risk Appetite The Board is responsible for “overseeing the establishment of systems of risk management by approving accounting policies, financial statements and reports, credit policies and standards, risk management policies and procedures and operational risk policies and systems of internal controls”; and The CEO is responsible for “implementing processes, including a system of internal controls and audits, to identify and manage risks that are material to the business of the Group”. A primary action of the Risk Committee is to construct the Group‟s Risk Appetite for adoption by the Board. The Risk Committee is also responsible for agreeing and recommending risk management framework consistent with the agreed risk appetite. for Board approval a Further information of the role and function of the Risk Committee is discussed in the Corporate Governance section of this report. At management level, risk governance is undertaken by a structured hierarchy of committees and forums across the Group, each with specified accountabilities. Risk Management Organisation Independent risk management for the Group is undertaken by the Chief Risk Officer, who uses a matrix management approach within the Risk Management Business Unit. This Unit is comprised of risk management teams embedded in the businesses and Group functional teams that develop controls for each type of risk and who help the Group understand risk aggregation to produce enterprise wide risk management. Employees within these risk management teams report directly through to the Chief Risk Officer who in turn reports to the CEO and who also has direct reporting requirements to the Risk Committee. Risk management professionals deployed in each Business Unit measure risks and assist the business in making decisions that optimise their risk-adjusted returns. They also take actions to ensure businesses adhere to risk policies and procedures. Whilst the Risk Management function is an important component of the risk management framework, business managers are the consequential owners of the risks taken in their businesses. As such owners, they are expected to support their businesses with employees who are appropriately knowledgeable about risk and its management. The Risk Appetite Framework helps to protect the Group from control and other operational failures, creating transparency over risk management and strategy decisions and, in turn, promotes a strong risk culture. Furthermore, governance processes and disciplines create independence of the Risk Management function from the Group‟s Business Units and the internal audit function, as well as encourage and protect whistle blowing actions when required. Independent review of the risk management framework is carried out by Group Audit through audits of the actions of business and risk management In addition, risk management and audit support “whistle blower” protocols to teams. it The Risk Appetite of the Group represents the types and degree of risk that its shareholders. is willing to accept for Fundamentally, it guides the Group‟s risk culture and sets out quantitative and qualitative boundaries on risk-taking activities which apply Group wide. The Board is of the view that a well articulated Risk Appetite is important in giving the Group‟s stakeholders a clear expectation as to how the Group will operate from a risk taking perspective. This expectation is defined by a number of principles and metrics that are aligned to the Board‟s risk philosophy and sets minimum standards for shareholder value; allowing for resiliency factors in capital, funding, asset/liability management, our liquidity, risk culture, and other risk mitigants. Risk Appetite is dynamic in nature and is reviewed on a regular basis in conjunction with the Group‟s strategic plans and business actions. The validation of strategic plans against the Risk Appetite ensures that the assessment of the adequacy of capital and contingent capital plans into the future are also aligned with the Risk Appetite. The Group‟s risk appetite is to take risks that are adequately rewarded and that support its aspiration of achieving solid and sustainable growth in shareholder value. Supporting this appetite, the Group will: Operate responsibly, meet the needs of its customers, provide excellent customer service and maintain impeccable professional standards and business ethics; Make business decisions only after careful recognition, assessment, management and pricing of risk; Understand the risks it takes on, increasing exposure to new strategic initiatives and products only as sufficient experience and insight is gained; Exercise disciplined moderation in risk-taking, underpinned with strength in capital, funding and liquidity; Diligently strive to protect and enhance its reputation whilst being intolerant of a wide range of actions including regulatory and compliance breaches and risks associated with health and safety of employees; Maintain a control environment constraints, minimises risks; and that, within practical Promote a culture aimed at the achievement of best practice, quality outcomes. Risk Policies and Tolerances support Statement by: the Risk Appetite Summarising the principles and practices to be used by the Group in managing its major risks; Quantifying the financial operating limits for major risks, principally credit risk, market risk (both traded and non- traded) and operational risk; and Stating clearly the types of risk outcomes to which the Group is intolerant. The Group regularly benchmarks and aligns its policy framework against existing prudential and regulatory standards. Potential developments in Australian and international standards and best practice generally are considered during a review. Commonwealth Bank of Australia Annual Report 2010 39 Risk Management Risks that are readily quantifiable (such as credit, market and liquidity risks) have their risk profiles restricted by limits. Other significant risk categories are not managed in terms of defined financial limits, but via comprehensive qualitative management standards and procedures. Principal Risk Types The principal risk types, their relevant governing policies and how they support the Risk Appetite are outlined in the table below. Risk Type Governing Policies How Policy Supports Risk Appetite Principal Risk Type / Governance Framework Credit Risk including Concentration Risk Group Credit Policy; Country Risk Policy; Aggregation Policy; Large Credit Exposure Policy; Industry Sector Concentration Policy; and Securitisation Policy. Quantitative limits/tolerances: Control Country Risk through a limits structure that captures cross- border credit risk exposures to other countries or entities based overseas; Set industry limits for exposures by industry; Govern the authority of management with regard to the amount of credit provided to any single counterparty after applying the aggregation policy within the Credit Risk Rated segment; and Govern all Securitisation activities undertaken by the Group. Market Risk Group Market Risk Policy; and Funds Management and Insurance Market Risk Policy. Quantitative limits/tolerances: Traded Market Risk (Total VaR and Stress Testing limits); Non-Traded Market Risk (Market Value Sensitivity and Net Interest Earnings at Risk limits for Interest Rate Risk in the Banking Book); Seed Trust Market Risk limits; Lease Residual Value Risk limits; Investment mandates for insurance Asset and Liability Management Risk (including VaR and stress testing limits); and Non-Traded Equity Investment limits. Liquidity and Funding Risk Group Liquidity and Funding Policy. Quantitative limits/tolerances: Liquid asset holdings under name crisis scenario; and Wholesale funding limits. Operational Risk Operational Risk Policy and Framework. Management via: A suite of risk mitigating policies; Reporting and case management of loss and near loss incidents; Comprehensive risk assessment and control assurance processes; Quantitative Risk Assessment Framework and Capital modelling; and Support from skilled risk professionals embedded throughout the Group. Strategic Business Risk Strategic Framework. Management via a suite of management controls including: Strategic planning; Strategic implementation; and Financial management. Reputational Risk Ethics Framework. Management via: Support from risk professionals embedded throughout the Group; and Crisis management testing of leadership team. Insurance Risk Risk Management Framework. Management via: Compliance Risk Compliance Risk Management Framework (“CRMF”). Risk Management Strategy and Risk Statement; Underwriting and claims standards; Retaining the right to amend premiums on risk policies; and Re-insurance purchases under policy guidance. Management via: The CRMF Minimum Group standards for compliance; Obligations Register and Guidance Notes that detail specific requirements and accountabilities for each Business Unit; Business Unit compliance frameworks; and Support from skilled compliance professionals embedded throughout the Group. 40 Commonwealth Bank of Australia Annual Report 2010 Credit Risk Credit risk is the potential of loss arising from failure of a debtor or counterparty to meet their contractual obligations. At a portfolio level, credit risk includes concentration risk arising from interdependencies between counterparties (large credit exposures), and concentrations of exposure to countries, industry sectors and geographical regions. The Group‟s credit risk policies have been developed as a matter of sound risk management practice and in accordance with the expectations of regulators‟ prudential standards. 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. risk management and Further measurement is included in Note 39 to the Financial Statements. information on credit Market Risk Market risk is the potential of loss arising from adverse changes in interest rates, foreign exchange rates, commodity and equity prices, credit spreads, lease residual values, and implied volatility levels. Further information on market risk is included in Note 40 to the Financial Statements. Liquidity and Funding Risk 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 41 to the Financial Statements. Risk Management Within the Group, accountability for operational risk has been structured into “Three Lines of Defence” as illustrated below: responsible Line 1 – Business Management Business managers are for managing operational risk for their business and the processes they own. This includes understanding and articulating their risk profile, testing and monitoring key controls, and escalating, reporting and rectifying incidents and control weaknesses; Line 2 – Risk Management & Compliance Group, Business Unit and Divisional Risk Management and Compliance units support the risk strategy and philosophy, support business decisions within the Group‟s risk appetite and facilitate the embedding of the Group‟s operational risk framework and culture within the Group‟s businesses; and Line 3 – Internal and External Audit Group Audit is responsible for reviewing risk management frameworks and Business Unit practices risk management and internal controls. External Audit is responsible for providing an independent opinion on financial statements and control environments of the Group and Bank. the for risk measurement methodology The Group‟s operational combines expert assessment of individual risk exposures with loss data from various sources to determine potential loss, purchase insurance and calculate operational risk economic capital. The Group benchmarks and monitors its insurance risk transfer program for efficiency and effectiveness. This is primarily achieved total shareholder returns and determines the most appropriate blend of economic capital coverage and insurance risk transfer. through a methodology that optimises Operational Business Risk Strategic Business Risk Operational risk is defined as the risk of economic loss resulting from: Inadequate or failed internal processes; People and systems; or External events. It includes legal, regulatory, fraud, business continuity and technology risks. The Group‟s operational risk management framework supports the achievement of its financial and business goals. Framework objectives approved by the Risk Committee are: 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: Macroeconomic conditions; Competitive forces at work; or Social trends. Strategic business risk is taken into account when defining business strategy and objectives. The Board receives reports on business plans, major projects and change initiatives and monitors progress and reviews successes compared to plans. Maintenance of an effective internal control environment Reputational Risk 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; and Making decisions based upon an informed risk-return analysis and appropriate standards of professional practice. 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. Security risk is defined as threats associated with theft and fraud, information and IT security, protective security and crisis management. Reputational risk can be defined as the risk arising from negative the part of customers, counterparties, perception on shareholders, investors, debt-holders, market analysts, regulators and other relevant parties. This risk can adversely affect the Group‟s ability to maintain existing, or establish new, business relationships and access to sources of funding. Reputational risk is multidimensional and reflects the perception of other market participants. Furthermore, it exists throughout the organisation and exposure to reputational risk is essentially a function of risk management processes, as well as the manner and efficiency with which management responds to external influences on Group-related respects, adverse reputational risk outcomes flow from poor outcomes from the failure to manage other types of risk. the adequacy of the Group‟s transactions. In many internal Commonwealth Bank of Australia Annual Report 2010 41 Risk Management Insurance Risk Insurance risk is the risk of loss due to increases in policy benefits arising from variations in the incidence or severity of insured events. Insurance Risk exposure arises in the insurance business as the risk that claims payments are greater than expected. In the life insurance business this arises primarily through mortality (death) or morbidity (illness or injury) risks being greater than expected, whereas for the general insurance business variability arises mainly through weather related incidents and similar calamities, as well as general variability in home, motor and travel insurance claim amounts. The management of insurance risk is an integral part of the operation of the insurance business and is essential in the control of claims on an end-to-end basis, from underwriting to claim termination or payment, without which significant potential for negative financial results arises. The major methods of mitigating insurance risk are: Sound product design and pricing, to ensure that robust procedures are in place and there are no risks which have not been priced into contracts; Regular review of insurance experience, so that product design and pricing remains sound; Carrying out underwriting, so that the level of risk associated with an individual contract can be accurately assessed, charged through premium rates, and reserved for; Claims management, where an assessment is made such that only genuinely insured claims are admitted and paid, and only paid to the insured extent; and Transferring a proportion of the risk carried to reinsurers. for The insurance risk management framework is subject to a process of regular review and enhancement. Further information on the Life Insurance Business is included in Note 33 to the Financial Statements. Compliance Risk 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. The Group‟s Compliance Risk Management Framework (“CRMF”) is a key element of the Group‟s integrated risk management framework. The CRMF is designed to meet the Group‟s obligations under relevant financial services laws and industry standards. It incorporates a number of components including Group Policies 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 and 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 42 Commonwealth Bank of Australia Annual Report 2010 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. Stress Testing Framework testing is used, Stress in combination with other risk management practices, to understand, manage and quantify the Group‟s risks. The Group regularly carries out stress tests across its various businesses as part of: Formal business and strategic planning as well as capital assessment at Board level; Regular risk management stress testing exercises; Business contingency planning; and Requests from regulators or external agencies. In addition to more standard risk measures, regular and ad-hoc risk stress testing is undertaken to identify and assess the risk profile of the Group. The stress testing framework includes: Group-wide credit risk stress scenarios embedded in the strategic planning process, which informs and engages the in assessing capital adequacy under various Board operating circumstances using current macro-economic parameter settings. These tests are conducted across Businesses with the results aggregated to the Group level; and Risk Management related stress testing, which supports enhanced risk identification, assessment and management within the Group‟s Risk Appetite. Such stress testing facilitates a more robust understanding of the Group‟s risks facilitates better management policies and and predictability of capital requirements in more extreme circumstances. Stress testing also provides an input into the development of capital contingency plans which detail how the Group would respond to the need for increases in capital held to cover the potential for unexpected future outcomes. For further detail on the Group‟s assessment of capital, refer to the section on Capital Management and Note 31 to the Financial Statements. Specific risk types for which stress tests are conducted on a routine basis for business risk management purposes are outlined below. Credit Risk Business Units conduct credit risk stress tests on the Home Loan portfolio, as well as for secured and unsecured non- mortgage products (Credit Cards, Personal Loans, and Cheque Accounts), in conjunction with Group-wide stress tests. Business Units also conduct stress testing of the commercial loan portfolio. Market Risk Stress testing is performed on the traded market risk, non-traded interest rate risk, non-traded equity risk and non-traded insurance risk portfolios. Stress testing is undertaken on a frequency from daily to monthly for a holding period consistent with the appropriateness of the risks being considered. The stress events considered are extreme but plausible market movements and have been backtested against moves seen during 2008 and 2009 at the height of the global financial crisis. The results are reported to the Board‟s Risk Committee and the Group Asset and Liability Committee (“ALCO”) on a regular basis. Stress tests also include a range of forward looking macro scenario stresses. Liquidity and Funding Risk A range of liquidity stress tests that determine survival horizons are performed and reported to Group ALCO on a monthly basis. The stress tests look to identify the timeframe over which high quality liquid assets could survive under various stress liability run-off scenarios, including a “name crisis” and various “market- systemic crises”. The funding early warning indicators monitor a range of balance sheet metrics focussing on external market conditions, changing patterns of business activity and concentration risk within the Group‟s wholesale funding profile. These are also reported to Group ALCO on a regular basis. Operational Risk The Group has a framework for operational risk stress testing. The purpose of this framework is to assess the potential for operational risk outcomes. In addition, crisis management exercises are undertaken to test Executive leadership team preparedness to handle a large, unexpected operational risk failure. Operational risk stress tests are undertaken on an annual basis. Crisis management exercises are more frequent. Risk Management Initiatives In order to remain effective in constantly evolving economic, strategic and regulatory environments, the risk management framework and culture requires a continuous cycle of review and refinement. Over the last twelve months the Group has made the following key refinements to its framework: Upgraded its risk management governance structure by formalising various committees and forums across the Group and refreshing the charters for the key governance committees; Established formal risk appetite statements for each of the Group‟s major Business Units, to articulate at a more granular level the types and degrees of risk that the Group is willing to accept, including specific risk tolerances and intolerances; Embedded, more fully and formally, considerations of risk into remuneration policy and practices; Further enhanced the Group‟s policy framework including the articulation of appropriate lower level sub-limits that are consistent with Group level limits; Integrated subsidiary entities more fully into the Group‟s risk management framework and practices to ensure a more consistent and efficient risk environment. The most significant example of this is the Group supporting Bankwest‟s efforts to extend the Group‟s accreditation to use the Advanced Internal Ratings Based approach to determine regulatory capital; risk optimisation strategies and Undertaken various portfolio reviews that have provided insight into key risk dependencies and resulted in adjusting risk exposure levels based on available risk-adjusted returns; Secured Executive and Board support and funding for projects that will substantially enhance core risk systems, data and processes. Key appointments have been made and work on delivering these projects is in train; Risk Management the credit decisioning process, the Strengthened monitoring of deteriorating credits, the provisioning process and risk-based pricing models; Management completed annual reviews of policies relating to Credit Risk, Market Risk, Operational Risk, Compliance Risk and the Insurance Risk Management Framework. Liquidity and Funding Risk policy was also reviewed and the main parameter settings confirmed as being appropriate for current and forecast economic conditions; Continued to develop the Group‟s risk modelling and stress testing capabilities to meet the demands of an ever- changing macroeconomic environment; and Monitored and responded to regulatory changes and likely future regulatory change, both of which are being driven by evolving thinking by regulators, banking and economic organisations in light of the learnings from the global financial crisis. In particular, the Group has increased its participation in global financial forums and taken actions to influence regulators and Government to help shape future regulatory reform. Commonwealth Bank of Australia Annual Report 2010 43 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 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”), which includes both Bankwest and ASB Bank (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 Group 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 46 to 48. 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 Group. 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 2009 and 2010 Financial Years were in compliance with both APRA minimum the Board Approved capital adequacy requirements and minimums. The Bank is required to inform APRA immediately of any breach its minimum capital adequacy or potential breach of 44 Commonwealth Bank of Australia Annual Report 2010 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. APRA does not permit banks to pay dividends from retained profits without prior approval. Under APRA guidelines, the expected dividend must be deducted from Tier One Capital. Current Regulatory Framework Basel II The Basel II framework consists of three pillars: Pillar 1 – defines the rules for calculating the minimum regulatory capital requirements for credit, market and operational risk; Pillar 2 – addresses the supervisory review process including 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. the Group‟s internal The Group was granted “advanced” Basel II accreditation by APRA on 10 December 2007. 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 were adopted in the calculation of RWA effective from 1 January 2008. APRA specifically requested Australian banks to incorporate regulatory capital for Interest Rate Risk in the Banking Book (IRRBB) in their assessment of total regulatory capital from 1 July 2008. Interest rate risk in the banking book is the risk that the Bank‟s profit derived from Net Interest Income (interest earned less interest paid), in current and future periods, is adversely impacted from changes to interest rates. This is measured from two perspectives; firstly by quantifying the change in the net present value of the balance sheet‟s future earnings potential and secondly; as the anticipated change to the Net Interest Income which is reported in the Bank‟s Income Statement. This is not a requirement under the Basel II Pillar 1 framework. There is an agreed methodology for measuring market risk for traded assets, which remained unchanged from Basel I. The work undertaken for the Bank to achieve the advanced accreditation has provided increased sophistication in risk measurement and management, thereby increasing the flexibility with which the Group manages its decision making and capital management. the Group with Proposed Regulatory Changes In the current environment, regulatory reform is expected to continue to evolve as global regulators seek to address risks highlighted through the global financial crisis. Basel Committee proposal On 17 December 2009 the Basel Committee on Banking Supervision (“BCBS”) released its consultation package of proposals to strengthen global capital and liquidity regulations. The capital proposals relate to the quality, consistency and transparency of capital, enhancing the risk coverage framework, introduction of a non-risk based leverage ratio, reducing pro- cyclicality, and addressing systemic risk. Subsequent to this, the BCBS has issued more details with respect to specific areas addressed in the original proposals. This includes a refinement of the definition of capital and the leverage ratio and a proposal for the introduction of a counter cyclical capital buffer. Delivery of a fully calibrated and finalised package of capital reforms is expected by the end of 2010 with implementation due to commence from 2012. The leverage ratio is set to be phased in over a more extended time period including parallel reporting undertaken between 2013 and 2017 with a view to migrating to Pillar 1 in 2018. Basel II enhancements announced in July 2009, relating to securitisation and market risk, intended for introduction by the end of 2010 have been deferred until the end of 2011. Supervision of conglomerate groups On 18 March 2010, APRA released a Discussion Paper titled “Supervision of Conglomerate Groups”. The proposal aims to extend APRA‟s current prudential supervision framework to conglomerate groups that have material operations in more than one APRA-regulated industry and/or have one or more material unregulated entities. The aims of the Level 3 proposal are to ensure that a conglomerate group holds adequate capital to protect the APRA-regulated entities from potential contagion and other risks within the group. APRA is conducting a Quantitative Impact Study (“QIS”) in the second half of 2010, prior to finalising the standards in 2011 and implementation of the Level 3 supervision framework in 2012. Capital standards for general insurers and life insurers On 13 May 2010, APRA released a Discussion Paper titled “Review of capital standards for general insurers and life insurers” and more detailed technical papers in July 2010. APRA proposes introducing a common framework for required capital and eligible capital across general insurers and life insurers. APRA is conducting a QIS on the proposed changes in the second half of 2010 calendar year. The final capital standards are expected to be released in mid-2011 and to take effect in 2012. Active Capital Management The Group maintains a strong capital position with the capital ratios well in excess of APRA minimum capital adequacy requirements (Prudential Capital Ratio (“PCR”)) and the Board Approved minimum levels at all times throughout the 2010 financial year. The Tier One Capital and Total Capital ratios as at 30 June 2010 were 9.15% and 11.49% respectively. Tier One Capital increased by five basis points over the prior half, reflecting strong profit growth and a net reduction in Risk Weighted Assets (“RWA”), partially offset by the provision for final dividend. No allowance has been taken into account in the capital ratios for the Dividend Reinvestment Plan (“DRP”) in respect of the 30 June 2010 final dividend, as it has been assumed the DRP is expected to be satisfied in full by an on market purchase of shares. The Group‟s Total Capital dropped by 14 bps over the prior half year to 11.49%, with the improvement in Tier One more than offset by the planned redemptions of Lower Tier Two Capital. RWA were $291 billion at 30 June 2010, a decrease of $7 billion since 31 December 2009, primarily influenced by a $6 billion decrease in IRRBB RWA, reflecting a change in repricing and yield curve risk. During the year ended 30 June 2010, Tier One Capital increased by 108 bps reflecting the impact of the strong profit performance and the issue of PERLS V. Total Capital increased by 107 bps since June 2009, benefitting from the improvement Capital Management in Tier One Capital and a major Lower Tier Two Capital issue, partially offset by planned redemption of Lower Tier Two Capital. Further details on the PERLS V and Lower Tier Two Capital are provided in the capital initiatives section below. Capital Initiatives The following significant initiatives were undertaken during the financial year to actively manage the Group‟s capital: Tier One Capital The allocation of $685 million of ordinary shares in order to satisfy the DRP in respect of the final dividend for the 2008/2009 financial year, representing a DRP participation rate of 39%, inclusive of DRP discount of 1.5%; The allocation of $772 million of ordinary shares in order to satisfy the DRP, in respect of the interim dividend for the 2009/2010 financial year, representing a participation rate of 42%, inclusive of DRP discount of 1.5%; and The Group issued $2 billion ($1,964 million net of issue costs) PERLS V securities in October 2009 which qualify as Non-Innovative Tier One Capital. Tier Two Capital Issue of $1.7 billion (EUR 1 billion) subordinated Lower Tier Two debt in August 2009; offset by Redemption of subordinated Lower Tier Two debt including $615 million (USD 500 million) in August 2009, $300 million in February 2010 and a further $450 million (EUR 300 million) in March 2010. Regulatory Capital Requirements for Other Major ADI‟s in the Group ASB Bank Limited ASB Bank Limited (ASB Bank) is subject to regulation by the Reserve Bank of New Zealand (“RBNZ”). The RBNZ applies a similar methodology to APRA in calculating regulatory capital requirements. ASB Bank operates under Basel II advanced status. At 30 June 2010 ASB Bank had a Tier One ratio of 10.85% and a Total Capital ratio of 13.20%. ASB Bank was in compliance with its regulatory capital requirements at all times throughout the 2010 financial year. Bankwest Bankwest operates as a separate ADI and is separately regulated by APRA. Bankwest operates under the standardised Basel II methodology. There is a program to extend the Group‟s advanced accreditation to determine regulatory capital to Bankwest. Bankwest‟s capital ratios, as at 30 June 2010, are in excess of both APRA minimum requirements and Board approved minimum levels. The Tier One ratio was 8.59% and Total Capital was 12.39%. Bankwest was in compliance with its regulatory capital requirements at all times during the 2010 financial year. Regulatory Capital Requirements for 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 (1) The Shareholders‟ fund is subject to a separate capital requirement. Commonwealth Bank of Australia Annual Report 2010 45 Capital Management 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 Insurance Business”, issued by the New Zealand Society of Actuaries. The Group‟s general insurance businesses are regulated by APRA under the Insurance Act 1973. The Group determines insurance businesses in capital requirements for general accordance with APRA Prudential Standards. Fund managers in Australia are subject to “Responsible Entity” Capital Adequacy the Australian Securities and Investment regulation by 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 insurance and funds management companies held assets in excess of regulatory capital requirements at 30 June 2010. The Group‟s Australian and New Zealand insurance and funds management businesses held $1,007 million of assets in excess of regulatory solvency requirements at 30 June 2010 (2009: $1,036 million). (1) Represents shares held by the Group's life insurance operations and employee share scheme trusts. (2) Trust Preferred Securities 2006 issued 15 March 2006 of USD700 million. These instruments qualify as Tier One Innovative Capital of the Group. (3) The Group's general reserve, capital reserve and foreign currency translation reserve (excluding balances related to non consolidated subsidiaries) qualify as Fundamental Tier One Capital. (4) Represents expected dividends required to be deducted from current period earnings. (5) The 30 June 2010 capital position assumes that the Bank‟s Dividend Reinvestment Plan (DRP) in respect of the June 2010 final dividend will be satisfied in full by an on-market purchase of shares. The DRP in respect of the December 2009 interim dividend and the June 2009 final dividend were satisfied through the issue of shares. (6) Represents retained earnings adjustment for non-consolidated subsidiaries. This includes adjustments to the extent to which profits from non-consolidated subsidiaries are not repatriated back to the Bank in dividends (June 2010: $360 million, December 2009: nil, June 2009: nil). The retention of these profits will be used to fund the future growth of these operations. This has been offset by the one-off write back adjustments upon adoption of AIFRS of $752 million. (7) Non-controlling interest classified as Tier One Innovative Capital under Basel II regulations. Comprised predominately of ASB Perpetual Preference Shares of NZD550 million issued by New Zealand subsidiary entities. These shares are non-redeemable and carry limited voting rights. 46 Commonwealth Bank of Australia Annual Report 2010 GroupBasel IIBasel IIBasel II30/06/1031/12/0930/06/09Risk Weighted Capital Ratios%%%Tier One9.159.108.07Tier Two2.342.532.35Capital Base11.4911.6310.42GroupBasel IIBasel IIBasel II30/06/1031/12/0930/06/09Regulatory Capital$M$M$MTier One CapitalOrdinary Share Capital23,08122,34421,642Treasury shares (1)298262278Ordinary Share Capital and Treasury Shares23,37922,60621,920Other Equity Instruments939939939Trust Preferred Securities 2006 (2)(939)(939)(939)Reserves (3)1,089459516Cash flow hedge reserve417625813Employee compensation reserve(125)15-Asset revaluation reserve(194)(169)(173)Available-for-sale investments reserve(173)(50)55Foreign currency translation reserve related to non-consolidated subsidiaries82112Total Reserves1,0229011,223Retained Earnings and current period profits9,9389,3207,825Expected dividend (4)(2,633)(1,841)(1,747)Estimated reinvestment under Dividend Reinvestment Plan (5)-608507Retained earnings adjustment for non-consolidated subsidiaries (6)392752752Other(52)(91)(181)Net Retained Earnings7,6458,7487,156Non-controlling Interest (7)523521520ASB Perpetual Preference Shares (7)(505)(505)(505)Non-controlling interests less ASB Perpetual Preference Shares181615Total Fundamental Tier One Capital32,06432,27130,314 Capital Adequacy (continued) Capital Management (1) APRA approved Innovative Tier One Capital instruments (PERLS III and Trust Preferred Securities 2003 and 2006). (2) Non-controlling 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. (3) Comprises PERLS IV $1,465 million (less costs) issued by the Bank in July 2007 and PERLS V $2,000 million (less costs) issued by the Bank in October 2009. These have been approved by APRA as Tier One Non-Innovative Capital instruments. (4) 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. (5) Represents total Goodwill and other intangibles (excluding capitalised computer software costs) which is required to be deducted from Tier One Capital. (6) 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. (7) Capital deduction at 30 June 2010 of $90 million (after tax) to ensure the Group has sufficient provisions and capital to cover credit losses estimated to arise over the full life of the individual facilities, as required by APS 220. (8) Represents 50% Tier One and 50% Tier Two Capital deductions under Basel II. (9) Represents the Group's non-controlling interest in major infrastructure assets and unit trusts. During the half year ended 30 June 2010 the Bank sold its remaining interest in ENW Limited to the First State European Diversified Infrastructure Fund (“EDIF”) and acquired a 10% interest in Air Lease Corporation, a US based aircraft leasing business. The Bank‟s holding in AWG plc was sold to EDIF in the half year ended 31 December 2009. (10) Represents the net equity within the non-consolidated subsidiaries (primarily the Colonial Group) which is deducted 50% from Tier One and 50% from Tier Two Capital. This deduction is net of $1,495 million in Non-Recourse Debt issued by Colonial Finance Limited (December 2009: $1,538 million, June 2009: $1,707 million) and the Colonial Hybrid Issue $700 million (December 2009: $700 million, June 2009: $700 million). (11) Regulatory Expected Loss (pre tax) using stressed loss given default assumptions associated with the loan portfolio in excess of eligible credit provisions (collective provision and general reserve for credit losses net of tax and individually assessed provision pre tax) are deducted 50% from both Tier One and Tier Two capital. Commonwealth Bank of Australia Annual Report 2010 47 GroupBasel IIBasel IIBasel II30/06/1031/12/0930/06/09Regulatory Capital$M$M$MResidual Tier One CapitalInnovative Tier One CapitalNon-cumulative preference shares (1)2,7282,6992,762Non-controlling Interests (2)505505505Eligible loan capital236225248Total Innovative Tier One Capital3,4693,4293,515Non-Innovative Residual Tier One Capital (3)3,4073,4071,443Less: Residual capital in excess of prescribed limits transferred to Upper Tier Two Capital (4)(225)(73)-Total Residual Tier One Capital6,6516,7634,958Tier One Capital Deductions - 100%Goodwill and other intangibles (excluding software) (5)(8,470)(8,523)(8,572)Capitalised expenses(288)(283)(257)Capitalised computer software costs(950)(799)(673)Defined benefit superannuation plan surplus (6)(221)(411)(347)General reserve for credit losses (7)(90)--Deferred tax(96)(34)(257)(10,115)(10,050)(10,106)Tier One Capital Deductions - 50% (8)Equity investments in other companies and trusts (9)(323)(315)(422)Equity investments in non-consolidated subsidiaries (net of intangibles) (10)(518)(600)(529)Expected impairment losses (before tax) in excess of eligible credit provisions (net of deferred tax) (11)(830)(727)(654)Other deductions(328)(277)(250)(1,999)(1,919)(1,855)Total Tier One Capital Deductions(12,114)(11,969)(11,961)Total Tier One Capital26,60127,06523,311 Capital Management Capital Adequacy (continued) (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) Represents the after tax collective provisions and general reserve for credit losses of banking entities in the Group (including Bankwest) which operate under the Basel II Standardised methodology. (3) APRA allows only 45% of 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) Represents 50% Tier One and 50% Tier Two Capital deductions under Basel II rules. 48 Commonwealth Bank of Australia Annual Report 2010 GroupBasel IIBasel IIBasel II30/06/1031/12/0930/06/09Regulatory Capital$M$M$MTier Two CapitalUpper Tier Two CapitalResidual capital in excess of prescribed limits transferred from Tier One Capital (1)22573-Prudential general reserve for credit losses (net of tax) (2)603603590Asset revaluation reserve (3)877678Upper Tier Two note and bond issues382350373Other836456Total Upper Tier Two Capital1,3801,1661,097Lower Tier Two CapitalLower Tier Two note and bond issues (4) (5)7,4548,2997,561Holding of own Lower Tier Two Capital(16)(17)(19)Total Lower Tier Two Capital7,4388,2827,542Tier Two Capital Deductions50% Deductions from Tier Two Capital (6)(1,999)(1,919)(1,855)Total Tier Two Capital6,8197,5296,784Total Capital33,42034,59430,095 Capital Adequacy (continued) Capital Management (1) APRA requires risk weighted assets amounts that are derived from IRB risk weight functions be multiplied by a factor of 1.06. (2) 30 June 2010, 31 December 2009 and 30 June 2009 Risk Weighted Assets (“RWA”) include the consolidation of Bankwest which operates under the Basel II Standardised methodology. Commonwealth Bank of Australia Annual Report 2010 49 GroupBasel IIBasel IIBasel II30/06/1031/12/0930/06/09Risk Weighted Assets$M$M$MCredit RiskSubject to Advanced IRB approachCorporate44,25243,03154,242SME Corporate26,21625,32231,222SME Retail5,1704,7654,925Sovereign2,8001,9561,713Bank7,4926,7458,040Residential mortgage55,88256,90954,841Qualifying revolving retail6,7726,2925,698Other retail6,3226,3156,336Impact of the regulatory scaling factor (1)9,2949,07910,021Total risk weighted assets subject to Advanced IRB approach164,200160,414177,038Specialised lending (SL) exposures subject to slotting criteria35,48338,67822,627Subject to Standardised approachCorporate8,87210,05311,094SME Corporate7,7467,5407,455SME Retail4,6844,5054,469Sovereign215233282Bank1,1361,206170Residential mortgage22,43622,53120,576Other retail2,5302,4112,398Other5,4726,4057,517Total risk weighted assets subject to standardised approach53,09154,88453,961Securitisation1,5691,9622,724Equity exposures2,4202,5282,103Total risk weighted assets for credit risk exposures256,763258,466258,453Market risk3,5034,0333,450Interest rate risk in the banking book 10,27216,6018,944Operational risk20,28318,34917,989Total risk weighted assets (2)290,821297,449288,836 Description of Business Environment Australia Financial Services Financial services providers in Australia offer household and business customers a wide range of products and services 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 last year has seen recovery in the global financial system. Sentiment towards banks has improved significantly since the chaos of late 2008 and early 2009. While market risk indicators in the global financial services sector remain above pre-crisis levels, many banking systems have returned to profitability, and capital and funding positions have been strengthened. The structure of the Australian financial industry has changed coming out of the recent crisis. Foreign banks participation has stabilised while the regional banks and specialist players are beginning to re-establish themselves. Despite the global financial crisis, the Australian financial system remained resilient and highly competitive. All major Australian banks reported improved financial results with strong cash growth compared to 2009. This was mainly driven by significant reductions in loan impairments and solid growth in operating income. Global uncertainties have meant that the cost of wholesale funds to all institutions has risen. This has spilled over to the market for deposits which has also seen a substantial increase in the cost of retail funds. While the cost of funds has risen, Australia‟s resilience has meant that the demand for credit has continued to expand. The impact of higher wholesale funding costs will be felt for some time as lower priced term funding is progressively replaced with more expensive funding, and due to the impact of banks their wholesale maturity. The strong competition for domestic deposits will continue to put pressure on deposit margins. lengthening In the near to medium term, significant challenges and uncertainties for the global financial system remain. Confidence in financial markets has recently been affected by concerns about sovereign credit risk, particularly Greece‟s debt crisis. This will likely result in a continuation of conservative capital and liquidity settings. Funds Management for long term growth outlook funds The management industry remains positive, underpinned by the proposal to increase compulsory superannuation contributions to 12% by 2019/20 and the proposed simplification of superannuation. the Australian Fund management profit margins remain under pressure with further Australian regulatory changes expected to reduce fees and increase capital requirements and compliance costs. Consolidation continues as industry participants seek scale to counteract margin pressure and expand capabilities. The demand for simple, transparent and lower fee products will continue as retail commissions are removed and investors focus on net-of-fee performance. Demand for solutions which address market volatility, inflationary threats and longevity risks is being 50 Commonwealth Bank of Australia Annual Report 2010 driven by ageing populations and widening retirement funding gaps. Insurance Underinsurance within the Australian community, and government policy supporting the beneficial treatment of life insurance inside superannuation, will drive continued strong growth in the Life Insurance sector. Distribution dynamics continue to evolve, with bancassurance, master trusts and industry funds emerging as the strongest growth channels. Insurance manufacturers are placing a greater emphasis on technology and service efficiency to meet the growing needs of these distribution channels. The general insurance market remains concentrated but also highly competitive, particularly with the entry of low cost operators. Industry profitability continues to be challenged by claims events and instability of investment markets, even following a recent period of price hardening. New Zealand The Group‟s activities in New Zealand are conducted through the ASB Group. In addition to ASB Bank, ASB Group also competes in the New Zealand insurance and investment market through its wholly owned subsidiaries, Sovereign Group and ASB Group Investments. total banking system. In addition, Kiwibank, The New Zealand banking system is characterised by strong competition, with the four main banks operating in the market being owned by Australian parents, and accounting for 90% of the the Government/NZ Post owned and operated bank launched in 2002, continues to compete aggressively in the retail sector. The non-bank financial sector remains weak following increased costs of funding arising from the global financial crisis, with further consolidation expected. Competition for retail funding has increased as banks move to secure more domestic medium to long term funding and reduce reliance on the wholesale funding market, in line with more stringent Reserve Bank requirements. The New Zealand economy ended five consecutive quarters of negative growth in early 2009, signalling the end of the recession. Economic recovery is continuing gradually, with future growth expected to be driven by fixed capital expenditure and export receipts rather than household spending. Lending volumes remain constrained, particularly in the business sector where balances declined but ASB‟s market share improved. The housing market rebound has slowed against a backdrop of tax changes targeting property investment, and an expectation that interest rates will rise. Financial System Regulation in Australia Australia has, by international standards, a high quality financial financial products and services system which regulates consistently regardless of the type of financial institutions providing them. the Australian Securities and The main regulators of financial services in Australia are the Reserve Bank of Australia, the Australian Prudential Regulation Authority, Investments Commission, the Australian Transaction Reports and Analysis Centre and the Australian Competition and Consumer Commission. Each agency has system-wide responsibilities for the different objectives of government oversight of the financial system. A description of these agencies and their general below. responsibilities functions and out set is Description of Business Environment Reserve Bank of Australia (“RBA”) is responsible for monetary policy, financial system stability and regulation of the payments system. The RBA also administers sanctions implemented via the „Banking (Foreign Exchange) Regulations 1959‟. 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 Australian Prudential Regulation Authority (“APRA”) has responsibility for the prudential supervision of banks, building insurance societies and credit unions, companies, funds (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 including The Australian Securities and Investments Commission (“ASIC”) has responsibility for regulating and enforcing Company and financial services laws that protect consumers, investors and „Corporations Act 2001‟. The creditors, „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. From 1 July 2010, ASIC also regulates consumer credit activities. Credit providers and intermediaries are required to apply for an Australian Credit Licence by 31 December 2010. 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. The Australian Transaction Reports and Analysis Centre (“AUSTRAC”) has responsibility for overseeing compliance with the „Anti-Money Laundering and Counter Terrorism Financing Act 2006‟ and the „Financial Transaction Reports Act 1988‟. 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 In addition to the above, the Department of Foreign Affairs and Trade (“DFAT”), a federal government department, has to responsibility sanctions-related decisions of the United Nations Security Council (UNSC), including the freezing of terrorist assets. legislation giving effect implementing for Supervisory Arrangements The Bank and its subsidiary Bank of Western Australia are Authorised Deposit-taking the „Banking Act 1959‟ and are subject to prudential regulation by APRA. (“ADIs”) under Institutions 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 ADIs 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. The prudential framework applied by APRA is embodied in a series of prudential standards and other requirements including: (i) Capital Adequacy APRA has 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. (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 obligations, AUD Certificates of Deposit/Bills of other banks and AUD overnight interbank loans) and other highly liquid marketable securities. More detailed comments on the Group‟s liquidity and funding risks are provided in Note 41 to the Financial Statements. (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 39 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 delegate approval powers to APRA where one financial institution seeks to acquire another. The Government‟s present policy is that mergers among the four major banks will not be permitted until the Government is satisfied that competition from new and established participants in the financial industry 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‟. Commonwealth Bank of Australia Annual Report 2010 51 Description of Business Environment Supervisory Arrangements (continued) (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 which include designated members of senior management. ADIs also have to comply with APRA‟s Governance prudential standard which sets out requirements for Board size and composition, independence of directors, executive remuneration and other APRA governance matters. (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. including standards Life insurance and general insurance companies are subject to risk prudential management and reinsurance arrangements. Compliance with APRA returns, independent actuarial investigations, Auditor certification and supervisory inspections. capital adequacy, is monitored regulation through regular 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 (ii) to the Financial Statements. 52 Commonwealth Bank of Australia Annual Report 2010 Sustainability Commitment Customer Assist Sustainability The Group continued to focus on sustainability during 2010, demonstrating its long-term commitment to key stakeholders – customers, people, shareholders and the wider community. Long-term sustainability is essential for creating enduring value for shareholders and the Australian community as a whole. Sustainability is achieved by managing five aspects of the Group‟s business – customers, people, environment, community engagement and corporate governance. In this section of the report commentary is provided on the first four of these aspects. Full details about the Group‟s corporate governance approach can be the Corporate Governance section of this report. found in The Group continued to build the capacity of the Customer Assist team, which supports customers experiencing financial difficulty. The team increased in size to over 90 specially trained Customer Assist officers. Accessibility of Customer Assist services also increased with an extension of operating hours, the implementation of a freecall number and the ability to apply for assistance through email and NetBank. The team‟s capability was further developed to enable it to act as an on-the-ground special response team to assist customers affected by major events such as natural disasters. This ensures staff are equipped with the appropriate delegations and are ready to respond immediately and effectively so affected customers receive prompt communication and service. This section of the report captures data from Australian domestic operations only (excluding Bankwest), unless otherwise stated. Interest rates The Group‟s sustainability scorecard of key metrics is shown at the end of the Sustainability section of this report. More detailed information about the Group‟s sustainability strategy and achievements is covered in the Sustainability Report 2010, available in October from www.commbank.com.au/sustainability. Customers The Group made significant progress towards the goal of becoming number one for customer satisfaction. During 2010 a number of initiatives were rolled out for retail, business and wealth management customers, providing innovative financial solutions and improvements to customer experience. In the 12 months to June 2010 the Group made some notable improvements in customer satisfaction: The Group‟s main financial institution (MFI) retail customer satisfaction levels, measured on a six months rolling averages by Roy Morgan Research, showed consecutive monthly improvements throughout most of the year, resulting in the Group moving into and consolidating 3rd position, with an increase of 2.6 percentage points since this time last year; Main financial institution (MFI) business customer satisfaction over the 12 months to June 2010, as measured by the TNS Business Finance Monitor, declined by 4.9% on a 12 month basis. However the gap to the number one main bank has reduced from 16.6% in January 2006 to 6.2% in June 2010; and Colonial First State‟s FirstChoice product platform was again ranked first for overall satisfaction by financial advisers in the 2010 Wealth Insights Platform Service Level survey. Responsible Banking Fees In October 2009 significant changes were made to exception fees across a range of personal and business transaction accounts, as well as the implementation of safety net options to help customers avoid fees in the future. The Group also introduced a zero fee account for a range of disadvantaged groups in the community, abolished non-CBA ATM fees for customers (ahead of the industry) and abolished a number of one-off service fees for home loan customers. The Reserve Bank began raising interest rates at the end of 2009. The Group takes a considered approach to interest rates, balancing the pricing of its products with its responsibility to both customers and shareholders and the likelihood of changes to the cost of funds. Viewpoint In early March 2010 the Group launched its inaugural economic vitality report, Viewpoint. Produced in conjunction with NATSEM, the independent research institute at the University of Canberra, the regular report provides insights into the state of the Australian economy based on the analysis of data held by the Group. With a customer base of around 11 million, the Group‟s EFTPOS terminals, retail outlets and credit cards process 45% of Australia‟s financial transactions each day. This scale of data gives the Group a window into the financial wellbeing of the Australian community. Viewpoint will act as a barometer of the economic mood, providing a resource that businesses and government can utilise. Youth financial literacy Financial literacy is essential for a prosperous Australia. In the 12 months to June 2010 the Group announced its „one million kids‟ commitment to improve the financial literacy of more than one million Australian school children over the next five years. this commitment As part of the Commonwealth Bank Foundation continued the roll-out of the StartSmart Secondary program – a series of classroom sessions and workshops to help young Australians build better money designed management skills – and extended the program to primary schools with the introduction of the StartSmart Primary program in early 2010. In the 12 months to June 2010, over 68,000 secondary school students and their teachers booked to attend the 1,535 classroom sessions and 243 workshops delivered through StartSmart Secondary while over 50,000 primary school students participated in 1,889 classroom sessions as part of the StartSmart Primary program since it began in February 2010. The Group also launched Coinland, an online world where children learn the basics of money management in a fun and engaging environment, interacting with characters such as the Dollarmites. Commonwealth Bank of Australia Annual Report 2010 53 Sustainability Indigenous Banking Team (IBT) The IBT, the first of its kind from a major Australian bank, was created after consultation with the Group‟s Indigenous partners, communities and customers. The team is dedicated to providing the Group‟s Indigenous customers with the highest-quality level of business expertise and customer service. This specialised support Indigenous communities have access to the same opportunities for wealth creation as other Australians. The IBT currently has offices in Cairns and Sydney and is supported by specialists from across the Group. in ensuring is crucial The Group also progressed Strategy, as detailed below under the „People‟ heading. Indigenous Employment its People In the past 12 months a number of initiatives have been developed for the Group‟s people, with a particular focus on diversity, talent development, and health and wellbeing. Diversity – Women in Leadership In the 12 months to June 2010 the Group-wide Diversity Strategy was refreshed. The strategy has a focus on four primary areas: diversity in leadership, respect and inclusion, adaptable work practices and diversity support. The Group believes that a focus on women in leadership is a leading indicator of broader diversity within the organisation. As a result the Group has set a specific goal to increase the representation of women in senior management levels from the current level of 26% to 35% by December 2014. To achieve this goal, diversity has been included as a specific performance indicator for the Group‟s most senior leaders and is now included in Business Unit strategic plans. In addition, the Group‟s executive leadership team are all members of the Diversity Council which is chaired by the Group‟s CEO, and clear targets and measurement have been put in place to monitor progress. its The Group is also supporting greater diversity within the organisation by strengthening talent pipeline. The Appointment to Role Policy was recently updated to require representation of both women and men on recruitment panels and in candidate pools. In addition, over the past 12 months the Group has continued to strengthen talent identification and review processes for all levels of leadership. Diversity - Indigenous Employment Strategy During the year the Group made significant progress on its Indigenous Employment Strategy, following the commitment announced in July 2009 to create 350 additional positions for Indigenous Australians by June 2012. By 30 June 2010, the Group had made significant progress towards this target, with 130 new Indigenous employees joining the Group. People and Culture Survey A continued focus on developing a culture of trust and team spirit and embedding the Group‟s behaviours has assisted with delivering strong people engagement and pride within the organisation. In the 2010 people engagement survey the Group recorded a People and Culture Indicator result of 4.31 and Gallup GrandMean score of 4.32. This put the Group in the 76th percentile in the Gallup Worldwide database – a best practice result according to the Gallup organisation. Talent Development & Leadership Talent development continued to be a key focus during the year. The Group enhanced its commitment to the development of its 54 Commonwealth Bank of Australia Annual Report 2010 people with a particular focus on leadership competencies and the ability of existing leaders to assess and coach their teams. The Talent Review process now requires talent review plans to be discussed by the whole Executive Committee, providing a more robust assessment of the workforce. The Group also modifies succession plans according to market dynamics and individual development plans. leadership development programs are tailored across a range of career levels and audiences. response, In Health and Wellbeing The Group provides numerous initiatives, services, resources and tools to its people to support their health and wellbeing. This includes flexible working arrangements, health checks, flu vaccinations, child care and carer services, the CBA Sports Club, fitness deals, competitive private health insurance through the CBHS Health Fund and confidential counselling services. During the year, a number of new initiatives were introduced, including: My Wellbeing online –a personal online health and wellness centre providing interactive resources tailored to help define and achieve individual wellness goals. All Group employees and their families can use this resource; RealTime Health videos – all employees and their families have access to this 'speaking from experience' video resource which includes personal patient and carer stories covering a range of conditions; Dealing With Stress Toolkit – An online toolkit created to provide easy access to information about the resources available to employees dealing with stress and mental health matters; and Drugs and Alcohol Policies – Policies relating to drugs and alcohol were reviewed and communicated to employees, including alcohol consumption. responsible promotion the of Safety, Absenteeism and Turnover to the continued The past few years saw significant decreases in the Group‟s Lost Time Injury Frequency Rate (LTIFR) which can be attributed the safety management system. The 12 months to June 2010 saw a levelling out of the declining trend in the LTIFR. A focused approach of targeting identified risk areas within each business as well as looking at safety behaviours is being adopted to attain further decreases in the LTIFR. implementation of The Group remained relatively steady against other key indicators. There was no material change in absenteeism, while voluntary turnover increased slightly as a result of the improving economic conditions. Community The Group‟s dedication to working with Australian communities, large and small, was demonstrated through many programs with partners in the areas of health and welfare, the arts, environment and sport. Indigenous Commitment Working with Indigenous communities remained a key priority for the Group. The second edition of the Reconciliation Action Plan (RAP) was launched in July 2009 and the Group also celebrated the first anniversary of One Laptop Per Child (OLPC) Australia. The Group is the founding partner of OLPC, a charity that was established to improve the lives of children living in rural and remote Australia – many of which are Indigenous communities – by providing them with the purpose-built, educational, connected tool, the XO laptop. in Sustainability The Group has made major changes to reduce the carbon emissions associated with its tool-of-trade fleet. Vehicle options are now aligned with terrain types, meaning that smaller vehicles are being used for city driving. Over 900 6-cylinder vehicles have been replaced with 4-cylinder vehicles in the last year. Combined with education initiatives, this has seen the carbon emissions associated with the Group‟s tool-of-trade fleet reduce by 8% since June 2009. Reporting The Group is subject to the Federal Government‟s Energy Efficiency Opportunity Act (EEOA), which provides a framework for identifying cost-effective energy savings, and the National Greenhouse and Energy Reporting Scheme (NGERS). In October 2009 the Group reported through the NGERS system for the first time. This reporting is assisting the Group to identify opportunities to reduce carbon emissions. The Group again voluntarily reported its carbon emissions to the Carbon Disclosure Project (CDP) in May 2010. The 2009 CDP Global 500 Report released in September 2009 revealed that the Group achieved a place the Carbon Disclosure Leadership Index. The Index recognises the top 10 per cent of the largest 500 companies in the world for the level and quality of disclosure and reporting on greenhouse gas emissions and climate change strategy data. in Future Developments The Group is committed to sustainability. In the coming year the Group will continue the challenge of pursuing a broad definition of corporate sustainability to ensure its policies and practices support customers, people, the environment, the community and rigorous corporate governance. The Group will publish its annual Sustainability Report during October 2010, an important tool in communicating the Group‟s sustainability performance to its stakeholders. The Sustainability Report will be available online at www.commbank.com.au/sustainability. Community Partnerships The Group continued its significant support for Australian communities. At the start of the 2009-10 cricket season, the Group launched the Grants for Grassroots Cricket program to support local clubs. More than 220 clubs received a grant of cash and equipment worth $1,750 each to help with skills training, ground restoration, new facilities and other initiatives. The Group‟s Staff Community Fund is Australia‟s longest running workplace giving program, having commenced in 1917. This year grants of up to $10,000 were made to youth and children‟s charities, totalling $550,000. As major long-term sponsor of the Australian of the Year Awards, the Group joined the National Australia Day Council in early 2010 to celebrate 50 years of recognising the valuable contributions of outstanding Australians from a diverse range of communities. The Group also continued its ongoing partnerships in the arts, supporting Opera Australia and the Australian Chamber Orchestra. The Group and Opera Australia have one of the longest running business-arts partnerships in Australia, now in its 33rd year. In the health sector the Group continued to support the Breast Cancer Institute of Australia with fundraising through staff activities and the sale of the Australian Women‟s Health Diary in Commonwealth Bank branches. The Group also continued its partnership with the Prostrate Cancer Foundation, raising awareness of this important issue amongst staff and customers. 2010 marked the second year of the Group‟s partnership with Clean Up Australia Day, which supported an estimated 588,000 Australians help clean up their local environment. For more information on the full range of community programs the Group supports visit www.commbank.com.au/about-us. Environment Property Environmental Performance The Group continued its shift to more environmentally-friendly commercial properties. Teams moved into the Darling Park office in Sydney in a number of phases during the year, with full occupancy achieved at the end of June 2010. There are more than 4,500 people now located at Darling Park, which has a focus on environmental performance. Construction work on Commonwealth Bank Place continued at a significant pace, and occupancy will begin in late 2011. The building will target environmental performance ratings including 6 Star Green Star Office Design and 5 Star NABERS. Managing Carbon Emissions Following the announcement of the Group‟s carbon reduction target to reduce emissions from its Australian operations by 20 per cent by June 2013 (from 2008–09 levels), the Group has been working on a number of initiatives in its tool-of-trade fleet and retail and commercial properties. Improvements made to the Group‟s carbon reporting system the emissions from a number of branches had not been captured in previous years. As a result of including these emissions, the Group has seen the total carbon emissions increase slightly in 2009-10. However, the Group is still on track to meet its carbon reduction target. identified that Commonwealth Bank of Australia Annual Report 2010 55 Sustainability How the Group Performed Metric (1) Customers Roy Morgan Research main financial institution customer satisfaction (2) Rank TNS Business Finance Monitor (3) Rank Wealth Insights Platform Service Level survey (4) Rank People Absenteeism (Average days per full-time equivalent staff member) (5) Employee turnover (voluntary) (6) Gallup Survey GrandMean (7) People and Culture Indicator (8) Lost time injury frequency rate (LTIFR) (9) Environment Property and fleet carbon emissions total (tonnes CO2-e) (10) 2010 2009 2008 75. 6% 3rd 67. 9% 4th 86. 5% 1st 5. 9 12. 73% 4. 32 4. 31 2. 5 73. 0% 4th 72. 8% 4th 84. 1% 1st 5. 9 11. 37% 4. 37 4. 36 2. 4 70.1% Equal 4th 73. 9% 5th 88. 2% 1st 6. 5 18. 45% 4. 28 N/A 3. 1 176,806 172,752 173,397 (1) All metrics capture data from Australian domestic operations only (excluding Bankwest), unless otherwise stated. (2) The proportion of each financial institution‟s MFI retail customers surveyed by Roy Morgan Research that are either „Very Satisfied‟ or „Fairly Satisfied‟ with their overall relationship with that financial institution on a scale of 1 to 5 where 1 is „Very Dissatisfied‟ and 5 is „Very Satisfied‟. The metric is reported as a 6 month rolling average to June, based on the Australian population aged 14 and over. The ranking refers to the Group‟s position relative to the other four main Australian banks (Westpac, St. George, NAB, and ANZ). (3) The proportion of each financial institution‟s MFI business customers surveyed by TNS Business Finance Monitor that are either „Very Satisfied‟ or „Fairly Satisfied‟ with their overall relationship with that institution on a scale of 1 to 5 where 1 is „Very Dissatisfied‟ and 5 is „Very Satisfied‟. The metric is reported as a 12 month rolling average as at 30 June. The ranking refers to the Group‟s position relative to the other four major Australian banks. (4) The proportion of financial advisers giving the Colonial FirstChoice platform an overall satisfaction score of 7-10, on a scale of 1-10 where 1 is „Poor‟ and 10 is „Excellent‟, in the Wealth Insights Platform Service Level survey. Ranking captures the relative position of Colonial FirstChoice compared with bank peer master trusts measured in the survey, based on the percentage of advisers giving 7-10 for overall satisfaction. Until 2010 this survey was known as the Wealth Insights MasterTrust/Wrap survey. (5) Absenteeism is the annualised figure as at 31 May each year. Absenteeism refers to the average number of sick leave days (and, for CommSec employees, carers‟ leave days) per full-time equivalent (FTE), reported by domestic, permanent employees. FTE captures domestic, permanent employees (full-time, part-time, job share or on extended leave). (6) Employee turnover refers to all voluntary exits of domestic, permanent employees as a percentage of the average domestic, permanent headcount (full-time, part- time, job share or on extended leave). (7) The Gallup Survey GrandMean measures the average response, on a 5-point scale (where 5 is the most positive response), summarising the average (mean) responses to the Gallup Q12 statements, given by employees in the People and Culture survey. The result captures the responses of domestic and international Group employees excluding those of Bankwest, ASB Bank, Commonwealth Bank Indonesia, Bank of Hangzhou, Qilu Bank, Sovereign Group, and some smaller international branches and subsidiaries. (8) The PCI measures the average response on a 5-point scale (where 5 is the most positive response), by summarising the average (mean) responses to 25 People and Culture Survey statements comprising the Gallup Q12 statements and 13 additional statements selected by the Group, all of which measure progress towards the Group‟s cultural aspiration of trust and team spirit. The surveyed population is the same as for the Gallup GrandMean. The PCI was first measured in 2009. (9) LTIFR is the reported number of occurrences of lost time arising from injury or disease that have resulted in an accepted workers compensation claim, for each million hours worked by domestic employees. The metric captures claims relating to domestic employees only (permanent, casual and those contractors paid directly by the Group). Data is complete as at 30 June each year, however it may be updated in future reports due to late reporting of incidents that occurred during the year, or the subsequent acceptance or rejection of claims made in the year. To reflect this, the 2009 figure (previously reported as 2.1) has been adjusted. (10) Emissions relate to consumption of electricity, gas and fuel (gasoline and diesel) by domestic retail and commercial properties, the business use of domestic tool-of- trade vehicle fleet, dedicated bus services, business use of private vehicles and domestic ATMs. Due to the electricity billing cycle, 28 % of 2009-2010 electricity data was estimated to meet publication deadlines. 2009 figures previously reported have been adjusted by replacing estimated data with actual data following receipt of outstanding electricity invoices. 56 Commonwealth Bank of Australia Annual Report 2010 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 its well-being. 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 “Corporate Governance revised Principles and Recommendations”, dated 30 June 2010, released by the Australian Securities Exchange (ASX) Limited‟s Corporate Governance Council. the Charter The role and responsibilities of the Board of Directors are set out in the Board Charter. The responsibilities include: The corporate governance of the Group, including the 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; Overseeing the establishment of appropriate systems of risk management including defining the Group‟s risk appetite and 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; 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. A copy of the Board Charter appears on the Group‟s website. The Board carries out the legal duties of its role in accordance with the Group‟s values of trust, honesty and integrity and having regard to the interests of the Group‟s customers, staff, shareholders and the broader community in which the Group operates. 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 best-in-industry performance in safety, community reputation and environmental impact. sustained providing and The Chief Executive Officer is responsible for the day to day management of the Group and maintaining a comprehensive set of management delegations under the Group‟s Delegation cover of Authorities commitments operational project expenditure and non-financial activities or processes. They are designed to accelerate decision-making processes and improve efficiency and customer service. framework. These investment, delegations around Composition There are currently nine Directors of the Bank and details of their experience, qualifications, special responsibilities and attendance at meetings are set out in the Directors‟ Report. Membership of the Board and Committees is set out below: Board Membership Position Title Committee Membership Board Performance & Renewal People & Remuneration Audit Chairman Chairman Member Director D J Turner (1) R J Norris J A Anderson C R Galbraith Non-Executive, independent Executive Non-Executive, independent Non-Executive, independent Chief Executive Officer Member Member Risk Member Member Member Member Member J S Hemstritch (2) Non-Executive, Chairman Member S C H Kay A M Mohl F D Ryan H H Young independent Non-Executive, independent Non-Executive, independent Non-Executive, independent Non-Executive, independent J M Schubert (3) Non-Executive, R J Clairs (3) independent Non-Executive, independent Member Member Member Member Member Chairman Member Member Chairman (1) Mr Turner was appointed Chairman of the Board and the Board Performance and Renewal Committee following Mr Schubert‟s retirement on 10 February 2010. (2) Ms Hemstritch was appointed Chairman of the People and Remuneration Committee following Mr Clairs‟ retirement from the position on 1 January 2010. (3) Mr Schubert and Mr Clairs retired from the Board on 10 February 2010 and 13 April 2010 respectively. Commonwealth Bank of Australia Annual Report 2010 57 Corporate Governance Constitution Education 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 thirteen (or such lower number as the Board may from time to time determine). The Board has determined that the number of directors shall be nine; 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. 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. 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; That no Director is, or has been associated directly with, a substantial shareholder of the Bank; That no Non-Executive Director has ever been employed by the Bank or any of its subsidiaries; That no Director is, or has been associated with, a supplier, professional adviser, consultant to or customer of the Group which is material under accounting standards; and That no Non-Executive Director has a material contractual relationship with the Group other than as a Director of the Bank. 58 Commonwealth Bank of Australia Annual Report 2010 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 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. Performance evaluations the above processes have been undertaken during the 2010 financial year. in accordance with Details on Management performance evaluations are contained in the Remuneration Report section of the Directors‟ Report. 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 management to achieve sustained outstanding company 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: and exhibit outstanding performance Be capable of operating as part of an exceptional team; Contribute impeccable values; Be capable of inputting strongly to risk management, strategy and policy; Provide appropriate mix of 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 insights, input and questions to management from their experience and skill; and Vigorously debate and challenge management. Professional intermediaries are engaged to identify a diverse range of potential candidates for appointment as Directors based on the identified criteria. The Board Performance and Renewal Committee will assess the skills and experience of these candidates as well as take into consideration other attributes such as diversity to ensure that any appointment decisions are made in line with the objectives of the Board. Candidates who are considered suitable for appointment as Directors by the Board Performance and Renewal Committee are then recommended for decision by the Board and, if appointed, stand the for election, Constitution, at the next general meeting of shareholders. in accordance with 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; 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 one Board meeting annually; The Board has an agreed policy on the basis on which Directors are entitled to obtain access to Company documents and information and to meet with management; and The 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. Corporate Governance 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, in addition to the prohibition of any trading (including hedging) in positions prior to vesting of shares or options. those securities. Similar restrictions apply in Directors and executives who report to the Chief Executive Officer are also prohibited from: Any hedging of publicly disclosed shareholding positions; and Entering into or maintaining arrangements for margin borrowing, short selling or stock lending, in connection with the securities of the Group. In June 2010 the Board approved a revised Group Securities Trading Policy, which replaces the guidelines and applies to all Directors, employees & contractors of the Group from 21 September 2010. A copy of the policy is available on the Group‟s website. Remuneration Arrangements Details of the governance arrangements and policies relevant to remuneration are set out in the Directors‟ Report - Remuneration Report. Audit Arrangements Audit Committee The purpose of the Audit Committee is to assist the Board in fulfilling its statutory and fiduciary responsibilities by providing an objective non-executive review of the effectiveness of the external reporting of financial information, and the internal control environment of the Group, including obtaining an understanding of the tax and accounting risks which face the Group. The Audit Committee is also responsible for the oversight of accounting policies, professional accounting requirements, internal and external audit and APRA statutory regulatory requirements, and the appointment of the external auditor. 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 in The Audit Committee shall comprise at least three members. All members must be Non-Executive, Independent Directors and financially literate. At least one relevant qualifications and member should have experience as the ASX Corporate to referred Governance Principles and Recommendations; The Audit Committee chairman may not be the Chairman of the Board. The term of each member will be determined by the Board through annual review. The Risk Committee chairman will be a member of the Audit Committee and vice-versa to ensure the flow of relevant information between the two committees; The Audit Committee will meet at least quarterly, and as required. The Audit Committee will invite the external auditor to all meetings of the Committee; Commonwealth Bank of Australia Annual Report 2010 59 Corporate Governance The Audit Committee will meet from time to time with the Group Auditor and external auditor without management or others being present; The Audit Committee has the power to call attendees as required, including open access to management, auditors (external and internal) and the right to seek explanations and additional information; Senior management and the internal and external auditor have free and unfettered access to the Audit Committee, with the Group Auditor having a direct reporting line, whilst maintaining a management reporting line to the Chief Financial Officer; and The Audit Committee has the option, with the concurrence of the Chairman of the Board, to retain independent legal, accounting, or other advisors to the extent the Committee considers necessary at the Group‟s expense. A copy of the Audit Committee Charter appears on the Group‟s website. Non-Audit Services 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 unless 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; lodgement of Related services connected with statements or documents with the ASX, ASIC, APRA or other regulatory or supervisory bodies; Services reasonably related to the performance of the audit services; the 60 Commonwealth Bank of Australia Annual Report 2010 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. Auditor 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 2010 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 Group Auditor only after consultation with the Audit Committee. Due to the U.S. Securities and Exchange Commission (“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. Risk Management Risk Management governance originates at Board level, and cascades through to the CEO and businesses, via policies and delegated authorities. This ensures Board-level oversight and a clear segregation of duties between those who originate and those who approve risk exposures. Independent review of the risk management framework is carried out through Group Audit. The Board and its Risk Committee operate under the direction of their respective charters. The Board Charter stipulates, amongst other things that: The Board is responsible for “overseeing the establishment of systems of risk management by approving accounting policies, financial statements and reports, credit policies and standards, risk management policies and procedures and operational risk policies and systems of internal controls”; and The CEO is responsible for “implementing a system, including a system of internal controls and audits, to identify and manage risks that are material to the business of the Group”. As part of the process whereby the Board reviews the annual financial statements, the Chief Executive Officer and the Chief Financial Officer have given the Board their declaration in accordance with section 259A(2) of the Corporations Act 2001 (Cth), as well as the assurance that the declaration is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial risks. Risk Committee The Risk Committee oversees the Group‟s risk management framework, including the credit, market (including traded, interest rate risk in the banking book, lease residual values, non-traded equity and structural foreign exchange), liquidity and funding, operational, risks assumed by the Group in the course of carrying on its business. It the measurement of risk and the adequacy and effectiveness of the Group‟s risk management and internal controls systems. insurance, compliance and from Management on regulatory reviews regular reports Strategic risks are governed by the full Board, with input from the various Board sub-committees. Tax and accounting risks are governed by the Board Audit Committee. A key purpose is to help formulate the Group‟s risk appetite for consideration by the Board, and agreeing and recommending a risk management framework to the Board that is consistent with the approved risk appetite. This framework, which is designed to achieve portfolio outcomes consistent with the Group‟s risk/return expectations, includes: High-level risk management policies for each of the risk areas it is responsible for overseeing; and A set of risk limits to manage exposures and risk concentrations. The Committee monitors Management‟s compliance with the Group risk framework (high-level policies and limits); it also makes recommendations on the key policies relating to capital, liquidity and funding that underpin the Internal Capital Adequacy Assessment Process, which is overseen and reviewed by the Board on at least an annual basis. In overseeing the risk framework, and through its dialogues with the risk leadership team and executive management, the Committee also monitors the health of the Group‟s risk culture, and reports any significant issues to the Board. As part of the remuneration policy, the Risk Committee provides written input to the People & Remuneration Committee to assist in the alignment of executive remuneration with appropriate risk behaviours. The Committee reviews significant correspondence between the Group and its regulators, receives reports from management on the Group‟s regulatory relations and reports any significant regulatory issues to the Board. Levels of insurance cover on insurance policies maintained by the Group to mitigate some operational risks are disclosed to the Risk Committee for comment. 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 risk management function. The Chairman of the Risk Committee provides a report to the Board following each Risk Committee meeting. A copy of the Risk Committee charter appears on the Group‟s website. Framework The Group has an integrated risk management framework in place to identify, assess, manage and report risks and risk adjusted returns on a consistent and reliable basis. A description of the functions of the framework and the nature of the risks is set out in the Risk Management section of the Annual Report and in Notes 38 to 41 to the Financial Statements. 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 independent Non- the Committee shall consist solely of Executive Directors. The Chief Executive Officer attends the meeting by invitation. Corporate Governance A copy of the Board Performance and Renewal Committee Charter appears on the Group‟s website. Continuous Disclosure “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”, a copy of which appears on the Group‟s website, 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. Continuous Disclosure Policy and Processes 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 ASX 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 in place formed Shareholder Communication The Group believes it is important for its shareholders to make informed decisions about their investment in the Group. In order for shareholders to have an understanding of the business operations and performance, the Group seeks to provide shareholders with access to quality information in a timely fashion. This will be communicated in the form of: Interim and final Results; Annual Reports; Shareholder newsletters; Annual General Meetings; Quarterly trading updates and Business Unit briefings where considered appropriate; All other price sensitive information will be released to the ASX in a timely manner; and The Group‟s dedicated www.commbank.com.au is kept up-to-date so shareholders can access this information at all times. shareholder website at that The Group employs a wide range of communication approaches, including direct communication with shareholders, publication of all relevant Group information on the shareholder centre section of the website and webcasting of most market briefings for shareholders. Upcoming webcasts are announced to the market via ASX announcements and publicised on the Bank‟s website so all interested parties may participate. A summary record of issues discussed at one-on-one or group meetings with investors and analysts, including a record of those present, time and venue of the meeting are kept for internal reference only. The Group is committed to maintaining a level of disclosure that meets the highest of standards and provides all investors with timely and equal access to information. Commonwealth Bank of Australia Annual Report 2010 61 Corporate Governance Ethical Policies 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 policy has been extended to include reporting of auditing and accounting issues, which will be reported to the Chief Compliance Officer by the Chief Security Officer, who administers the reporting and investigation system. The Chief Security Officer reports any such matters the Audit Committee, noting the status of resolution and actions to be taken. to The Group‟s vision is to be Australia‟s finest financial services organisation through excelling in customer service. 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 applicable regulations. The Board employs 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 communication 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 of conflict of 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. interest situations can be Website The Group‟s Corporate Governance statement can be viewed at www.commbank.com.au > About us > Shareholders > Corporate Profile. The current charters and summary of policies and guidelines referred to in this statement are also published on this section of this website. 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 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. Information on the Group‟s diversity strategy can be found in the Corporate Sustainability section of this report. Behaviour Issues 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. 62 Commonwealth Bank of Australia Annual Report 2010 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 2010. 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 have declared an interest. responsibilities qualifications, special David J Turner, Chairman Mr Turner was appointed to the Board in August 2006 and has been Chairman since 10 February 2010. He is Chairman of the Board Performance and Renewal Committee and a member of the Risk Committee and the People & Remuneration Committee. From May 2008 until May 2010, Mr Turner was Chairman of Cobham plc. Until his retirement on 30 June 2007, Mr Turner was CEO of Brambles Limited, occupying the 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 extensive experience finance, international business and governance. in Mr Turner is a resident of New South Wales. Age 65. Ralph J Norris, KNZM, Managing Director and Chief Executive Officer Mr Norris was appointed as Managing Director and Chief Executive Officer effective September 2005. From 2002, Mr Norris was Chief Executive Officer and Managing Director of Air New Zealand having 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. Chairman: Australian Bankers‟ Association and Comm- Foundation Pty Limited. Director: Business Council of Australia and Financial Markets Foundation for Children. Other Interests: New Zealand Institute of Management (Fellow) and New Zealand Computer Society (Fellow). Mr Norris is a resident of New South Wales. Age 61. Sir John A Anderson, KBE Sir John joined the Board on 12 March 2007. He is a member of the Risk Committee and Board Performance and Renewal Committee. Sir John is a highly respected business and community leader, having held many senior positions in the New Zealand finance industry including Chief Executive Officer 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 the “Outstanding Leadership inaugural Blake Medal Contributions to New Zealand”. for Directors‟ Report Chairman: Television New Zealand Limited, Capital and Coast District Health Board, New Zealand Venture Investment Fund, Hawke‟s Bay District Health Board and PGG Wrightson Limited. Other Interests: Institute of Financial Professionals New Zealand (Fellow), Institute of Directors (Fellow), New Zealand Institute of Chartered Accountants (Fellow), Australian Institute of Banking and Finance (Life Member). Sir John is a resident of Wellington, New Zealand. Age 65. Colin R Galbraith, AM Mr Galbraith has been a member of the Board since 2000 and is a member of the Risk Committee, 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 62. Jane S Hemstritch Ms Hemstritch was appointed to the Board effective 9 October 2006. She is Chairman of the People & Remuneration Committee and a member of the Risk Committee. Ms Hemstritch was Managing Director - Asia Pacific for 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, Tabcorp Ltd and Santos Ltd. Other Interests: Institute of Chartered Accountants in Australia (Fellow), Institute of Chartered Accountants in England and Wales (Fellow), Chief Executive Women Inc. (Member), Council of Governing Members of The Smith Family and CEDA‟s Policy and Research Committee (Member) and Council of the National Library of Australia (Member). Ms Hemstritch is a resident of Victoria. Age 56. Carolyn H Kay Ms Kay has been a member of the Board since 2003 and is also a member of the Audit, People & Remuneration and Risk Committees. She holds Bachelor Degrees in Law and Arts and a Graduate Diploma in Management. She has extensive experience in Finance, particularly in International Finance, having worked as both a banker and a lawyer at Morgan Stanley, JP Morgan and Linklaters & Paines in London, New York and Australia. Director: Allens Arthur Robinson, Brambles Industries Limited and Sydney Institute. 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 49. Commonwealth Bank of Australia Annual Report 2010 63 Directors‟ Report Andrew M Mohl Mr Mohl was appointed to the Board effective 1 July 2008 and is a member of the Risk and People & Remuneration Committees. He has over 30 years of financial services experience. Mr Mohl was Managing Director and Chief Executive Officer of AMP Limited from October 2002, until December 2007. Mr Mohl‟s previous roles at AMP included Managing Director, AMP Financial Services and Managing Director and Chief Investment Officer, AMP Asset Management. Mr Mohl was a former Group Chief Economist and Managing Director, ANZ Funds Management at ANZ Banking Group. He began his career at the Reserve Bank of Australia where his roles included Senior Economist and Deputy Head of Research. Chairman: Federal Government Export Finance and Insurance Corporation. Director: AMP Foundation. Interests: Coaching services to senior executives, Other (Member) the Advisory Council of the Australian School of Business and the Corporate Council of the European Australian Business Council (Member). Mr Mohl is a resident of New South Wales. Age 54. 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. John M Schubert, Chairman (retired 10 February 2010) Dr Schubert was a member of the Board from 1991 and Chairman from November 2004, until his retirement in February 2010. He was Chairman of the Board Performance & Renewal Committee and a member of the Risk Committee and 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 Found- ation. Director: BHP Billiton Limited, BHP Billiton Plc and Qantas Airways Limited, Committee for Economic Development of Australia. Interests: Academy of Technological Science and Other Institute of Engineers (Fellow) and Engineering (Fellow), Honorary Member & Past President, Business Council of Australia. Dr Schubert is a resident of New South Wales. Age 67. David Turner succeeded John Schubert as Chairman in February 2010. Reg J Clairs, AO (retired 13 April 2010) Mr Clairs was a member of the Board since 1999. He was Chairman of the People & Remuneration Committee, and a member of the Risk Committee. As the former Chief Executive Officer of Woolworths Limited, he has 33 years experience in retailing, branding and customer service. Director: David Jones Limited Director: Australian Foundation Investment Company Limited, and Centre for Social Impact. Other Interests: Australian Institute of Company Directors (Member). Other Interests: Committee for Melbourne (Counsellor) and Pacific Institute (Patron). Mr Clairs is a resident of Queensland. Age 72. Mr Ryan is a resident of Victoria. Age 67. Harrison H Young 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. On appointment to the Board, Mr Young retired as Chairman of Morgan Stanley Australia, a position he had held since 2003. 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 Officer of China International Capital Corporation. From 1991 to 1994 he was a senior officer of the Federal Deposit Insurance Corporation in Washington. Chairman: NBN Co Limited and Better Place (Australia) Pty Limited. Deputy Chairman: The Asia Society AustralAsia and Asialink (Advisory Board). Director: Bank of England and Financial Services Volunteer Corps. Mr Young is a resident of Victoria. Age 65. 64 Commonwealth Bank of Australia Annual Report 2010 Other Directorships The Directors held directorships on listed companies within the last three years as follows: Director D J Turner Company Brambles Limited Cobham plc C R Galbraith OneSteel Limited J S Hemstritch Tabcorp Holdings Limited Santos Limited S C H Kay Brambles Industries Limited Directors‟ Report Date of Ceasing (if applicable) 16/11/2007 06/05/2010 Date Appointed 21/03/2006 01/12/2007 25/10/2000 13/11/2008 16/02/2010 01/06/2006 A M Mohl F D Ryan J M Schubert R J Clairs Directors‟ Meetings AMP Limited 07/10/2002 31/12/2007 Australian Foundation Investments Company Limited 08/08/2001 BHP Biliton Limited Qantas Airways Limited BHP Biliton Plc David Jones Limited Cellnet Group Limited 01/06/2000 23/10/2000 29/06/2001 22/02/1999 01/07/2004 20/08/2007 The number of Directors‟ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors during the financial year were: Director D J Turner R J Norris J A Anderson C R Galbraith J S Hemstritch S C H Kay A M Mohl F D Ryan H H Young J M Schubert (2) R J Clairs (3) No. of Meetings Held (1) No. of Meetings Attended 11 13 13 13 13 13 13 13 11 10 11 11 12 12 13 13 13 13 13 10 10 9 (1) The number of meetings held during the time the Director was a member of the Board and was eligible to attend. (2) Mr Schubert retired 10 February 2010. (3) Mr Clairs retired 13 April 2010. Commonwealth Bank of Australia Annual Report 2010 65 Directors‟ Report Committee Meetings Risk Committee Audit Committee People & Remuneration Committee No. of Meetings Held (1) No. of Meetings Attended No. of Meetings Held (1) No. of Meetings Attended No. of Meetings Held (1) No. of Meetings Attended 6 6 6 6 6 6 6 6 6 4 5 6 5 5 6 6 6 6 6 6 4 3 4 - - 6 - 6 - 6 6 - - 4 - - 6 - 6 - 6 6 - - 4 - - - 9 9 9 - - 5 8 4 - - - 7 9 9 - - 5 6 Board Performance & Renewal Committee No. of Meetings Held (1) No. of Meetings Attended 8 2 8 6 8 2 8 6 Director D J Turner R J Norris J A Anderson C R Galbraith J S Hemstritch S C H Kay A M Mohl F D Ryan H H Young J M Schubert R J Clairs Director D J Turner J A Anderson C R Galbraith J M Schubert (1) The number of meetings held during the time the Director was a member of the relevant committee. Principal Activities The principal activities of the Group during the financial year ended 30 June 2010 were the provision of a broad range of banking and financial products and services to retail, small business, corporate and institutional clients. The Group conducts its operations primarily in Australia and New Zealand and the Asia Pacific region. It also operates in a number of other countries including the United Kingdom and the United States. There have been no significant changes in the nature of the principal activities of the Group during the financial year. 66 Commonwealth Bank of Australia Annual Report 2010 Consolidated Profit Consolidated net profit after income tax and non controlling interests for the financial year ended 30 June 2010 was $5,664 million (2009: $4,723 million). The net operating profit for the year ended 30 June 2010 after tax and non controlling interests and before Bankwest significant items, tax on New Zealand structured finance transactions, treasury shares valuation adjustment, hedging and AIFRS volatility, loss on disposal of controlled entities and other one off expenses was $6,101 million. This is an increase of $1,686 million or 38% over the year ended 30 June 2009. The result for the year was favourably impacted by a lower loan impairment expense as the domestic economy recovers. While the environment remains challenging, the Group‟s operating performance has been healthy. Operating income growth was solid, reflecting strong volume growth. Operating expense growth reflects the effect of inflation on salary and general expenses, as well as higher occupancy and volume expenses. Loan impairment expense decreased significantly compared to the prior year as a result of improved economic conditions. There have been no significant changes in the nature of the principal activities of the Group during the financial year. Dividends The Directors have declared a fully franked (at 30%) final dividend of 170 cents per share amounting to $2,633 million. The dividend will be payable on 1 October 2010 to shareholders on the register at 5pm AEST on 20 August 2010. Dividends paid in the year ended 30 June 2010 were as follows: As declared in the 30 June 2009 Annual Report, a fully franked final dividend of 115 cents per share amounting to $1,747 million was paid on 1 October 2009. The payment comprised cash disbursements of $1,058 million, with $688 million being reinvested by participants through the Dividend Reinvestment Plan (DRP); and In respect of the year to 30 June 2010, a fully franked interim dividend of 120 cents per share amounting to $1,841 million was paid on 1 April 2010. The payment comprised direct cash disbursements of $1,067 million, with $774 million being reinvested by participants through the DRP. Review of Operations An analysis of operations for the financial year is set out in the Highlights section and in the sections for Retail Banking Services, Business and Private Banking, Institutional Banking and Markets, Wealth Management, New Zealand, Bankwest and Other Divisions. Changes in State of Affairs During the year, the Group continued to make significant progress in implementing a number of initiatives designed to ensure a better service outcome for the Group‟s customers. Highlights included: Successful migration of over one million deposit accounts to the new Core Banking platform, enabling real time visibility and improved functionality for customers; A range of additional features were to help business customers conduct CommBiz transactions faster; launched within their Directors‟ Report Continued NetBank enhancements benefitting over five million online customers, including free SMS services and new autopay functionality; and The successful launch of the new American Express companion card, and the Travel Money Card. There were no other significant changes in the state of affairs of the Group during the financial year. Events Subsequent to Balance Date On 1 July 2010 the Tax consolidated Group began to apply the new tax regime for financial instruments – Taxation of Financial Arrangements (“TOFA”). Further details are set out in Note 5 Income Tax Expense. On 2 July 2010, class action proceedings were commenced against the Bank in relation to Storm Financial. At this stage, the size of the class action has not been defined and damages sought have not been quantified. The Group is also aware from media reports and other public announcements that class action proceedings may be commenced against it and other Australian banks with respect to exception fees. At this stage, such proceedings have not commenced. The Directors are not aware of any other matter or circumstance that has occurred since the end of the financial year that has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. The Dividend Reinvestment Plan for the final dividend for the 2010 financial year will be satisfied fully or partially by an on- market purchase and transfer of shares. Business Strategies and Future Developments Accommodation Strategy The Group is implementing a property strategy to consolidate its Sydney metropolitan teams across three main precincts: Sydney Central Business District (CBD), Sydney Olympic Park and Parramatta. At 30 June 2010, over 4,000 employees are accommodated in Darling Park Tower 1. In the coming 12 months, employees will commence occupying a new building – Commonwealth Bank Place. This will result in rationalisation of the existing Sydney CBD property space in line with lease expiry profiles. The buildings in which employees are now being accommodated are either new builds or substantially refurbished, providing improved working environments, more efficient use of space and greater open plan and collaborative work spaces. 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 years, are referred to in the Chief Executive Officer‟s Statement. In the opinion of the Directors, disclosure of any further information on likely strategic developments would be unreasonably prejudicial to the interests of the Group. Commonwealth Bank of Australia Annual Report 2010 67 Directors‟ Report Environmental Reporting Directors‟ Interests in Contracts The Group is subject to The Energy Efficiency Opportunities Act 2006 large energy-using businesses to improve their energy efficiency. (EEO Act), which encourages The Group, including several Colonial First State managed funds, is required to comply with the EEO Act due to exceeding certain energy consumption thresholds. As required by the EEO Act, the Group lodged a five year energy efficiency assessment plan and reported to Federal Government on 31 December 2008. The Group is subsequently required to report to the Federal Government every three years and to release a public report annually, covering all preceding years‟ assessment outcomes. The Group is also subject to the National Greenhouse and Energy Reporting Scheme (NGERS). The scheme makes it mandatory for controlling corporations to report annually on greenhouse gas emissions, energy production and energy consumption, if they exceed certain threshold levels. As a result of a long history in voluntary environmental reporting, the Group is well placed to meet the NGERS‟ mandatory requirements, and has previously updated its energy and emissions data management and reporting systems to comply with the new legislation. The Group is not subject to any other particular or significant environmental regulation under any law of the Commonwealth or of a State or Territory, but can incur environmental liabilities as a lender. The Group has developed policies to ensure this is managed appropriately. 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. An Executive Option Plan (“EOP”) was approved by shareholders at the Annual General Meeting on 8 October 1996 and its continuation was 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 102,340 shares were allotted by the Bank following the exercise of options granted under the EOP and ERP. Full details of the Plan are disclosed in Note 29 to the Financial Statements. No options have been allocated since the beginning of the 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. 68 Commonwealth Bank of Australia Annual Report 2010 A number of Directors have given written notices, stating that they hold office in specified companies and accordingly are to be regarded as having an interest in any contract or proposed contract that may be made between the Bank and any of those companies. Directors‟ and Officers‟ Indemnity Articles 19.1, 19.2 and 19.3 of the Commonwealth Bank of Australia‟s Constitution provides: “19. Indemnity 19.1 Persons to whom articles 19.2 and 19.4 apply Articles 19.2 and 19.4 apply: (a) to each person who is or has been a Director, secretary or senior manager of the Company; and (b) to such other officers, employees, former officers or former employees of the Company or of its related bodies corporate as the Directors in each case determine, (each an “Officer” for the purposes of this article). 19.2 Indemnity The Company must indemnify each Officer on a full indemnity basis and to the full extent permitted by law against all losses, liabilities, costs, charges and expenses (“Liabilities”) incurred by the Officer as an officer of the Company or of a related body corporate. 19.3 Extent of indemnity The indemnity in article 19.2: (a) is enforceable without the Officer having to first incur any expense or make any payment; (b) is a continuing obligation and is enforceable by the Officer even though the Officer may have ceased to be an officer of the Company or its related bodies corporate; and (c) applies to Liabilities incurred both before and after the adoption of this constitution.” An indemnity for employees, who are not Directors, secretaries or senior managers, is not expressly restricted in any way by the Corporations Act 2001. The Directors, as named on pages 63 and 64 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 the Commonwealth Bank of Australia, consistent with the above articles in favour of each Director. An the indemnity 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 person who, at the prior formal request of the Bank, act as Director, secretary or senior management of a body corporate which is not a related body corporate of the Bank (in which case the indemnity operates excess of protection provided by that body corporate). Directors‟ Report 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. Commonwealth Bank of Australia Annual Report 2010 69 Directors‟ Report – Remuneration Report Message from the People & Remuneration Committee Chairman Dear Shareholder Non-Executive Director Remuneration Philosophy 2010 has been a year of great challenges. Once again remuneration practices in Australia and overseas have come under the spotlight, and regulatory change has followed. Our considered approach to remuneration At the Commonwealth Bank, we have followed a careful, measured approach to remuneration, in particular as it applies to our executive remuneration arrangements. However, your Board is determined not to be complacent. The People & Remuneration Committee of the Board continues to focus on our remuneration practices. Our aim is to continually review those remuneration practices to ensure they drive achievement of our strategy, comply with changing regulations and incorporate high standards of governance. frameworks and outcomes A key step in this process is the way we communicate our to remuneration philosophy, shareholders and the community. This year we have refreshed our approach. We have worked to present our Remuneration Report in a clear and concise way that we believe is easier to read. We have also engaged Hewitt Associates as our independent remuneration consultant. Hewitt Associate‟s role is to pro- actively advise the People & Remuneration Committee on regulatory and market developments, as well as specific remuneration matters. Executive Remuneration Philosophy Our approach is embodied in our remuneration philosophy for the Chief Executive Officer and his senior executive team. Our remuneration philosophy is to: provide target remuneration which is market competitive, without putting upward pressure on the market; clearly articulate to executives the link between individual and Group performance and individual reward; reward superior performance, while managing risks associated with delivering and measuring that performance; align rewards with shareholder business strategy; provide flexibility to meet changing needs and emerging market practice; and provide appropriate benefits on termination, that do not deliver any windfall payment. interests and our The same remuneration philosophy applies throughout the executive levels of the Group. For our own remuneration, we have a straightforward and effective remuneration philosophy. Non-Executive Directors receive fees that are market competitive in order to attract and retain a high calibre of experienced Directors. We do not receive performance based incentive payments, in keeping with our strategic role. However, we undertake individual performance reviews each year. Our fees are managed within a cap approved by shareholders. This cap is set at a moderate level that will not burden the Group. We receive 20% of our annual fees as Commonwealth Bank Shares. This supports alignment of all Directors with shareholder interests. Continuing to meet the challenges of the global economic crisis These remuneration philosophies were put to the test during 2010. I am very pleased that our approach stood up well to the challenges of the economic crisis. the economic As performance contracted with environment, so did executive performance-based pay. As the environment improved, along with a strengthened share price, so did performance-based pay, albeit within caps set by your Board. In addition, your Directors and the CEO took a voluntary 10% pay cut during the worst of the crisis. Group Executives took a 5% pay cut. This set a responsible example in the market, and sent a strong message to our customers, shareholders and staff. the unsettling Throughout turmoil of 2009/10 our executives remained focused. Our long term incentives focused our executives on improving customer satisfaction and creating shareholder value. Our customer satisfaction increased during 2010, and our share price and dividend yield delivered higher gains to shareholders than most of our peers. Our continuing remuneration focus Our focus continues to be on achieving the most effective remuneration framework for our varied businesses, with strong governance and risk oversight. We do this to ensure our bank continues to earn the respect of the community and our customers, while paying for the performance that drives value for our shareholders. Jane Hemstritch Committee Chairman 70 Commonwealth Bank of Australia Annual Report 2010 Directors‟ Report – Remuneration Report The Information Provided in this Report This report details the Group‟s remuneration frameworks and 2010 outcomes for Key Management Personnel and one Other Executive. The information is set out in four sections: Section Information 2010 Remuneration in Review Provides an update of how our remuneration framework and governance frameworks are meeting the challenges of the changing economic and regulatory environments. Remuneration Arrangements Details the Group‟s remuneration arrangements for Key Management Personnel and the Other Executive required for disclosure. Statutory Remuneration Disclosures Discloses the 2010 remuneration for Key Management Personnel and the Other Executive. Glossary of Key terms Provides a reference of key terms used in this report Page 71 75 83 88 This report has been prepared and audited in accordance with the requirements of the Corporations Act 2001. 2010 Remuneration in Review Our remuneration frameworks and governance frameworks are designed to deliver on the Board‟s remuneration philosophies for: However, Non-Executive Directors continue to align their remuneration to the performance of our share price and dividend yield. They do this by receiving 20% of their annual fees as Commonwealth Bank Shares. Non-Executive Directors; The CEO and Group Executives; and Other executives, including the Other Executive disclosed in this remuneration report. This section provides shareholders with an update of how those frameworks are meeting the challenges of the economic environment and regulatory change. We explain how our remuneration frameworks have focused executives‟ efforts to deliver tangible results to our customers and shareholders: results that are strong relative to our peers, both in terms of our business strategy, and creating sustainable shareholder value. Non-Executive Directors Key developments for 2010: Dr John Schubert retired as the Chairman of the Board, and was replaced by David Turner in February 2010; Reg Clairs retired from the Board in April 2010; Non-Executive Directors took a voluntary 10% pay cut during the worst of the global financial crisis from 1 July to 31 December 2009; Jane Hemstritch replaced Reg Clairs as Chairman of the People & Remuneration Committee (the Committee) in January 2010; and Hewitt Associates was engaged as the Committee‟s independent remuneration consultant. We continue to retain a strong line-up of skilled, knowledgeable and experienced Directors. We believe the Board provided strong and clear stewardship in conjunction with the CEO during the 2010 financial year, in the face of unprecedented market dislocation. Non-Executive Directors are remunerated in their role of providing strategic leadership to the Group. They receive fees which are market competitive compared to other large complex organisations. Fees also reflect the scope of Directors‟ roles, and the responsibilities that come with those roles. As is appropriate for such a role, Non-Executive Directors do not receive incentive awards based on performance. CEO and Group Executives Key developments for 2010: The CEO took a voluntary 10% pay-cut during the worst of the global financial crisis from 1 July to 31 December 2009; Group Executives‟ voluntary pay-cut was 5% during the same period; and The executive team line-up remained unchanged during 2010. Key achievements for 2010: The Group achieved strong profit results despite the challenges of the business environment; Shareholder returns remained strong during 2010, and high relative to our peers; We continue to deliver on our business strategy, centred on improving customer satisfaction; Employee engagement remains high; Our investment in technology and operations continues to deliver strong results; We continue to foster and develop our key talent; and Diversity continues to be a key focus of the Board and executive team, which also actively focuses on the support and development of women in our Group. The achievements listed above are directly related to our executive remuneration framework. The framework is based on the strategic direction set by the Board, and articulated through its executive remuneration philosophy. We provide target remuneration which is market competitive, without putting upward pressure on the market. The executive remuneration framework has three components: Fixed Remuneration (including base remuneration and employer superannuation); Short term incentives; and Long term incentives. Together, these components make up an executive‟s total target remuneration. When setting our target remuneration levels, we consider the size of the role and its responsibilities. We also consider the market for similar roles. To support this, we participate in a number of executive remuneration surveys. Commonwealth Bank of Australia Annual Report 2010 71 Directors‟ Report – Remuneration Report Our goal is always to remain competitive, and we generally set target remuneration at the market median for similar roles at peer organisations so that we can attract and retain the best people. We also aim to avoid adding pressure to the market. This is particularly important for our most senior roles, given the small size of the market for these types of roles in Australia and New Zealand in particular. This year we increased the portion of target remuneration the CEO and Group Executives received in long term incentives. This is intended to increase the focus on our long term business strategy and shareholder value creation. Our new long term incentive plan has performance hurdles directly related to those aims; through customer satisfaction and Total Shareholder Return. We clearly articulate the link between individual and Group performance and individual reward. We clearly articulate to each executive the performance based objectives for each component of their performance- based remuneration. Short Term Incentives Drive Performance Over the Financial Year. Short term incentive performance objectives are managed through a balanced scorecard approach. We select financial and non-financial performance objectives and weight them in support of our overall business strategy. These performance objectives are then communicated to each executive at the beginning of the performance year. This effectively focuses each executive on our key performance objectives because the short term incentive that they will ultimately receive will depend on Group and individual achievements against those objectives. Executives‟ performance evaluations are conducted following the end of each financial year. Performance evaluations for the 2010 financial year were conducted in July 2010. Similarly, performance evaluations for the 2009 financial year were conducted in July 2009. Long Term Incentives Drive Performance Over Four Years. Long term incentives focus executives on Group performance over the longer term. Performance hurdles for our long term incentive plan were specifically chosen to support our business strategy, and to drive the long term creation of shareholder value. Performance hurdles must be achieved before an executive can receive any value from this portion of their total target remuneration. Performance is generally measured over a four year period: One half of each long term incentive award measures our customer satisfaction results relative to our peers. Our research demonstrates a direct relationship between high levels of customer satisfaction and high levels of shareholder returns; and The other half measures our Total Shareholder Return relative to our peers. Shareholder return is a cornerstone of our remuneration philosophy. 72 Commonwealth Bank of Australia Annual Report 2010 We actively manage risks associated with delivering and measuring short term performance. All our activities are carefully managed within our risk appetite, and individual incentive outcomes are reviewed and may be reduced in light of any risk management issues. Risk management is also built into our remuneration framework. Profit After Capital Charge (PACC) is the performance measure that drives short term incentive outcomes. This is important, as PACC is a risk-adjusted measure. That is, it takes into account not just the profit achieved, but also considers the risk to capital that was taken to achieve it. Risk is also managed by deferring half of the 2010 short term incentive of the CEO and each Group Executive for one year. This deferral serves two key purposes. Firstly, it is an important retention mechanism which helps us manage the risk of losing key executive talent. Secondly, it provides a mechanism for the Board to reduce or cancel the deferred component of a short term incentive. We align rewards with shareholder interests and our business strategy. We explain above how the performance objectives and hurdles we have selected for our short term and long term incentives align our executives‟ rewards with: shareholder interests, through shareholder returns and other financial performance measures; and our business strategy, through customer satisfaction. Our results for 2010 are strong. Our one year Total Shareholder Return is ranked in the top 10% of our peers. The peer group(1) includes the large financial services companies we compete with for customers and capital. Our 2010 customer satisfaction results are also strong. We provide flexibility to meet changing needs and emerging market practice. This flexibility was clearly demonstrated during 2010, when uncertainty around changes to the taxation of employee share awards impacted short term incentive deferral arrangements. In the recent past, the CEO and Group Executives received their deferred short term incentive as Commonwealth Bank Shares. However, in July 2009 this arrangement was suspended while its changes to the taxation of employee share awards. the Federal Government finalised Our remuneration framework allows the Board flexibility to meet these types of challenges, and the 2010 deferred short term incentive will be received as cash, with a higher portion deferred to maintain alignment with shareholders‟ interests. The framework also provides flexibility to make additional payments to new executives and key executives at risk of being enticed to other organisations. An appropriate governance framework exists to review and approve (or reject) any such proposed awards. (1) The peer group is made up of the 20 largest companies listed on the Australian Securities Exchange, after excluding resources companies and CBA. Directors‟ Report – Remuneration Report The framework provides flexibility to tailor remuneration arrangements in specialised parts of our business. This includes the Other Executive disclosed in this report, whose performance related remuneration arrangements recognise the unique market practice of that business segment. We provide appropriate entitlements on termination that do not deliver any windfall payment. Employment arrangements for the CEO, Group Executives and the Other Executive disclosed in this report are set out in individual employment agreements. These agreements include the terms that will apply when an executive leaves the Group. for termination Entitlements on the CEO and Group Executives were reviewed and standardised prior to the end of the 2010 financial year. Remuneration arrangements for other executives in the Group continue to be reviewed and standardised as part of an ongoing program. the Federal Government amended the During 2010, Corporations Act to reduce the limit of benefits that directors and disclosed executives may receive when they leave a company. Almost all affected employees‟ termination entitlements are already within the revised limit. This includes the CEO and Group Executives. We continue to manage the small number of exceptions who have legacy arrangements. Our long term incentive plan for the CEO and Group Executives supports our approach. Under the plan, executives who resign or are dismissed forfeit their long term incentive award. Executives who are retrenched or retire do not lose their award. However, their award is generally pro-rated for the time served, and the performance period continues unchanged. Performance is measured at the end of the performance period in the normal way, and the Board determines the portion of the remaining award that may vest. Commonwealth Bank of Australia Annual Report 2010 73 Directors‟ Report – Remuneration Report 2010 Executive Remuneration Outcomes Summary CEO & Group Executives The CEO and Group Executives receive a mix of remuneration, with a portion paid during the year, and a portion received up to four years later, depending on service and performance. This can make it difficult for shareholders to get a clear picture of the actual amount of remuneration an executive received in the financial year in review. To assist shareholders, table (a) below provides a clear report of the remuneration the CEO and Group Executives actually received in relation to the 2010 financial year. The table sets out base remuneration, employer superannuation, the portion of the 2010 short term incentive that is not required to be deferred, and the value of executives‟ 2006 long term incentive awards that vested during the 2010 financial year. The information provided in table (a) is different to the information provided in the statutory remuneration table on page 84, which has been prepared in accordance with the accounting requirements and shows the accounting expense incurred for the 2010 financial year of each component of remuneration. Table (b) provides a reconciliation in relation to the CEO of the remuneration details set out in table (a) with the remuneration information provided in the statutory remuneration table on page 84. (1) Base Remuneration and superannuation make up an executive's Fixed Remuneration. (2) This is the 50% of the 2010 short term incentive payable in cash for performance during the 12 months to 30 June 2010. The remaining 50% is deferred until 1 July 2011. (3) The value of long term incentive awards granted under the Equity Reward Plan in July 2006 that vested in July 2009, calculated as the number of Reward Shares that vested multiplied by the market price of Commonwealth Bank shares at that time, plus dividends earned. Simon Blair, David Cohen and Alden Toevs joined the Group after the 2006 LTI awards were made. 74 Commonwealth Bank of Australia Annual Report 2010 (a) Remuneration received in relation to the 2010 Financial YearPrevious years'2010 STI forawards Base Remuneration Performance toTotal cashthat vested& Superannuation (1)30 June 2010 (2)paymentsduring 2010 (3)$$$$Managing Director and CEORalph Norris 2,961,863 1,852,500 4,814,363 4,318,014 ExecutivesSimon Blair742,877 464,453 1,207,330 - Barbara Chapman828,459 517,969 1,346,428 809,598 David Cohen804,092 502,734 1,306,826 - David Craig1,023,390 639,844 1,663,234 1,079,527 Michael Harte925,925 578,906 1,504,831 680,072 Ross McEwan1,169,589 731,250 1,900,839 682,326 Ian Narev 828,459 517,969 1,346,428 54,005 Grahame Petersen1,072,123 670,313 1,742,436 1,187,442 Ian Saines 1,267,055 792,188 2,059,243 237,488 Alden Toevs1,364,521 853,125 2,217,646 - (b) Cash payments from table (a) and non-cash remuneration expenses for the CEOFinancial year2010award($)vestsCash remuneration received in relation to 2010 - refer to table (a) above 4,814,363 n/a2010 STI deferred for one year at risk 1,852,500 2012Annual leave and long service leave accruals 302,903 n/aOther payments 441 n/aShare based payments: accounting expense in 2010 for LTI awards made over the past 5 years2005 ERP 2006 ERPExpense for shares that have now vested following relative TSR outperformance over 3 years 351,306 651,453 2009 20102007 GLSP 3,629,999 20112008 GLSP 2,785,736 20122009 GLRP: Expense for two awards that may vest subject to improved customer satisfaction performance 887,312 2013 & 20142009 GLRP: Expense for two awards that may vest subject to improved relative TSR outperformance 881,733 2013 & 2014Total remuneration as per page 84 16,157,746 Expense reflecting $2.4 billion increase in PACC (see page 81) in the past 3 years. The 2007 award is now due to vest and the 2008 award may vest in 2012 Directors‟ Report – Remuneration Report Remuneration Arrangements This section details the Group‟s remuneration arrangements for Key Management Personnel and the Other Executive during the year ended 30 June 2010. Governance & Risk Management People & Remuneration Committee to high standards of corporate The Group adheres governance. The People & Remuneration Committee (the Committee) the Group‟s remuneration philosophy, framework and policies for approval by the Board. for developing is responsible The Committee is made up of independent Non-Executive Directors and meets at least four times per year. The CEO attends meetings by invitation, but is absent when matters affect him personally. The role and responsibilities of the Committee are set out in their Charter, which is reviewed by the Board each year. The Charter is available on the Group‟s website at www.commbank.com.au/shareholder. the Committee is responsible for recommending to the Board for approval: general, In senior executive appointments, and appointments where the remuneration target of the individual exceeds that of the head of their business/service unit; roles may affect remuneration arrangements and all reward outcomes for the CEO, senior direct reports to the CEO and other individuals whose financial soundness of the Group; remuneration arrangements for finance, risk & internal control personnel; remuneration arrangements for employees who have a significant portion of their total remuneration based on performance; and the significant changes in remuneration policy and structure, including superannuation, employee equity plans and benefits. is also responsible for reviewing and The Committee approving Group to that apply subsidiaries of the Group that do not have their own remuneration committees. remuneration policies Membership During 2010 the Committee consisted of: Jane Hemstritch (Chairman from 1 January 2010); Reg Clairs (Chairman until 1 January 2010); Carolyn Kay; Andrew Mohl; and David Turner Commonwealth Bank of Australia Annual Report 2010 75 NamePositionTerm1. Key Management Personel Non-Executive Directors David TurnerChairman (from 10 February 2010)Full Year John SchubertFormer Chairman (until 10 February 2010)Retired 10 February 2010 John AndersonDirectorFull Year Reg Clairs Former DirectorRetired 13 April 2010 Colin Galbraith DirectorFull Year Jane HemstritchDirectorFull Year Carolyn KayDirectorFull Year Andrew MohlDirectorFull Year Fergus RyanDirectorFull Year Harrison YoungDirectorFull Year Managing Director and CEO Ralph NorrisManaging Director and CEOFull Year Group Executives Simon BlairGroup Executive, International Financial ServicesFull Year Barbara ChapmanGroup Executive, Human Resources and Group ServicesFull Year David CohenGroup General CounselFull Year David CraigGroup Executive, Financial Services and Chief Financial OfficerFull Year Michael HarteGroup Executive, Enterprise Services and Chief Information OfficerFull Year Ross McEwanGroup Executive, Retail Banking ServicesFull Year Ian NarevGroup Executive, Business and Private BankingFull Year Grahame PetersenGroup Executive, Wealth ManagementFull Year Ian SainesGroup Executive, Institutional Banking and MarketsFull Year Alden ToevsGroup Chief Risk OfficerFull Year2. Other Executive Mark LazbergerCEO Colonial First State Global Asset ManagementFull Year Directors‟ Report – Remuneration Report Independent Remuneration Consultants During the year, the People & Remuneration Committee engaged Hewitt Associates as their on-going independent remuneration consultant. Hewitt Associates will advise the Committee on specific remuneration matters, as well as changes to regulatory environment and market practice. During 2010, and prior to engaging Hewitt Associates, the Committee also obtained independent advice from Guerdon Associates. Risk Management The Committee has free and unfettered access to all risk, legal and financial control personnel as required. This is documented within the Committee Charter. full review of The Committee conducts a the Group‟s Remuneration Policy and practices in December of each year. The Risk Committee is involved in this process to ensure that any risks associated with remuneration arrangements are managed within the Group‟s risk management framework. Remuneration Arrangements in Detail Non-Executive Directors‟ Remuneration Non-Executive remuneration is fixed and they do not receive incentive based pay. Rather they receive fees for service on the Board and Committees. The total amount of all fees for Non-Executive Directors is capped by a pool approved by shareholders. The current Non- Executive Director fee pool is $4 million, and was approved by shareholders at the Annual General Meeting held on 13 November 2008. Fee Structure The Bank‟s Non-Executive Directors‟ receive a base fee for service on the Board and fees for serving on Committees. Different Committees have different fees, according to workload, and there are separate fees for chairing and membership of a Committee. The following table sets out the fee structure for Non-Executive Directors at 30 June 2010. also brings fees into alignment with the Audit and Risk Committees. Superannuation Non-Executive Directors also receive statutory superannuation contributions of 9% of their superannuation salary, up to the superannuation concessional contribution cap that applies to them. In general, superannuation salary is 80% of their total fees. Reg Clairs did not receive superannuation contributions from the Group as he is above the age where contributions are required (i.e. 70 years). Shareholder Alignment Non-Executive Directors receive 20% of their after-tax annual fees as Commonwealth Bank Shares. These shares cannot be traded until the earlier of a director‟s retirement from the Board or 10 years. Service Agreements Each Non-Executive Director enters into a service agreement with the Bank when they are appointed to the Board. This service agreement is set out in a letter of appointment, and includes the terms of their engagement and their responsibilities. A copy of the pro-forma letter of appointment is provided on the Group's website. Retirement Benefits During the year, four Non-Executive Directors held entitlements under the Directors‟ Retirement Allowance Scheme. This scheme was approved by shareholders at the 1997 Annual General Meeting. However, the Board discontinued the scheme in 2002 and froze entitlements for participating directors at that time. The scheme was also closed to new participants at that time. Frozen entitlements for directors under this scheme are set out in the remuneration disclosures in section 3. Entitlements paid on retirement during 2010 for John Schubert ($636,398) and Reg Clairs ($202,989) were disclosed in previous years‟ remuneration reports. The Board Performance and Renewal Committee reviews the Non-Executive Directors‟ fee schedule annually and assesses fee levels in comparison to market trends. Last year, Non- Executive Directors elected to reduce their base and committee fees by 10% from 1 July 2009, in response to economic conditions at that time. Economic conditions subsequently improved and fees were reinstated to their previous level, effective 1 January 2010. People & Remuneration Committee fees increased by $10,000 for the Chairman and $5,000 for members with effect from 1 January 2010. This change increased responsibilities of the People & Remuneration Committee, and recognises the 76 Commonwealth Bank of Australia Annual Report 2010 PositionFees ($)BoardChairman695,000 Non-Executive Director210,000 Audit CommitteeChairman50,000 Member25,000 Risk CommitteeChairman50,000 Member25,000 People & RemunerationChairman50,000 CommitteeMember25,000 Board Performance & Chairman10,000 Renewal CommitteeMember10,000 Directors‟ Report – Remuneration Report Executive Remuneration Remuneration Framework and Pay Mix The CEO and Group Executives receive an appropriate mix of fixed remuneration and incentive-based remuneration. Incentive- based remuneration includes short term incentives and long term incentives. These incentives are aligned to the Group‟s short term and long term business strategies and reflect the Group‟s strategic priorities. Financial and non-financial performance measures are set at the beginning of the performance period. Performance against these measures drives the value each individual ultimately receives from their incentive-based remunerations. Our incentive programs are designed to discourage excessive risk taking. The Committee has discretion to reduce deferred incentive awards where performance outcomes are not ultimately realised. Remuneration for the Other Executive disclosed in this report is explained in the following section. CEO and Group Executives The following table sets out the mix of each component of the CEO and Group Executives‟ remuneration, and demonstrates how each component links to our business strategy. Target Mix Component Link to Business Strategy 1/3 1/3 1/3 Fixed Remuneration, comprising: Base remuneration Employer Superannuation Short Term Incentive: 50% paid after final results 50% deferred for 12 months Long term incentive: 4 year performance period Split performance hurdle: - - Customer satisfaction Total Shareholder Return Fixed remuneration targets the median of the market for similar roles in the same country, primarily in large financial services companies. Short Term Incentives reward financial and non-financial performance over the 12 months to 30 June. We pay the deferred portion after 12 months provided the executive has remained with the Group. Before the deferred portion is paid, the performance that determined it is reviewed again, and the deferred payment may be reduced if warranted. Long term incentive awards are subject to performance hurdles over a period of up to four years. Executives only receive value from this component if performance hurdles are met. Performance hurdles are aligned to: our business strategy, through the Customer Satisfaction performance hurdle; and shareholders‟ interests, though the relative Total Shareholder Return performance hurdle. Mark Lazberger‟s Remuneration Arrangements Short Term Incentives Mark Lazberger receives fixed remuneration, a short term incentive and a long term incentive. His remuneration is set considering the size and responsibility of his role as well as external benchmarks, and is reviewed annually. CEO and Group Executives‟ Remuneration in Detail Fixed Remuneration The Board sets fixed remuneration for the CEO and Group Executives considering recommendations from the Committee. The Board considers the size and responsibility of each role as well as external benchmarks when setting fixed remuneration levels, in order to maintain market competitiveness. Fixed remuneration includes cash salary, any salary sacrifice items and employer superannuation contributions. Salary sacrifice means using before-tax salary to receive benefits such as child care and car parking. The Group provides employer superannuation contributions of 9% of each executive‟s superannuation salary, up to the superannuation concessional contribution cap that applies to them. In general, superannuation salary is 80% of their base remuneration. Fixed remuneration is reviewed annually in July. This review takes into account changes in the size or responsibilities of each role. Changes to our remuneration philosophy, and market competitiveness are also taken into account. Short term incentives reward performance over the financial year to 30 June, within a funding cap set by the Board. Both financial and non financial performance is measured against performance objectives set at the beginning of the year. Financial performance objectives include PACC, which is a risk- adjusted financial measure, and NPAT. Performance objectives are aligned with our business strategy, and are chosen as drivers of long term shareholder value. Setting Performance Objectives At the beginning of each financial year, each executive‟s performance objectives are set. The performance objectives are linked to our strategic priorities. The Committee reviews the performance objectives and measures and recommends them to the Board for approval. For 2010, short term incentive performance measures included: Financial objectives: Cash Net Profit After Tax (NPAT); Profit After Capital Charge (PACC); Profitable Growth. Non financial objectives: Increasing customer satisfaction; Excellence in technology and operations; Employee engagement and teamwork; Effective talent management; Building our reputation. Commonwealth Bank of Australia Annual Report 2010 77 Directors‟ Report – Remuneration Report Measuring Performance and Determining Short Term Incentive Outcomes At the end of the financial year, the Board and the Committee review performance against each performance objective. They also receive advice from the Risk Committee on appropriate risk matters to be considered when assessing the performance. The review by the Board and Committee drives the short term incentive outcome for each executive, within an overall cap. Depending on performance outcomes, executives may receive 0% to 125% of their 2010 short term incentive target. The Board recognises that the business environment changes over time and it is not always possible to anticipate these changes. Given this, the Board retains discretion to adjust remuneration outcomes up or down to ensure consistency with the Group‟s remuneration philosophy, and to prevent any inappropriate reward outcomes. Payment and Mandatory Deferral Half the CEO and Group executives‟ short term incentive is paid in cash following the annual results announcement, usually in September each year. The other half is deferred for one year. The 2010 deferred component will be paid as cash, and will attract interest at the same rate as a Commonwealth Bank one year term deposit. The CEO and Group Executives will forfeit the deferred portion if they resign or are dismissed from the Group before the applicable deferral period has passed. The Board reserves the right to reduce the deferred portion, or reduce future short term incentive outcomes, and receives advice from the Risk Committee each year in this regard. 2010 Performance Outcomes The following table provides a summary of performance for the year ended 30 June 2010 against the Group‟s performance objectives. Performance Objective Customer Satisfaction 2010 Achievements We have achieved significant improvements in Customer Satisfaction The Group has made significant progress towards its vision “to be Australia‟s finest financial services organisation through excelling in customer service”. The Group is now ranked third among the five main Australian banks in retail customer satisfaction as measured by Roy Morgan Research1, with the gap to the number one improved from 12.3 percentage points in January 2006, to 5.1 percentage points in June 2010. Over this period, the Group‟s customer satisfaction score has increased by 9.9 percentage points, and the Group now has over 4 million satisfied customers, which is more than Westpac, NAB and St. George combined. In business banking as measured by the TNS Business Finance Monitor, the Group has improved the gap to number one main bank from 16.6% in January 2006 to 6.2% in June 2010. Our Wealth Management business has maintained its number one position in customer satisfaction since 2008. In May 2010, the Group was awarded Money Magazine‟s “Bank of the Year” for the second time in three years, and was also recognised as “Australia‟s leading financial institution (Retail)” at the 2010 Australian Banking & Finance Awards. 1 Roy Morgan Research Australians 14+, MFI customers, excluding BankWest, six-month rolling average. Business Banking The Group‟s market share in the Business Banking segment has been strengthened The Business Banking growth strategy is designed to improve the Group‟s historically underweight position in this key market segment. In recent times, key initiatives have included the expansion of our distribution footprint, the introduction of local business bankers across the branch network and the rollout of CommBiz, our market leading transactional online banking presence. These initiatives, together with the establishment of Business and Private Banking under the leadership of a dedicated Group Executive in early 2009, have been the catalyst for significant improvement in the Group‟s business banking performance. The Group‟s market share in this segment has been strengthened, customer satisfaction scores have improved relative to peers, and staff engagement is higher. CommSec, the Group‟s market leading retail online broking platform, continues to perform strongly. In June, the Group‟s Private Banking team was awarded “Outstanding Private Banking Institute of the Year” in the $1m to $10m category at the Australian Private Banking Awards 2010. 78 Commonwealth Bank of Australia Annual Report 2010 Directors‟ Report – Remuneration Report Performance Objective Technology & Operational Excellence Trust & Team Spirit 2010 Achievements Our Core Banking Modernisation program is on track and progressing well The Group‟s Technology and Operational Excellence initiatives are designed to improve efficiency and productivity levels, whilst at the same time enhancing the service proposition to customers through more innovative and responsive systems, processes and procedures. The key undertaking in this regard is the Core Banking Modernisation program, which represents a complete overhaul of the Group‟s ageing core banking platforms. The program is progressing well, with recent milestones including the successful migration of over 1 million Term Deposit accounts. Other key deposit and lending products will be progressively migrated over the next 1-2 years. Once completed, the program will drive a step-change improvement in customer service and efficiency levels, positioning the Group well for future growth. We have achieved significant improvements in employee engagement Trust and team spirit focuses on achieving a culture where our people feel engaged, passionate and valued, which is central to the success of the Group‟s vision “to be Australia‟s finest financial services organisation‟s through excelling in customer service”. A range of programs and initiatives over recent years have led to significant improvements in this area. This is highlighted by the Group now achieving top quartile staff engagement in the Gallup Worldwide database. Profitable Growth The Group continues to pursue a targeted growth strategy in Asia The Profitable Growth strategy is designed to enhance the Group‟s growth profile through the targeted pursuit of investment and acquisition opportunities which complement the overall Group strategy and which offer sustainable, long term shareholder value. In recent times, this has included the acquisition of Bankwest at a very attractive price and the taking of a strategic stake in Aussie Home Loans, Australia‟s leading home loan mortgage broker. The Group continues to pursue a targeted growth strategy in Asia, including stakes in two city commercial banks in China, as well as ownership of the largest foreign branch network in Indonesia, through PT Bank Commonwealth. In April, the Group announced a strategic partnership with Vietnam International Bank (VIB), which will lead to the Group taking a 15% stake in VIB, one of the top eight Joint Stock Banks in Vietnam. Long Term Incentives Long term incentives reward sustained performance over the longer term. Long term incentive awards are subject to performance hurdles designed to build shareholder value, and achieve the Group‟s long term business objectives. Group Leadership Reward Plan (GLRP) CEO and Group Executives received long term incentive awards under the GLRP during the 2010 financial year. In general, the GLRP delivers value to executives over a four year performance period, subject to meeting performance hurdles, as shown in the following diagram. Commonwealth Bank of Australia Annual Report 2010 79 Reward Shares granted4 year performance periodCustomer Satisfaction hurdle = 50%Total Shareholder Return hurdle = 50% Directors‟ Report – Remuneration Report The key features of the GLRP are set out in the following table. Feature Instrument Determining the number of Reward Shares Performance Period Description Reward Shares. Each Reward Share entitles the executive to receive one Commonwealth Bank ordinary share in the future, subject to meeting performance hurdles set out below. The number of Reward Shares each executive receives depends on their long term incentive target. The number of Reward Shares received is calculated taking into account the expected number of shares to vest at the end of the performance period. The performance period is four years, starting at the beginning of the financial year in which the award is made. Transitional arrangements were applied to awards made in 2010, in view of the transition from the Group‟s previous long term incentive arrangements that measured performance over a three year period. During 2010, executives received their long term incentive in two awards. The first award is subject to a three year performance period. The second award is subject to a four year performance period. Performance Hurdles Half of each award is subject to a performance hurdle which measures the Group‟s Customer Satisfaction achievements relative to a peer group. The other half is subject to a performance hurdle which measures the Groups Total Shareholder Return relative to a separate peer group. Peer Groups The peer group for the Customer Satisfaction performance hurdle is Australia & New Zealand Banking Group Limited (ANZ), National Australia Bank Limited (NAB), St. George Bank Limited (St. George), and Westpac Banking Corporation (WBC). The peer group for the Total Shareholder Return performance hurdle is made up of the 20 largest companies listed on the Australian Securities Exchange at the beginning of the performance period, after excluding resources companies and CBA. The peer group for the most recent award includes: - AGL Energy Limited, AMP Limited, Australia and New Zealand Banking Group Limited, ASX Limited, Brambles Industries Limited, CSL Limited, Foster‟s Group Limited, Insurance Australia Group Limited, Macquarie Group Limited, National Australia Bank Limited, Qantas Airways Limited, QBE Insurance Group Limited, Stockland, Suncorp-Metway Limited, Transurban Group, Telstra Corporation Limited, Wesfarmers Limited, Westfield Group, Westpac Banking Corporation and Woolworths Limited. Vesting Framework Total Shareholder Return hurdle applies to half the award Customer Satisfaction hurdle applies to half the award No Reward Shares in this part of the award will vest if the Group‟s Total Shareholder Return is ranked below the median of the peer group; If the Group is ranked at the median, half the Reward Shares will vest; Full vesting is achieved if the Group‟s Total Shareholder Return is ranked in the top quarter of the peer group (i.e. 75th percentile or higher); and Vesting increases on a sliding scale if the Group is ranked between the median and below the 75th percentile. The vesting scale is determined with reference to the Group‟s position relative to the peer group; for each award For this part of the GLRP awarded during 2010: - - - - Full vesting applies if the Group is ranked 1st relative to our peers; 75% will vest if the Group is ranked 2nd; If the Group is ranked 3rd, half will vest; and None of the Reward Shares in this portion of the award will vest if the Group is ranked 4th or 5th. Who calculates the performance results Customer satisfaction is measured with reference to three separate independent surveys provided by: Roy Morgan Research, which measures customer satisfaction across the retail bank base; TNS Business Finance Monitor, which measures business banking customer satisfaction; Wealth Insights 2010 Service Level Report, Platforms, which measures wealth management service performance of master trusts/wraps in Australia; Total Shareholder Return is calculated independently by Standard & Poors. If an executive leaves during a performance period If the executive ceases employment with the Group before the Reward Shares vest, they will generally forfeit that award unless the Board determines otherwise. For example, in cases of death or ill health the Board may require the award to be pro-rated for the portion of the performance period served, with the performance period continuing unchanged. In such cases any portion of the award that ultimately vests may be satisfied by cash rather than shares. Expiry At the end of the applicable performance period, any Reward Shares that have not vested will expire. 80 Commonwealth Bank of Australia Annual Report 2010 Directors‟ Report – Remuneration Report Previous and Other Long Term Incentive Plans The Group regularly reviews remuneration arrangements to ensure they continue to align with and support our strategic objectives. During the year the Group introduced the GLRP for long term incentive awards to the CEO and Group Executives. Prior year‟s long term incentive awards were made under legacy plans. These legacy plans are now closed to new offers, and existing awards continue to run their course. The legacy plans are summarised in this section. Group Leadership Share Plan (GLSP) During the 2008 and 2009 financial years, long term incentive awards were made under the GLSP. Details of the GLSP were provided to shareholders in the Remuneration Reports for those years, and a summary of the key features is provided below. Under the GLSP, executives were awarded rights to receive Commonwealth Bank ordinary shares in the future, subject to meeting set performance hurdles over a three year period. The number of shares each executive will ultimately receive is determined in three steps: The Group‟s growth in Profit After Capital Charge (PACC) is measured and determines the size of the rights pool. The rights pool is subject to a cap of $34.0 million for the 2008 financial year award, and $36.1 million for the 2009 financial year award; The Group‟s cash NPAT growth is measured. The rate of growth must be greater than the average of the peer group (ANZ, WBC, NAB and St. George) or nothing will vest; Provided the relative NPAT growth hurdle is met, the Group‟s customer satisfaction ranking relative to the peer group drives the portion of the rights pool that will vest, according to the following scale: Percentage of rights pool to vest (1) Customer Satisfaction ranking 2008 financial year award 2009 financial year award 1 2 3 4 5 100% 75% 50% 30% Nil 100% 75% 50% Nil Nil (1) The vesting scale for each award is different, because it is determined with reference to the Group‟s position relative to the peer group at the time of each invitation. The number of shares an executive will ultimately receive will be calculated by dividing their individual portion of the GLSP rights pool by the market value of Commonwealth Bank ordinary shares at the end of the performance period. The Board retains discretion to take into account unforeseen changes, and prevent any unintended outcomes. Equity Reward Plan (ERP) We reported in the 2009 Remuneration Report that the final ERP award vested on 14 July 2009. This plan was closed to new offers in July 2006. Under the ERP executives received awards where vesting was subject to the Group‟s Total Shareholder Return growth relative to a set peer group. At the end of the performance period the peer group included: Adelaide Bank, AMP Limited, Australia and New Zealand Banking Group Limited, AXA Asia Pacific Holdings Limited, Bank of Queensland Limited, Bendigo Bank Limited, Insurance Australia Group, Macquarie Bank Limited, National Australia Bank Limited, QBE Insurance Group Limited, St. George Bank Limited, Suncorp-Metway Limited and Westpac Banking Corporation. The Total Shareholder Return growth calculation for each company in the peer group was weighted according to the company‟s market capitalisation. Other Long Term Incentive Plans In line with our philosophy of providing flexibility to provide effective reward structures linked to our business strategy, the Group operates other long term incentive plans for key employees in parts of our business. Mark Lazberger participates in the Colonial First State Global Asset Management (CFS GAM) cash-settled long term incentive plan. The purpose of this plan is retention and motivation 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 dependent on their confidence in the investment capability, experience and long term tenure of individual fund managers. Awards made under this plan during 2010 have a three year vesting period and are not subject to performance hurdles. Hedging All employees are prohibited from hedging, or otherwise limiting, their exposure to risk in relation to unvested shares, options or rights issued or acquired under the Group‟s employee equity arrangements. The Board has discretion under respective employee equity plan rules to enforce this policy. Executives who report to the CEO are also prohibited from using instruments or arrangements for margin borrowing, short selling or stock lending in relation to any securities of the Bank or of any other member of the Group. These restrictions are set out in the Group‟s Share Trading Policy. Commonwealth Bank of Australia Annual Report 2010 81 Directors‟ Report – Remuneration Report Group Performance Relating to Long Term Incentives Equity Reward Plan (ERP) Executives only receive value from their long term incentive awards when performance hurdles are met. During the 2010 financial year, the long term incentive award made under the ERP in July 2006 reached a performance test date. Under the ERP, the value executives receive at the end of the the Group‟s Total performance period depends on Shareholder Return growth relative to a set peer group, and weighted by market capitalisation. For the 2006 ERP award, the Group‟s Total Shareholder Return to the measurement date of 14 July 2009 was among the highest 25% of the peer group, and resulted in full vesting. following graph demonstrates the Group‟s Total The Shareholder Return performance over the three year period, relative to each of the thirteen other companies in the peer group. CBA TSR Performance Relative to Peer Group At 30 June 2010, we were ranked third overall against our peers in Customer Satisfaction, under the GLSP. Under the GLSP Customer Satisfaction is measured based on independent surveys provided by Roy Morgan Research, TNS Business Finance Monitor, and the Wealth Insights 2010 Service Level Report, Platforms. The GLSP award granted during the 2008 financial year reached the end of its performance period on 1 July 2010. Since the year end, the Board has reviewed performance against the financial and customer satisfaction hurdles and has determined that 50% of the available pool will vest. This results in a total distribution of $14.8 million in the 2011 financial year. Group Leadership Reward Plan (GLRP) The GLRP is the Group‟s current LTI plan for the CEO and Group Executives. Awards under the GLRP are subject to performance hurdles of relative Total Shareholder Return and Customer Satisfaction. The Customer Satisfaction measure for the GLRP is consistent with the methodology used under the GLSP. Total Shareholder Return measures a company‟s share price movement, dividends and any return of capital over a specific period. The Commonwealth Bank‟s share price movement and dividends per share for the three year period to June 2010 are shown in the following graphs. Share Price Group Leadership Share Plan (GLSP) (1) Awards were made under the GLSP in the 2008 and 2009 financial years, and have a three year performance period. These awards are subject to performance hurdles of NPAT and customer satisfaction relative to our peers. The following graph demonstrates our NPAT performance over the past three years. It shows our strong cash NPAT over the period, despite a challenging economic environment. Cash NPAT CBA Dividends Per Share (1) This information is general. For each award, performance is measured from the beginning of that award‟s performance period to the end. 82 Commonwealth Bank of Australia Annual Report 2010 40%50%60%70%80%90%100%110%12CBA4567891011121314TSRPeers4,7334,4156,10101,0002,0003,0004,0005,0006,0007,000Jun 08Jun 09Jun 10$ Million$0$10$20$30$40$50$60$70Jun 07Jun 08Jun 09Jun 10CBA Share Price2.662.282.90$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50Jun 08Jun 09Jun 10 Directors‟ Report – Remuneration Report Statutory Remuneration Disclosures Remuneration of Non-Executive Directors Individual remuneration details for Non-Executive Directors for the year ended 30 June 2010. (1) Cash includes base fees and committee fees paid as cash. (2) Superannuation arrangements include statutory superannuation contributions and any allocations made by way of salary sacrifice. (3) Non-Executive Directors receive 20% of their total annual fees as Commonwealth Bank shares under the Non-Executive Directors' Share Plan. The amount shown in the table is the pre-tax portion of fees received as shares. However, the number of shares each Non-Executive Director receives is calculated on a post-tax basis. (4) David Turner was appointed as Chairman on 10 February 2010. (5) John Schubert retired from the Board on 10 February 2010. Reg Clairs retired from the Board on 13 April 2010. Both directors received payments of $636,398 and $202,989 respectively, representing their entitlements under the Directors‟ Retirement Allowance Scheme. (6) These Directors are entitled to a retirement allowance, which was frozen in 2002. The entitlements are Colin Galbraith ($159,092) and Fergus Ryan ($168,263). Commonwealth Bank of Australia Annual Report 2010 83 Short Term BenefitsShare-based paymentsRetiring Non-executiveSuper-AllowanceDirectors'TotalCash (1)annuation (2)PaidShare Plan (3)Remuneration$$$$$ChairmanDavid Turner (4)2010353,933 47,854 - 88,483 490,270 2009- 99,313 - 176,617 275,930 John Schubert (5)2010357,027 24,500 636,398 68,055 1,085,980 2009589,918 53,093 - 147,480 790,491 Non-Executive DirectorsJohn Anderson2010180,232 16,221 - 45,058 241,511 2009188,000 16,920 - 47,000 251,920 Reg Clairs (5)2010160,362 - 202,989 37,775 401,126 2009209,918 - - 52,480 262,398 Colin Galbraith (6)2010205,111 18,460 - 51,278 274,849 2009205,918 18,533 - 51,480 275,931 Jane Hemstritch2010205,618 18,506 - 51,404 275,528 2009204,000 18,360 - 51,000 273,360 Carolyn Kay2010214,692 19,322 - 53,673 287,687 2009213,918 19,253 - 53,479 286,650 Andrew Mohl2010195,700 33,613 - 48,925 278,238 2009129,072 82,299 - 48,479 259,850 Fergus Ryan (6)2010216,506 19,486 - 54,127 290,119 2009228,000 20,520 - 57,000 305,520 Harrison Young2010216,506 19,486 - 54,127 290,119 2009228,000 20,520 - 57,000 305,520 Post employment Benefits Directors‟ Report – Remuneration Report Remuneration of Executives The following table sets out remuneration disclosures for the CEO, Group Executives (who are Key Management Personnel), and the Other Executive for the year ended 30 June 2010. The table has been prepared in accordance with the accounting requirements and does not represent the remuneration each individual executive actually received during the year. Details of the remuneration the CEO and Group Executives received in relation to the 2010 performance year are set out in the tables on page 74. In the table below, where a component of remuneration (such as an equity award) vests over a number of years and some of the vesting period fell during 2010, we are required to show the portion of the expense relating to the 2010 year. In some cases, where performance exceeds expectations we may be required to recognise a greater expense. This occurred during the year in relation to performance under both GLSP awards. Higher performance has resulted in a higher expense recognised this year in the table below under „LTI Performance Rights At Risk‟. (1) Cash Fixed remuneration is the total cost of salary, including any annual leave accruals and salary sacrificed benefits. (2) Non Monetary Fixed represents the cost of car parking (including associated fringe benefits tax). (3) 2010 Cash STI payment includes for the CEO and Group Executives 50%, and for Mark Lazberger 66.6%, of the total STI award in recognition of performance for the year ended 30 June 2010 (2009: 66.6%). Any portion of STI sacrificed to superannuation is included under 'Superannuation.' (4) 2010 STI Deferred includes the compulsory deferral of 50% of the CEO and Group Executives‟ STI payments for performance for the year ended 30 June 2010 (2009: 33%). These amounts are deferred until 1 July 2011. For Mark Lazberger, 2010 STI Deferred includes the compulsory deferral of 33.4% of his STI payment for performance for the year ended 30 June 2010 (2009: 33.4%). These amounts are deferred for three years, and he will need to be an employee of the Group at the end of the deferral period to receive this payment. (5) Other Short Term Benefits relate to company funded benefits (including associated fringe benefits tax where applicable). These benefits include preparation of Australian taxation returns for expatriates, club memberships, and relocation costs. This item also includes a payment to Mr Toevs of $929,970 in June 2010 relating to his sign-on arrangements. The 2009 amounts for David Cohen, Mark Lazberger and Alden Toevs relate to sign on arrangements. 84 Commonwealth Bank of Australia Annual Report 2010 Post employment Long-term benefitsLTI LTI LTI Non Cash STI STI Super-PerformanceReward Perform-TotalCash Monetary Payment Deferred annuationRightsShares At ance UnitsRemun-Fixed (1)Fixed (2)At Risk (3)At Risk (4)Other (5) fixed (6)Other (7)At Risk (8)Risk (9)At Risk (10)eration (11)($)($)($)($)($)($)($)($)($)($)($)Managing Director and CEO20103,128,875-1,852,5001,852,50044150,00085,8916,415,7352,771,804-16,157,74620093,253,551-1,733,333866,667-100,00082,0201,936,5461,237,635-9,209,752Group ExecutivesSimon Blair (12) 2010746,74214,078464,453464,453-49,33817,219-228,441-1,984,7242010865,09413,231517,969517,96920,74425,000151,9261,334,602630,874-4,077,4092009861,37013,233600,000300,00010,35750,00020,635403,956133,25587,8612,480,667David Cohen 2010811,94125,237502,734502,734-50,00015,8111,334,602493,756-3,736,8152009834,45213,233800,000400,000573,00450,00012,612403,956 - - 3,087,257David Craig 20101,047,97413,231639,844639,844-50,00027,8591,506,616791,291-4,716,65920091,049,64913,233800,000400,0004,71179,94431,175454,521177,673 - 3,010,906Michael Harte2010970,03714,341578,906578,90624,47525,00015,5401,334,602671,174-4,212,9812009969,04113,218800,000400,00014,05850,00014,449403,956111,929 - 2,776,651Ross McEwan 20101,205,47513,045731,250731,25012,81550,00030,3441,815,846718,201121,4875,429,71320091,185,72213,268933,333466,66711,492100,23162,670542,317 - 220,3933,536,093Ian Narev (14) 2010845,41413,182517,969517,96910,50543,18211,743374,100516,871 - 2,850,9352009370,0065,491254,820127,4105,44524,0877,120143,334 - - 937,71320101,100,41314,666670,313670,313-50,00053,6021,709,081914,029 - 5,182,41720091,080,39512,446666,667333,333-101,02686,307516,753372,781 - 3,169,708Ian Saines (14)20101,274,98211,832792,188792,188 - 85,10173,266374,100832,237 - 4,235,8942009651,3833,660403,280201,640 - 43,29855,459143,334 - - 1,502,054Alden Toevs 20101,415,58114,341853,125853,1251,011,76550,000536,909506,339837,902 - 6,079,08720091,399,726 - 1,066,667533,333241,699100,000532,797194,000 - - 4,068,222Other Executive (13)Mark Lazberger2010791,83512,038807,934403,967-25,0001,261,296--2,500,0005,802,0702009615,6119,335498,000249,0001,000,00041,6791,743,674--1,750,0005,907,299Barbara ChapmanGrahame PetersenShort Term Benefits Share-based paymentsRalph Norris Directors‟ Report – Remuneration Report (6) Superannuation arrangements include statutory superannuation contributions and any allocations made by way of salary sacrifice. (7) Includes long service entitlements accrued during the year. For Alden Toevs this also includes amounts relating to retention arrangements, and for Mark Lazberger it includes amounts relating to his sign on arrangements. (8) This includes Performance Rights awarded under the GLSP in the 2008 and 2009 financial years (now closed to new offers). (9) This includes Reward Shares awarded during the 2010 financial year under the GLRP, and in 2006 Reward Shares awarded under the ERP (now closed to new offers). (10) For Barbara Chapman and Ross McEwan this includes awards made under a cash-equivalent plan to the ERP (now closed to new offers) to executives who were located outside Australia at the time of the award. For Mark Lazberger, this represents awards made under the CFS GAM long term incentive plan. (11) The percentage of 2010 remuneration related to performance was: Ralph Norris 80%, Simon Blair 58%, Barbara Chapman 74%, David Cohen 76%, David Craig 76%, Michael Harte 75%, Mark Lazberger 64%, Ross McEwan 76%, Ian Narev 68%, Grahame Petersen 76%, Ian Saines 66% and Alden Toevs 50%. None of the remuneration was received as options. (12) Simon Blair was appointed to a Key Management Personnel role on 1 July 2009. (13) The five executives who received the highest remuneration for the year ended 30 June 2010 as defined in the Section 300A of the Corporations Act 2001, include Mark Lazberger, who is not one of the Key Management Personnel, Ross McEwan, Ralph Norris and Grahame Petersen and Alden Toevs. (14) Ian Narev and Ian Saines were appointed KMP during the 2009 financial year, 27 January 2009 and 31 December 2008 respectively. The 2009 remuneration disclosed relates to the portion of the year that they were a KMP. STI Allocations to Executives for the Year Ended 30 June 2010 (1) The maximum STI is represented as a percentage of Fixed Remuneration. The minimum STI potential is $nil. (2) Includes the annual cash award immediately payable in recognition of performance for the year ended 30 June 2010. (3) This represents the portion of STI that is deferred. The Executive will need to be an employee of the Group at the end of the respective deferral period to receive this payment. Commonwealth Bank of Australia Annual Report 2010 85 STI Target Maximum STI Potential (1) ($)(%)(%)($)(%)($)Managing Director and CEORalph Norris 2,964,000 125%50% 1,852,500 50% 1,852,500 Group ExecutivesSimon Blair 743,125 125%50% 464,453 50% 464,453 Barbara Chapman 828,750 125%50% 517,969 50% 517,969 David Cohen 804,375 125%50% 502,734 50% 502,734 David Craig 1,023,750 125%50% 639,844 50% 639,844 Michael Harte 926,250 125%50% 578,906 50% 578,906 Ross McEwan 1,170,000 125%50% 731,250 50% 731,250 Ian Narev 828,750 125%50% 517,969 50% 517,969 Grahame Petersen 1,072,500 125%50% 670,313 50% 670,313 Ian Saines 1,267,500 125%50% 792,188 50% 792,188 Alden Toevs 1,365,000 125%50% 853,125 50% 853,125 Other ExecutiveMark Lazberger n/a n/a 67% 807,934 33% 403,967 STI Paid (2)STI Portion Deferred (3) Directors‟ Report – Remuneration Report Equity Awards Received as Remuneration The following table sets out the number and value of equity awards that were granted, exercised, or forfeited/lapsed during 2010. It also shows the value of awards made in previous years that vested during 2010. Further information about equity holdings of Key Management Personnel are provided in Note 44 to the financial statements. (1) No amounts are payable on exercise. 86 Commonwealth Bank of Australia Annual Report 2010 Previousyears'awardsthat vestedduring 2010NameClass(Units)($)(Units)(Units)($)(Units)($)Managing Director and CEORalph Norris Reward Shares 204,626 9,027,208 90,910 - - - - Deferred Shares 16,460 868,100 - - - - - Group ExecutivesSimon BlairReward Shares 30,190 1,336,511 - - - - - Deferred Shares - - - - - - - Barbara Chapman Reward Shares 58,844 2,595,931 17,045 - - - - Deferred Shares 5,698 300,513 - - - - - David Cohen Reward Shares 57,113 2,519,573 - - - - - Deferred Shares 7,597 400,666 - - - - - David Craig Reward Shares 72,690 3,206,757 22,728 - - - - Deferred Shares 7,597 400,666 - - - - - Michael Harte Reward Shares 65,767 2,901,351 14,318 - - - - Deferred Shares 7,597 400,666 - - - - - Ross McEwan Reward Shares 83,074 3,664,854 - - - - - Deferred Shares 8,863 467,435 - - - - - Ian NarevReward Shares 58,844 2,595,931 1,137 - - - - Deferred Shares 5,698 300,513 - - - - - Grahame PetersenReward Shares 76,151 3,359,449 25,000 - - - - Deferred Shares 6,331 333,897 - - - - - Ian SainesReward Shares 89,997 3,970,275 5,000 - - - - Deferred Shares 7,597 400,666 - - - - - Alden Toevs Reward Shares 96,920 4,275,681 - - - - - Deferred Shares 10,130 534,256 - - - - - Other Executive - - - Mark LazbergerReward Shares - - 23,463 - - - - Deferred Shares 4,729 249,407 - - - - - Ordinary sharesof previousyear's awardsduring 2010 (1)received on exerciseForfeited orlapsedduring 2010during 2010Granted Directors‟ Report – Remuneration Report Equity Awards Outstanding during 2010 – Fair Value Assumptions The „fair value‟ of LTI awards granted has been calculated using a Monte-Carlo simulation method incorporating the assumptions below: (1) The performance hurdle for this portion of the GLRP award is Customer Satisfaction relative to our peers. (2) The performance hurdle for this portion of the GLRP award is Total Shareholder Return relative to our peers. Termination Arrangements The Group‟s executive contracts provide for the following termination arrangements for Key Management Personnel and the Other Executive: (1) Permanent contracts are ongoing until notice is given by either party. (2) Severance applies where termination is initiated by the Group, other than for misconduct or unsatisfactory performance. Executives receive their statutory entitlements of accrued annual leave, long service leave and superannuation benefits when they leave the Group. Those executives who cease employment with the Group during a performance year (i.e. 1 July to 30 June) will generally not receive a short term incentive payment for that year except if they leave due to retrenchment, retirement or death. Loans to Key Management Personnel Information on loans to Key Management Personnel, including loan amounts, interest charged, and loan balances outstanding are set out in note 44 to the financial statements. Commonwealth Bank of Australia Annual Report 2010 87 GLRP - Reward Shares(1)25/09/2009 51.30 Nil 30/06/20122.8Nil305.1GLRP - Reward Shares(2)25/09/2009 36.52 Nil 30/06/20122.8Nil305.1GLRP - Reward Shares(1)25/09/2009 51.30 Nil 30/06/20133.8Nil305.4GLRP - Reward Shares(2)25/09/2009 37.24 Nil 30/06/20133.8Nil305.4GLSP - Performance Rights3/12/2008 26.20 Nil 1/07/20112.66.75304.7GLSP - Performance Rights12/10/2007 53.50 Nil 1/07/20102.86.75304.7ERP - Reward Shares3/11/2006 30.62 Nil 14/07/20093.9Nil305.4Exercise Price ($)Expected Life(years)Expected Dividend Yield(%)Risk free rate (%)Expected Volatility (%)Award typeGrantDateFair Value ($)Performance Period EndNameContract Type (1)NoticeSeverance (2)Managing Director & CEORalph NorrisPermanent6 monthsn/aGroup ExecutivesSimon BlairPermanent6 months6 monthsBarbara ChapmanPermanent6 months6 monthsDavid CohenPermanent6 months6 monthsDavid CraigPermanent6 months6 monthsMichael HartePermanent6 months6 monthsRoss McEwanPermanent6 months6 monthsIan NarevPermanent6 months6 monthsGrahame PetersenPermanent6 months6 monthsIan SainesPermanent6 months6 monthsAlden ToevsPermanent6 monthsn/aOther ExecutiveMark LazbergerPermanent3 months3 months Directors‟ Report – Remuneration Report Glossary of Key Terms To assist readers, 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. Board The Board of Directors of the Group. Fixed Remuneration Consists of Base Remuneration plus employer contributions to superannuation. Equity Reward Plan (ERP) The Group‟s long term incentive plan applying to grants made prior to the 2008 financial year. 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 Reward Plan (GLRP) Group Leadership Share Plan (GLSP) Key Management Personnel Long Term Incentive (LTI) The Group‟s long term incentive plan from 1 July 2009 for the CEO and Group Executives. The Group's previous long term incentive plan applying to grants made in the 2008 and 2009 financial years 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. A remuneration arrangement which grants benefits to participating executives that may vest if, and to the extent that, performance hurdles are met over a period of three or more years. The Group‟s long term incentive plans include the GLRP, and the closed GLSP and ERP. NPAT Net profit after tax. Other Executives 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 Commonwealth Bank of Australia ordinary 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 relative weighting of each component of remuneration (Fixed Remuneration, STI and LTI). Reward Shares Salary Sacrifice Short Term Incentive (STI) Total Shareholder Return (TSR) Shares in the Bank granted under the GLRP or ERP and subject to performance hurdles. 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. Remuneration paid with direct reference to the Group‟s and the individual‟s performance over one financial year. TSR measures a company‟s share price movement, dividend yield and any return of capital over a specific period. 88 Commonwealth Bank of Australia Annual Report 2010 Directors‟ Report Company Secretaries Audit Services The details of the Bank‟s Company Secretaries, including their experience and qualifications are set out below. Amounts paid or payable for audit PricewaterhouseCoopers totalled $17,654,000. services to 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 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. She is a Graduate of the Australian Institute of Company Directors. Non-Audit Services Amounts paid or payable to PricewaterhouseCoopers for non- audit services provided during the year, as set out in Note 34 to the Financial Statements are as follows: Regulatory audits, reviews, attestations and assurances for Group entities – Australia Regulatory audits, reviews, attestations and assurances for Group entities – Offshore 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 (1) 2010 $’000 870 140 174 405 182 503 2,342 1,093 2,566 8,275 (1) An additional amount of $7,867,223 was paid to PricewaterhouseCoopers by way of fees for entities not consolidated into the Financial Statements. Of this amount $6,794,440 relates to statutory audits. Signed in accordance with a resolution of the Directors. The Bank has in place an Independent Auditor Services Policy, details of which are set out in the Corporate Governance section of this Annual Report, to assist in ensuring the independence of the Bank‟s external auditor. The Audit Committee has considered the provision, during the year, of non-audit services by PricewaterhouseCoopers and has concluded that the provision of those services did not compromise the auditor independence requirements of the Corporations Act. The Audit Committee advised the Board accordingly and, after considering the Committee‟s advice, the Board of Directors agreed that it was satisfied that the provision of the non-audit services by 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 Independent Auditor Services Policy during the year to restrict the nature of non-audit services engagements, to prohibit certain services and to require Audit Committee pre-approval for all such engagements; and The relative quantum of fees paid for non-audit services compared to the quantum for audit services. 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 8 to 12), Analysis sections for Retail Banking Services (pages 20 to 21), Business and Private Banking (pages 22 to 23), Institutional Banking and Markets (pages 24 to 25), Wealth Management (pages 26 to 29), New Zealand (pages 30 to 32), Bankwest (pages 34 to 35) Other Divisions (pages 36 to 37) and Shareholding Information (pages 235 to 237) sections of this Annual report. D J Turner Chairman 11 August 2010 R J Norris Managing Director and Chief Executive Officer 11 August 2010 Commonwealth Bank of Australia Annual Report 2010 89 PricewaterhouseCoopers ABN 52 780 433 757 Darling Park Tower 2 201 Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999 www.pwc.com/au Auditor‟s independence declaration As lead auditor for the audit of the Commonwealth Bank of Australia for the year ended 30 June 2010, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of the Commonwealth Bank of Australia and the entities it controlled during the year. Rahoul Chowdry Partner Sydney 11 August 2010 PricewaterhouseCoopers Liability limited by a scheme approved under Professional Standards Legislation 90 Commonwealth Bank of Australia Annual Report 2010 Five Year Financial Summary (1) Due to the change in expectations on the size and impact of defined benefit superannuation plan (income)/expense, from 1 July 2009 this amount has been included as part of total expenses (“cash basis”) and is recorded in the Other segment. Commonwealth Bank of Australia Annual Report 2010 91 20102009200820072006$M$M$M$M$MIncome StatementNet interest income11,86810,1867,9077,0366,514Other operating income7,1916,6326,4346,1615,613Total operating income19,05916,81814,34113,19712,127Operating expenses(8,601)(7,765)(7,021)(6,427)(5,994)Impairment expense(2,075)(3,048)(930)(434)(398)Operating profit before income tax expense8,3836,0056,3906,3365,735Corporate tax expense(2,266)(1,560)(1,626)(1,782)(1,618)Non-controlling interests(16)(30)(31)(27)(31)Net profit after income tax (“cash basis”)6,1014,4154,7334,5274,086Defined benefit superannuation plan (expense)/income (1)-(10)95(25)Treasury shares valuation adjustment(44)(28)60(75)(100)Hedging and AIFRS volatility17(245)(42)13(33)Visa Initial Public Offering gain after tax--295--Investment and restructuring--(264)--One-off expenses-(23)---Tax on NZ structured finance transactions(171)----Loss on disposal of controlled entities / investments(23)----Bankwest significant items(216)614---Net profit after income tax attributable to Equity holders of the Bank5,6644,7234,7914,4703,928Contributions to profit (after tax)Retail Banking Services2,4612,1071,9111,7661,576Business and Private Banking893736721n/an/aInstitutional Banking and Markets1,182166771n/an/aPremium Business Servicesn/an/an/a1,4451,138Wealth Management592514789548441New Zealand387438n/an/an/aBankwest60113n/an/an/aInternational Financial Servicesn/an/a555461442Other348537(1)211278Net profit after income tax (“underlying basis”) 5,9234,6114,7464,4313,875Investment experience after tax178(196)(13)9666Net profit after income tax (“cash basis”)6,1014,4154,7334,5273,941Defined benefit superannuation plan (expense)/income (1)-(10)95(25)Treasury shares valuation adjustment(44)(28)60(75)(100)Hedging and AIFRS volatility17(245)(42)13(33)Profit on sale of the Hong Kong Insurance Business----145Visa Initial Public Offering gain after tax--295--Investment and restructuring--(264)--One-off expenses-(23)Tax on NZ structured finance transactions(171)----Loss on disposal of controlled entities / investments(23)----Bankwest significant items(216)614---Net profit after income tax5,6644,7234,7914,4703,928Balance SheetLoans, bills discounted and other receivables493,459466,631361,282315,465273,525Total assets646,330620,372487,572440,157382,850Deposits and other public borrowings374,663368,721263,706219,068187,576Total liabilities610,760588,930461,435415,713361,507Shareholders‟ equity35,57031,44226,13724,44421,343Net tangible assets24,68820,73816,42215,15812,087Risk weighted assets290,821288,836205,501245,347216,438Average interest earning assets553,735481,248385,667332,492289,416Average interest bearing liabilities521,338453,458362,249311,236269,718Assets (on Balance Sheet)Australia561,618528,354410,225360,188318,578New Zealand56,94859,60654,31255,16043,318Other27,76432,41223,03524,80920,954Total assets646,330620,372487,572440,157382,850 Five Year Financial Summary 92 Commonwealth Bank of Australia Annual Report 2010 20102009200820072006Shareholder SummaryDividend per share – fully franked (cents)290228266256224Dividend cover – statutory (times)1. 31. 31. 31. 31. 4Dividend cover – cash (times)1. 41. 31. 31. 31. 4Dividend cover – underlying (times)1. 31. 31. 31. 31. 3Earnings per share (cents)BasicStatutory367. 9328. 5363. 0344. 7308. 2Cash basis395. 5305. 6356. 9347. 1318. 5Underlying basis383. 9319. 3357. 9339. 6302. 0Fully dilutedStatutory354. 2313. 4348. 7339. 7303. 1Cash basis379. 8292. 4343. 1342. 1312. 9Underlying basis369. 0305. 0344. 0335. 0297. 1Dividend payout ratio (%)Statutory79. 773. 174. 175. 273. 3Cash basis73. 978. 275. 074. 270. 5Underlying basis76. 174. 974. 875. 874. 3Net tangible assets per share ($)15. 913. 712. 411. 79. 4Weighted average number of shares (statutory basic) (M)1,5271,4201,3071,2811,275Weighted average number of shares (statutory fully diluted) (M)1,6401,5481,4241,3441,329Weighted average number of shares (cash basic) (M)1,5311,4261,3131,2891,283Weighted average number of shares (cash fully diluted) (M)1,6441,5541,4301,3511,338Number of Shareholders784,382776,283741,072696,118698,552Share prices for the year ($)Trading high60. 0046. 6962. 1656. 1647. 41Trading low36. 2024. 0337. 0242. 9836. 62End (closing price)48. 6439. 0040. 1755. 2544. 41Performance Ratios (%)Return on average Shareholders‟ equityStatutory17. 516. 819. 820. 720. 4Cash basis18. 715. 820. 421. 721. 5Underlying basis18. 216. 520. 421. 220. 4Return on average total assetsStatutory0. 90. 91. 01. 11. 1Cash basis1. 00. 81. 01. 11. 1Underlying basis0. 90. 81. 01. 11. 1Capital adequacy – Tier One9. 158. 078. 177. 147. 56Capital adequacy – Tier Two2. 342. 353. 413. 413. 10Capital adequacy – Deductions---(0. 79)(1. 00)Capital adequacy – Total11. 4910. 4211. 589. 769. 66Net interest margin2. 132. 102. 022. 082. 22Other Information (numbers)Full-time equivalent employees45,02544,21839,62137,87336,664Branches/services centres (Australia)1,1471,1421,0091,0101,005Agencies (Australia)3,8843,8593,8143,8333,836ATMs (proprietary)4,1494,0753,3013,2423,191EFTPOS terminals165,621167,025187,377171,138157,350ProductivityTotal operating income per full-time (equivalent) employee ($)423,298380,343361,955348,454330,760Employee expense/Total operating income (%)24. 023. 725. 524. 523. 3Total operating expenses/Total operating income (%)45. 146. 249. 048. 749. 4 Income Statements Statements of Comprehensive Income Balance Sheets Statements of Changes in Equity 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 Note 50 Accounting Policies Profit Income from Ordinary Activities Average Balances and Related Interest Income Tax Dividends Earnings per Share Cash and Liquid Assets Receivables due from Other Financial Institutions Assets at Fair Value through Income Statement Derivative Financial Instruments Available-for-Sale Investments Loans, Bills Discounted and Other Receivables Provisions for Impairment 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 Bills Payable and Other Liabilities Loan Capital Shareholders‟ Equity Share Capital Share Based Payments Non-Controlling Interests Capital Adequacy Financial Reporting by Segments Life Insurance Business Remuneration of Auditors Lease Commitments Contingent Liabilities, Contingent Assets and Commitments Fiduciary Activities Financial Risk Management Credit Risk Market Risk Liquidity and Funding Risk Retirement Benefit Obligations Investments in Associated Entities and Joint Ventures Key Management Personnel Related Party Disclosures Notes to the Statements of Cash Flows Disclosures about Fair Value of Financial Instruments Securitisation Controlled Entities Subsequent Events Financial Statements 94 95 96 97 99 101 114 116 117 123 126 127 127 128 128 130 137 140 144 148 150 152 152 152 153 153 154 154 155 158 158 166 168 169 172 173 174 178 180 180 181 184 185 185 202 205 209 213 215 218 220 223 227 228 231 Commonwealth Bank of Australia Annual Report 2010 93 Financial Statements Income Statements For the year ended 30 June 2010 The above Financial Statements should be read in conjunction with the accompanying notes. 94 Commonwealth Bank of Australia Annual Report 2010 GroupBank20102009200820102009Note$M$M$M$M$MInterest income232,21531,51929,23427,75427,991Interest expense2(20,293)(21,218)(21,327)(18,603)(19,956)Net interest income11,92210,3017,9079,1518,035Other operating income24,2083,9143,5595,2604,151Net banking operating income16,13014,21511,46614,41112,186Funds management income1,9061,6182,369--Investment revenue/(expense)975(859)(525)--Claims and policyholder liability (expense)/revenue(953)731519--Net funds management operating income21,9281,4902,363--Premiums from insurance contracts1,7941,6511,373--Investment revenue/(expense)687(232)(27)--Claims and policyholder liability expense frominsurance contracts(1,251)(650)(606)--Net Insurance operating income21,230769740--Total net operating income219,28816,47414,56914,41112,186Gain on acquisition of controlled entities46(e)-983---Impairment expense2,14(2,379)(3,048)(930)(1,193)(2,703)Operating expenses2(8,716)(7,960)(7,384)(5,917)(5,553)Net profit before income tax28,1936,4496,2557,3013,930Corporate tax expense5(2,383)(1,860)(1,548)(1,686)(844)Policyholder tax (expense)/benefit5(130)164115--Net profit after income tax5,6804,7534,8225,6153,086Non-controlling interests(16)(30)(31)--Net profit attributable to Equity holders of the Bank5,6644,7234,7915,6153,086Group201020092008NoteEarnings per share: Basic7367. 9328. 5363. 0 Fully diluted7354. 2313. 4348. 7Cents per share Statements of Comprehensive Income For the year ended 30 June 2010 Financial Statements The above Financial Statements should be read in conjunction with the accompanying notes. Commonwealth Bank of Australia Annual Report 2010 95 20102009200820102009$M$M$M$M$MProfit from ordinary activities after income tax for the financial year5,6804,7534,8225,6153,086Other comprehensive income/(expense):Actuarial gains and losses from defined benefit superannuation plans(64)(739)(240)(64)(739)Gains and losses on cash flow hedging instruments:Recognised in equity(239)(1,630)42211(872)Transferred to Income Statement828(21)(573)208(199)Gains and losses on available-for-sale investments:Recognised in equity3271026216052Transferred to Income Statement on disposal(24)(24)(312)(16)(24)Transferred to Income Statement on impairment237---Revaluation of properties50(25)2039(20)Foreign currency translation reserve(19)168(648)(67)158Income tax on items transferred directly to/from equity:Foreign currency translation reserve(1)94531-Available-for-sale investments revaluation reserve(77)(37)44(33)(17)Revaluation of properties(9)9(4)(7)8Cash flow hedge reserve(193)49752(71)319Other comprehensive income/(expense) net of income tax 581(1,661)(924)161(1,334)Total comprehensive income for the financial year6,2613,0923,8985,7761,752Total comprehensive income for the financial year is attributable to:Equity holders of the Bank6,2453,0623,8675,7761,752Non-controlling interests163031--Total comprehensive income for the financial year6,2613,0923,8985,7761,752GroupBank Financial Statements Balance Sheets As at 30 June 2010 The above Financial Statements should be read in conjunction with the accompanying notes. 96 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009Note$M$M$M$MAssetsCash and liquid assets810,11911,3408,7119,684Receivables due from other financial institutions910,07214,4219,76613,986Assets at fair value through Income Statement:10Trading22,85125,40118,77520,988Insurance15,94017,260--Other6541,677-60Derivative assets1127,68926,35827,36325,536Available-for-sale investments1232,91521,50465,77960,659Loans, bills discounted and other receivables13493,459466,631377,195353,408Bank acceptances of customers11,56914,72811,56914,726Shares in and loans to controlled entities49--49,80954,671Property, plant and equipment152,3512,4721,5061,572Investment in associates431,4901,0471,194845Intangible assets169,4209,2453,3823,101Deferred tax assets51,2701,6531,2421,628Other assets176,4826,0704,7063,866646,281619,807580,997564,730Assets held for sale184956549370Total assets646,330620,372581,046565,100LiabilitiesDeposits and other public borrowings19374,663368,721307,844305,170Payables due to other financial institutions2012,60815,10912,42214,942Liabilities at fair value through Income Statement2115,34216,5964,6133,485Derivative liabilities1124,88432,13423,68929,442Bank acceptances11,56914,72811,56914,726Due to controlled entities--52,41181,084Current tax liabilities221,0568831,016835Deferred tax liabilities22221168-40Other provisions231,1971,243934913Insurance policy liabilities3314,59216,056--Debt issues24130,210101,819107,03962,894Managed funds units on issue880914--Bills payable and other liabilities2510,0258,52010,7337,969597,247576,891532,270521,500Loan capital2613,51312,03913,57512,174Total liabilities610,760588,930545,845533,674Net assets35,57031,44235,20131,426Shareholders' EquityShare capital:Ordinary share capital2823,08121,64223,37921,825Other equity instruments289399391,8951,895Reserves271,0895162,0471,697Retained profits279,9387,8257,8806,009Shareholders' equity attributable to Equity holders of the Bank35,04730,92235,20131,426Non-controlling interests30523520--Total Shareholders' equity35,57031,44235,20131,426 Statements of Changes in Equity For the year ended 30 June 2010 Financial Statements The above Financial Statements should be read in conjunction with the accompanying notes. Commonwealth Bank of Australia Annual Report 2010 97 GroupShareholders'equityattributableOrdinaryOtherto Equity Non-Total shareequityRetainedholderscontrollingShareholders'capitalinstrumentsReservesprofitsof the Bank interests equity$M$M$M$M$M$M$MAs at 30 June 200815,7279391,2067,74725,61951826,137Total comprehensive income for the financial year--(922)3,9843,062303,092Transactions with equity holders in their capacity as equity holders:Issue of shares (net of issue costs)4,829---4,829-4,829Dividends paid---(3,731)(3,731)-(3,731)Dividend reinvestment plan (net of issue costs)1,099---1,099-1,099Other equity movements:Share based payments1-39-40-40(Purchase)/sale and vesting of treasury shares(14)---(14)-(14)Other changes--193(175)18(28)(10)As at 30 June 200921,6429395167,82530,92252031,442Total comprehensive income for the financial year--6455,6006,245166,261Transactions with equity holders in their capacity as equity holders:Dividends paid---(3,621)(3,621)-(3,621)Dividend reinvestment plan (net of issue costs)1,457---1,457-1,457Other equity movements:Share based payments2-125-127-127(Purchase)/sale and vesting of treasury shares(20)---(20)-(20)Other changes--(197)134(63)(13)(76)As at 30 June 201023,0819391,0899,93835,04752335,570 Financial Statements Statements of Changes in Equity (continued) For the year ended 30 June 2010 The above Financial Statements should be read in conjunction with the accompanying notes. 98 Commonwealth Bank of Australia Annual Report 2010 BankShareholders'equityattributableOrdinaryOtherto Equity shareequityRetainedholderscapitalinstrumentsReservesprofitsof the Bank$M$M$M$M$MAs at 30 June 200815,9271,8952,2537,35327,428Total comprehensive income for the financial year--(595)2,3471,752Transactions with equity holders in their capacity as equity holders:Issue of shares (net of issue costs)4,829---4,829Dividends paid---(3,691)(3,691)Dividend reinvestment plan (net of issue costs)1,099---1,099Other equity movements:Share based payments1-39-40(Purchase)/sale and vesting of treasury shares(31)---(31)As at 30 June 200921,8251,8951,6976,00931,426Total comprehensive income for the financial year--2255,5515,776Transactions with equity holders in their capacity as equity holders:Dividends paid---(3,587)(3,587)Dividend reinvestment plan (net of issue costs)1,457---1,457Other equity movements:Share based payments2-125-127Sale/(purchase) and vesting of treasury shares95---95Other changes---(93)(93)As at 30 June 201023,3791,8952,0477,88035,201Group201020092008NoteDividends per share attributable to shareholders of the Bank:Ordinary shares6290228266Trust preferred securities6,7158,1426,850Cents per share Statements of Cash Flows (1) For the year ended 30 June 2010 Financial Statements (1) It should be noted that the Group does not use these accounting Statements of Cash Flows in the internal management of its liquidity positions. (2) Represents gross premiums and policy payments before splitting between policyholders and shareholders. The above Financial Statements should be read in conjunction with the accompanying notes. Commonwealth Bank of Australia Annual Report 2010 99 GroupBank20102009200820102009Note$M$M$M$M$MCash Flows from Operating ActivitiesInterest received31,66331,74529,46427,19728,380Interest paid(19,387)(20,986)(20,786)(17,625)(20,254)Other operating income received5,5735,5515,3143,1813,371Expenses paid(7,766)(7,334)(6,882)(4,988)(5,028)Income taxes paid(2,022)(2,043)(1,905)(1,628)(1,938)Net (increase)/decrease in assets at fair value through Income Statement (excluding life insurance)(2,466)4,864(990)(3,962)4,705Net increase/(decrease) in liabilities at fair value through Income Statement:Life insurance:Investment income335275509--Premiums received (2)2,0942,0632,304--Policy payments (2)(3,901)(3,144)(3,789)--Other liabilities at fair value through Income Statement(1,200)2878101,260405Cash flows from operating activities beforechanges in operating assets and liabilities2,92311,2784,0493,4359,641Changes in operating assets and liabilities arising from cash flow movementsMovement in available-for-sale investments:Purchases(60,021)(37,200)(35,113)(36,325)(59,909)Proceeds from sale4,1074,9966104,0954,996Proceeds at or close to maturity44,20122,18931,97426,63522,049Net change in deposits with regulatory authorities-25132(2)Net (increase) in loans, bills discounted and other receivables(28,999)(52,878)(51,570)(25,159)(48,392)Net decrease/(increase) in receivables due from otherfinancial institutions not at call2,725(5,575)(2,621)2,641(3,959)Net decrease/(increase) in securities purchased underagreements to resell776(507)634751363Life insurance business:Purchase of insurance assets at fair value through Income Statement(5,660)(11,950)(8,719)--Proceeds from sale/maturity of insurance assets at fair value through Income Statement fair value through Income Statement8,38414,47811,159--Net increase in deposits and other public borrowings8,85247,39449,6035,32157,471Net proceeds from issuance of debt securities30,12810,253(4,816)43,0426,754Net (decrease)/increase in payables due to other financial institutions not at call(1,157)(8,012)4,486(1,112)(5,641)Net (decrease)/increase in securities sold underagreements to repurchase(2,814)6,985(1,764)(2,650)6,824Changes in operating assets and liabilities arising from cash flow movements522(9,802)(6,124)17,241(19,446)Net cash provided by/(used in) operating activities46(a) 3,4451,476(2,075)20,676(9,805)Cash Flows from Investing ActivitiesPayments for acquisition of controlled entities46(e) -(1,741)(241)-(2,101)Proceeds from disposal of controlled entities46(c) (11)-244-Proceeds from disposal of entities and businesses (net of cash disposals)(22)----Dividends received7176391,648863Net amounts received from/(paid to) controlled entities---(23,823)11,833Proceeds from sale of property, plant and equipment70914616Purchases of property, plant and equipment(293)(987)(482)(230)(499)Payments for acquistions of investments in associates/joint ventures(414)(144)-(396)(144)Purchase of intangible assets(454)(405)(226)(427)(369)Sale/(purchase) of assets held for sale 542(22)766346(23)Net decrease/(increase) in other assets254(77)(24)193(180)Net cash (used in)/provided by investing activities(257)(3,291)(152)(22,584)9,386 Financial Statements Statements of Cash Flows (1) For the year ended 30 June 2010 (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 $98 million allocated to participants under the Dividend Reinvestments plan in the year ended 30 June 2008. The above Financial Statements should be read in conjunction with the accompanying notes. 100 Commonwealth Bank of Australia Annual Report 2010 GroupBank20102009200820102009Note$M$M$M$M$MCash Flows from Financing ActivitiesProceeds from issue of shares (net of issue costs)24,830324,830Dividends paid (excluding Dividend Reinvestment Plan) (2)(2,149)(2,620)(2,351)(2,119)(2,580)Net movement in other liabilities(240)3445531,3091,956Net (purchase) /sale of treasury shares(20)(14)(9)95(31)Issue of loan capital3,7075002,0913,707500Redemption of loan capital(1,760)(1,250)(7)(1,760)(1,250)Other3(54)12828493Net cash (used in)/provided by financing activities(457)1,7364081,5183,518Net increase/(decrease) in cash equivalents2,731(79)(1,819)(390)3,099Cash and cash equivalents at beginning of period 2,1862,2654,0843,436337Cash and cash equivalents at end of period 46(b) 4,9172,1862,2653,0463,436 Notes to the Financial Statements Note 1 Accounting Policies Comparatives 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 2010, were approved and authorised for issue by the Board of Directors on 11 August 2010. The Bank is incorporated and domiciled in Australia. It is a company limited by shares that are publicly traded on the Australian Securities Exchange. The address of its registered office is Ground Floor, Tower 1, 201 Sussex Street, Sydney, NSW 2000, 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. (a) Bases of Accounting This general purpose Financial Report for the year ended 30 June 2010 has been prepared in accordance with Australian Accounting Standards (“AIFRS”) and the requirements of the Corporations Act 2001. The basis of the AIFRS standards is 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 International Financial Reporting Interpretations Committee (“IFRIC”). 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 (ii) 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 principal accounting policies adopted in the preparation of this financial report and that of the previous financial year are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. This financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (which includes Australian Interpretations by virtue of AASB 1048 Interpretation and Application of Standards) and the Corporations Act 2001. Historical Cost Convention This financial report has been prepared under the historical cost convention, as modified by the revaluation of investment securities available for sale and certain other assets and liabilities (including derivative instruments) at fair value. Use of Estimates and Assumptions The preparation of the financial report requires the use of management judgement, estimates and assumptions that affect reported amounts and the application of policies. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable. Actual results may differ from these estimates. Discussion of the critical accounting include complex or subjective decisions or assessments, are covered in note 1 (ii). Such estimates may require review in future periods. treatments, which Where necessary, comparative information has been restated to conform with changes in presentation in the current year. Rounding of Amounts The Bank is of a kind referred to in ASIC Class Order 98/0100 (as amended), relating to the rounding off of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest million dollars unless otherwise indicated. The Financial Report is presented in Australian dollars. Segment Reporting Operating segments are reported based on the Group‟s organisational and management structures. Senior management review the Group‟s internal reporting based around these segments to assess performance and allocate resources. in order All transactions between segments are conducted on an arm‟s length basis, with intra-segment revenue and costs being eliminated in “Other”. During the year, the Group restructured the former International Financial Services segment which incorporated the results of ASB Bank, Sovereign, Fiji and Asian businesses. This led to the formation of: New Zealand incorporating ASB Bank and Sovereign businesses; and Asia incorporating the majority of the Group‟s Asian businesses. On the grounds of materiality, disclosures with respect to Asia have been combined with the “Other” segment. Comparatives have been restated accordingly. Changes in Accounting Policies The Group has continued to apply the accounting policies used for the 2009 Annual Report and has adopted the following: AASB 101 „Presentation of Financial Statements‟ (revised September 2007) and AASB 2007-8 and 2007-10 „Amendments arise in from the revisions to AASB 101 - the revised standard does not impact the financial position or results of the Bank or the Group. It does, however, result in certain presentational changes in the Financial Statements, including: presentation of all items of income and expense in the “Consolidated Income Statement”, in a presentation of non-owner changes “Consolidated Statement of Comprehensive Income” that replaces the “Consolidated Statement of Recognised Income and Expense”, and in equity presentation of a “Consolidated Statement of Changes in Equity” as a primary statement, showing owner changes in equity. „Business Combinations AASB 3 (revised)‟, AASB 127 „Consolidated and Separate Financial Statements‟, AASB 2008- 3 „Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 - the revised standards, applied prospectively from 1 July 2009 changes certain aspects of accounting for business combinations including: Transaction costs associated with a business combination are immediately expensed, unless the cost relates to issuing debt or equity securities; and Commonwealth Bank of Australia Annual Report 2010 101 Notes to the Financial Statements Note 1 Accounting Policies (continued) Contingent consideration is recognised at its fair value at acquisition date and classified as a liability or equity. If the contingent consideration liability, subsequent changes in that liability are recognised in profit or loss. If classified as equity, it is not remeasured in subsequent periods. is classified as a AASB 2009-2 „Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments‟ – the amendment has lead to additional disclosures around financial instruments measured at fair value and liquidity risk. AASB 2008-7 „Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate‟ – the amendment removes the requirement to deduct dividends declared out of pre-acquisition profits from the cost of an investment in a subsidiary, jointly controlled entity or associate. The following amendments to Australian Accounting Standards adopted during the year are of a technical or clarifying nature and do not have a material impact on the Bank or the Group: AASB 2008-1 „Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations‟; AASB 2009-6 „Amendments to Australian Accounting Standards‟; AASB 123 „Borrowing Costs (revised)‟; AASB 2009-4, 2008-6 and 2008-5 „Amendments arising from the first annual improvements project‟; and AASB 2008-8 „Amendments to Australian Accounting Standards – Eligible Hedged Items‟. for Financial assets which meet classification at amortised cost are optionally permitted to be measured at fair value if that eliminates or significantly reduces an accounting mismatch. requirements the Aspects of financial instrument accounting which will be addressed in future phases of the project include the accounting for financial liabilities, impairment of amortised cost financial assets and hedge accounting. The Group is assessing the impacts of the first phase, as well as following developments in the future phases. (c) Principles of Consolidation Subsidiaries The consolidated financial report comprises the financial report of the Bank and its subsidiaries. Subsidiaries are all those entities (including special purpose entities) over which the Bank has the power to govern directly or indirectly decision-making in relation to financial and operating policies, so as to require that entity to conform with the Bank‟s objectives. The effects of all transactions between entities in the consolidated entity are eliminated in full. Non-controlling interests in the results and equity of subsidiaries, where the Parent owns less than 100 per cent of the issued capital, are shown separately in the consolidated Income Statement and consolidated Balance Sheet, respectively. Where control of an entity was obtained during the financial year, its results have been included in the consolidated Income Statement from the date on which control commenced. Where control of an entity ceased during the financial year, its results are included for that part of the financial year during which control existed. Future Accounting Developments Impairment of Subsidiaries Investments in subsidiaries are tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the investments carrying amount exceeds its recoverable amount (which is the higher of fair value less costs to sell and value in use). At each Balance Sheet date, in subsidiaries that have been impaired are reviewed for possible reversal of the impairment. investments the Interests in Associates and Joint Ventures Accounted for Using the Equity Method Associates and joint ventures are entities over which the consolidated entity has significant influence or joint control, but not control, and are accounted for under the equity method. The equity method of accounting is applied in the consolidated financial report and involves the recognition of the consolidated entity‟s share of its associates‟ and joint ventures‟ post- acquisition profits or losses in the Income Statement, and its share of post acquisition movements in other comprehensive income. (d) Revenue Recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognised for each major revenue stream as follows: The following standards and amendments to existing standards have been published and are mandatory for the Group‟s accounting periods beginning on or after 1 January 2010 or later periods, but have not been adopted. They are not expected to result in significant changes to the Group‟s accounting policies. AASB 2009-8 „Amendments to group cash-settled share- based payments‟; and AASB 2009-5 „Further amendments arising from the second annual improvements project‟. AASB 9 „Financial Instruments: Classification and Measurement‟ was published on 12 November 2009. It is the first phase of a project to replace AASB 139 and will ultimately result in fundamental changes in the way that the Group accounts for financial instruments. Adoption of the standard is not mandatory until accounting periods beginning on or after 1 January 2013 but early adoption is permitted. The main changes from AASB 139 include: All financial assets, except for certain equity investments, will be classified into two categories: - amortised cost, where they generate solely payments of interest and principal and the business model is to collect contractual cash flows that represent principal and interest; or - fair value through Income Statement. Certain non-trading equity investments would be classified at fair value through Income Statement or fair value through other comprehensive income with dividends recognised in net income. Embedded derivatives will no longer be considered for bifurcation but included in the assessment of cash flows for the classification of the financial asset as a whole. 102 Commonwealth Bank of Australia Annual Report 2010 Note 1 Accounting Policies (continued) Interest Income Interest income is brought to account using the effective interest method. The effective interest method calculates the amortised cost of a financial instrument and allocates the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or liability. Fees and transaction costs associated with loans are capitalised and included in the effective interest rate and recognised in the Income Statement over the expected life of the instrument. Interest income on finance leases is brought to account progressively over the life of the lease consistent with the outstanding investment balance. Fee and Commission Income Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are capitalised and included in the effective interest rate and recognised in the Income Statement over the expected life of the instrument. Commitment fees to originate a loan which is unlikely to be drawn down are recognised as fee income as the service is provided. Fees and commissions that relate to the execution of a significant act (for example, advisory or arrangement services, placement fees and underwriting fees) are recognised when the significant act has been completed. Fees charged for providing ongoing services (for example, maintaining and administering existing facilities) are recognised as income over the period the service is provided. Other Income Trading income is recognised when earned based on changes in fair value of financial instruments and is recorded from trade date. (e) Foreign Currency Translation Functional and Presentation Currency Items included in the financial statements of each of the Group‟s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Australian dollars, which is the Bank‟s functional and presentation currency. Foreign Currency Transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities resulting from foreign currency transactions are subsequently translated at the spot rate at reporting date. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different to those at which they were initially recognised or included in a previous financial report, are recognised in the Income Statement in the period in which they arise. Translation differences on non-monetary items, such as derivatives measured at fair value through Income Statement, are reported as part of the fair value gain or loss on these items. Translation differences on non-monetary items measured at fair Notes to the Financial Statements value through equity, such as equities classified as available-for- sale financial assets, are included in the available-for-sale reserve in equity. Foreign Operations The results and financial position of all Group entities (none of which has the currency of a hyperinflationary economy), that the Group‟s have a presentation currency, are the Group‟s presentation currency as follows: functional currency different translated from into liabilities of each foreign operation are assets and translated at the rates of exchange ruling at Balance Sheet date; revenue and expenses of each foreign operation are translated at the average exchange rate for the period, unless this average is not a reasonable approximation of the rate prevailing on transaction date, in which case revenue and expenses are translated at the exchange rate ruling at transaction date; and all resulting exchange differences are recognised in the foreign currency translation reserve. When a foreign operation is disposed, exchange differences are recognised in the Income Statement as part of the gain or loss on sale. (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. 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. (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 using the effective interest rate method. (h) Financial Instruments Financial Assets The accounting policy for each class of financial instrument is detailed below. The Group classifies its financial assets in the following categories: financial assets at fair value through Income loans and receivables, and Statement, derivative assets, available-for-sale investments. Management determines the classification of its financial assets at initial recognition. Purchases and sales of financial assets at fair value through Income Statement, and available-for-sale are recognised on trade-date, the date on which the Group commits to purchase or sell the asset. Loans are recognised when cash is advanced to the borrowers. Financial assets at fair value through Income Statement are recognised initially at fair value. All other financial assets are recognised initially at fair value plus directly attributable transaction costs. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all the risks and rewards of ownership. Commonwealth Bank of Australia Annual Report 2010 103 Notes to the Financial Statements Note 1 Accounting Policies (continued) The Group has no held to maturity investments. Financial Liabilities The Group classifies its financial liabilities in the following categories: liabilities at fair value through Income Statement, liabilities at amortised cost and derivative liabilities. Financial liabilities are initially recognised at fair value less transaction costs except where they are designated at fair value, in which case transaction costs are expensed as incurred. They are subsequently measured at amortised cost except for derivatives and liabilities at fair value, which are held at fair value through Income Statement. Financial liabilities are recognised when an obligation arises and derecognised when it is discharged. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in Income Statement. Offsetting Financial assets and liabilities are offset 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. Recognition of Deferred Day One Profit or Loss The best evidence of fair value at initial recognition is the transaction price, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets. into fair value transactions where The Group enters is determined using valuation models for which not all inputs are market observable prices or rates. Such a financial instrument is initially recognised at the transaction price which is the best indicator of fair value, although the value obtained from the relevant valuation model may differ. The difference between the transaction price and the model value , commonly referred to as „day one profit or loss‟, is not recognised immediately in profit or loss. The timing of recognition of deferred day one profit or loss is determined individually. It is either amortised over the life of the transaction, deferred until the instrument‟s fair value can be determined using market observable inputs, or realised through settlement. The financial instrument is subsequently measured at fair value, adjusted for the deferred day one profit or loss. Subsequent changes in fair value are recognised immediately in the Income Statement without reversal of deferred day one profits or losses. 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 104 Commonwealth Bank of Australia Annual Report 2010 the assets are recognised to the extent of the Group‟s continuing involvement. (i) Assets at Fair Value Through Income Statement Assets classified 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. 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 to initial recognition, where an active market exists fair value is measured using quoted market bid prices. In a trading portfolio with offsetting risk positions, quoted mid prices, where available are used to measure fair value. Non market quoted assets are valued using valuation techniques based on market observable inputs. In a limited number of instances valuation techniques are based on non- market observable inputs. Subsequent to initial recognition 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. In addition the Group measures bills discounted intended to be sold into the market at fair value, which are classified within loans, bills discounted and other receivables. Assets classified at fair value through Income Statement are further classified into three subcategories: Trading, Insurance and Other. Trading Trading assets are debt and equity securities that are actively traded. Insurance Insurance assets are investments that back life insurance contracts and life investment contracts. 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. (j) Available-for-Sale Investments Available-for-sale investments are public and other debt and equity securities that are not classified as at fair value through Income Statement, or as loans and receivables. including transaction costs. Subsequent Available-for-sale investments are initially recognised at fair value initial recognition, where an active market exists fair value is measured using quoted market bid prices. Quoted mid prices, where available, are used to measure fair value in a portfolio with offsetting risk positions. to Non-market quoted instruments are valued using valuation techniques, based on observable inputs. In a limited number of instances valuation techniques are not based on observable market data. Notes to the Financial Statements Note 1 Accounting Policies (continued) Assets Acquired Through Securities Enforcement (AATSE) investments whose Equity fair value cannot be reliably measured are valued at cost. Gains and losses arising from changes in fair value are recognised 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 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 the Available-for-sale investments reserve is transferred to the Income Statement and reported within other operating income. 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, Bills Discounted and Other Receivables The Group has individually assessed and collective provisions for impairment as explained in Note 1 (n). (k) Repurchase Agreements (m) Leases Securities sold under agreements to repurchase are retained within the Available-for-sale investments or Assets at fair value Income Statement categories and accounted for through accordingly. A liability is recognised within deposits in respect of the obligation reverse repurchase agreements are recorded within Cash and liquid assets. repurchase. Securities held under to (l) Loans, Bills Discounted and Other Receivables Loans, bills discounted and other receivables are non-derivative financial assets with fixed and determinable payments that are not quoted in an active market. They are measured at amortised cost, with the exception of bills discounted, which are measured at fair value. Loans, bills discounted and other receivables include overdrafts, home loans, credit card and other personal lending, term loans, bill financing, redeemable preference shares, securities and finance leases. Initially recognised at fair value including direct and incremental transaction costs, loans and receivables are subsequently measured at amortised cost using the effective interest method and are presented net of provisions for impairment. Bills discounted (bank acceptances) intended to be sold into the market are measured at fair value until sold. Non-Performing Facilities Individual provisions for impairment are recognised to reduce the carrying amount of loans, bills discounted and other receivables to their estimated recoverable amounts. Individually significant provisions are calculated based on discounted cash flows. 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. When the Group is a lessor leases are classified as either finance leases or operating leases. Under a finance lease, substantially all the risks and rewards incidental to legal ownership are transferred to the lessee. In contrast, an operating lease exists where the leased assets are allocated to the lessor. In its capacity as a lessor, the Group recognises the assets held under finance lease in the Balance Sheet as loans at an amount equal to the net investment in the lease. The recognition of finance income is based on a pattern reflecting a constant periodic return on the Group‟s net investment in the finance leases. Finance lease income is included within interest income in the Income Statement. In its capacity as a lessor, the Group recognises the assets held under operating lease in the Balance Sheet as property, plant and equipment and depreciates the assets accordingly. Operating Statement on a straight line basis over the lease term. leases revenue is recognised in the Income When the Group is a lessee it engages in operating leases for which rental expense is recognised on a straight line basis over the lease term. (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. 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, Bills Discounted 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, bills discounted 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. Commonwealth Bank of Australia Annual Report 2010 105 Notes to the Financial Statements Note 1 Accounting Policies (continued) Off-Balance Sheet Items Guarantees and other contingent liabilities are accounted for as off balance sheet items. Provisioning for these exposures is calculated under AASB 137 – „Provisions, Contingent Liabilities and Contingent Assets‟. The receivable for an off balance sheet item only crystallises when the facility is drawn upon. Therefore, generally it will not be appropriate to provision for these assets under an incurred loss model. However, the Group has determined that it is appropriate to include these assets in an impairment calculation where a customer has been downgraded. A risk rated model is used to calculate these provisions (e.g. Collective Provision = Probability of Default (PD) x Loss Given Default x Exposure At Default). The PD is based on the remaining life of the exposure, capped at 5 years. These provisions are disclosed as other liabilities as there are no on balance sheet assets to offset these provisions against. (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 Investments in controlled entities are initially recorded at cost and subsequently held at the lower of cost and recoverable amount. (q) Assets Classified as Held for Sale Assets are classified as held for sale when their carrying amounts are expected to 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 line with another accounting standard. they be measured in Assets classified as held for sale are neither amortised nor depreciated. (r) Property, Plant and Equipment The Group measures its property assets (land and buildings) at fair value based on 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 determined as the net disposal 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. Depreciation is calculated using the straight line method to allocate the cost of assets less any residual value over the estimated useful economic life as follows: Computer software is capitalised at cost and classified as Property, Plant and Equipment where it is integral to the operation of associated hardware. impairment. The Group has Loans and bills discounted are presented net of provisions for loan Individually Assessed provisions and Collectively Assessed provisions. Individually assessed provisions are made against financial assets that are individually significant or which have been individually assessed as impaired. 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 credit 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 The Group assesses at each Balance Sheet date whether there is any objective evidence of impairment. For available-for-sale debt securities the Group uses the same indicators as Loans, Bills Discounted and Other Receivables. For available-for-sale equity securities a significant or prolonged decline in the fair value below the cost is considered in determining whether the asset is impaired. If any such evidence exists for available-for- sale securities cumulative losses are removed from equity and recognised in the Income Statement. If in a subsequent period the fair value of an available-for-sale debt security increases and the increase 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. Goodwill and Other Non-Financial Assets Goodwill balances and intangible assets with an indefinite useful life are assessed for impairment annually or more regularly where an indication of impairment exists. Refer to Note 1(s) Intangibles intangibles for more details on goodwill and impairment testing. If any such indication exists, the asset‟s carrying amount is written down to the asset‟s estimated 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 is 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. 106 Commonwealth Bank of Australia Annual Report 2010 Notes to the Financial Statements Note 1 Accounting Policies (continued) Impairment The useful lives of major depreciable asset categories are as follows: Buildings Fixtures and fittings Leasehold improvements Up to 30 years 10 – 20 years Lesser of unexpired lease term or lives as above Furniture and Equipment 3 - 8 years Depreciation rates and methods are kept under review to take account of any change in circumstances. 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. (s) Intangibles Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the consolidated entity‟s share of the net identifiable assets of the acquired entity at the date of acquisition. Goodwill arising from business combinations is included in intangible assets on the face of the Balance Sheet. Goodwill arising from acquisitions of associates is included in the carrying amount of investments in associates. Computer Software Costs Certain internal and external costs directly incurred in acquiring and developing certain software are capitalised and amortised over the estimated useful life, a period of three to twelve years. Costs incurred on software maintenance are expensed as incurred. Core Deposits Core deposits intangibles have been recognised following the acquisition of Bankwest and represent the value of a deposit base acquired in a business combination. Initially recognised at fair value they are subsequently amortised over their estimated useful life of seven years. Brand Names Brand names are recognised when acquired in a business combination. Initially recognised at fair value, they are considered to have an indefinite useful life as there is no foreseeable limit to the period over which the brand name is expected to generate net cash flows. Management Fee Rights Management fee rights are recognised when acquired as part of a business combination and are considered to have an indefinite useful life under the contractual terms of the management agreements. Other Intangibles Other lists. intangibles predominantly comprise customer Customer relationships acquired as part of a business combination are initially measured at fair value at the date of less acquisition and subsequently measured at cost accumulated amortisation and any losses. Amortisation is calculated based on the timing of projected cash flows of the relationships over their estimated useful lives. impairment Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. All definite useful life intangibles are tested for impairment should an event or change in circumstance indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset‟s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset‟s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Intangible assets (other than goodwill) that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (t) Deposits From Customers Deposits and other public borrowings includes certificates of deposits, term deposits, savings deposits, other demand deposits, and debentures. They are initially recognised at fair transaction costs and value subsequently measured at amortised cost. Interest and yield related fees are recognised on an effective interest basis. including directly attributable (u) Payables to Other Financial Institutions Payables to other financial institutions include deposits, vostro balances and settlement account balances due to other banks. Initially they are recognised at fair value including directly attributable transaction costs. They are subsequently recognised at amortised cost. Interest and yield related fees are recognised using the effective interest method. (v) 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. Initially they are recognised on trade date at fair value with transaction costs being taken directly to the Income Statement. Subsequently they are measured at fair value using quoted market offer prices where an active market exists. Quoted mid prices, where available, are used to measure liabilities with offsetting risk positions in a portfolio at fair value. Non-market quoted instruments are valued using valuation techniques based on observable inputs existing at reporting date. In a limited number of instances valuation techniques are based on non-market data. (w) Income Taxes 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 other comprehensive income, in which case it is recognised in other comprehensive income. 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. Commonwealth Bank of Australia Annual Report 2010 107 Notes to the Financial Statements Note 1 Accounting Policies (continued) Deferred tax is provided using the balance sheet liability method, providing the carrying temporary differences between amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. for 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. 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 Tax Consolidated 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 „Income Taxes‟, and on a modified stand alone basis under UIG 1052 „Tax Consolidation Accounting‟. 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. (x) Employee Benefits Annual Leave The provision represents outstanding liability to employees at Balance date. for annual leave Long Service Leave 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 108 Commonwealth Bank of Australia Annual Report 2010 employee incentives under employee share plans and bonus schemes. The Group engages in share-based remuneration in respect of services received from certain 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 increase in the Employee 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 the equity measurement of the expense. instruments included in 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. Actuarial gains and to defined benefit superannuation plans are directly recorded in Retained Profits through other comprehensive income. related losses 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. (y) Provisions Provision for Dividends Provisions for Restructuring Provisions for restructuring are recognised where there is a detailed formal plan for restructure and a demonstrated commitment to that plan. Provision for Self-Insurance The provision for self-insurance covers certain non-lending losses and non-transferred insurance risks. Actuarial reviews are carried out at regular intervals with provisioning effected in accordance with actuarial advice. the current A provision for dividend payable is recognised when dividends are declared by the Directors. Note 1 Accounting Policies (continued) (z) Debt Issues Debt issues are short and long term debt issues of the Group including commercial paper, notes, term loans and medium term notes issued by the Group. 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. Where the Group has designated debt instruments at fair value through Income Statement, the changes in fair value are recognised in the Income Statement. Embedded derivatives with economic characteristics and risks that are not closely related to the economic characteristics and risks of the host instruments are separated from the debt issues. 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 amortised cost. (aa) Loan Capital Loan capital is debt issued by the Group with terms and conditions that qualify for inclusion as capital under APRA Prudential Standards. It is initially recorded at fair value plus directly attributable transaction costs and thereafter at amortised cost using the effective interest method. (bb) Shareholders‟ Equity Ordinary shares are recognised at the amount paid up per ordinary share net of directly attributable issue costs. Where the Bank or other members of the Group purchases shares in the Bank, the consideration paid is deducted from total shareholders‟ equity and the shares are treated as treasury shares until they are subsequently sold, reissued or cancelled. Where such shares are sold or reissued, any consideration received is included in 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 and is available for dividend payments. (cc) Derivative Financial Instruments Derivative financial instruments are contracts whose value is derived from one or more underlying price, index or other variables. They include foreign exchange contracts, forward rate agreements, futures, options and interest rate, currency, equity and credit swaps. Derivatives are entered into for trading purposes or for hedging purposes. Derivatives entered into as economic hedges that do not qualify for hedge accounting are classified as other derivatives. Derivative financial instruments are recognised initially at the fair value of consideration given or received. Subsequent gains or Notes to the Financial Statements losses are recognised designated within a cash flow hedging relationship. the in Income Statement, unless Where an active market exists, fair value is measured based on quoted market prices. Non market-quoted instruments are valued using valuation techniques. Included in the determination of the fair value of derivatives is a credit valuation adjustment to reflect the credit worthiness of the counterparty. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. 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 derivatives to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions. Where derivatives are held for risk management purposes, and when transactions meet the required criteria, the Group applies fair value hedge accounting, cash flow hedge accounting, or hedging of a net investment in a foreign operation as appropriate to the risks being hedged. Fair Value Hedges Changes in fair value of derivatives that qualify and are designated as fair value hedges are recorded in the Income Statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, it is discontinued. For fair value hedges of interest rate risk, the fair value adjustment to the hedged item is amortised to the Income Statement over the period to maturity of the previously designated hedge relationship using the effective interest method. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the Income Statement. Cash Flow Hedges Changes in fair value associated with the effective portion of a derivative designated as a cash flow hedge are recognised in the cash flow hedge reserve, in equity. Ineffective portions are recognised immediately in the Income Statement. Amounts deferred in equity are transferred to the Income Statement in the period in which the hedged forecast transaction takes place. When a hedging instrument expires or is sold, terminated or exercised or when the hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the period in which the hedge item affects profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is recycled immediately to the Income Statement. Commonwealth Bank of Australia Annual Report 2010 109 Notes to the Financial Statements Note 1 Accounting Policies (continued) Investment Assets Net Investment Hedges Gains and losses on derivative contracts relating to the effective portion of the hedge are recognised in the Foreign Currency Ineffective portions are Translation Reserve recognised immediately in the Income Statement. Gains and losses accumulated in equity are included in the Income Statement when the overseas subsidiary or branch is disposed of. in equity. Embedded Derivatives In certain instances, a derivative may be embedded within a „host contract‟. If the host contract is not carried at fair value through Income Statement, and the economic characteristics and risks of the embedded derivative are not closely related to those 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. (dd) 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. (ee) Life and General Insurance Business Life Insurance Business The life insurance business is comprised of insurance contracts and investment contracts as defined in AASB 4 „Insurance Contracts‟. The following are key accounting policies in relation to the life insurance business. Disclosure The consolidated financial statements include the assets, liabilities, income and expenses of the life insurance business conducted by a subsidiary of the Bank in accordance with AASB 139 „Financial Instruments: Recognition and Measurement‟, and AASB 1038 „Life Insurance Contracts‟ respectively. These amounts represent the total life insurance business of the subsidiary, including underlying amounts that relate to both policyholders and shareholders of the life insurance business. 110 Commonwealth Bank of Australia Annual Report 2010 Investment assets are carried at fair value through Income Statement. Fair values of quoted investments in active markets are based on current bid prices. If the relevant market is not considered active (and for unlisted securities), fair value is established by using valuation techniques, including recent arm‟s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Changes in fair values are recognised in the Income Statement in the financial period in which the changes occur. Restriction on Assets Investments held in the Life Funds can only be used within the restrictions imposed under the Life Insurance Act 1995. The main restrictions are that the assets in a fund can only be used to meet the liabilities and expenses of the fund, acquire investments to further the business of the fund or pay distributions when solvency and capital adequacy requirements allow. Shareholders can only receive a distribution when the capital adequacy requirements of the Life Insurance Act 1995 are met. Policy Liabilities Life insurance liabilities are measured as the accumulated benefits to policyholders in accordance with AASB 139 and AASB 1038, which apply to investment contracts and insurance liabilities, respectively. 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 linked to 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. Life investment contract liabilities are measured at fair value in accordance with AASB 139 as Liabilities at fair value. 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. 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, other from unvested policyholder benefits transfers 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. Note 1 Accounting Policies (continued) (ii) Life 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. Fees earned for managing the funds invested are recognised as represent revenue. Claims under 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 to participating policies include the value of future planned future shareholder profit margins and an allowance supportable bonuses. liabilities attributable 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 Funds Units on Issue – Held by Non-Controlling 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. Notes to the Financial Statements When a controlled unit trust is consolidated, the share of the unit holder liability attributable to the Group 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 non-controlling unit holders is disclosed separately on the Balance Sheet. In the Income Statement, the net profit or loss of the controlled entities relating to non-controlling interests is eliminated before arriving at the net profit or loss attributable to Equity holders of the Bank. 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 immediately 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. 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. Commonwealth Bank of Australia Annual Report 2010 111 Notes to the Financial Statements Note 1 Accounting Policies (continued) Provisions for impairment of financial assets 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. In addition, provisions are raised where there is no observable evidence of impairment, but for which a loss event has occurred which is likely to result in a loss. 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. Individually assessed provisions Individually assessed provisions are raised where there is objective evidence of impairment, i.e. where the Group does not expect to receive all of the cash flows contractually due. Individually assessed provisions are made against individual risk rated credit facilities where a loss of $20,000 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. Collective provision All other loans and receivables 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 receivables to their estimated recoverable amounts at the Balance Sheet date. The evaluation process is subject to a series of estimates and judgements. In the 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 statistically managed (retail) 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. Life Insurance Policyholder Liabilities Life insurance policyholder liabilities are accounted for under AASB 1038: Life Insurance Contracts. A significant area of judgement is in the determination of policyholder liabilities, which involve actuarial assumptions. 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. (ff) Asset Securitisation 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 Group and consequently the Group cannot derecognise these assets. An imputed liability is recognised inclusive of the derivative and any related fees. For further details on the treatment of securitisation entities, refer to Note 1 (c) Principles of Consolidation. (gg) Fiduciary Activities Certain controlled entities within the Group 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. (hh) Earnings Per Share Basic earnings per share the consolidated entity‟s profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the financial year. is calculated by dividing Diluted earnings per share is calculated by dividing the consolidated entity‟s profit attributable to ordinary equity holders, after deducting interest on the convertible redeemable loan capital instruments, by the weighted average number of ordinary shares adjusted for the effect of dilutive options and dilutive convertible non-cumulative redeemable loan capital instruments. (ii) Critical Accounting Policies and Estimates The application of the Group‟s accounting policies requires the use of judgement, estimates and assumptions. If different assumptions or estimates were applied, the resulting values would change, impacting the net assets and income of the Group. Management discusses the accounting policies which are sensitive to the use of judgement, estimates and assumptions with the Board Audit Committee. 112 Commonwealth Bank of Australia Annual Report 2010 Note 1 Accounting Policies (continued) The areas of judgement where key actuarial assumptions are made in the determination of policyholder liabilities are: Business assumptions including: - timing and duration of claims/policy Amount, payments; Policy lapse rates; and Acquisition and long term maintenance expense levels; - - Long term economic assumptions for discount and interest rates, inflation rates and market earnings rates; and Selection of methodology, either projection or accumulation method. The selection of the method is generally governed by the product type. The determination of assumptions relies on making judgements on variances from long-term assumptions. Where experience differs from long term assumptions: Recent results may be a statistical aberration; or There may be a commencement of a new paradigm requiring a change in long term assumptions. Notes to the Financial Statements Periodically, the Group calibrates the valuation technique and tests it for validity using prices from any observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on any available observable market data. Goodwill The carrying value of goodwill is reviewed annually and is written down, to the extent that it is no longer supported by probable future benefits. Goodwill is allocated to cash-generating units (CGU) for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management reporting purposes. Impairment testing of purchased goodwill is performed annually, or more frequently when there is an indication that the goodwill may be impaired, by comparing the recoverable amount of the CGU with the current carrying amount of its net assets, including goodwill. Where the current carrying value is greater than recoverable amount, a charge for impairment of goodwill will be recorded in the Income Statement. The Group‟s actuaries arrive at conclusions regarding the statistical analysis using their experience and judgement. Additional information on goodwill impairment testing is included in Note 16 Intangible Assets. Additional information on the accounting policy is set out in Note 1 (ee) Life and General Insurance Business. 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 predominantly the Group‟s securitisation program and structured transactions. the context of required in Financial Instruments at Fair Value A significant portion of financial instruments are carried on the Balance Sheet at fair value. The best evidence of fair value is quoted prices in an active market. If the market for a financial instrument is not active, the Group establishes fair value by using a valuation technique. The objective of using a valuation technique is to establish what the transaction price would have been on the measurement date in an arm‟s length exchange motivated by normal business considerations. Valuation techniques include using recent arm‟s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Group uses that technique. The chosen valuation technique makes maximum use of market inputs and relies as little as possible on entity specific inputs. It incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Data inputs that the Group relies upon when valuing financial instruments relate risk, volatility, correlation and to counterparty credit extrapolation. Provisions (Other than Loan Impairment) Provisions are held in respect of a range of future obligations such as employee entitlements, restructuring costs and non- lending losses. Provisions carried for long service leave are supported by an independent actuarial report. Some of the provisions involve significant judgement about the likely outcome of various events and estimated future cash flows. involves these benefits the exercise of The deferral of management judgements about the ultimate outcomes of the transactions. Payments which are expected to be incurred later than one year are discounted at a rate which reflects both current interest rates and the risks specific to that provision. Taxation Provisions for taxation held in respect of uncertain tax positions represents the unrecovered tax benefits associated with specific transactions. Superannuation Obligations The Group operates a number of defined benefit plans as described in Note 42. For each of these plans, actuarial fair value the plan‟s obligations and valuations of measurements of the plan‟s assets are performed at least annually in accordance with the requirements of AASB 119 „Employee benefits‟. the The actuarial valuation of plan obligations is dependent upon a series of assumptions, the key ones being price inflation, earnings growth, mortality, morbidity and investment returns assumptions. Different assumptions could significantly alter the amount of the difference between plan assets and obligations, and the superannuation cost charged to the Income Statement. Additional information is included in Note 42 Retirement Benefit Obligations. Commonwealth Bank of Australia Annual Report 2010 113 Notes to the Financial Statements Note 2 Profit Profit before income tax has been determined as follows: (1) The net gain on financial assets and liabilities designated at fair value was $140 million (2009: $150 million loss) for the Group and $31 million (2009: $78 million loss) for the Bank. (2) The Group result in 2010 includes $30 million loss on disposal of controlled entities, refer to note 46 for further details. 114 Commonwealth Bank of Australia Annual Report 2010 GroupBank20102009200820102009$M$M$M$M$MInterest IncomeLoans and bills discounted29,84928,43825,59822,38222,136Other financial institutions141434474115391Cash and liquid assets192510473150397Assets at fair value through Income Statement7931,2361,9336161,024Available-for-sale investments1,2409017563,1022,835Controlled entities---1,3891,208Total interest income32,21531,51929,23427,75427,991Interest ExpenseDeposits13,97014,21612,39313,32914,199Other financial institutions164509989145403Liabilities at fair value through Income Statement6241,0211,129130163Debt issues4,9204,7676,0244,0023,565Controlled entities---360898Loan capital615705792637728Total interest expense20,29321,21821,32718,60319,956Net interest income11,92210,3017,9079,1518,035Other Operating IncomeLoan service fees:From financial assets1,3871,3519331,2101,085Other4845434040Commission and other fees:From financial liabilities568531507445429Other1,4381,4961,3209681,115Trading income597741546588592Net gain/(loss) on disposal of available-for-sale investments 27(12)3091424Net (loss)/gain on other non-fair valued financial instruments(52)(9)(1)(15)(111)Net hedging ineffectiveness(62)(18)(58)(60)(28)Net (loss)/gain on other fair valued financial instruments:Fair value through Income Statement (1)8(66)(9)(13)1Reclassification of net interest on swaps(259)(275)(265)(148)(92)Non-trading derivatives217(187)37147(21)Dividends - Controlled entities---1,641820Dividends - Other51439743Net loss on sale of property, plant and equipment(4)(11)(15)(4)(9)Funds management and investment contract income:Fees receivable on trust and other fiduciary activities1,4931,2911,835--Other435199528--Insurance contracts income1,230769740--Other (2)290314173440263Total other operating income7,3666,1736,6625,2604,151Total net operating income19,28816,47414,56914,41112,186Gain on acquisition of controlled entities (Note 46)-983---Impairment expenseLoan impairment expense 2,3792,6839301,1932,338Available-for-sale debt securities impairment expense-365--365Total impairment expense (Note 14)2,3793,0489301,1932,703 Notes to the Financial Statements Note 2 Profit (continued) (1) Includes software impairment of $nil in 2010 (2009: $30 million )(refer to Note 16). (2) Merger related amortisation relates to Bankwest core deposits and customer lists. Commonwealth Bank of Australia Annual Report 2010 115 GroupBank20102009200820102009$M$M$M$M$MStaff ExpensesSalaries and wages3,8453,4053,0972,5362,281Share-based compensation1301251068289Superannuation contributions484414(27)(28)Defined benefit superannuation plan expense/(benefit)10314(14)10314Provisions for employee entitlements5888903968Payroll tax202188162140137Fringe benefits tax4036323130Other staff expenses1579416010669Total staff expenses4,5833,9943,6473,0102,660Occupancy and Equipment ExpensesOperating lease rentals527488403392394Depreciation:Buildings3029272626Leasehold improvements9885637568Equipment9089845755Operating lease assets4537202418Repairs and maintenance8480816765Other103102896361Total occupancy and equipment expenses977910767704687Information Technology ServicesApplication, maintenance and development209167224135136Data processing227202195225197Desktop141141114131137Communications199179174160142Amortisation of software assets1781228813488IT equipment depreciation7562315751Total information technology services1,029873826842751Other ExpensesPostage1151211198898Stationery97100987471Fees and commissions:Fees payable on trust and other fiduciary activities497453538--Other367359280584622Advertising, marketing and loyalty398475348285375Amortisation of intangible assets (excluding software and merger related amortisation) (2)271715--Non-lending losses10386787879Other408391291237143Total other expenses2,0122,0021,7671,3461,388Total expenses8,6017,7797,0075,9025,486Investment and restructuringIntegration expenses (1)40112-1535Merger related amortisation (2)7537---One-off expenses-32--32Investment and restructuring--377--Total investment and restructuring1151813771567Total operating expenses8,7167,9607,3845,9175,553Profit before income tax8,1936,4496,2557,3013,930Net hedging ineffectiveness comprises:Gain/(Loss) on fair value hedges:Hedging instruments771543921738480Hedged items(838)(569)(970)(810)(510)Cash flow hedge ineffectiveness58(9)122Net hedging ineffectiveness(62)(18)(58)(60)(28) Notes to the Financial Statements Note 3 Income from Ordinary Activities 116 Commonwealth Bank of Australia Annual Report 2010 GroupBank20102009200820102009$M$M$M$M$MBankingInterest income32,21531,51929,23427,75427,991Fees and commissions3,4413,4232,8032,6632,669Trading income597741546588592Net gain/(loss) on disposal of available-for-sale investments recognised in Income Statement27(12)3091424Net (loss)/gain on other non-fair valued financial instruments(52)(9)(1)(15)(111)Net hedging ineffectiveness(62)(18)(58)(60)(28)Net (loss)/ gain on other fair valued financial instruments:Fair value through Income Statement8(66)(9)(13)1Reclassification of net interest on swaps(259)(275)(265)(148)(92)Non-trading derivatives217(187)37147(21)Dividends514391,648863Net loss on sale of property, plant and equipment (4)(11)(15)(4)(9)Other29031417344026336,42335,43332,79333,01432,142Funds Management, Investment contract and Insurance contract revenue Funds management and investment contract income including premiums1,9061,6182,369--Insurance contract premiums and related income1,7941,6511,373--Funds management claims and policyholder liability revenue-731519--Investment income1,662----5,3624,0004,261--Total income41,78539,43337,05433,01432,142 Notes to the Financial Statements Note 4 Average Balances and Related Interest The following tables list 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. Averages used were predominantly daily averages. Interest is accounted for based on product yield. Trading gains and losses are disclosed as Trading income within Other operating income. Interest income and expense disclosed are on a “cash basis” and therefore exclude the amortisation of acquisition related fair value adjustments. 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 are included in interest earning assets under Loans, bills discounted and other receivables. The official cash rate in Australia increased by 150 basis points during the year while rates in New Zealand increased by 25 basis points. (1) Excludes amortisation of acquisition related fair value adjustments made to fixed interest financial instruments. (2) Used for calculating net interest margin. Commonwealth Bank of Australia Annual Report 2010 117 Group201020092008AverageInterestAverageAverageInterestAverageAverageInterestAverageBalanceRateBalanceRateBalanceRateInterest earning assets$M$M%$M$M%$M$M%Cash and liquid assetsAustralia3,6741464. 08,3533243. 93,9302386. 1Overseas7,644460. 66,6831862. 84,1012355. 7Receivables due from other financial institutionsAustralia7,253630. 99,2052272. 55,4032424. 5Overseas6,645781. 27,2382072. 93,7002326. 3Assets at fair value through Income Statement - TradingAustralia15,5875853. 817,6149225. 220,1271,3886. 9Overseas5,9441752. 94,3782315. 33,1862457. 7Assets at fair value through Income Statement - OtherAustralia1171210. 379930. 4383277. 0Overseas1,157211. 82,507803. 24,8132735. 7Available-for-sale investmentsAustralia23,3601,1665. 010,5536286. 06,0174026. 7Overseas5,485741. 37,8312733. 56,1823545. 7Loans, bills discounted and other receivablesAustralia (1)419,66725,8266. 2344,53423,0986. 7273,12420,0477. 3Overseas57,2023,5166. 161,5534,5847. 454,7014,4638. 2Intragroup assetsAustralia---------Overseas12,343200. 212,0231581. 38,1442953. 6Total interest earning assets and interest income including intragroup566,07831,7285. 6493,27130,9216. 3393,81128,4417. 2Intragroup eliminations(12,343)(20)0. 2(12,023)(158)1. 3(8,144)(295)3. 6Total interest earning assets and interest income(2)553,73531,7085. 7481,24830,7636. 4385,66728,1467. 3Securitisation home loan assets10,9675344. 912,2797426. 013,4271,0888. 1 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) 118 Commonwealth Bank of Australia Annual Report 2010 Group201020092008AverageAverageAverageBalanceBalanceBalanceNon-interest earning assets$M$M$MBank acceptancesAustralia12,55916,98319,735Overseas---Assets at fair value through Income Statement - InsuranceAustralia15,51217,37017,896Overseas2,1662,3162,634Property, plant and equipmentAustralia1,9331,7441,242Overseas191199192Other assetsAustralia42,44448,48728,182Overseas6,1529,3938,093Provisions for impairmentAustralia(4,904)(2,492)(1,219)Overseas(338)(299)(111)Total non-interest earning assets75,71593,70176,644Total assets640,417587,228475,738Percentage of total assets applicable to overseas operations (%)14.417.318.4 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) (1) Excludes amortisation of acquisition related fair value adjustments made to fixed interest financial instruments. (2) Certain comparative information has been restated to conform to presentation in the current period Commonwealth Bank of Australia Annual Report 2010 119 Group201020092008AverageInterestAverageAverageInterestAverageAverageInterestAverageBalanceRateBalanceRateBalanceRateInterest bearing liabilities$M$M%$M$M%$M$M%Time depositsAustralia (1)168,8468,6435. 1135,0108,4686. 392,2975,9856. 5Overseas32,4691,4254. 430,2491,6255. 421,3641,3536. 3Savings depositsAustralia (1)72,6081,8342. 568,6401,5392. 246,4721,4683. 2Overseas5,8851622. 86,1322894. 74,7593246. 8Other demand depositsAustralia (1)82,6411,9162. 374,6402,2213. 071,5252,9474. 1Overseas4,1151293. 14,3472134. 94,5013167. 0Payables due to other financialinstitutionsAustralia5,2961102. 14,9741603. 25,7482905. 0Overseas9,448540. 613,8713492. 513,6586995. 1Liabilities at fair value throughIncome StatementAustralia3,5801363. 83,8311594. 23,1241976. 3Overseas12,4944883. 913,5958626. 311,8939327. 8Debt issuesAustralia (2)91,2234,2914. 765,1093,6245. 658,2404,2347. 3Overseas18,6781050. 620,7634172. 016,9298224. 9Loan capitalAustralia (2)9,3703673. 99,4555075. 48,7815666. 4Overseas4,6852555. 43,6422025. 53,7582266. 0Intragroup borrowingsAustralia12,343200. 212,0231581. 38,1442953. 6Overseas---------Interest bearing liabilities and interest expense including intragroup 533,68119,9353. 7466,28120,7934. 5371,19320,6545. 6Intragroup eliminations(12,343)(20)0. 2(12,023)(158)1. 3(8,144)(295)3. 6Total interest bearing liabilities and interest expense521,33819,9153. 8454,25820,6354. 6363,04920,3595. 6Securitisation debt issues9,9274594. 612,0426845. 713,2059687. 3Group201020092008AverageAverageAverageBalanceBalanceBalanceNon-interest bearing liabilities$M$M$MDeposits not bearing interestAustralia6,6385,9406,132Overseas1,4581,4381,545Liabilities on Bank acceptancesAustralia12,55916,98319,735Overseas---Insurance policy liabilitiesAustralia14,43216,51019,185Overseas1,5481,7662,296Other liabilitiesAustralia32,91442,93918,538Overseas6,0696,1636,647Total non-interest bearing liabilities75,61891,73974,078Total liabilities606,883558,039450,332Shareholders' equity33,53429,18925,406Total liabilities and Shareholders' equity640,417587,228475,738Total liabilities applicable to overseas operations (%)16.018.319.4 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) Geographical analysis of key categories The overseas component comprises overseas branches of the Bank and overseas domiciled controlled entities. Overseas intragroup borrowings have been adjusted into the interest spread and margin calculations to more appropriately reflect the overseas cost of funds. Non–accrual loans were included in interest earning assets under loans, bills discounted and other receivables. In calculating net interest margin, assets, liabilities, interest income and interest expense related to securitisation vehicles have been excluded. This has been done to more accurately reflect the Group‟s underlying net margin. 120 Commonwealth Bank of Australia Annual Report 2010 Group Avg BalInterestYieldAvg BalInterestYieldNet interest margin$M$M%$M$M%Total interest earning assets excluding securitisation553,73531,7085. 73481,24830,7636. 39Total interest bearing liabilities excluding securitisation521,33819,9153. 82454,25820,6354. 55Net interest income and interest spread (excluding securitisation)11,7931. 9110,1281. 84Benefit of free funds0. 220. 26Net interest margin2. 132. 1020102009GroupAvg BalInterestYieldAvg BalInterestYield$M$M%$M$M%Loans, bills discounted and other receivablesAustralia419,66725,8266. 15344,53423,0986. 70Overseas57,2023,5166. 1561,5534,5847. 45Total476,86929,3426. 15406,08727,6826. 82Other interest earning assetsAustralia49,9911,9723. 9446,5242,1044. 52Overseas26,8753941. 4728,6379773. 41Total76,8662,3663. 0875,1613,0814. 10Total interest bearing depositsAustralia324,09512,3933. 82278,29012,2284. 39Overseas42,4691,7164. 0440,7282,1275. 22Total366,56414,1093. 85319,01814,3554. 50Other interest bearing liabilitiesAustralia109,4694,9044. 4883,3694,4505. 34Overseas45,3059021. 9951,8711,8303. 53Total154,7745,8063. 75135,2406,2804. 6420102009GroupYear Ended2010 vs 20092009 vs 2008IncreaseIncreaseChange in net interest income$M$MDue to changes in average volume of interest earning assets1,5351,971Due to changes in interest margin130370Change in net interest income1,6652,341 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) Commonwealth Bank of Australia Annual Report 2010 121 June 2010 vs June 2009June 2009 vs June 2008Changes in net interest income:Volume Rate Total Volume Rate Total Volume and rate analysis$M $M $M $M $M $M Interest Earning AssetsCash and liquid assetsAustralia(183)5(178)220(134)86Overseas16(156)(140)110(159)(49)Receivables due from other financial institutionsAustralia(33)(131)(164)132(147)(15)Overseas(12)(117)(129)162(187)(25)Assets at fair value through Income Statement - TradingAustralia(92)(245)(337)(152)(314)(466)Overseas64(120)(56)77(91)(14)Assets at fair value through Income Statement - OtherAustralia(37)46915(39)(24)Overseas(34)(25)(59)(102)(91)(193)Available-for-sale investmentsAustralia701(163)538286(60)226Overseas(57)(142)(199)76(157)(81)Loans, bills discounted and other receivablesAustralia4,830(2,102)2,7285,014(1,963)3,051Overseas(296)(772)(1,068)535(414)121Intragroup loansAustralia------Overseas3(141)(138)96(233)(137)Changes in interest income including intragroup4,323(3,516)8076,709(4,229)2,480Intragroup eliminations(3)141138(96)233137Changes in interest income4,392(3,447)9456,543(3,926)2,617Securitisation home loan assets(72)(136)(208)(81)(265)(346)Interest Bearing Liabilities and Loan CapitalTime depositsAustralia1,927(1,752)1752,724(241)2,483Overseas108(308)(200)520(248)272Savings depositsAustralia95200295599(528)71Overseas(9)(118)(127)79(114)(35)Other demand depositsAustralia211(516)(305)111(837)(726)Overseas(9)(75)(84)(9)(94)(103)Payables due to other financial institutionsAustralia8(58)(50)(32)(98)(130)Overseas(68)(227)(295)8(358)(350)Liabilities at fair value through Income StatementAustralia(10)(13)(23)37(75)(38)Overseas(57)(317)(374)121(191)(70)Debt issuesAustralia1,341(674)667441(1,051)(610)Overseas(27)(285)(312)132(537)(405)Loan capitalAustralia(4)(136)(140)40(99)(59)Overseas57(4)53(7)(17)(24)Intragroup borrowingsAustralia3(141)(138)96(233)(137)Overseas------Changes in interest expense including intragroup2,762(3,620)(858)4,766(4,627)139Intragroup eliminations(3)141138(96)233137Changes in interest expense2,804(3,524)(720)4,629(4,353)276Changes in net interest income1,5351301,6651,9713702,341Securitisation debt issues(109)(116)(225)(76)(208)(284) Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) Changes in Net Interest Income: Volume and Rate Analysis The preceding table shows the movement in interest income and expense due to changes in volume and 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. Volume and rate variance for total interest earning assets and interest bearing liabilities have been calculated separately (rather than being the sum of the individual categories). (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 are 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. 122 Commonwealth Bank of Australia Annual Report 2010 Group201020092008Geographical analysis of key categories%%%AustraliaInterest spread (1)2. 041. 931. 79Benefit of interest-free liabilities, provisions and equity (2)0. 190. 210. 27Net interest margin (3)2. 232. 142. 06OverseasInterest spread (1)1. 091. 321. 11Benefit of interest-free liabilities, provisions and equity (2)0. 270. 400. 57Net interest margin (3)1. 361. 721. 68GroupInterest spread (1)1. 911. 841. 68Benefit of interest-free liabilities, provisions and equity (2)0. 220. 260. 34Net interest margin (3)2. 132. 102. 02 Notes to the Financial Statements Note 5 Income Tax The income tax expense for the year is determined from the profit before income tax as follows: (1) The New Zealand corporate tax rate will reduce from 30% to 28% effective 1 April 2011. (2) The 2010 prior period tax adjustment relates to tax on NZ structured finance transactions. The 2008 year prior period tax benefit arose from the resolution of long outstanding tax issues with the tax authorities. (3) The effective tax rate for the year ended 30 June 2010 includes tax on New Zealand structured finance transactions of $171 million. (4) The effective tax rate for the year ended 30 June 2010 has been impacted by the unwind of fair value adjustments on Bankwest issued RMBS that does not have an associated impact on tax expense. Commonwealth Bank of Australia Annual Report 2010 123 GroupBank20102009200820102009$M$M$M$M$MProfit before Income Tax8,1936,4496,2557,3013,930Prima facie income tax at 30%2,4581,9351,8772,1901,179Effect of amounts which are non-deductible/(assessable)in calculating taxable income:Taxation offsets and other dividend adjustments(18)(59)(65)(493)(249)Tax adjustment on policyholder income91(115)(81)--Bankwest - Gain on acquisition-76---Tax losses not previously brought to account(4)-(89)--Tax losses assumed by the Bank under UIG 1052---(31)(14)Offshore tax rate differential(66)(55)(35)(11)(19)Offshore banking unit(32)(56)(16)(32)(56)Investment allowance(57)(28)-(31)(14)Effect of changes in tax rates (1)(12)----Income tax under/(over) provided in previous years (2)1645(122)(22)(27)Other(11)(7)(36)11644Total income tax expense2,5131,6961,4331,686844Corporate tax expense2,3831,8601,5481,686844Policyholder tax expense/(benefit)130(164)(115)--Total income tax expense2,5131,6961,4331,686844GroupBank20102009200820102009$M$M$M$M$MIncome tax expense attributable to profit fromordinary activities comprised:AustraliaCurrent tax expense1,9032,2651,5221,3631,628Deferred tax expense/(benefit)150(886)(326)275(900)Total Australia2,0531,3791,1961,638728OverseasCurrent tax expense43520112734121Deferred tax expense/(benefit)2511611014(5)Total Overseas46031723748116Total income tax expense2,5131,6961,4331,686844GroupBank20102009200820102009%%%%%Effective Tax RateTotal – corporate (3)29. 628. 124. 323. 121. 5Retail Banking Services – corporate30. 129. 730. 0n/an/aBusiness and Private Banking – corporate28. 928. 128. 7n/an/aInstitutional Banking and Markets – corporate22. 5large14. 1n/an/aWealth Management – corporate28. 030. 128. 5n/an/aNew Zealand – corporate (3)56. 923. 822. 2n/an/aBankwest – corporate (4)18. 035. 4-n/an/a Notes to the Financial Statements Note 5 Income Tax (continued) (1) Deferred tax assets and liabilities are set off where they relate to income tax levied by the same taxation authority on either the same taxable entity or different taxable entities within the same taxable group. 124 Commonwealth Bank of Australia Annual Report 2010 GroupBank20102009200820102009$M$M$M$M$MDeferred tax asset balances comprise temporary differences attributable to:Amounts recognised in the Income Statement:Provision for employee benefits364338294313295Provisions for impairment on loans, bills discounted and other receivables1,4761,336523813889Other provisions not tax deductible until expense incurred193243192109139Recognised value of tax losses carried forward36635Financial instruments25942485202242Other2914221581951922,5862,7691,2581,6351,762Amounts recognised directly in equity:Foreign currency translation reserve333--Cash flow hedge reserve21225526186240Employee compensation reserve123-123Avaliable-for-sale investments reserve396129623027090227249Total deferred tax assets (before set off) 2,8163,0391,3481,8622,011Set off of tax (1)(1,546)(1,386)(1,272)(620)(383)Net deferred tax assets1,2701,653761,2421,628Deferred tax liability balances comprise temporary differences attributable to:Amounts recognised in the Income Statement:Lease financing347299287144112Defined benefit superannuation plan surplus(51)(33)(20)(51)(33)Intangible assets14517624--Financial instruments63956726123888Other37127327050401,4511,282822381207Amounts recognised directly in equity:Revaluation of properties7363595751Cash flow hedge reserve55361777(5)Defined benefit superannuation plan surplus135171481135171Avaliable-for-sale investments reserve532(1)40(1)316272716239216Total deferred tax liabilities (before set off) 1,7671,5541,538620423Set off of tax (1)(1,546)(1,386)(1,272)(620)(383)Net deferred tax liabilities (Note 22)221168266-40Deferred tax assets opening balance:1,653762541,62854Movement in temporary differences during the year:Provisions for employee benefits264461827Provisions for impairment on loans, bills discounted and other receivables140813152(76)413Other provisions not tax deductible until expense incurred(50)5156(30)(36)Recognised value of tax losses carried forward(3)-(2)(2)(1)Financial instruments(214)529(8)(71)375Other(122)254(145)12141Set off of tax (1)(160)(114)(237)(237)655Deferred tax assets closing balance1,2701,653761,2421,628Deferred tax liabilities opening balance:1682669084019Movement in temporary differences during the year:Property asset revaluations10446(8)Lease financing4812(43)327Defined benefit superannuation plan surplus(54)(323)(83)(54)(323)Intangible assets(31)15214--Financial instruments142168(45)203(296)Other983(252)10(14)Set off of tax (1)(160)(114)(237)(237)655Deferred tax liabilities closing balance (Note 22)221168266-40 Notes to the Financial Statements Note 5 Income Tax (continued) Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: Potential deferred tax assets of the Group arose from: Capital losses arising under the tax consolidation system; 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: Future capital gains and assessable income of a nature and of an amount sufficient to enable the benefit from the losses to be realised is derived; Compliance with the conditions for claiming capital losses and deductions imposed by tax legislation is continued; and No changes in tax legislation adversely affect the Group in realising the benefit from deductions for the losses. Tax Consolidation Tax consolidation legislation has been enacted to allow Australian resident entities to elect to consolidate and be treated as single entities tax purposes. The for Australian Commonwealth Bank of Australia elected to be taxed as a single entity with effect from 1 July 2002. The Bank has recognised a tax consolidation contribution to the wholly-owned tax consolidated entity of $84 million (2009: $61 million). The Bank is the head entity of the tax consolidated group and has entered into tax funding and tax sharing agreements with its eligible Australian resident subsidiaries. The terms and conditions of these agreements are set out in note 1(w). As at 30 June 2010, the amount receivable by the Bank under the tax funding agreement was $439 million (2009: $100 million receivable). This balance is included in „Other assets‟ in the Bank‟s separate Balance Sheet. Taxation of Financial Arrangements “TOFA” The new tax regime for financial instruments TOFA began to apply to the Tax Consolidated Group from 1 July 2010. The regime aims to align the tax and accounting recognition and measurement of financial arrangements and their related flows. Upon adoption, deferred tax balances from financial instruments will progressively reverse over a four year period. Commonwealth Bank of Australia Annual Report 2010 125 GroupBank20102009200820102009Deferred tax assets not taken to account$M$M$M$M$MTax losses and other temporary differences on revenue account1101003599100Tax losses on capital account14----Total1241003599100GroupBank20102009200820102009Expiration of deferred tax assets not taken to account$M$M$M$M$MAt Balance Sheet date carry-forward losses expired as follows: From one to two years--2-- From two to four years21421 After four years10899229799Losses that do not expire under current tax legislation14-7--Total1241003599100 Notes to the Financial Statements Note 6 Dividends (1) The 2010 final dividend will be satisfied by cash disbursements and a full or partial on-market purchase and transfer of shares to satisfy the Dividend Reinvestment Plan (“DRP”). The 2009 final dividend was satisfied by cash disbursements of $1,058 million and the issue of $685 million of ordinary shares through the DRP. The 2008 final dividend was satisfied by cash disbursements of $1,335 million and the issue of $694 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 2010. Dividend Franking Account After fully franking the final dividend to be paid for the year, the amount of credits available, at the 30% tax rate as at 30 June 2010 to frank dividends for subsequent financial years, is $446 million (2009: $758 million). This figure is based on the franking accounts of the Bank at 30 June 2010, adjusted for franking credits that will arise from the payment of income tax payable on profits for the year, franking debits that will arise from the payment of dividends proposed and franking credits that the Bank may be prevented from distributing in subsequent financial periods. Dividend History (1) Dividend Payout Ratio: dividends divided by statutory earnings. (2) DRP Participation Rate: the percentage of total issued share capital participating in the Dividend Reinvestment Plan. (3) Dividend expected to be paid on 1 October 2010. 126 Commonwealth Bank of Australia Annual Report 2010 GroupBank20102009200820102009$M$M$M$M$MOrdinary SharesInterim ordinary dividend (fully franked) (2010: 120 cents; 2009: 113 cents, 2008: 113 cents)Interim ordinary dividend paid - cash component only1,0671,2571,0871,0671,257Interim ordinary dividend paid - dividend reinvestment plan774405400774405Total dividend paid1,8411,6621,4871,8411,662Other Equity InstrumentsDividends paid475748--Total dividends provided for, reserved or paid1,8881,7191,5351,8411,662Other provision carried291852918Dividends proposed and not recognised as a liability (fully franked) (2010: 170 cents, 2009: 115 cents, 2008: 153 cents) (1)2,6331,7472,0292,6331,747Provision for dividendsOpening balance1856185Provision made during year3,5883,6913,4253,5883,691Provision used during year(3,577)(3,678)(3,426)(3,577)(3,678)Closing balance (Note 23)291852918Half-yearFull YearDRPPayoutPayoutDRPParticipationCents Per Ratio (1)Ratio (1)PriceRate (2)Half Year EndedShareDate Paid%%$%31 December 200711302/04/200863. 4-39.4433.530 June 200815301/10/200884. 674.142.4134.331 December 200811323/03/200965. 3-28.4524.430 June 200911501/10/200982. 473.144.4839.431 December 200912001/04/201063. 7-53.5642.030 June 2010 (3)170-96. 679.7-- Notes to the Financial Statements Note 7 Earnings Per Share Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the Bank by the weighted average number of ordinary shares on issue during the year, excluding the number of ordinary shares purchased and held as treasury shares. Diluted earnings per share amounts are calculated by dividing net profit attributable to ordinary equity holders of the Bank (after deducting interest on the convertible redeemable loan capital Note 8 Cash and Liquid Assets instruments) by the weighted average number of ordinary shares issued during the year (adjusted for the effects of dilutive options and dilutive convertible non-cumulative redeemable loan capital instruments). Commonwealth Bank of Australia Annual Report 2010 127 Group201020092008Earnings per ordinary shareBasic 367. 9328. 5363. 0Fully diluted354. 2313. 4348. 7Cents per shareGroup201020092008$M$M$MReconciliation of earnings used in calculation of earnings per shareProfit after income tax5,6804,7534,822Less: Other equity instrument dividends(47)(57)(48)Less: Non-controlling interests(16)(30)(31)Earnings used in calculation of basic earnings per share5,6174,6664,743Add: Profit impact of assumed conversionsLoan capital190187222Earnings used in calculation of fully diluted earnings per share5,8074,8534,965Number of Shares201020092008MMMWeighted average number of ordinary shares (net of treasury shares) used in the calculationof basic earnings per share1,5271,4201,307Effect of dilutive securities - executive share plans and convertible loan capital instruments113128118Weighted average number of ordinary shares (net of treasury shares) used in the calculation of fully diluted earnings per share1,6401,5481,425GroupBank2010200920102009$M$M$M$MAustraliaNotes, coins and cash at banks3,0901,9972,7371,690Money at short call11--Securities purchased under agreements to resell3,1413,4263,1753,426Bills received and remittances in transit1118574122Total Australia6,3435,5095,9865,238OverseasNotes, coins and cash at banks2,1951,7581,290508Money at short call1,0193,0149052,909Securities purchased under agreements to resell5401,0315301,029Bills received and remittances in transit2228--Total Overseas3,7765,8312,7254,446Total cash and liquid assets10,11911,3408,7119,684 Notes to the Financial Statements Note 9 Receivables Due from Other Financial Institutions (1) Required by law for the Group to operate in certain regions. The majority of the above amounts are expected to be recovered within twelve months of the Balance Sheet date. Note 10 Assets at Fair Value through Income Statement (1) (1) In addition to the assets above, the Group also measures bills discounted that are intended to be sold into the market at fair value. These are classified within Loans, bills discounted and other receivables (refer to Note 13). The above amounts are expected to be recovered within twelve months of the Balance Sheet date. 128 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009$M$M$M$MAustraliaPlacements with and loans to other financial institutions5,3558,5905,3378,482Total Australia5,3558,5905,3378,482OverseasDeposits with regulatory authorities (1)444435Other placements with and loans to other financial institutions4,6735,7874,4265,499Total Overseas4,7175,8314,4295,504Total receivables from other financial institutions10,07214,4219,76613,986GroupBank2010200920102009$M$M$M$MTrading22,85125,40118,77520,988Insurance 15,94017,260--Other6541,677-60Total assets at fair value through Income Statement39,44544,33818,77521,048GroupBank2010200920102009Trading$M$M$M$MAustraliaMarket Quoted: Australian Public SecuritiesCommonwealth and States6,0781,5156,0781,515Local and semi-government2,9902,2382,9902,238Bills of exchange579747579747Certificates of deposit4,35213,6914,35213,691Medium term notes1,2737801,273780Equity investments and other securities4228041875Non-Market Quoted:Commercial paper321451321451Other securities4570044700Total Australia16,06020,20216,05520,197OverseasMarket Quoted: Government securities3,3542,4071,792528Eurobonds2474524745Certificates of deposit1,4731,543--Floating rate notes339210339210Commercial paper335-335-Other securities46--Non-Market Quoted:Government securities6670--Medium term notes910853--Floating rate notes4335--Commercial paper12---Other securities83078Total Overseas6,7915,1992,720791Total trading assets22,85125,40118,77520,988 Notes to the Financial Statements Note 10 Assets at Fair Value through Income Statement (continued) Of the above amounts $2,102 million is expected to be recovered within twelve months of the Balance Sheet date (2009: $2,670 million). 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. Investments held in the Australian statutory funds may only be used within the restrictions imposed under the Life Insurance Act 1995. Refer to note 1(ee) for further details. (1) Designated at Fair Value through Income Statement at inception as they are managed by the Group on a fair value basis. Of the above amounts $654 million is expected to be recovered within twelve months of the Balance Sheet date by the Group (2009: $1,416 million) and all of the above amounts were expected to be recovered within twelve months of the Balance Sheet date by the Bank as at 30 June 2009. 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 resulted in a gain of $4 million for the year (2009: $18 million loss), and was insignificant for the Bank for the year ending 30 June 2009. The cumulative net loss attributable to changes in credit risk for loans and receivables designated at fair value since initial recognition for the Group is $1 million (2009: $18 million loss), and was insignificant for the Bank for the year ending 30 June 2009. These values have been calculated by determining the changes in credit spread implicit in the fair value of the instrument. Commonwealth Bank of Australia Annual Report 2010 129 InvestmentsInvestmentsInvestmentsInvestmentsBacking LifeBacking LifeBacking LifeBacking LifeRiskInvestmentRiskInvestmentContractsContractsTotalContractsContractsTotal201020102010200920092009Insurance $M$M$M$M$M$MEquity Security Investments:Direct315660975219110329Indirect6183,5084,1265514,7005,251Total equity security investments9334,1685,1017704,8105,580Debt Security Investments:Direct8245711,3959222631,185Indirect1,9795,1007,0792,7415,3258,066Total debt security investments2,8035,6718,4743,6635,5889,251Property Investments:Direct156075641579Indirect3668681,2343458631,208Total property investments3819281,3094098781,287Other Assets1758811,0561539891,142Total life insurance investment assets4,29211,64815,9404,99512,26517,260GroupBank2010200920102009Other (1)$M$M$M$MFair value structured transactions100552--Receivables due from financial institutions447909--Term loans107156--Other lending-60-60Total other assets at fair value through Income Statement6541,677-60 Notes to the Financial Statements Note 11 Derivative Financial Instruments Derivative Contracts Derivatives are classified as “Held for Trading”, “Held for Hedging”, or “Other”. Held for Trading derivatives are contracts entered into in order to meet customers‟ needs, or to undertake market making and positioning activities. Held for Hedging derivatives are instruments held for risk management purposes. Derivatives entered into as economic hedges that do not qualify for hedge accounting are classified as Other. Derivatives Transacted for Hedging Purposes There are three types of allowable hedging relationships: fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation. For details on the accounting treatment of each type of hedging relationship refer to Note 1 (cc). Fair Value Hedges Fair value hedges are used by the Group to manage exposure to changes in the fair value of an asset, liability or unrecognised firm commitment. Changes in fair values can arise from fluctuations in interest or foreign exchange rates. The Group principally uses interest rate swaps, cross currency swaps and futures to protect against such fluctuations. All gains and losses associated with the ineffective portion of fair value hedge relationships are recognised immediately as „Other operating income‟ in the Income Statement. Ineffectiveness recognised in the Income Statement in the current year amounted to a $67 million net loss for the Group (2009: $26 million net loss) and $72 million net loss for the Bank (2009: $30 million net loss). Cash Flow Hedges Cash flow hedges are used by the Group to manage exposure to volatility in future cash flows which may result from fluctuations in interest or exchange rates on financial assets, liabilities or highly probable forecast transactions. The Group principally uses interest rate and cross currency swaps to protect against such fluctuations. Ineffectiveness recognised in the Income Statement in the current year amounted to a $5 million gain for the Group (2009: $8 million gain) and $12 million gain for the Bank (2009: $2 million gain). Net Investment Hedges The Group uses foreign exchange forward transactions to minimise its exposure to the currency translation risk of certain net investments in foreign operations. In the current and prior year, there have been no material gains or losses as a result of ineffective net investment hedges. 130 Commonwealth Bank of Australia Annual Report 2010 Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) The notional (face) and fair value of derivative financial instruments are set out in the following tables: Derivative assets and liabilities Held for trading are expected to be recovered or settled within twelve months of the Balance Sheet date. The majority of derivative assets and liabilities Held for hedging and Other derivative assets and liabilities are expected to be recovered or settled after twelve months of the Balance Sheet date. Following a change in the organisational structure and product systems of ASB the interest rate trading book and the Balance Sheet hedging activities have been split. Group comparatives have been aligned with current period reporting resulting in the reclassification from Other to Held for trading of $1,100 million and $1,308 million of derivative assets and liabilities fair values respectively. Commonwealth Bank of Australia Annual Report 2010 131 Group20102009Face ValueFair ValueFair ValueFace ValueFair ValueFair ValueAssetLiabilityAssetLiability$M$M$M$M$M$MDerivative Assets and LiabilitiesHeld for trading2,319,17623,091(20,695)1,357,73322,599(27,297)Held for hedging294,5294,260(3,865)182,1703,296(3,877)Other derivatives29,997338(324)33,830463(960)Total derivative assets/(liabilities)2,643,70227,689(24,884)1,573,73326,358(32,134)Derivatives held for tradingExchange rate related contracts:Forward contracts1,076,3955,611(4,471)340,3534,680(6,905)Swaps377,6376,882(6,344)316,2808,531(11,755)Futures1,2821-943-Options purchased and sold4,215509(513)25,068466(466)Total exchange rate related contracts1,459,52913,003(11,328)681,79513,680(19,126)Interest rate related contracts:Forward contracts60,7107(8)38,0437(16)Swaps709,7499,377(8,823)492,5337,809(7,438)Futures51,3941(2)80,4614-Options purchased and sold24,302416(284)49,620593(402)Total interest rate related contracts846,1559,801(9,117)660,6578,413(7,856)Credit related contracts:Swaps10,317110(99)8,035295(130)Total credit related contracts10,317110(99)8,035295(130)Equity related contracts:Swaps83--5215(1)Options purchased and sold2447(49)2,27912(84)Total equity related contracts3277(49)2,80017(85)Commodity related contracts:Swaps1,649167(99)2,305189(91)Futures---24--Options purchased and sold1,1993(3)2,1175(9)Total commodity related contracts2,848170(102)4,446194(100)Total derivative assets/(liabilities) held for trading2,319,17623,091(20,695)1,357,73322,599(27,297) Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) 132 Commonwealth Bank of Australia Annual Report 2010 Group20102009Face ValueFair ValueFair ValueFace ValueFair ValueFair ValueAssetLiabilityAssetLiability$M$M$M$M$M$MFair value hedgesExchange rate related contracts:Forward contracts19-(1)1531(2)Swaps30,4932,013(1,605)18,2781,385(846)Total exchange rate related contracts30,5122,013(1,606)18,4311,386(848)Interest rate related contracts:Swaps33,9331,041(456)22,205606(379)Futures2,600-(21)5,2814-Total interest rate related contracts36,5331,041(477)27,486610(379)Equity related contracts:Swaps63532(32)6447(56)Total equity related contracts63532(32)6447(56)Commodity related contracts:Swaps---3--Total commodity related contracts---3--Total fair value hedges67,6803,086(2,115)46,5642,003(1,283)Cash flow hedgesExchange rate related contracts:Swaps19,26770(180)12,37541(77)Total exchange rate related contracts19,26770(180)12,37541(77)Interest rate related contracts:Swaps207,5531,104(1,567)123,2021,252(2,514)Total interest rate related contracts207,5531,104(1,567)123,2021,252(2,514)Total cash flow hedges226,8201,174(1,747)135,5771,293(2,591)Net investment hedgesExchange rate related contracts:Forward contracts29-(3)29-(3)Total exchange rate related contracts29-(3)29-(3)Total net investment hedges29-(3)29-(3)Total derivative assets/(liabilities) held for hedging294,5294,260(3,865)182,1703,296(3,877) Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) (1) Certain comparative information has been restated to conform to presentation in the current period. Commonwealth Bank of Australia Annual Report 2010 133 Group20102009Face ValueFair ValueFair ValueFace ValueFair ValueFair ValueAssetLiabilityAssetLiability$M$M$M$M$M$MOther derivatives (1)Exchange rate related contracts:Forward contracts5,70784(63)6,41942(468)Swaps3,337130(74)4,05061(182)Total exchange rate related contracts9,044214(137)10,469103(650)Interest rate related contracts:Forward contracts4,222--1,808--Swaps15,195108(159)17,779227(175)Futures1,108-(3)2,969-(2)Options purchased and sold61(5)---Total interest rate related contracts20,531109(167)22,556227(177)Credit related contracts:Swaps---803133(133)Total credit related contracts---803133(133)Commodity related contracts:Forward contracts---2--Total commodity related contracts---2--Identified embedded derivatives42215(20)---Total other derivatives29,997338(324)33,830463(960)Total recognised derivative assets/(liabilities)2,643,70227,689(24,884)1,573,73326,358(32,134) Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) Derivative assets and liabilities Held for trading are expected to be recovered or settled within twelve months of the Balance Sheet date. The majority of derivative assets and liabilities Held for hedging and Other derivative assets and liabilities are expected to be recovered or settled after twelve months of the Balance Sheet date. 134 Commonwealth Bank of Australia Annual Report 2010 Bank20102009Face ValueFair ValueFair ValueFace ValueFair ValueFair ValueAssetLiabilityAssetLiability$M$M$M$M $M$MDerivative Assets and LiabilitiesHeld for trading2,499,70423,300(20,195)1,412,09522,494(26,321)Held for hedging278,3674,054(3,456)158,9083,042(3,116)Other derivatives4939(38)41-(5)Total derivative assets/(liabilities)2,778,56427,363(23,689)1,571,04425,536(29,442)Derivatives held for tradingExchange rate related contracts:Forward contracts1,073,9955,596(4,448)339,2224,651(6,888)Swaps375,6566,836(6,178)312,3358,457(11,498)Futures1,2821-943-Options purchased and sold4,184508(512)25,037466(465)Derivatives held with controlled entities169,602895(389)92,511890(371)Total exchange rate related contracts1,624,71913,836(11,527)769,19914,467(19,222)Interest rate related contracts:Forward contracts60,3457(8)35,3435(16)Swaps664,9468,472(7,826)449,7106,692(6,081)Futures46,932--71,9233-Options purchased and sold24,084414(283)48,965588(401)Derivatives held with controlled entities65,030284(301)21,770233(288)Total interest rate related contracts861,3379,177(8,418)627,7117,521(6,786)Credit related contracts:Swaps10,317110(99)7,931295(128)Total credit related contracts10,317110(99)7,931295(128)Equity related contracts:Swaps83--5215(1)Options purchased and sold2447(49)2,27912(84)Total equity related contracts3277(49)2,80017(85)Commodity related contracts:Swaps1,649167(99)2,305189(91)Futures---24--Options purchased and sold1,1893(3)2,1175(9)Derivatives held with controlled entities166--8--Total commodity related contracts3,004170(102)4,454194(100)Total derivative assets/(liabilities) held for trading2,499,70423,300(20,195)1,412,09522,494(26,321) Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) Commonwealth Bank of Australia Annual Report 2010 135 Bank20102009Face ValueFair ValueFair ValueFace ValueFair ValueFair ValueAssetLiabilityAssetLiability$M$M$M$M$M$MFair value hedgesExchange rate related contracts:Forward contracts19-(1)19-(2)Swaps30,4932,013(1,605)18,2781,385(846)Total exchange rate related contracts30,5122,013(1,606)18,2971,385(848)Interest rate related contracts:Swaps30,061828(405)18,919435(320)Futures2,600-(21)5,2814-Derivatives held with controlled entities66793-71166-Total interest rate related contracts33,328921(426)24,911505(320)Equity related contracts:Swaps63532(32)6447(56)Total equity related contracts63532(32)6447(56)Commodity related contracts:Swaps---3--Total commodity related contracts---3--Total fair value hedges64,4752,966(2,064)43,8551,897(1,224)Cash flow hedgesExchange rate related contracts:Swaps18,83570(160)11,46241(37)Derivatives held with controlled entities2,63822(7)679-(6)Total exchange rate related contracts21,47392(167)12,14141(43)Interest rate related contracts:Swaps190,558979(1,224)102,9121,104(1,849)Derivatives held with controlled entities1,86117(1)---Total interest rate related contracts192,419996(1,225)102,9121,104(1,849)Total cash flow hedges213,8921,088(1,392)115,0531,145(1,892)Total derivative assets/(liabilities) held for hedging278,3674,054(3,456)158,9083,042(3,116)Other derivativesInterest rate related contracts:Swaps72-(11)38-(5)Options purchased and sold61(5)---Derivatives held with controlled entities64(2)---Total interest rate related contracts845(18)38-(5)Credit related contracts:Swaps---3--Total credit related contracts---3--Identified embedded derivatives4094(20)---Total other derivatives4939(38)41-(5)Total recognised derivative assets/(liabilities)2,778,56427,363(23,689)1,571,04425,536(29,442) Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) The following table shows the gross amount of deferred (losses)/gains held in equity in relation to cash flow hedges. Cash Flow Hedges - Deferred (Losses)/Gains 136 Commonwealth Bank of Australia Annual Report 2010 Exchange RateInterest RateGroupRelated ContractsRelated ContractsTotal201020092010200920102009$M$M$M$M$M $M6 months(43)56(85)(125)(128)(69)6 months - 1 year-7(65)(132)(65)(125)1 - 2 years--(198)(472)(198)(472)2 - 5 years9-(158)(703)(149)(703)After 5 years8(2)(44)204(36)202Net deferred (losses)/gains(26)61(550)(1,228)(576)(1,167)Exchange RateInterest RateBankRelated ContractsRelated ContractsTotal201020092010200920102009$M$M$M$M$M$M6 months-27(105)(57)(105)(30)6 months - 1 year-7(19)(26)(19)(19)1 - 2 years--(85)(217)(85)(217)2 - 5 years9-(163)(563)(154)(563)After 5 years(1)(2)(87)169(88)167Net deferred (losses)/gains832(459)(694)(451)(662) Notes to the Financial Statements Note 12 Available-for-Sale Investments (1) Included within Mortgage backed securities of the Bank are $37,105 million (2009: $37,105 million) of residential mortgage backed securities held within securitisation vehicles for potential repurchase by the Reserve Bank of Australia. Of the amounts above, the following amounts are expected to be recovered within twelve months of the Balance Sheet date; Group: $10,317 million (2009: $6,128 million), Bank $5,408 million (2009: $5,826 million). Revaluation of Available-for-sale investments resulted in a gain of $327 million (2009: $10 million gain) for the Group and a gain of $160 million (2009: $52 million gain) for the Bank recognised directly in equity. As a result of sale, derecognition or impairment during the year of Available-for-sale investments the following amounts were removed from equity and reported in Income Statement for the year; Group: $22 million net gain (2009: $13 million loss), Bank $16 million net gain (2009: $24 million gain). Proceeds received from settlement at or close to maturity of Available-for-sale investments for the Group were $44,201 million (2009: $22,189 million) and for the Bank were $26,635 million (2009: $22,049 million). Proceeds from sale of Available-for-sale investments for the Group were $4,107 million (2009: $4,996 million) and for the Bank were $4,095 million (2009: $4,996 million). Commonwealth Bank of Australia Annual Report 2010 137 GroupBank2010200920102009$M$M$M$MAustraliaMarket Quoted: Australian Public Securities:Local and semi-government12,5037,15212,1537,152Shares and equity investments283241222180Certificates of deposit2,595---Eurobonds1,843---Medium term notes8,2286,5758,2286,575Floating rate notes1,235327-327Other securities205-4-Non-Market Quoted:Australian Public Securities:Local and semi-government8485--Medium term notes5456872917Shares and equity investments166181567Mortgage backed securities (1)1,0661,38439,97340,379Other securities264--Total Australia28,26415,90261,60855,537OverseasMarket Quoted: Government securities1,259660863314Shares and equity investments2626--Certificates of deposit8791,6818751,677Eurobonds2,3682,7712,3692,771Medium term notes-113-113Floating rate notes8522064220Other securities3494-26Non-Market Quoted:Government securities-22--Certificates of deposit-14--Floating rate notes-1-1Total Overseas4,6515,6024,1715,122Total available-for-sale investments32,91521,50465,77960,659 Notes to the Financial Statements Note 12 Available-for-Sale Investments (continued) Maturity Distribution and Weighted Average Yield 138 Commonwealth Bank of Australia Annual Report 2010 GroupAs at 30 June 2010GrossGrossAmortisedUnrealisedUnrealisedFairCostGainsLossesValue$M$M$M$MAustraliaAustralian Public Securities:Local and semi-government12,363245(21)12,587Certificates of deposit2,596-(1)2,595Eurobonds1,82617-1,843Medium term notes8,26161(40)8,282Floating rate notes1,21817-1,235Mortgage backed securities1,0814(19)1,066Other securities and equity investments542114-656Total Australia27,887458(81)28,264OverseasGovernment securities1,2581-1,259Certificates of deposit879--879Eurobonds2,35517(4)2,368Floating rate notes86-(1)85Other securities and equity investments528-60Total Overseas4,63026(5)4,651Total available-for-sale investments32,517484(86)32,915GroupMaturity Period at 30 June 2010Non-0 to 3 months3 to 12 months1 to 5 years5 to 10 years10 or more yearsMaturingTotal$M%$M%$M%$M%$M%$M$MAustraliaAustralian Public Securities:Local and semi-government1504. 552155. 826,1555. 644,9756. 031,0925. 84-12,587Certificates of deposit2,2414. 733544. 94-------2,595Eurobonds3614. 799525. 045305. 73-----1,843Medium term notes3795. 471,2124. 866,3895. 273026. 95---8,282Floating rate notes--2753. 959604. 05-----1,235Mortgage backed securities--------1,0665. 21-1,066Other securities and equity investments23. 271974. 9180. 01----449656Total Australia3,133-3,205-14,042-5,277-2,158-44928,264OverseasGovernment securities4521. 976831. 641245. 07-----1,259Certificates of deposit7850. 40940. 67-------879Eurobonds1363. 631,7620. 41235. 504474. 00---2,368Floating rate notes--642. 10211. 16-----85Other securities and equity investments----364. 68----2460Total Overseas1,373-2,603-204-447---244,651Total available-for- sale investments4,506-5,808-14,246-5,724-2,158-47332,915 Notes to the Financial Statements Note 12 Available-for-Sale Investments (continued) Maturity Distribution and Weighted Average Yield Commonwealth Bank of Australia Annual Report 2010 139 GroupAs at 30 June 2009GrossGrossAmortisedUnrealisedUnrealisedFairCostGainsLossesValue$M$M$M$MAustraliaAustralian Public Securities:Local and semi-government7,32879(170)7,237Medium term notes6,60469(42)6,631Floating rate notes343-(16)327Mortgage backed securities1,4158(39)1,384Other securities and equity investments25370-323Total Australia15,943226(267)15,902OverseasGovernment securities6812(1)682Certificates of deposit1,6869-1,695Eurobonds2,7693(1)2,771Medium term notes113--113Floating rate notes225-(4)221Other securities and equity investments123-(3)120Total Overseas5,59714(9)5,602Total available-for-sale investments21,540240(276)21,504GroupMaturity Period at 30 June 2009Non-0 to 3 months3 to 12 months1 to 5 years5 to 10 years10 or more yearsMaturingTotal$M%$M%$M%$M%$M%$M$MAustraliaAustralian Public Securities:Local and semi-government1515. 843546. 254,2645. 911,9855. 204835. 37-7,237Medium term notes1314. 666585. 065,6494. 201935. 21---6,631Floating rate notes--1003. 81503. 81453. 811323. 81-327Mortgage backed securities--------1,3843. 68-1,384Other securities and equity investments643. 91--80. 01--43. 00247323Total Australia346-1,112-9,971-2,223-2,003-24715,902OverseasGovernment securities1619. 553252. 571963. 87-----682Certificates of deposit8851. 002740. 71--5364. 00---1,695Eurobonds1,0210. 561,7250. 65255. 50-----2,771Medium term notes411. 56723. 61-------113Floating rate notes61. 981461. 06692. 33-----221Other securities and equity investments351. 98583. 25------27120Total Overseas2,149-2,600-290-536---275,602Total available-for-sale investments2,495-3,712-10,261-2,759-2,003-27421,504 Notes to the Financial Statements Note 13 Loans, Bills Discounted and Other Receivables (1) 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 $9,696 million (2009: $12,568 million) and for the Bank were $5,963 million (2009: $7,623 million). The carrying value of liabilities associated with non- derecognised assets for the Group were $8,772 million (2009: $11,951 million) and for the Bank were $6,117 million (2009: $8,111 million). (2) The Group measures bills discounted intended to be sold into the market at fair value and includes these within loans, bills discounted and other receivables to reflect the nature of the lending arrangement. Of the amounts above, the following amounts are expected to be recovered within 12 months of the Balance Sheet date; Group - $125,897 million (2009: $121,714 million), Bank - $105,879 million (2009: $97,803 million). 140 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009$M$M$M$MAustraliaOverdrafts19,92417,82918,76716,630Home loans (1)292,140261,504249,134224,811Credit card outstandings10,2009,0558,8817,960Lease financing4,6574,5722,1941,902Bills discounted (2)14,37910,93614,37910,936Term loans101,794107,33777,10581,139Other lending1,2881,616748879Other securities564524562524Total Australia444,946413,373371,770344,781OverseasOverdrafts652744--Home loans31,43330,702392328Credit card outstandings589573--Lease financing5705416893Term loans23,05227,0799,38312,570Redeemable preference share financing-744--Other lending271625-Total Overseas56,32360,3999,86812,991Gross loans, bills discounted and other receivables501,269473,772381,638357,772LessProvisions for Loan Impairment (Note 14):Collective provision(3,436)(3,195)(1,964)(2,060)Individually assessed provisions (1,992)(1,729)(978)(1,020)Unearned income:Term loans(1,213)(1,134)(1,106)(885)Lease financing(1,169)(1,083)(395)(399)(7,810)(7,141)(4,443)(4,364)Net loans, bills discounted and other receivables493,459466,631377,195353,408GroupBank2010200920102009$M$M$M$MFinance LeasesMinimum lease payments receivable:Not later than one year1,3601,479637531Later than one year but not later than five years2,8032,5541,3571,132Later than five years1,0641,080268332Lease financing5,2275,1132,2621,995 Notes to the Financial Statements Note 13 Loans, Bills Discounted and Other Receivables (continued) Finance Lease Receivables The Group and the Bank provide finance leases to a broad range of clients to support financing needs in acquiring movable assets such as trains, aircraft, ships and major production and manufacturing equipment. Finance lease receivables are included within loans, bills discounted and other receivables to customers. Commonwealth Bank of Australia Annual Report 2010 141 Group20102009GrossPresent valueGrossPresent valueinvestment inof minimuminvestment inof minimumfinance leaseUnearnedlease paymentfinance leaseUnearnedlease paymentreceivableincomereceivablereceivableincomereceivable$M$M$M$M$M$MNot later than one year1,360(298)1,0621,479(263)1,216One year to five years2,803(688)2,1152,554(563)1,991Over five years1,064(183)8811,080(257)8235,227(1,169)4,0585,113(1,083)4,030Bank20102009GrossPresent valueGrossPresent value investment inof minimum investment inof minimumfinance leaseUnearnedlease paymentfinance leaseUnearnedlease paymentreceivableincomereceivablereceivableincomereceivable$M$M$M$M$M$MNot later than one year637(104)533531(92)439One year to five years1,357(247)1,1101,132(202)930Over five years268(44)224332(105)2272,262(395)1,8671,995(399)1,596 Notes to the Financial Statements Note 13 Loans, Bills Discounted and Other Receivables (continued) The following tables show the maturity of all loans by type of customer as at 30 June. 142 Commonwealth Bank of Australia Annual Report 2010 GroupMaturity Period at 30 June 2010Maturing 1MaturingMaturingYearBetweenAfteror Less1 & 5 Years5 YearsTotal$M$M$M$MAustraliaSovereign965579181,571Agriculture2,5641,2251,3695,158Bank and other financial6,7961,6357909,221Home loans33,27118,291240,578292,140Construction1,5911,2046433,438Personal3,75010,1612,06815,979Asset financing3,0575,3152498,621Other commercial and industrial58,69935,49314,626108,818Total Australia109,82473,881261,241444,946OverseasSovereign8222401511,213Agriculture2,1941,4441,8125,450Bank and other financial1,9972,0272,3206,344Home loans6,6214,69520,11731,433Construction226121125472Personal6881277822Asset financing205384179768Other commercial and industrial3,3205,0491,4529,821Total Overseas16,07314,08726,16356,323Gross loans, bills discounted and other receivables125,89787,968287,404501,269Interest Rate Sensitivity of LendingAustralia94,69949,268218,738362,705Overseas9,1219,05110,83129,003Total variable interest rates103,82058,319229,569391,708Australia15,12524,61342,50382,241Overseas6,9525,03615,33227,320Total fixed interest rates22,07729,64957,835109,561Gross loans, bills discounted and other receivables125,89787,968287,404501,269 Notes to the Financial Statements Note 13 Loans, Bills Discounted and Other Receivables (continued) Commonwealth Bank of Australia Annual Report 2010 143 GroupMaturity Period at 30 June 2009Maturing 1MaturingMaturingYearBetweenAfteror Less1 & 5 Years5 YearsTotal$M$M$M$MAustraliaSovereign2484658261,539Agriculture2,1221,2431,3524,717Bank and other financial5,6812,2281,9919,900Home loans30,47918,260212,765261,504Construction1,7821,5707204,072Personal3,5059,7661,87715,148Asset financing2,4444,1051,3747,923Other commercial and industrial57,73037,01313,827108,570Total Australia103,99174,650234,732413,373OverseasSovereign1,1861501301,466Agriculture2,1821,4891,8125,483Bank and other financial3,3091,6132,6977,619Home loans5,1544,50221,04630,702Construction14639891635Personal6775214743Asset financing91245381717Other commercial and industrial4,9786,4361,62013,034Total Overseas17,72314,88527,79160,399Gross loans, bills discounted and other receivables121,71489,535262,523473,772Interest Rate Sensitivity of LendingAustralia93,29858,853186,792338,943Overseas6,6268,9358,36123,922Total variable interest rates99,92467,788195,153362,865Australia10,69315,79747,94074,430Overseas11,0975,95019,43036,477Total fixed interest rates21,79021,74767,370110,907Gross loans, bills discounted and other receivables121,71489,535262,523473,772 Notes to the Financial Statements Note 14 Provisions for Impairment (1) The Group movement in 2009 includes fair value adjustments related to the Bankwest acquisition of $723 million of which $286 million remained at 30 June 2009 and $132 million remains as at 30 June 2010. (2) The Group movement in 2009 includes fair value adjustments related to the Bankwest acquisition of $180 million, of which nil remains at 30 June 2009 and 30 June 2010. (1) Basel II ratios are not calculated for the Bank legal entity as this is not a regulated structure for capital reporting purposes. For further details refer to Note 31 Capital Adequacy. 144 Commonwealth Bank of Australia Annual Report 2010 GroupBank20102009200820102009$M$M$M$M$MProvisions for impairment lossesCollective provisionBalance as at the beginning of the year3,2251,4661,1562,0901,360Acquisitions-250---Net collective provision funding9011,1766274601,083Impairment losses written off(734)(472)(381)(617)(423)Impairment losses recovered7773775865Fair value and other (1)(8)732(13)(2)5Balance as at the end of the year3,4613,2251,4661,9892,090Individually assessed provisionsBalance as at the beginning of the year1,7292791001,020238Acquisitions-380---Net new and increased individual provisioning1,8621,6863361,0031,388Write-back of provisions no longer required(384)(179)(33)(270)(133)Discount unwind to interest income(169)(45)(9)(86)(29)Fair value and other (2)293279716179Impairment losses written off(1,339)(671)(122)(850)(523)Balance as at the end of the year1,9921,7292799781,020Total provisions for impairment losses5,4534,9541,7452,9673,110Less: Off balance sheet provisions(25)(30)(32)(25)(30)Total provisions for loan impairment5,4284,9241,7132,9423,080GroupBank20102009200820102009%%%%%Provision RatiosCollective provision as a % of gross loans and acceptances0. 670. 660. 380. 510. 56Collective provision as a % of risk weighted assets - Basel II1. 191. 120. 71n/a (1)n/a (1)Individually assessed provisions for impairment as a % of gross impaired assets38.241.140.836.040.8Total provisions for impairment losses as a % of gross loans and acceptances1.061.010.460.750.83 Notes to the Financial Statements Note 14 Provisions for Impairment (continued) Individually Assessed Provisions by Industry Classification(1) (1) Certain comparative information has been restated to conform to presentation in the current period. Commonwealth Bank of Australia Annual Report 2010 145 GroupBank20102009200820102009Impairment Expense$M$M$M$M$MLoan Impairment ExpenseNet collective provision funding9011,1766274601,083Net new and increased individual provisioning1,8621,6863361,0031,388Write-back of individually assessed provisions(384)(179)(33)(270)(133)Total loan impairment expense2,3792,6839301,1932,338Available-for-sale debt securities impairment expense-365--365Total impairment expense2,3793,0489301,1932,703Group20102009200820072006$M$M$M$M$MAustraliaSovereign-----Agriculture7577434Bank and other financial2544832721Home loans15082342317Construction132104112Personal2123955Asset financing1531121311Other commercial and industrial1,2687601613935Total Australia1,9151,5602488675OverseasSovereign-----Agriculture159---Bank and other financial168411Home loans1210742Construction--8--Personal--212Asset financing--21-Other commercial and industrial498287-Total Overseas7716931145Total individually assessed provisions1,9921,72927910080 Notes to the Financial Statements Note 14 Provisions for Impairment (continued) Loans Written Off by Industry Classification 146 Commonwealth Bank of Australia Annual Report 2010 Group20102009200820072006$M$M$M$M$MLoans Written OffAustraliaSovereign-----Agriculture102318Bank and other financial3831105-1Home loans953623208Construction724113Personal651496364408388Asset financing7258494942Other commercial and industrial604255343036Total Australia1,887961479509486OverseasSovereign-----Agriculture7----Bank and other financial50864--Home loans25181--Construction-41--Personal18141377Asset financing-----Other commercial and industrial8660534Total Overseas186182241011Gross loans written off2,0731,143503519497Recovery of amounts previously written offAustralia70707399122Overseas73445Total amounts recovered777377103127Net loans written off1,9961,070426416370 Notes to the Financial Statements Note 14 Provisions for Impairment (continued) Loans Recovered by Industry Classification Commonwealth Bank of Australia Annual Report 2010 147 Group20102009200820072006$M$M$M$M$MLoans RecoveredAustraliaSovereign-----Agriculture-1-11Bank and other financial-1-1-Home loans31111Construction--11-Personal5952617799Asset financing355105Other commercial and industrial5105816Total Australia70707399122OverseasSovereign-----Agriculture-----Bank and other financial-----Home loans-----Construction-----Personal63345Asset financing-----Other commercial and industrial1-1--Total Overseas73445Total loans recovered777377103127 Notes to the Financial Statements Note 15 Property, Plant and Equipment The majority of the above amounts have expected useful lives longer than twelve months after the Balance Sheet date. There are no significant items of property plant and equipment that are currently under construction. Land and buildings are carried at fair value based on independent valuations performed during the year, refer Note 1(r). Under the cost model these assets would have been carried at the following value: 148 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009$M$M$M$MLand and BuildingsLandAt 30 June 2010 valuation275-193-At 30 June 2009 valuation-277-198Closing balance275277193198BuildingsAt 30 June 2010 valuation429-336-At 30 June 2009 valuation-395-318Closing balance429395336318Total land and buildings 704672529516Leasehold ImprovementsAt cost1,1671,147948934Provision for depreciation(600)(551)(483)(449)Closing balance567596465485EquipmentAt cost1,3801,305839750Provision for depreciation(990)(878)(574)(479)Closing balance390427265271Assets Under LeaseAt cost817866297331Provision for depreciation(127)(89)(50)(31)Closing balance690777247300Total property, plant and equipment2,3512,4721,5061,572GroupBank2010200920102009$M$M$M$MCarrying Amount of Land and Buildings under the Cost Model:Land1341366974Buildings332298253235Total land and buildings466434322309 Notes to the Financial Statements Note 15 Property, Plant and Equipment (continued) Reconciliation of the carrying amounts of Property, Plant and Equipment are set out below: Commonwealth Bank of Australia Annual Report 2010 149 GroupBank2010200920102009Reconciliation$M$M$M$MLandCarrying amount at the beginning of the year277258198232Acquisitions attributed to business combinations-47--Transfers to assets held for sale(8)(8)(8)(8)Disposals(4)(1)(1)(1)Net revaluations9(20)4(24)Foreign currency translation adjustment11-(1)Carrying amount at the end of the year275277193198BuildingsCarrying amount at the beginning of the year395341318312Acquisitions45353430Acquisitions attributed to business combinations-55--Transfers to assets held for sale(24)(1)(24)(2)Disposals(5)(1)(3)(1)Net revaluations47(6)373Depreciation(30)(29)(26)(26)Foreign currency translation adjustment11-2Carrying amount at the end of the year429395336318Leasehold ImprovementsCarrying amount at the beginning of the year596448485377Acquisitions7819357179Acquisitions attributed to business combinations-47--Disposals(8)(6)(2)(4)Net revaluations(2)(2)--Depreciation(98)(85)(75)(68)Foreign currency translation adjustment11-1Carrying amount at the end of the year567596465485EquipmentCarrying amount at the beginning of the year427358271282Acquisitions147148115101Acquisitions attributed to business combinations-76--Disposals/transfers(19)(5)(7)(5)Depreciation(165)(151)(114)(106)Foreign currency translation adjustment-1-(1)Carrying amount at the end of the year390427265271Assets Under LeaseCarrying amount at the beginning of the year777235300133Acquisitions2261122189Disposals/transfers(51)(4)(51)(4)Net revaluations-(2)--Depreciation(45)(37)(24)(18)Foreign currency translation adjustment(13)(26)--Carrying amount at the end of the year690777247300 Notes to the Financial Statements Note 16 Intangible Assets (1) Core deposits represents the value of the Bankwest deposit base compared to the avoided cost of alternative funding sources such as securitisation and wholesale funding. This asset has a useful life of seven years based on the weighted average attrition rates of the Bankwest deposit portfolio. (2) 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. (3) Brand names represent the value of royalty costs foregone by the Group through acquiring the Bankwest brand name. The royalty costs that would have been incurred by an entity using the Bankwest brand name are based on an annual percentage of income generated by Bankwest. This asset has an indefinite useful life, as there is no foreseeable limit to the period over which the brand name is expected to generate cash flows. The asset is not subject to amortisation, but is subjected to annual impairment testing. No impairment was required as a result of this test. (4) In the 2009 year, Other includes $38 million for the value of credit card relationships acquired from Bankwest. This value represents future net income generated from the relationships that existed at Balance Sheet date. The asset has a useful life of ten years based on the attrition rates of the Bankwest credit cardholders. (5) Due primarily to the Core Banking Modernisation project. 150 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009$M$M$M$MIntangible AssetsGoodwill7,4737,4732,5222,522Computer software costs950673860579Core deposits (1)388460--Management fee rights (2)311311--Brand name (3)186186--Other (4)112142--Total intangible assets9,4209,2453,3823,101GoodwillPurchased goodwill7,4737,4842,5222,522Accumulated impairment-(11)--Total goodwill7,4737,4732,5222,522Computer Software CostsCost1,5511,0851,241823Accumulated amortisation(562)(373)(342)(205)Accumulated impairment(39)(39)(39)(39)Total computer software costs950673860579Core Deposits (1)Cost495495--Accumulated amortisation(107)(35)--Total core deposits388460--Management Fee Rights (2)Cost311311--Total management fee rights311311--Brand Name (3)Cost186186--Total brand name186186--Other (4)Cost203210--Accumulated amortisation(91)(68)--Total other112142--Goodwill Opening balance7,4737,4842,5222,522Impairment-(11)--Total goodwill 7,4737,4732,5222,522Computer Software CostsOpening balance673353579304Additions:From acquisitions28120344From internal development (5)427352412319Amortisation(178)(122)(134)(88)Impairment-(30)--Total computer software costs950673860579 Notes to the Financial Statements Note 16 Intangible Assets (continued) Goodwill allocation to the following cash generating units („CGU‟): (1) The allocation to Retail Banking Services includes goodwill related to the acquisitions of Colonial and State Bank of Victoria. (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 fair value less cost to sell, using an earnings multiple applicable to that type of business, or actuarial assessments that were consistent with externally sourced information. Key Assumptions Used in Fair Value Less Cost to Sell Calculations Earnings multiples relating to the Group‟s Banking (Retail Banking Services, Business and Private Banking and New Zealand) and Wealth 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 component of the New Zealand 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. Commonwealth Bank of Australia Annual Report 2010 151 GroupBank2010200920102009$M$M$M$MCore DepositsOpening balance460---Additions: From acquisitions-495--Amortisation(72)(35)--Total core deposits388460--Management Fee RightsOpening balance311311--Total management fee rights311311--Brand NameOpening balance186---Additions: From acquisitions-186--Total brand name186186--OtherOpening balance142110--Additions: From acquisitions -51--Amortisation(30)(19)--Total other112142--Group20102009$M$MRetail Banking Services (1)4,1494,149Business and Private Banking297297Wealth Management (2)2,3582,358New Zealand669669Total7,4737,473 Notes to the Financial Statements Note 17 Other Assets Other than the defined benefit superannuation plan surplus, the above amounts are expected to be recovered within twelve months of the Balance Sheet date. Note 18 Assets Held for Sale (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 12 months. Since acquisition the Group has sold down all of its AWG related Eurobonds and preference shares. 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 12 months. Since acquisition the Group has sold down all of its ENW related Eurobonds and preference shares. Until sold, the Eurobonds were measured on the same basis as Loans, bills discounted and other receivables, while the preference shares were measured on the same basis as Available-for-sale investments. The remaining balance relates to FS Media Works Fund I, LP which the Group intends to sell down within 12 months. (2) Impairments were recognised on Assets held for sale of $11 million during the year ended 30 June 2010 (30 June 2009: $75 million). These impairments are included in Funds management and investment contract income - other for the Group and net gain/(loss) on other non-fair valued financial instruments for the Bank. Note 19 Deposits and Other Public Borrowings (1) Comparative liability balances have been restated following alignment of Bankwest product classifications with the Group. (2) The majority of the amounts are contractually payable within twelve months of the Balance Sheet date. 152 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009Note$M$M$M$MAccrued interest receivable2,1301,5792,1091,550Defined benefit superannuation plan surplus42316495316495Accrued fees/reimbursements receivable899943287214Securities sold not delivered1,6821,277863628Intragroup current tax receivable--439100Current tax assets6477--Other1,3911,699692879Total other assets6,4826,0704,7063,866GroupBank2010200920102009$M$M$M$MAvailable-for-sale investments (1)4037340228Loans, bills discounted and other receivables (1)-180-130Land and Buildings912912Total assets held for sale (2)4956549370GroupBank2010200920102009$M$M$M$MAustraliaCertificates of deposit40,89156,73541,69557,266Term deposits (1)122,71299,17797,75078,205On demand and short term deposits (1) (2)158,874153,382143,402136,501Deposits not bearing interest (2)7,2367,1356,8486,732Securities sold under agreements to repurchase (2)5,4408,4135,5288,413Total Australia335,153324,842295,223287,117OverseasCertificates of deposit7,8499,9607,4429,468Term deposits20,11922,5174,2998,377On demand and short term deposits (2)9,6649,760640203Deposits not bearing interest (2)1,5581,48155Securities sold under agreements to repurchase (2)320161235-Total Overseas39,51043,87912,62118,053Total deposits and other public borrowings374,663368,721307,844305,170 Notes to the Financial Statements Note 19 Deposits and Other Public Borrowings (continued) Maturity Distribution of Certificates of Deposit and Time Deposits (1) All certificates of deposit issued by the Group are for amounts greater than $100,000. Note 20 Payables due to Other Financial Institutions The majority of the above amounts are expected to be settled within twelve months of the Balance Sheet date. Note 21 Liabilities at Fair Value through Income Statement (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. Of the above amounts, trading liabilities are expected to be settled within twelve months of the Balance Sheet date for the Group and the Bank. The majority of the other amounts are expected to be settled within twelve months of the Balance Sheet date for the Group and after twelve months of the Balance Sheet date for the Bank. The change in fair value for those liabilities designated as Fair Value through Income Statement due to credit risk for the Group is a $27 million gain (2009: $4 million loss) and for the Bank is a $29 million gain (2009: $3 million gain), which has been calculated by determining the changes in credit spreads implicit in the fair value of the instruments issued. The cumulative change in fair value due to changes in credit risk for the Group is an $18 million gain (2009: $18 million gain) and for the Bank is a $15 million gain (2009: $18 million gain). The amount that would be contractually required to be paid at maturity to the holders of the financial liabilities designated at Fair Value through Income Statement for the Group is $15,293 million (2009: $16,550 million) and for the Bank is $4,595 million (2009: $3,464 million). Commonwealth Bank of Australia Annual Report 2010 153 GroupAt 30 June 2010MaturingMaturingMaturingMaturingThreeBetweenBetweenafterMonths orThree &Six & TwelveTwelveLessSix MonthsMonthsMonthsTotal$M$M$M$M$MAustraliaCertificates of deposit (1)29,2092,7077688,20740,891Time deposits71,81517,84425,8467,207122,712Total Australia101,02420,55126,61415,414163,603OverseasCertificates of deposit (1)5,4692,051287427,849Time deposits12,0673,0844,07889020,119Total Overseas17,5365,1354,36593227,968Total certificates of deposits and time deposits118,56025,68630,97916,346191,571GroupBank2010200920102009$M$M$M$MAustralia4,2855,9814,2655,954Overseas8,3239,1288,1578,988Total payables due to other financial institutions12,60815,10912,42214,942GroupBank2010200920102009$M$M$M$MDeposits and other borrowings (1)3,5514,816--Debt instruments (1)7,8389,202660907Trading liabilities3,9532,5783,9532,578Total liabilities at fair value through Income Statement15,34216,5964,6133,485 Notes to the Financial Statements Note 22 Income Tax Liability Note 23 Other Provisions Provisions expected to be recovered or settled within no more than 12 months after 30 June 2010 for the Group were $908 million (2009: $666 million) and for the Bank were $660 million (2009: $404 million). 154 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009$M$M$M$MAustraliaCurrent tax liability1,0047671,000770Deferred tax liability (Note 5)----Total Australia1,0047671,000770OverseasCurrent tax liability521161665Deferred tax liability (Note 5)221168-40Total Overseas27328416105Total income tax liability1,2771,0511,016875GroupBank2010200920102009Note$M$M$M$MProvision for:Long service leave355346318317Annual leave241239200196Other employee entitlements68686768Restructuring costs9618273148General insurance claims191185--Self insurance/non-lending losses57565354Dividends629182918Other160149194112Total other provisions1,1971,243934913GroupBank2010200920102009Reconciliation$M$M$M$MRestructuring costs:Opening balance182284148284Additional provisions1087140Amounts utilised during the year(94)(184)(75)(171)Transfer/(release) of provision(2)(5)(1)(5)Closing balance9618273148General insurance claims:Opening balance185117--Additional provisions114157--Amounts utilised during the year(109)(88)--Transfer/(release) of provision1(1)--Closing balance191185--Self insurance/non-lending losses:Opening balance56645464Additional provisions11695Acquisitions-1--Amounts utilised during the year(5)(9)(5)(9)Transfer/(release) of provision(5)(6)(5)(6)Closing balance57565354Other:Opening balance14913111287Additional provisions176388145311Acquisitions1161-Amounts utilised during the year(116)(365)(16)(272)Transfer/(release) of provision(50)(21)(48)(14)Closing balance160149194112 Notes to the Financial Statements Note 23 Other Provisions (continued) General Insurance Claims Provision Commentary Restructuring costs Provisions are recognised for restructuring activities when a detailed plan has been developed and a valid expectation that the plan will be carried out is held by those affected by it. The majority of the provision is expected to be used within 12 months of 30 June 2010. At 30 June 2009 the Group had recognised a provision for Investment and restructuring of $57 million relating to costs for integration of Bankwest. Note 24 Debt Issues This provision is to cover future claims on general insurance contracts that have been incurred but not reported. Self Insurance and Non-Lending Losses This provision covers certain non-transferred insurance risk and non-lending losses. The self insurance provision is reassessed annually in consultation with actuarial advice. (1) Represents the contractual maturity of the underlying instrument. The Bank‟s debt issues include a Euro Medium Term Note program under which it may issue notes up to an aggregate amount outstanding of USD 70 billion. The Bank also has a U.S. Medium Term Note program under which it may issue notes up to an aggregate amount outstanding of USD 30 billion. Notes issued under debt programs are both fixed and variable rate. Interest rate risk associated with the notes is incorporated within the Bank‟s interest rate risk framework. Where any debt issue is booked in an offshore branch or subsidiary, the amounts have first been converted into the functional currency of the branch at a branch defined exchange rate, before being converted into the AUD equivalent. Where proceeds have been employed in currencies other than that of the ultimate repayment liability, swaps or other risk management arrangements have been entered into. Commonwealth Bank of Australia Annual Report 2010 155 GroupBank2010200920102009$M$M$M$MShort term debt issues49,75739,58639,64415,852Long term debt issues80,45362,23367,39547,042Total debt issues130,210101,819107,03962,894Short Term Debt IssuesAUD Commercial Paper49425831294USD Commercial Paper20,42320,41919,8391,367EUR Commercial Paper1,98156636262GBP Commercial Paper4,98060913995Other Currency Commercial Paper88-23-Long Term Debt Issues with less than one year to maturity21,79117,73419,29514,034Total short term debt issues49,75739,58639,64415,852Long Term Debt IssuesUSD Medium Term Notes41,07423,22138,57719,329AUD Medium Term Notes9,79612,2732,8205,023NZD Medium Term Notes1,1121,163320268JPY Medium Term Notes8,8089,4898,5509,489GBP Medium Term Notes1,5582,1161,1522,021EUR Medium Term Notes11,0448,9719,0776,026Other Currencies Medium Term Notes6,9714,8516,8094,738Offshore Loans (all JPY)9014990148Total long term debt issues80,45362,23367,39547,042Maturity Distribution of Debt Issues (1)Less than three months27,93923,88319,8405,065Between three and twelve months21,81815,70319,80410,787Between one and five years61,74152,89949,83138,603Greater than five years18,7129,33417,5648,439Total debt issues130,210101,819107,03962,894 Notes to the Financial Statements Note 24 Debt Issues (continued) Short Term Borrowings The following table analyses the Group‟s short term borrowings for the year ended 30 June. (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. 156 Commonwealth Bank of Australia Annual Report 2010 Group201020092008USD Commercial PaperOutstanding at period end (1)20,42320,41914,116Maximum amount outstanding at any month end (2)42,79823,42814,693Approximate average amount outstanding (2)20,70715,99511,000Approximate weighted average interest rate on:Average amount outstanding0.3%1.6%4.2%Outstanding at period end0.5%0.4%2.6%EUR Commercial PaperOutstanding at period end (1)1,981566622Maximum amount outstanding at any month end (2)2,9306921,589Approximate average amount outstanding (2)1,751536885Approximate weighted average interest rate on:Average amount outstanding0.5%0.7%4.4%Outstanding at period end0.4%0.6%4.3%AUD Commercial PaperOutstanding at period end (1)4942581,024Maximum amount outstanding at any month end (2)6581,0592,588Approximate average amount outstanding (2)4463951,430Approximate weighted average interest rate on:Average amount outstanding4.0%6.7%7.0%Outstanding at period end4.7%3.2%7.9%GBP Commercial PaperOutstanding at period end (1)4,98060933Maximum amount outstanding at any month end (2)5,2081,257868Approximate average amount outstanding (2)3,110907358Approximate weighted average interest rate on:Average amount outstanding0.6%0.8%5.1%Outstanding at period end0.7%0.7%5.5%Other Currency Commercial PaperOutstanding at period end (1)88-383Maximum amount outstanding at any month end (2)253-657Approximate average amount outstanding (2)136-469Approximate weighted average interest rate on:Average amount outstanding0.6%-4.2%Outstanding at period end1.3%-7.3% (AUD millions, except where indicated)CurrencyAs AtAs At30 June30 JuneExchange Rates Utilised (End of day, Sydney time)20102009AUD 1.00 =USD 0.855940.81287EUR 0.699620.57551GBP 0.568600.48616JPY 75.9067177.64500NZD 1.231761.24300HKD 6.663096.29993CAD 0.898680.93665CHF 0.927110.87773ILS 3.314213.18646SGD 1.196841.17621 Notes to the Financial Statements longer guaranteed by the Demand deposits are no Commonwealth under this guarantee. However, term deposits outstanding at 19 July 1999 and debt issues payable by the Bank under a contract entered into prior to 19 July 1996 and outstanding at 19 July 1999 remain guaranteed until maturity. State Bank of NSW (also known as Colonial State Bank) New South Wales legislation provides, in general terms, for a guarantee by the NSW Government of all funding liabilities and off-balance sheet products (other than demand deposits) incurred or issued prior to 31 December 1997 by the State Bank of New South Wales (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 the 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. Guarantee under the Bank of Western Australia Act Western Australian State Government legislation provides, in general terms, for a guarantee by the WA State Government of the financial obligations (including contingent liabilities) of Bankwest as at 1 December 1995, subject to certain phase out conditions. The WA State Government guarantee does not apply to Bankwest transactions after 1 December 1995. Demand deposits accepted by Bankwest prior to 1 December 1995 are no longer guaranteed by the WA State Government under the guarantee, but term securities existing at that date remain guaranteed until maturity. Certain other obligations incurred before 1 December 1995 also continue to be guaranteed. Note 24 Debt Issues (continued) Guarantee Arrangements Commonwealth Bank of Australia Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding (Guarantee Scheme) The Bank issued debt under its programs which has the benefit of a guarantee by the Australian Government announced on 12 October 2008 and formally commenced on 28 November 2008. On 7 February 2010 it was announced that the Guarantee Scheme would close to new liabilities from 31 March 2010. The arrangements were provided in a Deed of Guarantee dated 20 November 2008, Scheme Rules and in additional documentation for offers to residents of the United States of America and other jurisdictions. The text of the Guarantee Scheme documents can be found at the Australian Government Guarantee website at www.guaranteescheme.gov.au. Fees are payable in relation to the Guarantee Scheme, calculated by reference to the term and amount of the liabilities guaranteed and the Bank‟s credit rating. Existing guaranteed debt guaranteed until maturity. issued by the Bank remains Separate arrangements continue to apply for deposit balances totalling up to and including $1 million under the Financial Claim Scheme. Such deposits are guaranteed without charge. Guarantee under the Commonwealth Bank Sale Act Historically, the due payment of all monies payable by the Bank was guaranteed by the Commonwealth of Australia under section 117 of the „Commonwealth Banks Act 1959‟ (as amended) at 30 June 1996. With the Commonwealth‟s shareholding in the Bank this guarantee has been progressively phased out under transitional arrangements found in the „Commonwealth Bank Sale Act 1995‟. the sale of Commonwealth Bank of Australia Annual Report 2010 157 Notes to the Financial Statements Note 25 Bills Payable and Other Liabilities Other than the defined benefit superannuation plan deficit, the above amounts are expected to be settled within twelve months of the Balance Sheet date. Note 26 Loan Capital 158 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009Note$M$M$M$MBills payable805975691786Accrued interest payable3,2332,3442,4521,574Accrued fees and other items payable1,9061,6041,3011,014Defined benefit superannuation plan deficit4282868286Securities purchased not delivered1,7541,124918574Other2,2452,3875,2893,935Total bills payable and other liabilities10,0258,52010,7337,969GroupBankCurrency 2010200920102009Amount (M)Footnotes$M$M$M$MTier One Loan CapitalExchangeableFRN USD 38 (1)44464446ExchangeableFRN USD 64 (2)75797579UndatedFRN USD 100 (3)117123117123UndatedTPS USD 550 (4)642676642679UndatedPERLS III AUD 1,166 (5)1,1541,1521,1541,152UndatedPERLS IV AUD 1,465 (6)1,4561,4511,4561,451UndatedPERLS V AUD 2,000 (7)1,963-1,953-UndatedTPS USD 700 (8)--813857Total Tier One loan capital5,4513,5276,2544,387Tier Two Loan CapitalAUD demoninated(9)1,7992,0981,7992,098USD demoninated(10)1,8192,8981,8192,898JPY denominated(11)1,1031,115985966GBP denominated(12)262306262306NZD denominated(13)747738284279EUR denominated(13)1,4225211,422521CAD denominated(13)666639666639Total Tier Two loan capital7,8188,3157,2377,707Fair value hedge adjustments2441978480Total loan capital13,51312,03913,57512,174 Notes to the Financial Statements Note 26 Loan Capital (continued) (4) TPS 2003 (1) USD 300 million undated Floating Rate Notes (FRNs) issued 11 July 1988 exchangeable into dated FRNs. Outstanding notes at 30 June 2010 were: Undated: USD 38 million. (2) USD 400 million undated FRNs issued 22 February 1989 exchangeable into dated FRNs. Outstanding notes at 30 June 2010 were: Due February 2011: USD 64 million. (3) 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. 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 the Bank. 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 30 June, 2015, holders may deliver a notice to the Bank requiring it to exchange each trust preferred security for 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 30 June, 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 2010 159 Notes to the Financial Statements Note 26 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. The Bank guarantees: the funding preferred Semi-annual distributions on 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 Bank‟s 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 or the redemption price of the convertible notes to CBA Funding Trust in accordance with their terms; 160 Commonwealth Bank of Australia Annual Report 2010 The Bank‟s New Zealand branch does not deliver ADSs representing preference shares to CBA Funding Trust in accordance with the terms of the convertible notes; 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. (5) PERLS III On 6 April 2006 a wholly owned entity of the Bank (Preferred Capital Limited “PCL”) 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; 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. Notes to the Financial Statements 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 the 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. (7) PERLS V On 14 October 2009 the Bank issued $2,000 million of Perpetual Exchangeable Resalable Listed Securities (PERLS V). PERLS V are stapled securities comprising an unsecured subordinated note issued by the Bank‟s New Zealand 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 V 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 3.40% 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. Note 26 Loan Capital (continued) 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. (6) 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 unpaid amount for the preceding four consecutive Distribution Periods has been paid to Holders; Four consecutive Dividends scheduled to be payable on PERLS IV thereafter have been paid in full; or 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; Commonwealth Bank of Australia Annual Report 2010 161 Notes to the Financial Statements Note 26 Loan Capital (continued) (8) TPS 2006 If distributions on PERLS V 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 unpaid amount for the preceding four consecutive Distribution Periods has been paid to Holders; Four consecutive Dividends scheduled to be payable on PERLS V thereafter have been paid in full; or All PERLS V have been exchanged. PERLS V are expected to be exchanged for cash or converted into ordinary shares of the Bank on 31 October 2014. However, exchange may not occur if certain conditions are not met. On 31 October 2014; The Bank may arrange a resale by requiring all Holders to sell their PERLS V to a third party for $200 (the face value); If the Bank does not arrange a resale, an Assignment Event will occur and PERLS V 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; In certain circumstances, where the conversion conditions are not satisfied, the Bank may (subject to APRA‟s prior approval) elect to repurchase all PERLS V for $200 each; or If PERLS V are not exchanged on this date, the same to each subsequent possible outcomes will apply distribution payment date until exchange occurs. The Bank may, subject to APRA‟s prior approval, elect to exchange all PERLS V 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 V on the occurrence of any of these events is subject to the same conversion conditions as mentioned above. If an Acquisition event occurs, Holders will receive cash or ordinary shares for all of their PERLS V (subject to APRA‟s approval). Holders are not entitled to request exchange or redemption of PERLS V. Holders of PERLS V 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. 162 Commonwealth Bank of Australia Annual Report 2010 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 the Bank. The trust preferred securities form part of the Bank‟s innovative residual Tier One capital. 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 New Zealand subsidiary of the Bank, the subordinated notes guarantee and the Bank‟s 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 NZ Subsidiary pays on the subordinated notes, payments in respect of interest on the subordinated notes by the Bank‟s NZ Branch as guarantor under the subordinated notes guarantee and, after 15 March 2016, the dividends the Bank pays on the Bank preference shares. Payments in respect of cash distributions will be guaranteed on a subordinated basis by the Bank, as guarantor, but only to extent CBA Capital Trust II has funds sufficient for the payment. There are restrictions on the Bank‟s New Zealand 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 the Bank‟s ability to make payments on the Bank 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 Bank 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 Bank preference shares if the Bank redeems or varies the terms of the Bank preference shares. The trust preferred securities are also subject to redemption if any other Assignment Event occurs. If the Bank preference shares are redeemed for qualifying Tier One securities or the terms thereof are varied, holders will receive one Bank 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. Note 26 Loan Capital (continued) 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 Bank preference shares. Trust preferred securities holders have the right to bring a direct action against: The Bank‟s New Zealand subsidiary if the Bank‟s New Zealand subsidiary does not pay when due, interest on the subordinated notes or certain other amounts payable under the subordinated notes in accordance with their terms; The Bank if it does not perform its obligations under the trust guarantee; and to CBA Capital Trust II The Bank‟s NZ Branch or the Bank if the Bank‟s NZ Branch does not perform its obligations under the subordinated notes guarantee or under the Bank‟s NZ Branch notes. 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 Bank 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 Bank 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. The trust guarantee does not cover the failure 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. 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 Bank‟s preference shares that are part of those units and automatically be transferred to CBA; If the Assignment Event is the cash redemption of the Bank 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 Bank preference shares and the accrued and unpaid interest on the subordinated notes that were part of the units with those Bank preference shares; and Notes to the Financial Statements If the Assignment Event is not the cash redemption of Bank preference shares, CBA Capital Trust II will deliver to all holders of trust preferred securities in redemption thereof one Bank 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 Bank 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. If the Bank is liquidated, holders of Bank preference shares will be entitled to receive an amount equal to a liquidation preference out of surplus assets of USD 1,000 per Bank 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 Bank preference shares if a New Zealand Subsidiary of the Bank or The Bank‟s 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 Bank preference shares on any interest payment date and/or dividend payment date. On or after 15 March 2016, the Bank may redeem the Bank preference shares for cash, in whole or in part, on any date selected by the Bank 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 Bank preference shares for cash, vary the terms of the preference shares or redeem the preference shares for qualifying Tier One securities, in whole but not in part, on any date selected by the Bank: If the Bank 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 Bank 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 Bank preference shares will be entitled to vote together with the holders of CBA ordinary shares on the basis of one vote for each Bank preference share: During a period in which a dividend (or part of a dividend) in respect of the Bank preference shares is in arrears; On a proposal to reduce share capital; On a proposal that affects rights attached to the Bank 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. Commonwealth Bank of Australia Annual Report 2010 163 Notes to the Financial Statements Note 26 Loan Capital (continued) (9) AUD denominated Tier Two Loan Capital issuances The rights attached to the Bank 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 Bank preference shares. The Bank‟s NZ Subsidiary may not make payments on the subordinated notes, the Bank‟s NZ Branch may not make payments on the subordinated notes guarantee or the Bank‟s NZ Branch notes and the Bank may not make payments on the Bank preference shares if an APRA condition exists; if the Bank‟s stopper resolution has been passed and not been rescinded or if the Bank‟s NZ Subsidiary, the Bank‟s NZ branch or the Bank, as the case may be, is prohibited from making such a payment by instruments or other obligations of the Bank. 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 Bank preference shares, then the Bank may not pay any interest; declare or pay any dividends or distributions from the income or capital of the Bank, or return any capital or undertake any buy-backs, redemptions or repurchases of existing capital securities or any securities, or instruments of the Bank that by their terms rank or are expressed to rank equally with or junior to the Bank‟s NZ Branch notes or the Bank 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 the Bank, 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 Bank preference shares on any dividend payment date, the Bank 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 Bank preference shares in full on each dividend payment date during a 12 consecutive month period; In the case of any non-payment of interest on the subordinated notes on any interest payment date, (A) on or within 21 business days after any interest payment date, (i) the Bank‟s NZ Subsidiary or the Bank‟s NZ Branch, as guarantor, has paid the full 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, the Bank 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) the Bank has paid dividends on the Bank 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 Bank preference shares or the trust preferred securities, such redemption price or securities have been paid or delivered in full, as applicable; the holders of to in then there are restrictions on the Bank paying any interest on equal ranking or junior securities. 164 Commonwealth Bank of Australia Annual Report 2010 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. The original issue size was $300 million; $25 million matured in December 2004. AUD 25 million subordinated FRN, issued April 1999, due April 2029; 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; and AUD 500 million subordinated floating rate notes, issued September 2008, due September 2018. (10) USD denominated Tier Two Loan Capital issuances USD 350 million subordinated fixed rate note, issued June 2003, due June 2018; USD 100 million subordinated EMTN, issued March 2005, due March 2025. Partial redemption of USD 39.5 million in September 2005; USD 200 million subordinated notes, issued June 2006, due July 2016; USD 300 million subordinated floating rate notes, issued September 2006, due September 2016; and USD 650 million subordinated floating rate notes, issued December 2006, due December 2016. (11) 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 10 billion subordinated notes, issued November 2005, due November 2035; Notes to the Financial Statements Note 26 Loan Capital (continued) JPY 5 billion subordinated loan, issued March 2006, due March 2018; and JPY 9 billion perpetual subordinated notes, issued May 1996. (12) GBP denominated Tier Two Loan Capital issuances GBP 150 million subordinated EMTN, issued June 2003, due December 2023. (13) Other currencies Tier Two Loan Capital issuances EUR 1,000 million subordinated notes, issued August 2009, due August 2019; 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; NZD 200 million subordinated notes issued June 2006, due June 2016; and NZD 370 million subordinated notes, issued November 2007, due November 2017. Commonwealth Bank of Australia Annual Report 2010 165 Notes to the Financial Statements Note 27 Shareholders’ Equity (1) Refer Note 28 Share Capital. (2) Relates to movement in treasury shares held within life insurance statutory funds and the employee share scheme trust (3) Relates to $93 million (2009: $nil) transferred from employee compensation reserve in respect of extinguished schemes. (4) The declared dividend includes an amount attributable to the dividend reinvestment plan (DRP) of $774 million (interim 2009/2010) and $688 million (final 2008/2009). Of these amounts $772 million (interim 2009/2010) and $685 million (final 2008/2009) have been issued in ordinary shares due to rounding under the plan rules. The rounding amount will be included in the next DRP allocations. 166 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009$M$M$M$MEquity ReconciliationsOrdinary Share Capital (1)Opening balance21,64215,72721,82515,927Issue of shares (net of issue costs)-4,829-4,829Dividend reinvestment plan (net of issue costs)1,4571,0991,4571,099Exercise of executive options under employee share ownership schemes2121(Purchase)/sale and vesting of treasury shares(2)(20)(14)95(31)Closing balance23,08121,64223,37921,825Other Equity Instruments (1)Opening balance9399391,8951,895Closing balance9399391,8951,895Retained ProfitsOpening balance7,8257,7476,0097,353Actuarial losses from defined benefit superannuation plans(64)(739)(64)(739)Realised gains and dividend income on treasury shares (1)3018--Operating profit attributable to Equity holders of the Bank5,6644,7235,6153,086Total available for appropriation13,45511,74911,5609,700Transfers from/(to) general reserve197(193)--Transfers from employee compensation reserve (3)(93)-(93)-Interim dividend - cash component(1,067)(1,257)(1,067)(1,257)Interim dividend - dividend reinvestment plan (4)(774)(405)(774)(405)Final dividend - cash component(1,058)(1,335)(1,058)(1,335)Final dividend - dividend reinvestment plan (4)(688)(694)(688)(694)Other dividends(34)(40)--Closing balance9,9387,8257,8806,009 Notes to the Financial Statements Note 27 Shareholders’ Equity (continued) (1) Includes $93 million (2009: $nil) transferred to retained earnings in respect of extinguished schemes. Commonwealth Bank of Australia Annual Report 2010 167 GroupBank2010200920102009$M$M$M$MReservesGeneral ReserveOpening balance1,4451,252570570Appropriation (to)/from retained profits(197)193--Closing balance1,2481,445570570Capital ReserveOpening balance2992931,5501,544Revaluation surplus on sale of property206176Closing balance3192991,5671,550Asset Revaluation ReserveOpening balance173195148166Revaluation of properties50(25)39(20)Transfers on sale of properties(20)(6)(17)(6)Tax on revaluation of properties(9)9(7)8Closing balance194173163148Foreign Currency Translation ReserveOpening balance(533)(795)(70)(228)Currency translation adjustments of foreign operations(41)514(63)158Currency translation on net investment hedge(4)(346)(4)-Transfer to Income Statement on disposal of foreign operations26---Tax on translation adjustments(2)(2)--Tax on net investment hedge movement1961-Closing balance(553)(533)(136)(70)Cash Flow Hedge ReserveOpening balance(813)341(460)292Gains and losses on cash flow hedging instruments:Recognised in equity(239)(1,630)11(872)Transferred to Income StatementInterest income(864)(611)(683)(578)Interest expense1,692590891379Tax on cash flow hedging instruments(193)497(71)319Closing balance(417)(813)(312)(460)Employee Compensation ReserveOpening balance-(39)-(39)Current period movement (1)1253912539Closing balance125-125-Available-for-Sale Investments ReserveOpening balance(55)(41)(41)(52)Net gains and losses on revaluation of available-for-sale investments3271016052Net gains and losses on available-for-sale investments transferred toIncome Statement on disposal(24)(24)(16)(24)Net gains and losses on available-for-sale investments transferred toIncome Statement for impairment237--Tax on available-for-sale investments(77)(37)(33)(17)Closing balance173(55)70(41)Total reserves1,0895162,0471,697Shareholders' equity attributable to Equity holders of the Bank35,04730,92235,20131,426Shareholders' equity attributable to non-controlling interests523520--Total Shareholders' equity35,57031,44235,20131,426 Notes to the Financial Statements Note 28 Share Capital (1) Relates to movement in treasury shares held within life insurance statutory funds and the employee share scheme trust. Ordinary Share Capital Ordinary shares have no par value and the company does not have a limited amount of share capital. Ordinary shares entitle holders to receive dividends payable to ordinary shareholders and to participate in the proceeds available to ordinary shareholders on winding up of the Company in proportion to the number of fully paid ordinary shares held. On a show of hands every holder of fully paid ordinary shares present at a meeting in person or by proxy is entitled to one vote, and upon a poll one vote for each share held. 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 $956 million and eliminates on consolidation. 168 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009Issued and Paid Up Ordinary Capital$M$M$M$MOrdinary Share CapitalOpening balance (excluding Treasury Shares deduction)21,92015,99121,92015,991Dividend reinvestment plan: Final dividend prior year685694685694Dividend reinvestment plan: Interim dividend772405772405Share Issue including issue costs-4,829-4,829Exercise of executive options under employee share ownership schemes2121Closing balance (excluding Treasury Shares deduction)23,37921,92023,37921,920Less: Treasury Shares (1)(298)(278)-(95)Closing balance23,08121,64223,37921,825SharesSharesSharesSharesNumber of Shares on IssueOpening balance (excluding Treasury Shares deduction)1,518,801,0691,326,130,8771,518,801,0691,326,130,877Dividend reinvestment plan issues:2007/2008 Final dividend fully paid ordinary shares $42.41-16,372,698-16,372,6982008/2009 Interim dividend fully paid ordinary shares $28.45-14,283,851-14,283,8512008/2009 Final dividend fully paid ordinary shares $44.4815,412,513-15,412,513-2009/2010 Interim dividend fully paid ordinary shares $53.5614,421,452-14,421,452-Issue of shares-161,983,643-161,983,643Exercise of executive options under employee share ownership schemes102,34030,000102,34030,000Closing balance (excluding Treasury Shares deduction)1,548,737,3741,518,801,0691,548,737,3741,518,801,069Less: Treasury Shares(6,647,087)(7,192,560)-(2,121,299)Closing balance1,542,090,2871,511,608,5091,548,737,3741,516,679,770Group Bank2010200920102009Other Equity Instruments$M$M$M$MOther equity instruments issued and paid up9399391,8951,895Shares Shares Shares Shares 700,000700,0001,400,0001,400,000 Notes to the Financial Statements Note 28 Share Capital (continued) Dividends The Directors have declared a fully franked final dividend of 170 cents per share amounting to $2,633 million. The dividend will be payable on 1 October 2010 to shareholders on the register at 5:00 pm on 20 August 2010. 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; Capital needs to support economic, regulatory and credit ratings requirements; Investments and/or divestments development; Competitors comparison and market expectation; and Earnings per share growth. to support business Note 29 Share Based Payments The Group operates a number of cash and equity settled share plans as detailed below. During the year three new plans were introduced, the Group- Wide Retention Plan (“GWRP”), the Group Employee Rights the Group Leadership Reward Plan Plan (“GERP”) and (“GLRP”). The GWRP was introduced to assist with employee retention across the Group. The plan is governed by the rules of the Equity Participation Plan (“EPP”) detailed below. The GERP was introduced to facilitate the mandatory deferral of short term incentive (“STI”) payments for executives of selected subsidiary companies. The GLRP was introduced as the Group‟s long-term incentive plan for the CEO and Group Executives replacing the Group Leadership Share Plan. Employee Share Acquisition Plan Under the Employee Share Acquisition Plan (ESAP), eligible employees have the opportunity to receive up to $1,000 worth of free shares each year if the Group meets required performance hurdles. The performance hurdle 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 a grant will be made. Notwithstanding the existence of this performance hurdle, the Board has the authority to apply discretion under the Plan Rules for a grant to be made. The Issue Price for the offer is equal to the volume weighted average of the prices CBA shares were traded on the Australian Securities Exchange (ASX) during the five trading day period up to and including the grant date. Shares granted are restricted for sale for three years or until such time as the employee ceases employment with the Group. Shares receive full dividend entitlements and voting rights. Dividends paid since the end of the previous financial year As declared in the 31 December 2009 Profit Announcement, a fully franked interim dividend of 120 cents per share amounting to $1,841 million was paid on 1 April 2010. The payment comprised cash disbursements of $1,067 million with $774 million being reinvested by participants through the Dividend Reinvestment Plan. Dividend Reinvestment Plan The Dividend Reinvestment Plan for the final dividend for the 2010 financial year is assumed to be satisfied through the purchase of shares on market. Record date The register closed for determination of dividend entitlement and for participation in the dividend reinvestment plan at 5pm on 20 August 2010 at Link Market Services Limited, Locked Bag A14, Sydney South, 1235. Ex-dividend Date The ex-dividend date is 16 August 2010. While the Group did not achieve the performance target for the 2009 financial year, the Board exercised its discretion and approved a partial grant of approximately $600 worth of shares to each eligible employee recognising the performance of employees in contributing to the Group‟s results in a difficult economic environment. The grant was allocated to eligible employees that achieved a minimum performance rating of “Meets Expectations” during the 2009 financial year and had not been on extended leave (excluding parental leave) for more than 12 months at grant date. On 11 September 2009, 319,267 shares were granted to 24,559 eligible employees. The issue price was $46.79. It is estimated that approximately $25.0 million of ordinary shares will be purchased on-market at the prevailing market price for the 2010 grant. Equity Participation Plan The Equity Participation Plan (“EPP”) comprises a voluntary and a mandatory component. The voluntary component allows the voluntary sacrifice of both fixed remuneration and annual short term incentives (STI) to be applied in the acquisition of shares under the Voluntary Equity Participation (VEP) plan. Shares are purchased on-market at the current market price and are restricted for sale for two years or until such time as the employee ceases employment with the Group. Shares receive full dividend entitlements and voting rights. The mandatory component comprises the sacrifice of one third of STI payments for executives under the Leadership Incentive Share Plan (“LISP”), together with sign-on and retention allocations under the Sign-on Incentive Plan (“SOI”), Enterprise the Group-Wide Services Retention Plan Retention Plan (“GWRP”). (“ESRP”) and Commonwealth Bank of Australia Annual Report 2010 169 Notes to the Financial Statements the mandatory component, shares only vest to Under employees if they remain in employment of the Group until the vesting date. The Group purchases fully paid ordinary shares and holds these in trust until such time as the vesting conditions are met. Shares receive full dividend and voting rights. Participants may direct the Trustee on how the voting rights are to be exercised during the vesting period. Dividends accrue in the trust and are paid to participants upon vesting of the shares. Where a participant does not satisfy the vesting conditions, shares and dividend rights are forfeited. During the year, 863,264 shares and rights were granted under the plan with issue prices in the range of $46.59 to $55.00 (2009: 1,118,604 shares, $29.41 to $44.60). The weighted average fair value at grant date was $52.81 (2009: $40.97). A total of $35.7 million has been expensed during the year (2009: $31.4 million) in respect of this plan. (“LIPUP”) and For a limited number of executives cash-based versions of LISP and GWRP operate, the Leadership Incentive (Performance the Group-Wide Retention Unit) Plan Performance Unit Plan (“GWRPUP”). Under these plans, grants of Performance Units, a monetary unit with a value linked to the share price of Commonwealth Bank shares, are made. These are subject to the same vesting conditions as LISP and GWRP. On meeting the vesting conditions, 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 $1.5 million (2009: $1.0 million) has been expensed during the year and as at 30 June 2010 $3.3 million (2009: $1.6 million) was accrued within other liabilities in respect of the LIPUP and GWRPUP plans. Group Leadership Reward Plan Effective July 2009, the Group Leadership Reward Plan (“GLRP”) replaced the Group Leadership Share Plan (“GLSP”) as the Group‟s long-term incentive plan for the CEO and Group Executives. Under the GLRP, participants are awarded a maximum number of Reward Shares that may vest at the end of the four year performance period subject to the satisfaction of performance hurdles. Each vested Reward Share entitles the participant to receive one ordinary CBA share. Vesting is subject to the satisfaction of certain performance hurdles as noted below: 50% of the award assessed against Customer Satisfaction compared to the peer group; and 50% of the award assessed against Total Shareholder Return (TSR) compared to the peer group. The Customer Satisfaction performance hurdle peer group consists of the ANZ, NAB, St George and Westpac. Customer satisfaction 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. The TSR performance hurdle peer group consists of the 20 largest companies listed on the ASX (by market capitalisation) at the beginning of the performance period, after excluding is measured resources companies and independently. A sliding scale operates to determine the level of vesting. Where performance is below the 50th percentile nothing vests. If the Group ranks at the 50th percentile half will vest. Full vesting is achieved if the Group reaches or exceeds the 75th the CBA. TSR 170 Commonwealth Bank of Australia Annual Report 2010 percentile. Between the 50th percentile and the 75th percentile a sliding vesting scale applies. The total number of Reward Shares that vest will be the aggregate of the Reward Shares that vest against the Customer Satisfaction hurdle and the TSR hurdle after testing against the relevant performance hurdles. As part of the introduction of the GLRP a transitional award was granted with a three year performance period. This transitional award reflects the move from the Group‟s previous long term incentives arrangements that measured performance over a three year period. The transition award is subject to the same performance hurdles as the four year award. As the GLRP commenced on 1 July 2009, no reward shares have yet been delivered. A total of $8.0 million has been expensed in the current year (2009: nil) for GLRP. Group Leadership Share Plan The Group Leadership Share Plan (“GLSP”) was part of the Group‟s previous long term incentive arrangements and has been replaced by the GLRP. Under the plan, participants share a pool that vests at the end of a three year performance period subject to satisfaction of performance conditions. No awards were made under this plan in the 2010 financial year. Two awards have been made under the GLSP: Financial year 2008 participants share in a pool with a value of 2.2% of the growth in the Group‟s Profit after Capital Charge (PACC), capped at a maximum pool of $34 million; and Financial year 2009 participants share in a pool with a value of 3.5% of the growth in the Group‟s Profit after Capital Charge (PACC), capped at a maximum pool of $36.1 million. Both awards are subject to the following performance hurdles: The Group‟s NPAT growth over the three year vesting period must be above the average of NPAT growth of ANZ, NAB, and Westpac; and The Group‟s customer satisfaction relative to ANZ, NAB, St George and Westpac. The 2008 financial year award is measured from 1 July 2007 and may vest depending on performance to 1 July 2010. The 2009 financial year award is measured from 1 July 2008 and may vest depending on performance to 1 July 2011. Independent external surveys are used to determine the Group‟s level of achievement against the customer satisfaction performance hurdle. A ranking is determined and a vesting scale applied. If the Group‟s NPAT growth is below the average of the peer group, then nothing will vest regardless of the Group‟s customer satisfaction ranking. Shares are provided to participants if and when awards vest. The number of shares is 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 reward shares have yet been delivered. The CBA three year measurement period for the 2008 financial year award concluded on 1 July 2010. The vesting level of the 2008 financial year award is undetermined at this stage whilst calculation components are finalised. A total of $13.2 million has been expensed in the current year (2009: $8.4 million) for GLSP. Notes to the Financial Statements Note 29 Share Based Payments (continued) Equity Reward Plan The Equity Reward Plan (“ERP”) was a former long term incentive arrangement offered by the Group to executives. ERP was last awarded in July 2006 with no further grants being made. Grants under the ERP were in two parts: share options, where recipients pay a set exercise price to convert each option to one CBA share upon vesting; and reward shares, where no exercise price is payable for participants to receive CBA shares upon vesting. Since 2002, no options have been issued under the ERP. The last allocation of reward shares under the ERP made in July 2006 was tested for vesting in July 2009. The measurement reached the 86th percentile resulting in a 100% vesting. The exercise of options and the vesting of shares was conditional on performance hurdles based on the Group‟s Total Shareholder Return (“TSR”) measured against a comparator group of companies. Details of movements in ERP options are as follows: For Reward Shares granted in 2006 a straight line vesting scale was applied, with 50% vesting at the 51st percentile, through to 100% vesting at the 75th percentile. The minimum vesting period for these grants was three years. Where, at the first measurement date, the Group‟s percentile ranking was lower than the 51st percentile, there was one retest 12 months later at which time 50% of shares would vest if the Group‟s percentile reaches the 51st percentile. Unvested shares in the plan at the end of the vesting period were forfeited. Participants who exited the Group before vesting forfeited their allocation. Shares were purchased on market at current market prices and held in Trust until vesting. These shares received full dividend and voting rights. Dividends accrued in the trust and were paid to participants upon vesting of the shares. Participants could direct the Trustee on how the voting rights were to be exercised during the vesting period. The fair value of shares allocated under the ERP is expensed over three to five years, reflecting the expected vesting period. In the current year, $6.8 million (2009: $12.1 million) has been expensed. (1) Options have vested and may be exercised up to 13 September 2010. (2) Options have vested and may be exercised up to 3 September 2011. For a limited number of executives a cash-based version of ERP was operated, the Equity Reward (Performance Unit) Plan (“ERPUP”). Under the plan, grants of Performance Units, a monetary unit with a value linked to the share price of Commonwealth Bank shares, were made. These were subject to the same vesting conditions as ERP. The last allocation under ERPUP vested in July 2009. On meeting the vesting conditions, a cash payment was made to executives, the value of which was determined based on the Group‟s share price upon vesting plus an accrued dividend value. Options lapse if not exercised prior to the end of their term. In the current year, $0.1 million (2009: $5.1 million) has been expensed in respect of the ERPUP plan. Non-Executive Directors Share Plan The Non-Executive Directors Share Plan (“NEDSP”) is a mandatory plan under which Non-Executive Directors sacrifice 20% of their annual fees. As a result of changes to Federal taxation legislation, shares purchased from 1 July 2009 have been on an after tax basis. Shares purchased are restricted for sale for ten years or until such time as the Director leaves the Board, whichever is earlier. In addition, Non-Executive Directors can voluntarily elect to sacrifice up to a further $5,000 per annum of their fees for the acquisition of shares. Shares are purchased on-market at the current market price and a total of 97,954 shares have been purchased under the NEDSP since the plan commenced in 2001. Shares acquired under the plan receive full dividend entitlements and voting rights and there are no forfeiture or vesting conditions. For the current year, $0.3 million (2009: $0.7 million) was expensed reflecting shares purchased and allocated under the NEDSP. Commonwealth Bank of Australia Annual Report 2010 171 July 2009 - June 2010July 2008 - June 2009Year of Grant2000 (1)2001 (2)2000 (1)2001 (2)Exercise price ($)26.9730.1226.9730.12Held by participants at the start of the year (no.)85,000296,60097,500314,100Granted during the year (no.)----Exercised during the year (no.)(20,000)(72,500)(12,500)(17,500)Lapsed during the year (no.)----Outstanding at the end of year (no.)65,000224,10085,000296,600Weighted Average remaining contractual life (days)74429439794Weighted Average share price at date of exercise ($)56.5654.5841.1041.10 Notes to the Financial Statements Note 29 Share Based Payments (continued) (1) From the 2010 financial year, all Directors‟ mandatory fee sacrifices are applied on an after tax basis to the purchase of shares. Executive Option Plan This plan was discontinued in 2001 with the last grant being made in September 2000. Under the Executive Option Plan (EOP), the Bank granted options to purchase fully paid ordinary shares to key executives. The options granted were a right to acquire a share in the future provided all conditions are met, with an exercise price based on the weighted average share price during a one week period prior to grant date. Options vested only if the performance hurdles were met. The performance hurdles for the September 2000 grant were met in 2004. Upon exercising vested options, an executive has the right to take up the entitlement in whole or in part as fully paid up ordinary shares. The exercise price is payable at the time. Options lapse if not exercised prior to the end of their term. Details of movements in EOP options during the period were as follows: (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) Performance hurdle was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010. Note 30 Non-Controlling Interests (1) Comprises predominantly New Zealand Perpetual Preference Shares - $505 million. On 10 December 2002, ASB Capital Limited, a New Zealand subsidiary, issued NZD 200 million (AUD 182 million) of perpetual preference shares. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly and are non-cumulative. On 22 December 2004, ASB Capital No.2 Ltd, a New Zealand subsidiary, issued NZD 350 million (AUD 323 million) of perpetual preference shares. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly and are non-cumulative. 172 Commonwealth Bank of Australia Annual Report 2010 Total Fees Applied (1)Average Purchase PricePeriod$ParticipantsShares Purchased$2010290,326105,98248.532009735,2571021,21334.66NEDSP GrantsJuly 2009 - June 2010July 2008 - June 2009Year of Grant2000 (2)2000 (2)Exercise price $ (1)26.9726.97Held by participants at the start of the year (no.)24,40024,400Granted during the year (no.)--Exercised during the year (no.)(10,200)-Lapsed during the year (no.)--Outstanding at the end of year (no.)14,20024,400Weighted Average remaining contractual life (days)74439Weighted Average share price at date of exercise$51.47n/aGroup20102009$M$MControlled entities:Share capital (1)523520Total Non-controlling interests523520 Notes to the Financial Statements Note 31 Capital Adequacy Regulatory Capital 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 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. 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. Economic Capital Economic Capital provides an estimate of capital required to cover the financial impact of unlikely events. The methodology used to calculate Economic Capital is consistent across all material risk types and businesses within the Group and involves: 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 risk appetite; and Aggregation of Economic Capital by individual risk type allowing for diversification benefits. 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. to drive delivery of The Group uses Economic Capital “shareholder-value-added” (“SVA”) results. 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 outcomes, and facilitate: Pricing of products based on appropriate charges for use of capital; and Internal measurement of performance on a risk adjusted basis. Business Unit segments are required to achieve minimum returns on their allocated Economic Capital equal to a uniform “Cost of Capital” which is set from time to time based on market conditions. its capital the The Group actively manages rating requirements of various stakeholders 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 Group. 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 2009 and 2010 financial years were in compliance with both APRA minimum capital adequacy requirements and the Board Approved Target Ranges. The Group‟s Tier One Board approved minimum is 7.0%. Commonwealth Bank of Australia Annual Report 2010 173 Notes to the Financial Statements Note 32 Financial Reporting by Segments (iv) Wealth Management The principal activities of the Group are carried out in the below business segments. These segments are based on the types of products and services provided to customers. Wealth Management includes the Global Asset Management (including operations in Asia), Platform Administration and Life and General Insurance businesses of the Australian operations. (v) New Zealand New Zealand includes the Banking, Funds Management and Insurance businesses operating in New Zealand, (excluding the international business of Institutional Banking and Markets). (vi) Bankwest Bankwest is a full service bank active in all domestic market segments, with lending diversified between the business, rural, housing and personal markets, including a full range of deposit in products. Bankwest also provides specialist services international banking and project finance. (vii) Other Asia incorporates the retail banking operations in Indonesia, Vietnam and Japan, investments in Chinese retail banks, investments in Sino-foreign joint venture life insurance business, the life insurance operations in Indonesia and the representative office in India. It does not include Business and Private Banking, Institutional Banking and Markets and Colonial First State Global Asset Management businesses in Asia. Corporate Centre includes the results of unallocated Group support functions such as Investor Relations, Group Strategy, Secretariat and Treasury. Eliminations/Unallocated includes intra-group elimination entries arising on consolidation, centrally raised provisions and other unallocated revenue and expenses. The primary sources of revenue are interest and fee income (Retail Banking Services, Institutional Banking and Markets, Business and Private Banking, Bankwest, New Zealand and Other Divisions) and funds management income (Wealth Management, New Zealand and Asia). insurance premium and Revenues and expenses occurring between segments are subject to transfer pricing arrangements. All intra-group profits are eliminated on consolidation. Business segments are managed on the basis of net profit after income tax (“cash basis”) which is defined by Management. Management use “cash basis” to assess performance and it provides the basis for the determination of the Bank‟s dividends. During the year, the Group restructured the former International Financial Services segment which incorporated the results of ASB Bank, Sovereign, Fiji and Asian businesses. This led to the formation of: the incorporating retail banking operations New Zealand incorporating ASB Bank and Sovereign; and Asia in Indonesia, Vietnam and Japan, investments in Chinese retail banks, investments in Sino-foreign joint venture life in insurance business, the life Indonesia and the representative office in India. It does not include Business and Private Banking, Institutional Banking and Markets and Colonial First State Global Asset Management business in Asia. insurance operations On the grounds of materiality, disclosures with respect to Asia have been merged with the “Other” segment. Comparatives have been restated accordingly. (i) Retail Banking Services Retail Banking Services includes both the origination of home loan, consumer finance and retail deposit products and the sales and servicing of all Retail bank customers. In addition commission is received for the distribution of business and wealth management products through the retail distribution network. (ii) Business and Private Banking Business and Private Banking provides specialised banking services to relationship managed business and Agribusiness customers, private banking to high net worth individuals and margin lending and trading through CommSec. In addition commission is received for the distribution of retail banking products through the Business and Private Banking network. (iii) Institutional Banking and Markets Institutional Banking and Markets services the Group‟s major corporate, institutional and government clients, creating customised solutions based on specific needs, industry trends and market conditions. The Total Capital Solutions offering raising, includes debt and equity capital financial and commodities risk management and transactional banking capabilities. This segment also has wholesale banking in London, Malta, New York, New Zealand, operations Singapore, Hong Kong, Japan and have recently received regulatory approval for a banking licence in Shanghai. 174 Commonwealth Bank of Australia Annual Report 2010 Note 32 Financial Reporting by Segments (continued) Notes to the Financial Statements (1) Business segments are measured on a net profit after income tax (“cash basis”) which is defined by management as net profit after tax and non-controlling interests before Bankwest significant items, the tax on New Zealand structured finance transactions, the gain/loss on disposal of controlled entities/investments, treasury shares valuation adjustment, unrealised gains and losses related to hedging and AIFRS volatility and other one-off non-cash expenses. Management use “cash basis” to assess performance and it provides the basis for the determination of the Bank‟s dividends. Commonwealth Bank of Australia Annual Report 2010 175 GroupRetailBusinessInstitutionalBusiness Segment InformationBankingand PrivateBanking andWealthNewServicesBankingMarketsManagementZealandBankwestOtherTotalIncome Statement$M$M$M$M$M$M$M$MInterest income15,7972,9693,303-3,1714,2992,67632,215Insurance premium and related revenue---1,358324-1121,794Other income1,2221,4451,1063,308432239247,776Total revenue17,0194,4144,4094,6663,9274,5382,81241,785Equity accounted earnings121217---93134Revenue from external customers17,1423,7944,7954,6663,9264,4852,84341,651Revenue from other operating segments(135)608(403)-153(124)-Interest expense(4,928)(2,337)(513)-(2,332)(2,757)(7,426)(20,293)Segment result before income tax3,5221,2561,5261,015510(255)6198,193Income tax expense(1,061)(363)(344)(341)(312)46(138)(2,513)Segment result after income tax2,4618931,182674198(209)4815,680Non-controlling interests------(16)(16)Segment result after income tax and non-controlling interests2,4618931,182674198(209)4655,664Non-Cash items---44190269(66)437Net profit after tax ("cash basis") (1)2,4618931,182718388603996,101Additional Information Intangible asset amortisation(25)(71)(10)(5)(27)(91)(51)(280)Impairment expense(736)(326)(249)-(100)(1,058)90(2,379)Depreciation(10)(24)(46)(4)(29)(34)(191)(338)Defined benefit superannuation plan expense------(103)(103)Bankwest integration-----(24)(16)(40)Other(12)(4)(2)(5)(3)(6)(26)(58)Balance SheetTotal assets263,63978,80194,49521,68953,43374,68459,589646,330Acquisition of property, plant and equipment, intangibles and other non–current assets16143942243182320Investment in associates76262783--6031,490Total liabilities155,334103,29858,89819,34949,59169,868154,422610,760Year Ended 30 June 2010 Notes to the Financial Statements Note 32 Financial Reporting by Segments (continued) (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 non-controlling interests, before Bankwest significant items, the gain on Visa Initial Public Offering, provisions for investment and restructuring, defined benefit superannuation plan (income)/expense, treasury shares valuation adjustment, other one-off expenses and unrealised gains and losses related to hedging and AIFRS volatility. Management use “cash basis” to assess performance and it provides the basis for the determination of the Bank‟s dividends. 176 Commonwealth Bank of Australia Annual Report 2010 GroupRetailBusinessInstitutionalBusiness Segment InformationBankingand PrivateBanking andWealthNewServicesBankingMarketsManagementZealandBankwestOtherTotalIncome Statement$M$M$M$M$M$M$M$MInterest income14,8593,1444,713-3,8722,0532,87831,519Insurance premium and related revenue---1,259356-361,651Other income1,5517521,2782,236404192(150)6,263Total revenue16,4103,8965,9913,4954,6322,2452,76439,433Equity accounted earnings63-41--91141Revenue from external customers16,2904,2835,5373,5154,5672,1242,97639,292Revenue from other operating segments114(390)454(61)65121(303)-Interest expense(5,769)(2,616)(1,835)-(3,029)(1,347)(6,622)(21,218)Segment result before income tax2,9961,024(17)1705651891,5226,449Income tax expense(889)(288)16088(161)(67)(539)(1,696)Segment result after income tax2,1077361432584041229834,753Non-controlling interests------(30)(30)Segment result after income tax and non-controlling interests2,1077361432584041229534,723Non-Cash items--232834(9)(384)(308)Net profit after tax ("cash basis") (1)2,1077361662864381135694,415Additional Information Intangible asset amortisation(8)(44)(7)(1)(22)(49)(45)(176)Impairment expense(699)(309)(1,708)-(194)(113)(25)(3,048)Depreciation(11)(24)(38)(5)(31)(19)(174)(302)Defined benefit superannuation plan expense------(14)(14)Gain on acquisition of controlled entities------983983Bankwest integration-----(76)(36)(112)Other(23)(9)(36)(9)(2)(1)(55)(135)Balance SheetTotal assets237,86274,815113,20022,70654,87468,32748,588620,372Acquisition of property, plant and equipment, intangibles and other non–current assets516152153361,3332,064Investment in associates71153640--3181,047Total liabilities141,32494,79973,87819,71447,22864,388147,599588,930Year Ended 30 June 2009 Notes to the Financial Statements Note 32 Financial Reporting by Segments (continued) (1) Other locations include: United Kingdom, United States of America, Japan, Singapore, Malta, Hong Kong, Indonesia, China and Vietnam. The geographical segment represents the location in which the transaction was recognised. Commonwealth Bank of Australia Annual Report 2010 177 GroupYear Ended 30 JuneGeographical Information201020092008Financial Performance & Position$M%$M%$M%RevenueAustralia35,90685. 932,49882. 429,13178. 6New Zealand4,20810. 14,90412. 44,92213. 3Other locations (1)1,6714. 02,0315. 23,0018. 141,785100. 039,433100. 037,054100. 0Non-Current AssetsAustralia12,65490. 511,90989. 89,92987. 7New Zealand1,0097. 21,0057. 61,12910. 0Other locations (1)3152. 33432. 62652. 313,978100. 013,257100. 011,323100. 0 Notes to the Financial Statements Note 33 Life Insurance Business The following information is provided to disclose the statutory life insurance business transactions contained in the Group Financial Statements and the underlying methods and assumptions used in their calculations. 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 (ee). The insurance segment result is prepared on a business segment basis. 178 Commonwealth Bank of Australia Annual Report 2010 Life InsuranceLife InvestmentContractsContractsGroup201020092010200920102009Summarised Income Statement$M$M$M$M$M$MPremium income and related revenue1,6221,6293132481,9351,877Outward reinsurance premiums expense(256)(271)(3)-(259)(271)Claims expense(1,118)(992)(214)(21)(1,332)(1,013)Reinsurance recoveries243207--243207Investment revenue (excluding investments in subsidiaries):Equity securities118(257)594(984)712(1,241)Debt securities233177530474763651Property46(150)106(197)152(347)Other101(27)30(96)131(123)(Increase)/decrease in contract liabilities54410(939)686(885)1,096Operating income1,0437264171101,460836Acquisition expenses(215)(254)(9)(11)(224)(265)Maintenance expenses(269)(247)(88)(97)(357)(344)Management expenses(9)(21)(22)(21)(31)(42)Other expense(28)(1)(32)-(60)(1)Net profit before income tax522203266(19)788184Income tax (expense)/benefit attributable to operating profit(151)(29)(118)139(269)110Net profit after income tax371174148120519294 Notes to the Financial Statements Note 33 Life Insurance Business (continued) The disclosure of the components of Net profit after income tax 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. Commonwealth Bank of Australia Annual Report 2010 179 Life InsuranceLife Investment ContractsContracts Group201020092010200920102009$M$M$M$M$M$MSources of Life Insurance Net ProfitThe net profit after income tax is represented by:Emergence of planned profit margins2091698497293266Difference between actual and planned experience26(47)60(11)86(58)Effects of changes to underlying assumptions137--137Reversal of previously recognised losses or loss recognition on groups of related products(3)11--(3)11Investment earnings on assets in excess of policyholder liabilities103255910834Other movements239(1)252234Net profit after income tax371174148120519294Life insurance premiums received and receivable1,6241,7389619542,5852,692Life insurance claims paid and payable1,1971,0852,9502,2694,1473,354Life InsuranceLife InvestmentContractsContractsGroupReconciliation of Movements in201020092010200920102009Policy Liabilities$M$M$M$M$M$MContract policy liabilitiesGross policy liabilities opening balance3,7284,12212,32814,37316,05618,495Acquisition of controlled entities-39-164-203Movement in policy liabilities reflected in the Income Statement(86)(338)939(686)853(1,024)Contract contributions recognised in policy liabilities216656706658722Contract withdrawals recognised in policy liabilities(281)(91)(2,536)(2,248)(2,817)(2,339)Non-cash movements(181)(27)(1)-(182)(27)FX translation adjustment(1)725192426Gross policy liabilities closing balance3,1813,72811,41112,32814,59216,056Liabilities ceded under reinsuranceOpening balance(219)(145)--(219)(145)Acquisition of controlled entities-(2)---(2)Increase/(decrease) in reinsurance assets30(72)--30(72)Closing balance(189)(219)--(189)(219)Net policy liabilities at 30 June Expected to be realised within 12 months4085351,6962,0312,1042,566Expected to be realised in more than 12 months2,5842,9749,71510,29712,29913,271Total net insurance policy liabilities2,9923,50911,41112,32814,40315,837 Notes to the Financial Statements Note 34 Remuneration of Auditors During the financial year, the auditor of the Group and the Bank, PricewaterhouseCoopers (PwC), and its related practices earned the following remuneration excluding goods and service tax: (1) An additional amount of $7,867,223 was paid to PricewaterhouseCoopers (2009: $7,132,535) by way of fees for entities not consolidated into the Financial Statements. Of this amount $6,794,440 (2009: $6,065,331) relates to statutory audits. The Audit Committee has considered the non-audit services provided by PricewaterhouseCoopers and is satisfied that the services and the level of fees are compatible with maintaining auditors‟ independence. All such services were approved by the Audit Committee in accordance with pre-approved policies and procedures. Taxation services included assistance and training in relation to tax legislation and developments and other services primarily consisted of project assistance and risk compliance support. Audit related services principally includes assurance and attestation reviews of the Group‟s foreign disclosures for overseas regulatory requirements, acquisition accounting advice as well as reviews of regulatory information. internal control systems and investors, services financial or relation to in Note 35 Lease Commitments (1) Certain comparative information has been restated to conform to presentation in the current period. Lease Arrangements Operating leases are entered into to meet the business needs of entities in the Group. Leases are primarily over commercial and retail premises and plant and equipment. Lease rentals are determined in accordance with market conditions when leases are entered into or on rental review dates. 180 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009$'000$'000$'000$'000a) Audit servicesPricewaterhouseCoopers Australian firm13,80712,4598,1607,861Related practices of PricewaterhouseCoopers Australian firm3,8474,470605711Total remuneration for audit services17,65416,9298,7658,572b) Non-audit servicesAudit related servicesPricewaterhouseCoopers Australian firm4,0193,7423,4392,878Related practices of PricewaterhouseCoopers Australian firm24842859235Total remuneration for audit related services4,2674,1703,4983,113Taxation servicesPricewaterhouseCoopers Australian firm1,5351,3751,5201,375Related practices of PricewaterhouseCoopers Australian firm8071,346276318Total remuneration for tax related services2,3422,7211,7961,693Other ServicesPricewaterhouseCoopers Australian firm1,645801,52480Related practices of PricewaterhouseCoopers Australian firm21166788Total remuneration for other services1,6662461,531168Total remuneration for non-audit services8,2757,1376,8254,974Total remuneration for audit and non-audit services (1)25,92924,06615,59013,546GroupBank2010200920102009$M$M$M$MLease Commitments - Property, Plant and Equipment (1)Due within one year478448359341Due after one year but not later than five years1,2951,257924868Due after five years1,0031,066494347Total lease commitments - property, plant and equipment2,7762,7711,7771,556 Notes to the Financial Statements Note 36 Contingent Liabilities, Contingent Assets and Commitments Details of contingent liabilities and off-balance sheet business are given below. The face (contract) value represents the maximum potential amount that could be lost if the counterparty fails to meet its financial obligations. (1) Guarantees are unconditional undertakings given to support the obligations of a customer to third parties. (2) Standby letters of credit are undertakings to pay, against presentation of documents, an obligation in the event of a default by a customer. (3) Bills of exchange endorsed by the Group and Bank which represent liabilities in the event of default by the acceptor and the drawer of the bill. (4) Documentary letters of credit are undertakings by the Group and Bank to pay or accept drafts drawn by an overseas supplier of goods against presentation of documents in the event of payment default by a customer. (5) Performance related contingents are undertakings that oblige the Group and Bank to pay third parties should a customer fail to fulfil a contractual non-monetary obligation. (6) Commitments to provide credit include all obligations on the part of the Group and Bank to provide credit facilities. As facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. (7) Other commitments include underwriting facilities and commitments with certain drawdowns. Contingent Credit Liabilities The Group is party to a range of financial instruments that give rise to contingent and/or future liabilities. These transactions are a consequence of the Group‟s normal course of business to meet the financing needs of its customers and in managing its own risk. These financial instruments include guarantees, letters of credit, bill endorsements and other commitments to provide credit. The face (contract) value represents the maximum potential amount that could be lost if the counterparty fails to meet its financial obligations. As the Group and Bank will only be required to meet these obligations in the event of default, the cash requirements of these instruments are expected to be considerably less than their face values. These transactions combine varying levels of credit, interest rate, foreign exchange and liquidity risk. In accordance with Bank policy, exposures to any of these transactions (net of collateral) are not carried at a level that would have a material adverse effect on the financial condition of the Bank and its controlled entities. Commitments to provide credit include both fixed and variable facilities. 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. Other commitments include the Group‟s obligations under sale and repurchase agreements, outright forward purchases, forward deposits and underwriting facilities. Other commitments also include obligations not otherwise disclosed above to extend credit, which 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. These transactions are categorised and credit equivalents calculated under APRA guidelines risk-based measurement of capital adequacy. The credit equivalent amounts are a measure of potential loss to the Group in the event of non-performance by the counterparty. the for Commonwealth Bank of Australia Annual Report 2010 181 GroupFace ValueCredit Equivalent2010200920102009$M$M$M$MCredit risk related instrumentsGuarantees (1)3,6583,6423,3643,641Standby letters of credit (2)817206809206Bill endorsements (3)5753757538Documentary letters of credit (4)71437043Performance related contingents (5)1,2401,9941,2081,951Commitments to provide credit (6)109,420117,88789,019100,798Other commitments (7)4784001,167265Total credit risk related instruments115,741124,70995,694107,442BankFace ValueCredit Equivalent2010200920102009$M$M$M$MCredit risk related instrumentsGuarantees (1)2,8742,8112,5812,571Standby letters of credit (2)6371963019Bill endorsements (3)5753857538Documentary letters of credit (4) 46174617Performance related contingents (5)1,2331,9781,2041,939Commitments to provide credit (6)93,881102,05683,27290,458Other commitments (7)39943995Total credit risk related instruments98,767107,51387,82995,637 Notes to the Financial Statements Note 36 Contingent Liabilities, Contingent Assets and Commitments (continued) In April 2009 the Group entered into an Agreement to Lease for 12 years (with options to extend) on completion of Raine Square, a new 21 level office tower in Perth that will provide almost 40,000m2 of office accommodation above three levels of retail space. Once complete it will accommodate over 3,500 of the Group‟s Perth based employees. Bankwest has also exercised an extension option on existing premises from November 2009. In April 2008, the Bank signed agreements with SAP Australia Pty Limited and Accenture Australia Limited for its Core Banking Modernisation program. 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. In November 2007, the Bank signed a lease agreement with a term of 12 years with DPT Operator Pty Ltd and DPPT Operator Pty Ltd for accommodating approximately 5,000 of the Group‟s employees at Darling Park Tower 1 at 201 Sussex Street in the Sydney CBD. 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. Failure to Settle Risk The Group 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, The Bulk Electronic Clearing System, The Consumer Electronic Clearing System and the High Value Clearing System (only if operating in “fallback mode”). This credit risk exposure is unquantifiable in advance, but is well understood, and is extinguished upon settlement at 9am each business day. Capital Commitments As at 30 June 2010, the Group is committed for capital expenditure, under contract of $19 million (2009: $18 million). The Bank is committed for $17 million (2009: $16 million). These commitments are expected to be extinguished within 12 months. Services 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 2010 was $6.5 million (2009: $12.2 million). Under the Basel II advanced internal ratings based 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 when approved by APRA may an exposure less that fully-advanced amount be used as the credit equivalent exposure amount. As the potential loss depends on counterparty performance, the Group utilises the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Group takes collateral where it is considered necessary to support off-balance sheet financial instruments with credit risk. 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 commitments shown in the above table also constitute contingent assets. These commitments would be classified as loans and other assets in the balance sheet on the occurrence of the contingent event. Litigation The Group is not 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 Group. Where some loss is probable and can be reliably estimated an appropriate provision has been made. Among other things, ASIC is currently in the course of investigating the Bank‟s conduct in relation to Storm Financial, a Queensland-based financial planning firm that collapsed and went into receivership in March 2009. The Group has established a resolution scheme for clients of Storm Financial who borrowed money from the Group. The resolution scheme is in the process of considering individual claims on a case by case basis and the Group believes that appropriate provisions are held to cover the outcomes and costs of the scheme. Discussion on potential litigation is included in Note 50 – Subsequent Events. Long Term Contracts On 26 September 1997, the Bank entered the Information Technology and Telecommunications Services Agreement with EDS (Australia) Pty Ltd now HP Enterprise Services Australia Pty Ltd. This agreement continues until 30 June 2012 and covers the provision of enterprise processing services, end user computing services and cards services. for In April 2009, the Bank entered into an agreement with Telstra Corporation Ltd telecommunications the provision of services. The term of the agreement is ten years. The current supplier, Gen-I Australia Pty Limited, is progressively transitioning most services to Telstra. The transition program is scheduled to complete in 2011. In 2009 the Bank entered into an Agreement for Lease with Lend Lease Development and Australian Prime Property Fund for Commonwealth Bank Place, a new building in the Sydney CBD comprising over 50,000m2 of commercial accommodation located above a retail podium. It is currently under construction and will accommodate around 5,500 of the Group‟s employees from early 2012. 182 Commonwealth Bank of Australia Annual Report 2010 Notes to the Financial Statements Note 36 Contingent Liabilities, Contingent Assets and Commitments (continued) Collateral held as security for assets The Group takes collateral where it is considered necessary to support both on and off-balance sheet financial instruments. The Group evaluates each customer‟s credit-worthiness on a case-by-case basis. The amount of collateral taken, if deemed necessary, is based on management‟s credit evaluation of the counterparty. The Group has the right to sell, repledge, or otherwise use collateral received. No collateral has been repledged or sold. At balance date, the fair value of collateral accepted is as follows: (1) Certain comparative information has been restated to conform to presentation in the current period. Assets pledged As part of standard terms of transactions with other banks, the Group has provided collateral to secure liabilities. At balance date, the fair value of assets pledged as collateral to secure liabilities is as follows: (1) These balances include assets sold under repurchase agreements. The liabilities related to these repurchase agreements are disclosed in Note 19 Deposits and Other Public Borrowings. (2) This line includes retail mortgage backed securities issued by consolidated special purpose entities and purchased by the Bank for repurchase with the RBA. Further details are included in Note 12. (3) Certain comparative information has been restated to conform to presentation in the current period. Assets Sold Under Repurchase Agreement Securities sold under agreement to repurchase are retained on the balance sheet when substantially all the risks and rewards of ownership remain with the Group, and the counterparty liability is included separately on the balance sheet when cash consideration is received. At balance date, the carrying amounts of such securities and their related liabilities are as follows: (1) Certain comparative have been restated to conform to presentation in the current period. Commonwealth Bank of Australia Annual Report 2010 183 GroupBank2010200920102009$M$M$M$MCash2,4111,4972,3881,463Assets at fair value through Income Statement2,9131,8522,9131,852Available-for-sale investments5402,2605302,258Collateral held (1)5,8645,6095,8315,573GroupBank2010200920102009$M$M$M$MCash2,4337,1752,0856,248Assets at fair value through Income Statement (1)7,8916,4335,1172,274Available-for-sale investments (1) (2)2356,0152356,015Assets pledged (3)10,55919,6237,43714,537Of which can be repledged or resold by counterparty (3)5,1828,2055,1008,205GroupBankCarrying AmountRelated LiabilityCarrying AmountRelated Liability20102009201020092010200920102009$M$M$M$M$M$M$M$MAssets sold under repurchase agreement (1)Assets at fair value through Income Statement4,9472,1904,8992,1904,8652,1904,8152,190Available-for-sale investments2356,0152356,0152356,0152356,015Total5,1828,2055,1348,2055,1008,2055,0508,205 Notes to the Financial Statements Note 37 Fiduciary Activities Certain controlled entities within the Group conduct investment management and other fiduciary activities as responsible entity, trustee, custodian or manager for investment funds and trusts, including superannuation and approved deposit funds, wholesale and retail trusts. Where the Group incurs liabilities in respect of these activities, a right of indemnity exists against the assets of the applicable fund or trust. As these assets are sufficient to cover the liabilities and it is therefore not probable that the Group will be required to settle the liabilities, the liabilities are not included in the financial statements. The aggregate value of funds as at 30 June, managed for each fiduciary activity but not reported in the Group‟s Balance Sheet are as follows: 184 Commonwealth Bank of Australia Annual Report 2010 Group20102009$M$MFunds under administration172,784159,927Funds under management144,298138,204 Notes to the Financial Statements Note 38 Financial Risk Management Note 39 Credit Risk Risk Management The Group is a major financial services provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services. Financial instruments are fundamental to the Group‟s business and managing financial risks, especially credit risk, is a fundamental part of its business activity. Governance Risk governance originates at Board level, and cascades through to the CEO and businesses via Group policies, delegated authorities and regular reviews of outcomes. This ensures Board level oversight and is based on a clear segregation of duties between those who originate and those who approve risk exposures. Independent review of the risk management framework is carried out by Group Audit. foreign exchange risks), The Risk Committee of the Board oversees credit, market (including traded, interest rate risk in the banking book lease residual values, non-traded equity and (“IRRBB”), structural funding, operational, insurance and reputational risks assumed by the Group in the course of carrying on its business. Strategic risks are governed by the full Board with input from the various Board sub-committees. Tax and accounting risks are governed by the Audit Committee. regulatory and compliance, liquidity and The main financial risks affecting the Group are discussed in Notes 39 (Credit Risk), 40 (Market Risk), and 41 (Liquidity and Funding Risk). Risk Management 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. Accountability for risk management is structured by a “Three Lines of Defence” model as follows: Line 1 – Business Management Business managers are for managing operational risk for their business and the processes they own. This includes understanding and articulating their risk profile, testing and monitoring key controls, and escalating, reporting and rectifying incidents and control weaknesses; responsible Line 2 – Risk Management & Compliance Group, Business Unit and Divisional Risk Management and Compliance units support the risk strategy and philosophy, support business decisions within the Group‟s risk appetite and facilitate the embedding of the Group‟s operational risk framework and culture within the Group‟s businesses; and Line 3 – Internal and External Audit Group Audit is responsible for reviewing risk management frameworks and Business Unit practices risk management and internal controls. External Audit is responsible for providing an independent opinion on the financial statements and control environments of the Group and Bank. for This framework requires each business to manage the outcome of its risk-taking activities and benefit from the resulting risk adjusted returns. Credit risk is the potential for loss arising from failure of 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, transactions, securitisations and other associated activities. In the insurance business, credit risk arises from investment in bonds and notes, loans, and from reliance on reinsurance. financial markets Credit Risk Management Principles and Portfolio Standards 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 meets at least quarterly, 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 loan terms and capacity, acceptable documentation tests. security and The Group uses a Risk Committee approved diversified portfolio approach risk concentrations comprised of the following: the management of credit for A large credit exposures policy, which sets limits for aggregate exposures individual, commercial and industrial client groups; to An industry concentrations policy that defines a system of limits for exposures by industry; and A system of country limits for managing 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 that are externally risk-rated and of 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 Managed 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. 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. Commonwealth Bank of Australia Annual Report 2010 185 Notes to the Financial Statements Note 39 Credit Risk (continued) Default is usually consistent with one or more of the following: Where the loan application does not meet scorecard Auto- decisioning requirements then these may be referred to manual decisioning. After loan origination, these portfolios are managed using behavioural scoring systems and 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 unit. Commercial lending up to $1 million is reviewed as part of the Group‟s 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 probability of default (“PD”) and the amount of loss given default (“LGD”) combine to determine a CRR grade commensurate with expected loss (“EL”). For credit risk exposures greater than $2 million or decisioned outside of the scorecard approach, either a PD calculator or expert judgement is used. judgement is used where Expert 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. the complexity of The CRR is designed to: Aid in assessing changes to the client quality of the Group's credit portfolio; 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. Credit risk-rated 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. Credit risk-rated exposures fall within the following categories: “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 “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 increased exposure unless it will protect or improve the Group‟s position by maximising recovery prospects or to facilitate rehabilitation. Where a client is in default but the facility is well secured then the facility may be classed as troublesome but not impaired. Where a client‟s facility is not well secured and a loss is expected, then a facility is impaired. Facilities that have been restructured are also classified as a sub-set of impaired. 186 Commonwealth Bank of Australia Annual Report 2010 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, part of Group Audit, 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. 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. The use of analytical tools is governed by a Credit Rating Governance Committee reviews and endorses the use of the tools prior to their implementation to ensure they are sufficiently predictive of risk. that (i) Expected Loss The expected loss is the product of: Probability of default (“PD”); Exposure at default (“EAD”); and Loss given default (“LGD”). For credit risk-rated facilities, EL is 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; Carrying costs (effectively the costs of providing a facility that is not generating an interest return); and Realisation costs (costs of internal workout specialists). Various factors 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. Notes to the Financial Statements Note 39 Credit Risk (continued) Loans for business purposes The Group‟s main collateral types may include: residential mortgages, mortgages over other properties (including commercial and broad acre), cash (usually in the form of a charge over a deposit), guarantees by company directors supporting commercial lending; a floating charge over a company‟s assets (including debtors, stock and work in progress); or a charge over stock or scrip. In some instances a client‟s facilities may not be secured by formal collateral. Life insurance assets These assets are carried at fair value which accounts for the credit risk. Collateral is not generally sought or provided on these types of assets other than a fixed charge over properties backing Australian mortgage investments. Due from subsidiaries Collateral is not generally taken on these balances. (ii) Unexpected Loss In addition to expected loss, a more stressed loss amount is calculated. This unexpected loss estimate directly affects the internal economic capital calculation of requirements (refer to section Capital Management and Note 31, 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 14, Provisions for Impairment). Credit Risk Mitigation, Collateral and Other Credit Enhancements 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. The general nature of collateral that may be taken by financial asset classes are summarised below. Cash and Liquid Assets With the exception of securities purchased under agreements to resell which are approximately 100% collateralised by highly liquid debt securities, collateral is usually not sought on these balances as exposures are generally considered low risk. Due from other financial institutions Collateral is usually not sought on these balances as exposures are generally considered to be of low risk. Derivative financial assets for the derivative financial Collateralisation arrangements International Swaps & instruments are governed by Derivatives Association (“ISDA”) Master Agreement and Credit Support Annex and the Global Master Repurchase Agreement. The ISDA Master Agreement is a close out netting agreement. Other collateral may be sought where prudent, depending on the transaction characteristics and credit-worthiness of counterparty. Trading assets These assets are carried at fair value which accounts for the credit risk. Collateral is not generally sought from the issuer or counterparty. Other financial assets designated at fair value These assets are carried at fair value which accounts for the credit risk. Credit derivatives have not been used to mitigate the exposure to credit risk. Collateral may be taken on loans and advances and debt securities may include collateralisation terms. Available for sale securities Collateral is not generally sought on these securities. However, collateralisation may be implicit in the asset structure. Loans for consumer purposes The Group‟s main collateral types may include: residential mortgages, mortgages over other properties (including commercial and broad acre), or cash (usually in the form of a charge over a deposit). In some instances (for example, credit cards), a client‟s facilities may not be secured by formal collateral. Commonwealth Bank of Australia Annual Report 2010 187 Notes to the Financial Statements Note 39 Credit Risk (continued) Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements The below tables detail the concentration of credit exposure assets by significant geographical locations and counterparty types. Disclosures do not take into account collateral held and other credit enhancements. (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) Loans, bills discounted and other receivables is presented gross of provisions for impairment and unearned income on lease receivables in line with Note 13 Loans, bills discounted and other receivables. (3) 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. 188 Commonwealth Bank of Australia Annual Report 2010 GroupAt 30 June 2010BankOtherAgri-& OtherHomeConstr-AssetComm &SovereigncultureFinancialLoansuctionPersonalFinancingIndust.OtherTotal $M$M$M$M$M$M$M$M$M$MCash and liquid assets--6,343------6,343Receivables due from otherfinancial institutions--5,355------5,355Assets at fair value throughIncome Statement:Trading8,618-4,931----2,511-16,060Insurance (1)1,478-9,1481,393101--2,157-14,277Other----------Derivative assets1633519,269-24--3,188-22,679Available-for-sale investments12,588-3,661----12,015-28,264Loans, bills discountedand other receivables (2)1,5715,1589,221292,1403,43815,9798,621108,818-444,946Bank acceptances53,090263-529--7,682-11,569Other assets (3)5395,442440141337813,63019,565Total on balance sheet Australia24,4288,32263,633293,5374,13215,9938,634136,74913,630569,058Guarantees731623624370--2,791-3,510Loan commitments1,1879923,57551,9951,44117,206-22,008-98,404Other commitments252616811357--1,713-2,300Total Australia25,7139,35667,612345,5676,30033,1998,634163,26113,630673,272Cash and liquid assets--3,776------3,776Receivables due from otherfinancial institutions--4,717------4,717Assets at fair value throughIncome Statement:Trading2,900-1,473----2,418-6,791Insurance (1)--1,663------1,663Other-6584--3-61-654Derivative assets388-3,814----808-5,010Available-for-sale investments674-879----3,098-4,651Loans, bills discountedand other receivables (2)1,2135,4506,34431,4334728227689,821-56,323Bank acceptances----------Other assets (3)12-951---671,3221,497Total on balance sheet Overseas5,1875,45623,34531,43447282576816,2731,32285,082Guarantees15-2-38--93-148Loan commitments2474692333,3661161,109-5,476-11,016Other commitments45--1641--153-363Total Overseas5,4945,92523,58034,9646271,93476821,9951,32296,609Total gross credit risk31,20715,28191,192380,5316,92735,1339,402185,25614,952769,881Australia Credit risk exposures relating to on balance sheet assets:Credit risk exposures relating to off balance sheet assets:Overseas Credit risk exposures relating to on balance sheet assets:Credit risk exposures relating to off balance sheet assets: Notes to the Financial Statements Note 39 Credit Risk (continued) Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements (1) (1) Certain comparative information has been restated to conform to presentation in the current period. (2) 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. (3) Loans, bills discounted and other receivables is presented gross of provisions for impairment and unearned income on lease receivables in line with Note 13 Loans, bills discounted and other receivables. (4) Other assets predominantly comprises assets which do not give rise to credit risk 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 2010 189 GroupAt 30 June 2009BankOtherAgri-& OtherHomeConstr-AssetComm &SovereigncultureFinancialLoansuctionPersonalFinancingIndust.OtherTotal $M$M$M$M$M$M$M$M$M$MCash and liquid assets--5,509------5,509Receivables due from otherfinancial institutions--8,590------8,590Assets at fair value throughIncome Statement:Trading3,473-14,438----2,291-20,202Insurance (2)1,631-5,134-295--8,509-15,569Other-601----29-90Derivative assets2843315,441-43--6,372-22,173Available-for-sale investments7,237-1,384----7,281-15,902Loans, bills discountedand other receivables (3)1,5394,7179,900261,5044,07215,1487,923108,570-413,373Bank acceptances72,972327-547--10,874-14,727Other assets (4)233666,67411131714172311,07618,954Total on balance sheet Australia14,4047,84867,398261,5154,97015,1658,064144,64911,076535,089Guarantees642219726279--2,6252963,509Loan commitments9001,2862,41552,2531,34816,413-31,208718106,541Other commitments262114512443-12,174282,850Total Australia15,3949,17770,155313,8067,04031,5788,065180,65612,118647,989Overseas Credit risk exposures relating to on balance sheet assets:Cash and liquid assets--5,831------5,831Receivables due from otherfinancial institutions--5,831------5,831Assets at fair value throughIncome Statement:Trading2,476-1,543----1,180-5,199Insurance (2)1,370-321------1,691Other22871,286--3-63-1,587Derivative assets173773,408-3--524-4,185Available-for-sale investments435-1,694----3,473-5,602Loans, bills discountedand other receivables (3)1,4665,4837,61930,70263574371713,034-60,399Bank acceptances-------1-1Other assets (4)18511252---1111,6742,098Total on balance sheet Overseas6,3335,56827,65830,70463874671718,3861,67492,424Guarantees241--29--79-133Loan commitments159390742,9362381,165-6,380-11,342Other commitments241-1332--174-334Total Overseas6,5405,96027,73233,7739071,91171725,0191,674104,233Total gross credit risk21,93415,13797,887347,5797,94733,4898,782205,67513,792752,222Australia Credit risk exposures relating to on balance sheet assets:Credit risk exposures relating to off balance sheet assets:Credit risk exposures relating to off balance sheet assets: Notes to the Financial Statements Note 39 Credit Risk (continued) Large Exposures Concentrations of exposure to any debtor or counterparty group are controlled by a large credit exposure policy, which defines a graduated limit framework that restricts credit limits based on the internally assessed risk of the client. All exposures outside the policy require approval by the Executive Risk Committee and reporting to the Board Risk Committee. The following table shows the aggregated number of the Group‟s Corporate and Industrial counterparty exposures (including direct and contingent exposures) which individually were greater than 5% of the Group‟s capital resources (Tier One and Tier Two capital): Derivative financial instruments expose the Group to credit risk where there is a positive current fair value. 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 Note 11. 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 2010, on balance sheet netting reduced the credit risk of the Group by approximately $16 billion (2009: $14 billion). The Group has a good quality and well diversified credit portfolio, with 58% of the gross loans and other receivables in domestic mortgage loans and a further 6% in overseas mortgage loans primarily in New Zealand. Overseas loans account for 11% of loans and advances at $56.3 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 are primarily used to manage the risk of derivative transactions and off-balance sheet exposures. Balance Sheet assets and liabilities are usually settled on a gross basis. The credit risk associated with favourable contracts 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 2010, the offsets obtained by applying master netting arrangements reduced the credit risk of the Group by approximately $9.9 billion (2009: $10.7 billion). 190 Commonwealth Bank of Australia Annual Report 2010 Group20102009Number Number 5% to less than 10% of the Group's capital resources- 110% to less than 15% of the Group's capital resources- - Notes to the Financial Statements Note 39 Credit Risk (continued) Distribution of Financial Assets by Credit Classification When doubt arises as to the collectability of a credit facility, the financial instrument is classified and reported as individually impaired. Provisions for impairment are raised where there is objective evidence of impairment and for an amount adequate to cover assessed credit related losses. The Group regularly reviews its financial assets and monitors adherence to contractual terms. Credit risk-rated portfolios are assessed, at least at each Balance Sheet date, to determine whether the financial asset or portfolio of assets is impaired. The distribution of performing assets, past due assets, impaired assets and individually assessed provisions for impairment by type of financial instrument at 30 June was: Distribution of Financial Instruments by Credit Quality Commonwealth Bank of Australia Annual Report 2010 191 Group2010Neither pastPast dueImpairedIndividually due norbut notNon- assessedimpaired impairedperformingRestructuredGrossprovisionsNet$M$M$M$M$M$M$MCash and liquid assets10,119---10,119-10,119Receivables due from other financial institutions10,072---10,072-10,072Assets at fair value through Income Statement:Trading22,851---22,851-22,851Insurance15,940---15,940-15,940Other654---654-654Derivative assets27,603-86-27,689-27,689Available-for-sale investments32,914-1-32,915-32,915Loans, bills discounted and other receivables:Australia428,46411,8614,54378444,946(1,915)443,031Overseas53,3202,51332116956,323(77)56,246Bank acceptances11,569---11,569-11,569Credit related commitments115,723-18-115,741-115,741 729,229 14,374 4,969 247 748,819 (1,992) 746,827 Bank2010Neither pastPast dueImpairedIndividuallydue nor but notNon-assessedimpairedimpairedperformingRestructuredGrossprovisionsNet$M$M$M$M$M$M$MCash and liquid assets8,711---8,711-8,711Receivables due from other financial institutions9,766---9,766-9,766Assets at fair value through Income Statement:Trading18,775---18,775-18,775Insurance-------Other-------Derivative assets27,278-85-27,363-27,363Available-for-sale investments65,778-1-65,779-65,779Loans, bills discounted and other receivables:Australia359,8919,3462,45578371,770(950)370,820Overseas9,786539389,868(28)9,840Bank acceptances11,569---11,569-11,569Shares in and loans to controlled entities49,809---49,809-49,809Credit related commitments98,749-18-98,767-98,767660,1129,3512,598116672,177(978)671,199 Notes to the Financial Statements Note 39 Credit Risk (continued) Distribution of Financial Instruments by Credit Quality (1) (1) Certain comparative information has been restated to conform to presentation in the current period. 192 Commonwealth Bank of Australia Annual Report 2010 Group2009Neither pastPast dueImpairedIndividually due nor but notNon-assessed impaired impairedperformingRestructuredGrossprovisionsNet$M$M$M$M$M$M$MCash and liquid assets11,340---11,340-11,340Receivables due from other financial institutions14,421---14,421-14,421Assets at fair value through Income Statement:Trading25,401---25,401-25,401Insurance17,260---17,260-17,260Other1,677---1,677-1,677Derivative assets26,349-9-26,358-26,358Available-for-sale investments21,503-1-21,504-21,504Loans, bills discounted and other receivables:Australia399,07510,6863,493119413,373(1,560)411,813Overseas56,9182,90440717060,399(169)60,230Bank acceptances14,728---14,728-14,728Credit related commitments124,698-11-124,709-124,709713,37013,5903,921289731,170(1,729)729,441Bank2009Neither pastPast dueImpairedIndividuallydue nor but notNon-assessedimpairedimpairedperformingRestructuredGrossprovisionsNet$M$M$M$M$M$M$MCash and liquid assets9,684---9,684-9,684Receivables due from other financial institutions13,986---13,986-13,986Assets at fair value through Income Statement:Trading20,988---20,988-20,988Insurance-------Other60---60-60Derivative assets25,535-1-25,536-25,536Available-for-sale investments60,658-1-60,659-60,659Loans, bills discounted and other receivables:Australia334,8127,7572,093119344,781(933)343,848Overseas12,708815911612,991(87)12,904Bank acceptances14,726---14,726-14,726Shares in and loans to controlled entities54,671---54,671-54,671Credit related commitments107,503-10-107,513-107,513 655,331 7,765 2,264 235 665,595 (1,020) 664,575 Notes to the Financial Statements Note 39 Credit Risk (continued) Financial Assets Individually Assessed as Impaired (1) (1) Certain comparative information has been restated to conform to presentation in the current period. Commonwealth Bank of Australia Annual Report 2010 193 Group20102009GrossIndividuallyNetGrossIndividuallyNetImpairedAssessedImpairedImpairedAssessedImpairedAssetsProvisionsAssetsAssetsProvisionsAssets$M$M$M$M$M$MAustraliaHome loans670(150)520274(82)192Other personal15(22)(7)27(23)4Asset financing81(15)6672(31)41Other commercial and industrial3,960(1,728)2,2323,260(1,424)1,836Financial assets individually assessed as impaired - Australia4,726(1,915)2,8113,633(1,560)2,073OverseasHome loans164(12)152203(10)193Personal4-41-1Asset financing------Other commercial and industrial322(65)257373(159)214Financial assets individually assessed as impaired - Overseas490(77)413577(169)408Total financial assets individually assessed as impaired5,216(1,992)3,2244,210(1,729)2,481Bank20102009GrossIndividuallyNetGrossIndividuallyNetImpairedAssessedImpairedImpairedAssessedImpairedAssetsProvisionsAssetsAssetsProvisionsAssets$M$M$M$M$M$MAustraliaHome loans559(107)452186(46)140Other personal11(18)(7)7(2)5Asset financing47(6)4138(23)15Other commercial and industrial2,020(819)1,2011,993(862)1,131Financial assets individually assessed as impaired - Australia2,637(950)1,6872,224(933)1,291OverseasHome loans14-14116-116Personal------Asset financing------Other commercial and industrial63(28)35159(87)72Financial assets individually assessed as impaired - Overseas77(28)49275(87)188Total financial assets individually assessed as impaired2,714(978)1,7362,499(1,020)1,479 Notes to the Financial Statements Note 39 Credit Risk (continued) Distribution of Loans, Bills Discounted and Other Receivables by Impairment Status The tables below segregate the loans, bills discounted and other receivables into neither past due nor impaired, past due but not impaired and impaired. An asset is considered to be past due when any payment under the contractual terms has been missed. The amount included as past due is the entire contractual balance, rather than the overdue portion. The split in the tables below does not reflect the basis by which the Group manages credit risk. The distribution of performing assets, past due assets and impaired assets at 30 June was: 194 Commonwealth Bank of Australia Annual Report 2010 GroupBank2010200920102009Distribution of loans by credit quality$M$M$M$MGross loans AustraliaNeither past due nor impaired428,464399,075359,891334,812Past due but not impaired11,86110,6869,3467,757Impaired4,6213,6122,5332,212Total Australia444,946413,373371,770344,781OverseasNeither past due nor impaired53,32056,9189,78612,708Past due but not impaired2,5132,90458Impaired49057777275Total Overseas56,32360,3999,86812,991Total gross loans 501,269473,772381,638357,772 Notes to the Financial Statements Note 39 Credit Risk (continued) Credit Quality of Loans, Bills Discounted and Other Receivables Neither Past Due nor Impaired For the analysis below, financial assets that are neither past due nor impaired have been segmented into investment, pass and weak classifications. This segmentation of loans in retail and risk-rated portfolios is based on the mapping of a customer‟s internally assessed PD to Standard and Poor‟s ratings, reflecting a client‟s ability to meet their credit obligations. In particular, retail PD pools have been aligned to the Group‟s PD grades which are consistent with rating agency views of credit quality segmentation. Investment grade is representative of lower assessed default probabilities with other classifications reflecting progressively higher default risk. No consideration is given to LGD, the impact of any recoveries or the potential benefit of mortgage insurance. Loans which were neither past due nor impaired (1) (1) Certain comparative information has been restated to conform to presentation in the current period. (2) For New Zealand Housing Loans, PDs reflect Reserve Bank of New Zealand requirements resulting in higher PDs on average and lower grading. Commonwealth Bank of Australia Annual Report 2010 195 Group2010OtherHomeAssetCommercialLoansPersonalFinancingand IndustrialTotal$M$M$M$M$MCredit GradingAustraliaInvestment179,5052,21159263,390245,698Pass96,54310,0817,54151,279165,444Weak7,3122,4402417,32917,322Total Australia283,36014,7328,374121,998428,464Overseas (2)Investment23,1948638612,69236,358Pass4,8214883458,84714,501Weak1,272--1,1892,461Total Overseas29,28757473122,72853,320Total loans which were neither past due nor impaired312,64715,3069,105144,726481,784Group2009Other HomeAsset Commercial LoansPersonal Financing and Industrial Total$M $M $M $M $MCredit GradingAustraliaInvestment146,1662,12859660,471209,361Pass101,6579,5896,75656,205174,207Weak6,6902,271786,46815,507Total Australia254,51313,9887,430123,144399,075Overseas (2)Investment20,5096237816,85837,807Pass6,3263803019,53716,544Weak1,410--1,1572,567Total Overseas28,24544267927,55256,918Total loans which were neither past due nor impaired 282,75814,4308,109150,696455,993 Notes to the Financial Statements Note 39 Credit Risk (continued) . Loans which were neither past due nor impaired (1) (1) Certain comparative information has been restated to conform to presentation in the current period. 196 Commonwealth Bank of Australia Annual Report 2010 Bank2010OtherHomeAssetCommercialLoansPersonalFinancingand IndustrialTotal$M$M$M$M$MCredit GradingAustraliaInvestment151,7531,96740760,975215,102Pass83,6879,0986,37735,162134,324Weak5,9942,0922012,17810,465Total Australia241,43413,1576,98598,315359,891OverseasInvestment--3727,2807,652Pass348141341,5142,037Weak25--7297Total Overseas3731414068,8669,786Total loans which were neither past due nor impaired241,80713,2987,391107,181369,677Bank2009OtherHomeAssetCommercialLoansPersonalFinancingand IndustrialTotal$M$M$M$M$MCredit GradingAustraliaInvestment124,8391,86939358,627185,728Pass89,4278,6724,67637,112139,887Weak4,6931,8501752,4799,197Total Australia218,95912,3915,24498,218334,812OverseasInvestment--110,07810,079Pass1504362,1172,316Weak54--259313Total Overseas20443712,45412,708Total loans which were neither past due nor impaired219,16312,4345,251110,672347,520 Notes to the Financial Statements Note 39 Credit Risk (continued) Age Analysis of Loans, Bills Discounted and Other Receivables That Are Past Due But Not Impaired For the purposes of this analysis an asset is considered to be past due when any payment under the contractual terms has been missed. Loans may be classed as Performing (that is, not impaired) even though contractual payments are past due where: (i) the Group has not ascertained a doubt as to whether full amounts due will be received in a timely manner; (ii) if facilities are well secured; or (iii) where matured facilities are in process of renegotiation and remain otherwise performing. It has not been practicable to determine the fair value of collateral held against these assets. (1) Collateral held against past due Home Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown. Personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and Other Commercial and Industrial receivables. (2) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made with the debtor. Commonwealth Bank of Australia Annual Report 2010 197 Group2010OtherHomeAssetCommercialLoansPersonal (2)Financingand IndustrialTotalLoans which were past due but not impaired (1)$M$M$M$M$MAustraliaPast due 1 - 29 days3,454708941,4045,660Past due 30 - 59 days1,634188362322,090Past due 60 - 89 days772111181721,073Past due 90 - 179 days1,152189122061,559Past due 180 days or more1,26533121691,479Total Australia8,2771,2291722,18311,861OverseasPast due 1 - 29 days1,360187241691,740Past due 30 - 59 days24726717297Past due 60 - 89 days12310229164Past due 90 - 179 days13213320168Past due 180 days or more11810115144Total Overseas1,980246372502,513Total loans which were past due but not impaired 10,2571,4752092,43314,374Group2009OtherHomeAssetCommercialLoansPersonal (2)Financingand IndustrialTotal$M$M$M$M$MAustraliaPast due 1 - 29 days3,0716832561,6255,635Past due 30 - 59 days1,349186632031,801Past due 60 - 89 days71110139137988Past due 90 - 179 days808156352071,206Past due 180 days or more75644192371,056Total Australia6,6951,1704122,40910,686OverseasPast due 1 - 29 days1,586215252352,061Past due 30 - 59 days28829719343Past due 60 - 89 days1261729154Past due 90 - 179 days14719315184Past due 180 days or more10819135163Total Overseas2,255299383132,905Total loans which were past due but not impaired 8,9501,4694502,72213,591Loans which were past due but not impaired (1) Notes to the Financial Statements Note 39 Credit Risk (continued) (1) Collateral held against past due Housing Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown. Other personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and Other Commercial/ Industrial receivables. (2) Certain comparative information has been restated to conform to presentation in the current period. (3) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made with the debtor. 198 Commonwealth Bank of Australia Annual Report 2010 Bank2010OtherHomeAssetCommercialLoansPersonal (3)Financingand IndustrialTotal$M$M$M$M$MAustraliaPast due 1 - 29 days2,945623515974,216Past due 30 - 59 days1,433166201541,773Past due 60 - 89 days648991270829Past due 90 - 179 days97817231181,271Past due 180 days or more1,1413310731,257Total Australia7,1451,093961,0129,346OverseasPast due 1 - 29 days4---4Past due 30 - 59 days1---1Past due 60 - 89 days-----Past due 90 - 179 days-----Past due 180 days or more-----Total Overseas5---5Total loans which were past due but not impaired 7,1501,093961,0129,351Loans which were past due but not impaired (1) (2)Bank2009OtherHomeAssetCommercialLoansPersonal (3)Financingand IndustrialTotal$M$M$M$M$MAustraliaPast due 1 - 29 days2,592592606183,862Past due 30 - 59 days1,170164241071,465Past due 60 - 89 days607881676787Past due 90 - 179 days6821501266910Past due 180 days or more61544668733Total Australia5,6661,0381189357,757OverseasPast due 1 - 29 days6---6Past due 30 - 59 days-----Past due 60 - 89 days-----Past due 90 - 179 days1---1Past due 180 days or more1---1Total Overseas8---8Total loans which were past due but not impaired 5,6741,0381189357,765Loans which were past due but not impaired (1) (2) Notes to the Financial Statements Assets acquired through security enforcement include: Other Real Estate Owned, comprising real estate where the Group assumed ownership or foreclosed in settlement of a debt; and Other Assets Acquired Through Securities Enforcement, comprising assets other than real estate where the Group assumed ownership or foreclosed in settlement of a debt. Assets acquired through security enforcement are sold through the Group‟s existing disposal processes. These 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 credit risk rating principles as described earlier in this note. Note 39 Credit Risk (continued) Impaired Assets by Classification Assets in credit risk-rated portfolios are assessed for objective evidence that the financial asset or portfolio of assets is impaired. Impaired assets in the retail segment are those facilities that are not well secured and are past due 180 days or more. Impaired assets are split into the following categories according to APRA‟s prudential standards: Non-Performing Facilities; Restructured Facilities; and Assets Acquired Through Security Enforcement. facilities are facilities against which an Non-performing individually assessed provision for impairment has been raised and facilities where loss of principal or interest is anticipated. Restructured facilities are facilities where the original contractual terms have been modified due to financial difficulties of the borrower. Interest on these facilities is taken to the Income Statement. Failure to comply fully with the modified terms will result in immediate reclassification to non-performing. (1) Certain comparative information has been restated to conform to presentation in the current period. Commonwealth Bank of Australia Annual Report 2010 199 Group20102009200820072006$M$M$M$M$MAustralia (1)Non-Performing assets:Gross balances4,6483,514620398312Less provisions for impairment(1,915)(1,560)(248)(86)(75)Net non-performing assets2,7331,954372312237Restructured assets:Gross balances78119---Less provisions for impairment-----Net restructured assets78119---Assets Acquired Through Security Enforcement:Gross balances-----Less provisions for impairment-----Net assets acquired through security enforcement-----Net Australia impaired assets2,8112,073372312237Overseas (1)Non-Performing assets:Gross balances321407632314Less provisions for impairment(77)(169)(31)(14)(5)Net non-performing assets2442383299Restructured assets:Gross balances169170---Less provisions for impairment-----Net restructured assets169170---Assets Acquired Through Security Enforcement:Gross balances-----Less provisions for impairment-----Net assets acquired through security enforcement-----Net Overseas impaired assets4134083299Total net impaired assets3,2242,481404321246 Notes to the Financial Statements Note 39 Credit Risk (continued) (1) Certain comparative information has been restated to conform to presentation in the current period. 200 Commonwealth Bank of Australia Annual Report 2010 GroupAustraliaOverseasTotal AustraliaOverseasTotal201020102010200920092009$M$M$M$M$M$MNon-Performing Assets by SizeLess than $1 million69240732493172665$1 million to $10 million1,4251481,5738431711,014Greater than $10 million2,6093022,9112,2972342,531Total4,7264905,2163,6335774,210Impaired Assets by Size (1)Group20102009200820072006$M$M$M$M$MGross impaired assets - opening balance4,210683421326395Acquisitions-770---New and increased5,4554,3741,104928745Balances written off(1,904)(1,056)(470)(482)(450)Returned to performing or repaid(2,545)(561)(372)(351)(364)Gross impaired assets - closing balance5,2164,210683421326Movement in Gross Impaired Assets Notes to the Financial Statements Note 39 Credit Risk (continued) Impaired Loans by Industry and Status (1) (1) Certain comparative information has been restated to conform to presentation in the current period. Commonwealth Bank of Australia Annual Report 2010 201 Group2010GrossIndividuallyNetImpairedAssessedImpairedNetLoansLoansProvisionsLoansWrite-offsRecoveriesWrite-offsIndustry $M$M$M$M$M$M$MAustraliaSovereign1,571------Agriculture5,158222(75)14710-10Bank and other financial9,221414(254)160383-383Home loans292,140671(150)52195(3)92Construction3,438271(132)13972-72Personal15,97915(21)(6)651(59)592Asset Financing8,62181(15)6672(3)69Other commercial and industrial108,8182,947(1,268)1,679604(5)599Total Australia444,9464,621(1,915)2,7061,887(70)1,817OverseasSovereign1,213------Agriculture5,450193(15)1787-7Bank and other financial6,34424(1)2350-50Home loans31,433145(12)13325-25Construction472------Personal8224-418(6)12Asset Financing768------Other commercial and industrial9,821124(49)7586(1)85Total Overseas 56,323490(77)413186(7)179Gross balances 501,2695,111(1,992)3,1192,073(77)1,996Group2009GrossIndividuallyNetImpairedAssessedImpairedNetLoansLoansProvisionsLoansWrite-offsRecoveriesWrite-offsIndustry $M$M$M$M$M$M$MAustraliaSovereign1,539------Agriculture4,717257(77)1802(1)1Bank and other financial9,900878(483)395110(1)109Home Loans261,504246(82)16436(1)35Construction4,072242(104)1384-4Personal15,14842(23)19496(52)444Asset Financing7,92346(31)1558(5)53Other commercial and industrial108,5701,901(760)1,141255(10)245Total Australia413,3733,612(1,560)2,052961(70)891OverseasSovereign1,466------Agriculture5,48360(9)51---Bank and other financial7,619109(68)4186-86Home Loans30,702196(10)18618-18Construction635---4-4Personal7431-114(3)11Asset Financing717------Other commercial and industrial13,034211(82)12960-60Total Overseas 60,399577(169)408182(3)179Gross balances 473,7724,189(1,729)2,4601,143(73)1,070 Notes to the Financial Statements Note 40 Market Risk Market Risk Market risk is the potential of loss arising from adverse changes in interest rates, foreign exchange rates, commodity and equity prices, credit spreads, lease residual values, and implied volatility levels. Market risk also includes risks associated with funding and liquidity management. 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 Institutional Banking and Markets business, ASB Bank Limited (“ASB”) and the Bank of Western Australia Ltd (“Bankwest”). Key Non-Traded Market Risks include Interest Rate Risk in the Banking Book (“IRRBB”) and Non-Traded Equity Risk on the Group‟s Balance Sheet. Other Non-Traded Market Risks are liquidity risk, funding risk, market risk arising from the insurance business, transactional and structural foreign exchange risk arising from capital investments in offshore operations and lease residual value risk. The Group‟s assessment of regulatory capital required under the new Basel II framework is discussed in Note 31 Capital Adequacy. Liquidity and funding risks are discussed in Note 41. 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 VaR measured for Traded Market Risk uses two years of daily market movements. The VaR measure for Non-Traded Banking Book market risk is based on six years of daily market movement history. 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 IRRBB, insurance business market risk and Non-Traded Equity Risk. The stress events considered for Traded Market Risk are extreme but plausible market movements, and have been back- tested against moves seen during 2008 and 2009 at the height of the Global Financial Crisis. The results are reported to the Risk Committee and the Group ALCO on a regular basis. Stress tests also include a range of forward looking macro scenario stresses. The following table provides a summary of VaR, across the Group, for those market risk types where it is appropriate to use this measure. 202 Commonwealth Bank of Australia Annual Report 2010 (1) The risk on these exposures has been represented in this table using a 1 day holding period. In practice however, these „non-traded‟ exposures are managed to a longer expected holding period. (2) Average VaR calculated for each twelve month period. 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 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. to 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. The Group is a participant in all major markets across foreign exchange and interest rate products, debt, equity and commodities products as required to provide treasury, capital institutional, risk management services markets and corporate, middle market and retail customers. to Income is earned from spreads achieved through market making and from taking market risk. 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 the Income Statement are in Note 10. Trading liabilities at fair value through the Income Statement are in Note 21. Note 2 details the income contribution of trading activities to the income of the Group. Traded Market Risk is managed under a clearly defined risk appetite within the market risk policy and limit structure approved by the Risk Committee of the Board. Risk is monitored by an independent Market Risk Management function. Average (2)As atAverage (2)As atTotal Market RiskJuneJuneJuneJuneVaR (1 day 97.5%2010201020092009confidence)$M$M$M$MTraded Market Risk 12.213.710.38.4Non-Traded Interest Rate Risk (1)22.040.823.215.7Non-Traded Equity Risk (1)34.831.532.938.0Non-Traded Insurance Market Risk (1)7.18.57.25.0 Notes to the Financial Statements Note 40 Market Risk (continued) The following table provides a summary of VaR for the trading book of the Group. The VaR for ASB and Bankwest is shown separately; all other data relates to the Group and is split by risk type. The figures in the following table represent the potential unfavourable change to the Group‟s net interest earnings during the year based on a 100 basis point parallel rate shock (increase) and the expected unfavourable net change in the price of assets and liabilities held for purposes other than trading. (1) Average VaR calculated for each twelve month period. 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 Group is the responsibility of the Group Executive of the associated Business Unit with senior management oversight by Independent the Group‟s Asset and Liability Committee. 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 Banking Book Interest rate risk in the Group‟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. (b) Economic Value Measuring the change in the economic value of equity is an assessment of the long term impact to the earnings potential of the Group present valued to the current date. The Group assesses the potential change in its economic value of equity through the application of the Value-at-Risk methodology. A 20 day 97.5% VaR measure is used to capture the net economic value impact over the long term or total life of all balance sheet assets and liabilities to adverse changes in interest rates. The impact of customer prepayments on the contractual cash flows for fixed rate products is included in the calculation. Cash flows for discretionary priced products are behaviourally adjusted and repriced at the resultant profile. 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. (1) Average VaR calculated for each twelve month period. (2) VaR is only for entities that have material risk exposure. (3) ASB data (expressed in NZD) is for the month-end date. Non-Traded Equity Risk The Group retains Non-Traded Equity Risk through strategic investments and business development activities in divisions including Institutional Banking & Markets, New Zealand, Asia 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. An indicative VaR measure is as follows: Commonwealth Bank of Australia Annual Report 2010 203 Average (1)As atAverage (1)As atTraded Market RiskJuneJuneJuneJuneVaR (1 day 97.5%2010201020092009confidence)$M$M$M$MInterest rate risk4.35.64.44.9Exchange rate risk 1.63.12.61.0Implied volatility risk1.51.91.81.7Equities risk 1.61.51.00.7Commodities risk 0.80.70.90.8Credit spread risk4.33.62.83.1Diversification benefit (7.3)(8.3)(6.3)(6.3)Total general market risk 6.88.17.25.9Undiversified risk 3.63.61.71.0ASB Bank 1.61.91.21.4Bankwest 0.20.10.20.1Total 12.213.710.38.4JuneJuneNet Interest20102009Earnings at Risk$M$MAverage monthly exposureAUD186.6116.8NZD5.614.5High monthly exposureAUD299.9174.3NZD12.629.0Low monthly exposureAUD72.163.5NZD1.54.8As at balance dateAUD162.9169.0NZD12.68.0Average (1)Average (1)JuneJuneNon-Traded Interest Rate VaR20102009(20 day 97.5% confidence) (2)$M$MAUD Interest rate risk74.477.0NZD Interest rate risk (3)2.50.9As atAs atJuneJuneNon-Traded Equity VaR 20102009(20 day 97.5% confidence)$M$MVaR 140.0171.0 Notes to the Financial Statements Note 40 Market Risk (continued) Transactional Foreign Currency Exposure Market Risk in Insurance Businesses Modest in the broader Group context, a significant component of Non-Traded Market Risk activities result from the holding of assets related to the Life Insurance Businesses. There are two main sources of market risk in these businesses; market risk arising from guarantees made to policyholders and market risk arising from the investment of Shareholders‟ capital. A second order market risk also arises for the Group from assets held for investment linked policies. On this type of contract the policyholder takes the risk of falls in the market value of the assets. However, falls in market value also impact funds under management and reduce the fee income collected for this class of business. Guarantee (to Policyholders) life insurance or All financial assets within the Life Insurance statutory funds directly support either the Group's life investment contracts. Market risk arises for the Group on contracts where the liabilities to policyholders are guaranteed by the Group. The Group manages this risk by the monthly monitoring and rebalancing of assets to contract liabilities. However, for some contracts the ability to match asset characteristics with policy obligations is constrained by a number of factors including regulatory requirements or the lack of investments that substantially align cash flows with the cash payments to be made to policyholders. Shareholders’ Capital A portion of financial assets held within the Insurance Business, both within the Statutory Funds and in the Shareholder Funds of the Life Insurance company represents shareholder (Group) capital. Market risk also arises for the Group on the investment of this capital. As at 30 June 2010, Shareholders‟ funds in the Australian Life Insurance Businesses are invested 85% in income assets (cash and fixed interest) and 15% in growth assets (shares and property). A 20 day 97.5% VaR measure is used to capture the Non- Traded Market Risk exposures. Transactional foreign exchange exposure results from exposure to banking assets and liabilities, denominated in currencies other than the functional currency of the transacting entity. The Group‟s risk management policies prevent the holding of significant open positions in foreign currencies outside the trading portfolio. There were no material net transactional foreign currency exposures outside the trading portfolio at 30 June 2010. Due to the low level of non-trading exposures no feasible change in foreign exchange rates would have a material effect on either the Group‟s profit or movements in equity for the year ended 30 June 2010. Structural Foreign Exchange Risk As just noted, the Group principally hedges Balance Sheet foreign exchange risks. However, long term capital investments in offshore branches and subsidiaries give rise to long-dated foreign exchange risk via potential future repatriation of capital investments. The Group‟s only significant structural foreign exchange exposure occurs due to the Group‟s capitalisation of ASB. For quantification of the effect of structural foreign exchange exposure to the Group during the year refer to movements in the Foreign Currency Translation Reserve in Note 27, Shareholders‟ Equity. Lease Residual Value Risk The Group takes Lease Residual Value Risk on assets such as industrial and mining equipment, rail, aircraft, marine technology, healthcare and other equipment. A lease residual value guarantee exposes the business to the movement in second- hand asset prices. The Lease 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 the Market Risk testing which stress Management function. is performed by (1) Average VaR calculated for each twelve month period. (2) VaR in relation to the investment of shareholder funds. (3) VaR in relation to product portfolios where the Group has a guaranteed liability to policyholders. Further information on the Life Insurance Business can be found in Note 33 Life Insurance Business. 204 Commonwealth Bank of Australia Annual Report 2010 Average (1)Average (1)Non-Traded VaR in AustralianJuneJuneLife Insurance Business20102009(20 day 97.5% confidence)$M$MShareholder funds (2)25.325.8Guarantees (to Policyholders) (3)23.644.4 Note 41 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; has sufficient quality assets to borrow against on a secured basis; 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 during the global financial crisis. 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 funding and customer deposit activities. The Group‟s customer deposit funding base formed approximately 58% of its total funding requirements as at 30 June 2010. 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 in manages 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 Bankwest, 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. Notes to the Financial Statements The Group also has relatively small banking subsidiaries in Indonesia and Malta 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: long funding Balance sheet assets that cannot be liquidated quickly are funded with deposits or term borrowings that meet minimum maturity requirements with appropriate liquidity buffers; limits are term wholesale Short and 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 undrawn lending obligations being drawn by customers, as calculated based on draw down estimates and forecasts; and The Group maintains certain liquid asset levels of 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. 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 programs are supplemented by 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. the Commonwealth Bank of Australia Annual Report 2010 205 Notes to the Financial Statements Note 41 Liquidity and Funding Risk (continued) Recent Market Environment The incremental cost of liquidity and funding has moderated from last year„s peak but remains high. The Group has managed 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. liquidity its During the year several regulatory bodies have released consultative documents. The Australian Prudential Regulation Authority “APRA” and the Basel Committee on Banking Supervision review of liquidity standards have yet to be finalised while the UK‟s Financial Services Authority “FSA” and Reserve Bank of New Zealand “RBNZ” have released new standards. The final impact of new liquidity and funding regulations on the Group is still uncertain though it is likely that they will require increased long term debt issuance and higher holdings of liquid assets. The Group continues to monitor developments in this area and will update its liquidity and funding policies as appropriate. Details of the Group‟s regulatory capital position and capital management activities are disclosed in Note 31 Capital Adequacy. The Group‟s key funding tools include: Its consumer retail funding base which includes a wide range of retail transaction accounts, investment accounts, term deposits and retirement style accounts for individual consumers; Its small business and institutional deposit base; and Its wholesale international and domestic funding sources which include Australian dollar Negotiable Certificates of Deposit; Australian dollar bank bills; Asian Transferable Certificates of Deposit program; Australian, U.S. and Euro Commercial Paper programs; Bankwest Euro Commercial Paper program; U.S. Extendible Notes program; Australian dollar Domestic Debt Program; U.S. Medium Term Note Program; Euro Medium Term Note Program and its Medallion and Swan securitisation programs. The chart below illustrates the maturity profile of the Group‟s total outstanding long term wholesale debt at 30 June 2010, broken down by type of debt instrument. Total outstanding long term wholesale debt includes securities with a maturity or first call date equal to or greater than 12 months at the time of issue. 206 Commonwealth Bank of Australia Annual Report 2010 05101520253035201120122013201420152016201720182019>2019A$ BillionsGroup Long Term Wholesale Liabilities Maturity ProfileDomesticOffshoreDebt CapitalSecuritisationStructured Notes to the Financial Statements Note 41 Liquidity and Funding Risk (continued) Maturity Analysis of Monetary Liabilities Amounts shown in the tables below are based on contractual undiscounted cash flows for the remaining contractual maturities. (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 Group. (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 agreements entered into by the Group allow for net settlement in the event of certain specific circumstances including default of the counterparties. (3) All trading derivatives are included in the 0 to 3 months maturity band. (4) All off balance sheet items are included in the 0 to 3 month maturity band to reflect their earliest possible maturity. (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 Group. (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 agreements entered into by the Group allow for net settlement in the event of certain specific circumstances including default of the counterparties. (3) All trading derivatives are included in the 0 to 3 months maturity band. (4) All off balance sheet items are included in the 0 to 3 month maturity band to reflect their earliest possible maturity. Commonwealth Bank of Australia Annual Report 2010 207 GroupMaturity Period as at 30 June 20100 to 33 to 121 to 5Over 5NotAt CallmonthsmonthsyearsyearsSpecifiedTotal$M$M$M$M$M$M$MLiabilitiesDeposits and other public borrowings (1)180,302123,07358,41417,420384-379,593Payables due to other financial institutions3,6187,5711,37668--12,633Liabilities at fair value through Income Statement-6,5284,6713,2121,644-16,055Derivative liabilities (2) (3)-25,9065362,4263,733-32,601Bank acceptances-11,360209---11,569Insurance policy liabilities-----14,59214,592Debt issues and loan capital-29,07125,56175,89536,089-166,616Managed funds units on issue-----880880Other monetary liabilities1573,9382,229345-4057,074Total monetary liabilities184,077207,44792,99699,36641,85015,877641,613Guarantees (4)-3,659----3,659Loan commitments (4)-109,420----109,420Other commitments (4)-2,662----2,662Total off balance sheet items-115,741----115,741Total monetary liabilities and off balance sheet items184,077323,18892,99699,36641,85015,877757,354GroupMaturity Period as at 30 June 20090 to 33 to 121 to 5Over 5NotAt CallmonthsmonthsyearsyearsSpecifiedTotal$M$M$M$M$M$M$MLiabilitiesDeposits and other public borrowings (1)183,878117,67350,01320,642143-372,349Payables due to other financial institutions1,58212,3471,203---15,132Liabilities at fair value through Income Statement-8,9153,6943,0821,564-17,255Derivative liabilities (2) (3)-33,6872,0183,9672,765-42,437Bank acceptances-14,444284---14,728Insurance policy liabilities-----16,05616,056Debt issues and loan capital-24,69518,75462,03027,513-132,992Managed funds units on issue-----914914Other monetary liabilities1,0943,0201,620127-4446,305Total monetary liabilities186,554214,78177,58689,84831,98517,414618,168Guarantees (4)-3,641----3,641Loan commitments (4)-117,887----117,887Other commitments (4)-3,181----3,181Total off balance sheet items-124,709----124,709Total monetary liabilities and off balance sheet items186,554339,49077,58689,84831,98517,414742,877 Notes to the Financial Statements Note 41 Liquidity and Funding Risk (continued) Maturity Analysis of Monetary Liabilities (continued) Amounts shown in the tables below are based on contractual undiscounted cash flows for the remaining contractual maturities. (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 Group. (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 agreements entered into by the Group allow for net settlement in the event of certain specific circumstances including default of the counterparties. (3) All trading derivatives are included in the 0 to 3 months maturity band. (4) All off balance sheet items are included in the 0 to 3 month maturity band to reflect their earliest possible maturity. (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 Group. (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 agreements entered into by the Group allow for net settlement in the event of certain specific circumstances including default of the counterparties. (3) All trading derivatives are included in the 0 to 3 months maturity band. (4) All off balance sheet items are included in the 0 to 3 month maturity band to reflect their earliest possible maturity. 208 Commonwealth Bank of Australia Annual Report 2010 BankMaturity Period as at 30 June 20100 to 33 to 121 to 5Over 5NotAt CallmonthsmonthsyearsyearsSpecifiedTotal$M$M$M$M$M$M$MLiabilitiesDeposits and other public borrowings (1)153,63596,45445,62216,074376-312,161Payables due to other financial institutions3,4487,5551,37668--12,447Liabilities at fair value through Income Statement-1637322,8081,797-5,500Derivative liabilities (2) (3)-23,6892975443,733-28,263Bank acceptances-11,360209---11,569Debt issues and loan capital-20,65522,73661,53534,947-139,873Due to controlled entities3,5584,9791,6245,20537,045-52,411Other monetary liabilities-2,4973,9232,180-2278,827Total monetary liabilities160,641167,35276,51988,41477,898227571,051Guarantees (4)-2,874----2,874Loan commitments (4)-93,881----93,881Other commitments (4)-2,012----2,012Total off balance sheet items-98,767----98,767Total monetary liabilities and off balance sheet items160,641266,11976,51988,41477,898227669,818BankMaturity Period as at 30 June 20090 to 33 to 121 to 5Over 5NotAt CallmonthsmonthsyearsyearsSpecifiedTotal$M$M$M$M$M$M$MLiabilitiesDeposits and other public borrowings (1)144,011103,80841,73718,615130-308,301Payables due to other financial institutions1,48512,2771,203---14,965Liabilities at fair value through Income Statement-1162692,0331,703-4,121Derivative liabilities (2) (3)-29,5115599922,745-33,807Bank acceptances-14,442284---14,726Debt issues and loan capital-5,56813,10645,30725,207-89,188Due to controlled entities-50,87117,26612,471476-81,084Other monetary liabilities3,3011,7581,42918-2106,716Total monetary liabilities148,797218,35175,85379,43630,261210552,908Guarantees (4)-2,811----2,811Loan commitments (4)-102,053----102,053Other commitments (4)-2,646----2,646Total off balance sheet items-107,510----107,510Total monetary liabilities and off balance sheet items148,797325,86175,85379,43630,261210660,418 Notes to the Financial Statements Note 42 Retirement Benefit Obligations Name of Plan Type Defined Benefits (1) and Accumulation Defined Benefits (1) and Accumulation Officers‟ Superannuation Fund (“OSF”) Commonwealth Bank of Australia (UK) Staff Benefits Scheme (“CBA(UK)SBS”) (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 2010 is currently in progress. Indexed pension and lump sum Indexed pension and lump sum Form of Benefit 30 June 2007 (2) Date of Last Actuarial Assessment of the Fund 30 June 2009 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 2009, was completed during the year ended 30 June 2010. In line with the actuarial advice contained in the assessment, the Bank does not need to make contributions to the OSF until further consideration of the next actuarial assessment of the OSF as at 30 June 2012. An actuarial assessment of the CBA(UK)SBS, as at 30 June 2007 confirmed a deficit of GBP 25 million (AUD 44 million at the 30 June 2010 exchange rate). Following this assessment, fund actuary‟s the Bank agreed to contribute at recommended contribution included rates amounts future accruals of defined benefits (contributions estimated at AUD 3 million per annum at the 30 June 2010 exchange rate) and additional contributions of GBP 3 million per annum (AUD 5.7 million per annum at the 30 June 2010 exchange rate) payable over 10 years to finance the fund deficit. the rates. These finance to An actuarial assessment of the CBA(UK)SBS at 30 June 2010 is currently in progress. Commonwealth Bank of Australia Annual Report 2010 209 Notes to the Financial Statements Note 42 Retirement Benefit Obligations (continued) Defined Benefit Superannuation Plans The amounts reported in the Balance Sheet are reconciled as follows: 210 Commonwealth Bank of Australia Annual Report 2010 OSFCBA(UK)SBSTotal201020092010200920102009$M$M$M$M$M$MPresent value of funded obligations(3,332)(3,118)(377)(394)(3,709)(3,512)Fair value of plan assets3,6483,6132953083,9433,921Total pension assets as at 30 June316495(82)(86)234409Asset/(liability) in Balance Sheet as at 30 June316495(82)(86)234409Amounts in the Balance Sheet:Liabilities (Note 25)--(82)(86)(82)(86)Assets (Note 17)316495--316495Net asset316495(82)(86)234409The amounts recognised in the Income Statement are as follows:Current service cost(43)(24)(3)(3)(46)(27)Interest cost(160)(184)(20)(24)(180)(208)Expected return on plan assets2763721521291393Employer financed benefits within Accumulation Division(168)(172)--(168)(172)Total included in defined benefit superannuation plan expense(95)(8)(8)(6)(103)(14)Actuarial return on plan assets391(457)33(5)424(462)Changes in the present value of the defined benefit obligation are as follows:Opening defined benefit obligation(3,118)(2,892)(394)(386)(3,512)(3,278)Current service cost(36)(20)(3)(3)(39)(23)Interest cost(160)(184)(20)(24)(180)(208)Member contributions(10)(13)--(10)(13)Actuarial (losses)/gains(199)(204)(25)2(224)(202)Benefits paid1911951315204210Exchange differences on foreign plans--522522Closing defined benefit obligation(3,332)(3,118)(377)(394)(3,709)(3,512)Changes in the fair value of plan assets are as follows:Opening fair value of plan assets3,6134,4283083213,9214,749Expected return2763721521291393Experience gains/(losses)115(829)18(26)133(855)Total contributions10139101923Exchange differences on foreign plans--(42)(3)(42)(3)Benefits and expenses paid(198)(199)(13)(15)(211)(214)Employer financed benefits within Accumulation Division(168)(172)--(168)(172)Closing fair value of plan assets3,6483,6132953083,9433,921 Note 42 Retirement Benefit Obligations (continued) Notes to the Financial Statements 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 losses recognised in equity from commencement of AIFRS (1 July 2005) to 30 June 2010 were $198 million. (1) For the OSF, additional age related allowances were made for the expected salary increases from future promotions. At 30 June 2010 and 30 June 2009, these assumptions were broadly between 1.6% and 2.6% per annum for full-time employees and 1.0% per annum for part time employees. The return on asset assumption for the OSF is determined as the weighted average of the long term expected returns of each asset class where the weighting is the benchmark asset allocations of the assets backing the defined benefit risks. The long term expected returns of each asset class are determined following receipt of actuarial advice. The discount rate (gross of tax) assumption for the OSF is based on the yield on 10 year Australian Commonwealth Government securities. In addition to financial assumptions, the mortality assumptions for pensioners can materially impact the defined benefit obligations. These assumptions are age related and allowances are made for future improvement in mortality. The expected life expectancies for pensioners are set out below: Commonwealth Bank of Australia Annual Report 2010 211 20102009200820072006$M$M$M$M$MPresent value of funded obligations(3,332)(3,118)(2,892)(3,094)(3,388)Fair value of plan assets3,6483,6134,4284,9074,616Total assets/liability in the Balance Sheet3164951,5361,8131,228Experience adjustments on plan liabilities77(120)13431(55)Experience adjustments on plan assets115(829)(520)282356Gains/(losses) from changes in actuarial assumptions(276)(84)92259239Total net actuarial (losses)/gains(84)(1,033)(294)572540OSF20102009200820072006$M$M$M$M$MPresent value of funded obligations(377)(394)(386)(401)(430)Fair value of plan assets295308321372365Total assets/liability in the Balance Sheet(82)(86)(65)(29)(65)Experience adjustments on plan liabilities1926(3)15Experience adjustments on plan assets18(26)(21)(2)2Gains/(losses) from changes in actuarial assumptions(44)-(32)25(3)Total net actuarial (losses)/gains(7)(24)(47)2014CBA(UK)SBS20102009200820072006$M$M$M$M$MPresent value of funded obligations(3,709)(3,512)(3,278)(3,495)(3,818)Fair value of plan assets3,9433,9214,7495,2794,981Total assets/liability in the Balance Sheet2344091,4711,7841,163Experience adjustments on plan liabilities96(118)14028(40)Experience adjustments on plan assets133(855)(541)280358Gains/(losses) from changes in actuarial assumptions(320)(84)60284236Total net actuarial (losses)/gains(91)(1,057)(341)592554TotalOSFCBA(UK)SBS2010200920102009Economic Assumptions%%%%The above calculations were based on the following assumptions:Discount rate at 30 June (gross of tax)5.105.505.306.10Expected return on plan assets at 30 June7.608.005.706.60Expected rate salary increases at 30 June (per annum)4.103.904.404.70OSFCBA(UK)SBS2010200920102009Expected Life Expectancies for PensionersYearsYearsYearsYearsMale pensioners currently aged 6028.928.827.926.8Male pensioners currently aged 6524.123.923.122.0Female pensioners currently aged 6034.033.930.629.7Female pensioners currently aged 6528.928.825.624.9 Notes to the Financial Statements Note 42 Retirement Benefit Obligations (continued) 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 34% were assumed to take pension benefits, increasing to 50% by 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 Group‟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”. 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 2010, the actual asset allocations for the assets backing the defined benefit portion of the OSF are as follows: (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 Bank as at 30 June 2010 was $96 million (2009: $72 million). Amounts on deposit with the Group at 30 June 2010 totalled $23 million (2008: $22 million). Other financial instruments with the Group at 30 June 2010 totalled $73 million (2009: $13 million). 212 Commonwealth Bank of Australia Annual Report 2010 Actual AllocationAsset Allocations%Australian Equities23.3Overseas Equities13.8Real Estate14.3Fixed Interest Securities31.0Cash7.0Other (1)10.6 Notes to the Financial Statements Note 43 Investments in Associated Entities and Joint Ventures (1) The value for CFS Retail Property Trust based on published quoted prices as at 30 June 2010 is $416 million (2009: $363 million). (2) The value for Commonwealth Property Office Fund based on published quoted prices as at 30 June 2010 is $132 million (2009: $104 million). (3) The consolidated entity has significant influence due to its relationship as Responsible Entity. (4) Voting rights are 25%. (5) Formerly known as China Life CMG Life Assurance Company Limited. Commonwealth Bank of Australia Annual Report 2010 213 Group2010200920102009OwnershipOwnershipPrincipalCountry ofBalance$M$MInterest %Interest % ActivitiesIncorporationDateAcadian Asset Management (Australia) Limited225050Investment ManagementAustralia30-JunAMTD Group Company Limited113030Financial ServicesVirgin Islands31-DecAspire Schools (Qld) Holdings Limited2-5050Investment VechicleAustralia30-JunAussie Home Loans Pty Limited76713333Mortgage BrokingAustralia30-JunBank of Hangzhou Co. Ltd. 3982052020Commercial BankingChina31-DecCardlink Services Limited (4)11-4444Transaction servicesAustralia30-JunCFS Retail Property Trust (1) (3)43943899Funds ManagementAustralia30-JunBoCommLife Insurance Company Limited (5)28113849Life InsuranceChina31-DecCMG CH China Funds Management Limited-1-50Investment ManagementAustralia31-MarCommonwealth Property Office Fund (2) (3)13911877Funds ManagementAustralia30-JunEquigroup Pty Limited16155050LeasingAustralia30-JunFirst State Cinda Fund Management Co. Ltd15144646Funds ManagementChina31-DecFirst State European Diversified Investment Fund145-39-Funds ManagementUnited Kingdom30-JunHealthcare Support (Newcastle) Limited-2-40Financial ServicesUnited Kingdom31-DecFS Media Works Fund 1, LP (3)-22-11Investment FundUnited Kingdom31-DecInternational Private Equity Real Estate Fund353333Funds ManagementAustralia30-JunQilu Bank Co. Ltd.2041122020Commercial BankingChina31-Dec452 Capital Pty Limited11303030Investment ManagementAustralia30-JunTotal1,4901,047Group20102009$M$MShare of Associates' profits/(losses)Operating profits/(losses) before income tax141144Income tax expense(7)(3)Operating profits/(losses) after income tax134141Carrying amount of investments in associated entities1,4901,047Group20102009Total lease commitments - property, plant and equipment$M$MGroup's share of lease commitments of associated entities due:Not later than one year53Later than one year but not later than five years116Later than five years79Total lease commitments - property, plant and equipment2318 Notes to the Financial Statements Note 43 Investments in Associated Entities and Joint Ventures (continued) 214 Commonwealth Bank of Australia Annual Report 2010 Group20102009$M$MFinancial Information of AssociatesAssets - current23,42424,914Assets - non-current35,29323,058Liabilities - current38,73832,399Liabilities - non-current4,8326,184Revenues1,9232,454Expenses9051,708Group20102009$M$MFinancial Information of Joint VenturesAssets - current157145Assets - non-current451209Liabilities - current58104Liabilities - non-current397194Revenues305157Expenses294159 Notes to the Financial Statements Note 44 Key Management Personnel The Company has applied the exemption under AASB 124 „Related Party Disclosures‟ which exempts listed companies from providing remuneration disclosures in relation to their key management personnel in their Annual Financial Reports. These remuneration disclosures are provided in the Remuneration Report of the Directors‟ Report on pages 70 to 88 and have been audited. (1) Further details of Key Management Personnel compensation as well as compensation to other disclosed individuals who are not Key Management Personnel is included in the Remuneration report. Equity Holdings of Key Management Personnel Shareholdings Details of shareholdings of Key Management Personnel (or close family members or entities controlled, jointly controlled, or significantly influenced by them, or any entity over which any of the aforementioned hold significant voting power) are set out below. For details of Director and Executive equity plans refer to Note 29 Share Based Payments. Shares held by Directors All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Directors‟ Share Plan. (1) Non-Executive Directors receive 1/5 of their total annual fees as Commonwealth Bank shares. These shares are subject to a ten year trading restriction (the shares will be released earlier if the Director leaves the Board). (2) "Net Change Other" incorporates changes resulting from purchases and sales during the year. (3) David Turner was appointed as Chairman on 10 February 2010. (4) John Schubert retired from the Board on 10 February 2010. (5) Reg Clairs retired from the Board on 13 April 2010. Commonwealth Bank of Australia Annual Report 2010 215 GroupBank2010200920102009Key Management Personnel Compensation (1)$'000 $'000$'000$'000Short term benefits33,18929,42733,18929,427Post-employment benefits1,5841,2751,5841,275Share-based payments26,7878,87226,7878,872Long term benefits1,0201,7121,0201,71262,58041,28662,58041,286BalanceSharesNet ChangeBalanceNameClass1 July 2009Acquired (1)Other (2)30 June 2010DirectorsDavid Turner (3)Ordinary 8,932668-9,600John Schubert (4)Ordinary 32,783854-33,637John AndersonOrdinary 14,150502-14,652Reg Clairs (5)Ordinary 20,353571-20,924Colin GalbraithOrdinary 15,334561-15,895Jane HemstritchOrdinary 21,358530-21,888Carolyn KayOrdinary 10,51958240011,501Andrew MohlOrdinary 9,288530-9,818Fergus RyanOrdinary 17,384592-17,976Harrison YoungOrdinary 25,284592-25,876 Notes to the Financial Statements Note 44 Key Management Personnel (continued) Shares held by the CEO and Group Executives (1) Reward Shares represent shares granted under the Equity Reward Plan (ERP) and Group Leadership Reward Plan (GLRP) which are subject to performance hurdles. Deferred Shares represent the deferred portion of STI received as shares restricted for three years. (2) Reward shares and Deferred shares become ordinary shares upon vesting. (3) "Net Change Other" incorporates changes resulting from purchases, sales and forfeitures during the year. (4) Mr Blair was appointed to a Key Management Personnel role on 1 July 2009. 216 Commonwealth Bank of Australia Annual Report 2010 Reward/Acquired/OnDeferredBalanceGranted asExercise ofSharesNet ChangeBalanceNameClass (1)30 June 2009RemunerationOptionsVested (2)other (3)30 June 2010Managing Director and CEORalph NorrisOrdinary 110,713---90,910201,623Reward Shares 90,910204,626-(90,910)-204,626Deferred Shares 22,70716,460---39,167Group ExecutivesSimon Blair (4)Ordinary ------Reward Shares -30,190---30,190Deferred Shares ------Barbara ChapmanOrdinary 1,571---(1,571)-Reward Shares 17,04558,844-(17,045)-58,844Deferred Shares 7,9685,698---13,666David CohenOrdinary 13,781----13,781Reward Shares -57,113---57,113Deferred Shares -7,597---7,597David CraigOrdinary 12,385---22,72835,113Reward Shares 22,72872,690-(22,728)-72,690Deferred Shares 11,9517,597---19,548Michael HarteOrdinary ----14,31814,318Reward Shares 14,31865,767-(14,318)-65,767Deferred Shares 10,3587,597---17,955Ross McEwanOrdinary ------Reward Shares -83,074---83,074Deferred Shares 11,9518,863---20,814Ian NarevOrdinary ----1,1371,137Reward Shares 1,13758,844-(1,137)-58,844Deferred Shares 12,5865,698---18,284Grahame PetersenOrdinary 36,244---12,02748,271Reward Shares 25,00076,151-(25,000)-76,151Deferred Shares 8,7656,331---15,096Ian SainesOrdinary 9,224---5,69514,919Reward Shares 5,00089,997-(5,000)-89,997Deferred Shares 26,5967,597---34,193Alden ToevsOrdinary 9,000----9,000Reward Shares -96,920---96,920Deferred Shares 37,78410,130---47,914 Notes to the Financial Statements Note 44 Key Management Personnel (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 Loans to Key Management Personnel Exceeding $100,000 in Aggregate (1) Balance declared in NZD for Mr Norris, Mr Blair, Ms Chapman and Mr McEwan. Exchange rates are taken from Forex (an independent exchange rate provider) as at 30 June 2010 for interest charged, 30 June 2010 balances and highest balances in period. The exchange rate as at 30 June 2009 has been used for the 1 July 2009 balances. Highest balance in period can appear lower than the opening balance due to changes in exchange rates. (2) Represents the highest balance of loans outstanding at any period during the year ended 30 June 2010. Terms and Conditions of Loans 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 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 Financial Instrument Transactions Financial instrument transactions (other than loans and shares disclosed within this report) of Key Management Personnel 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 entities controlled or significantly influenced by them. Financial instrument transactions that have occurred between entities within the Group and their Key Management Personnel are primarily domestic in nature and were in the nature of normal personal banking and deposit transactions. Transactions other than Financial Instrument Transactions of Banks All other transactions with Key Management Personnel 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. Commonwealth Bank of Australia Annual Report 2010 217 OpeningInterestClosingBalanceChargedBalanceNumber in$000s$000s$000sGroupDirectors2010----20092,8402111,9911CEO & Group Executives20109,9995799,32411200914,19987810,45311Total20109,9995799,32411200914,19987810,45311HighestBalanceInterestInterest NotWrite-offBalanceBalance1 July 2009ChargedCharged30 June 2010in Period$000s$000s$000s$000s$000s$000s (2)Managing Director & CEORalph Norris (1)1,991113--1,8392,191Group ExecutivesSimon Blair (1)-43--1,0821,097Barbara Chapman (1)2,230114--1,8692,433David Cohen60134--602611Michael Harte3,024198--2,9893,075Ross McEwan (1)1,56028--2201,111Ian Narev47225--381473Ian Saines56223--310562Total10,4405789,29213,178 Notes to the Financial Statements Note 45 Related Party Disclosures 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 on an arms length basis. 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 2010. (1) Not included above are management services provided for nil consideration to associated Group and Bank companies to the value of $7,520,000 (2009: $7,970,000). 218 Commonwealth Bank of Australia Annual Report 2010 GroupFor the Year Ended and as at 30 June 2010JointAssociatesVenturesTotal$000s$000s$000sInterest and dividend income58,1691,00059,169Interest expense3332,0372,370Fee and commission income for services provided (1)57,1212,88460,005Fee and commission expense for services received104,50810,118114,626Loans, bills discounted and equity contributions424,62112,620437,241Derivative assets12,4006,68419,084Other assets39,3678,38347,750Deposits18,709-18,709Derivative liabilities25,818-25,818Other liabilities22,698-22,698GroupFor the Year Ended and as at 30 June 2009JointAssociatesVenturesTotal$000s$000s$000sInterest and dividend income68,3007,00075,300Interest expense2,5011272,628Fee and commission income for services provided (1)116,50014,500131,000Fee and commission expense for services received188,932377189,309Loans, bills discounted and equity contributions373,25928,000401,259Derivative assets---Other assets91,01610,000101,016Deposits73,760-73,760Derivative liabilities3,733-3,733Other liabilities1677,0007,167 Notes to the Financial Statements Note 45 Related Party Disclosures (continued) (1) Not included above are management services provided for nil consideration to associated Group and Bank companies to the value of $7,520,000 (2009: $7,970,000). Details of controlled entities are disclosed in Note 49. The Bank‟s aggregate investments in, and loans to controlled entities are disclosed in Note 49. Amounts due to controlled entities are disclosed in the Balance Sheet of the Bank. The Bank is the head entity of the tax consolidated group and has entered into tax funding and tax sharing agreements with its eligible Australian resident subsidiaries. The terms and conditions of these agreements are set out in note 1(w) – Accounting policies. As at 30 June 2010, the amount receivable by the Bank under the tax funding agreement with the tax consolidated entities is $439 million (2009: $100 million receivable). This balance is included in „Other assets‟ in the Bank‟s separate balance sheet. All transactions between Group entities are eliminated on consolidation. Commonwealth Bank of Australia Annual Report 2010 219 BankFor the Year Ended and as at 30 June 2010JointSubsidiariesAssociatesVenturesTotal$000s$000s$000s$000sInterest and dividend income5,165,04255,678-5,220,720Interest expense2,916,015--2,916,015Fee and commission income for services provided (1)599,9212,650119602,690Fee and commission expense for services received601,00094,230218695,448Available-for-sale securities39,821,783--39,821,783Loans, bills discounted and equity contributions49,901,264412,000-50,313,264Derivative assets193,95912,400-206,359Other assets1,075,058--1,075,058Deposits53,873,6718,900-53,882,571Derivative liabilities408,51225,818-434,330Debt issues and loan capital2,916,825--2,916,825Other liabilities3,838,43022,698-3,861,128BankFor the Year Ended and as at 30 June 2009JointSubsidiariesAssociatesVenturesTotal$000s$000s$000s$000sInterest and dividend income4,075,00062,0026,0004,143,002Interest expense3,627,2961,811-3,629,107Fee and commission income for services provided (1)601,123-12,000613,123Fee and commission expense for services received358,740188,078-546,818Available-for-sale securities39,832,227--39,832,227Loans, bills discounted and equity contributions54,808,000372,000-55,180,000Derivative assets188,010--188,010Other assets458,76124,0009,000491,761Deposits82,008,00065,000-82,073,000Derivative liabilities202,0594,000-206,059Debt issues and loan capital3,005,995--3,005,995Other liabilities2,286,688-4,0002,290,688 Notes to the Financial Statements Note 46 Notes to the Statements of Cash Flows (a) Reconciliation of Net Profit after Income Tax to Net Cash provided by/(used in) Operating Activities (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. (1) At call includes certain receivables and payables due from and to financial institutions within three months. (c) Business Disposed During the current year, the Group disposed of its banking and insurance operations in Fiji. (1) The loss on sale of $30 million is inclusive of realised structural foreign exchange losses. 220 Commonwealth Bank of Australia Annual Report 2010 GroupBank20102009200820102009$M$M$M$M$MNet profit after income tax5,6804,7534,8225,6153,086Net (increase)/decrease in interest receivable(551)301187(559)516Increase/(decrease) in interest payable889(54)449878(587)Net decrease/(increase) in assets at fair value through Income Statement (excluding life insurance)3,3016901962,383568Net (gain)/loss on sale of investments(4)(1)(1)(4)(1)Net increase in derivative assets (1,331)(8,358)(6,429)(1,827)(6,789)Net loss on sale of property, plant and equipment 4111549Net (gain) on sale of Visa Initial Public Offering--(127)--Equity accounting profit(116)(141)(92)--Gain on acquisition of controlled entities-(983)---Impairment expense2,3793,0489301,1932,703Investment impairment expense- - - -110Depreciation and amortisation (including asset write downs)618519423373306(Decrease)/increase in liabilities at fair value through Income Statement (excluding life insurance)(1,254)661(884)1,128405(Decrease)/increase in derivative liabilities(9,804)13,3614,622(6,126)10,700Increase in other provisions 46602961046(Decrease)/increase in income taxes payable(150)5212980440Increase/(decrease) in deferred income taxes payable53(355)(643)721Decrease/(increase) in deferred tax assets 383(967)1781(1,255)Decrease/(increase) in accrued fees/reimbursements receivable4441(153)(73)173Increase/(decrease) in accrued fees and other items payable302178(575)524575Increase/(decrease) in life insurance contract policy liabilities853(1,025)184--Increase/(decrease) in cash flow hedge reserve589(1,651)(150)219(1,068)Increase/(decrease) in fair value on hedged items838569970810510Dividend received from controlled entities---(1,648)(820)Changes in operating assets and liabilities arising from cash flow movements522(9,802)(6,124)17,241(19,446)Other154100(198)35333Net cash provided by/(used in) operating activities3,4451,476(2,075)20,676(9,805)Year Ended 30 JuneGroupBank20102009200820102009$M$M$M$M$MNotes, coins and cash at banks5,2853,7552,4764,0272,198Other short term liquid assets1,1533,1281,3099793,031Receivables due from other financial institutions – at call (1)5,0121,8893,3574,3865,962Payables due to other financial institutions – at call (1)(6,533)(6,586)(4,877)(6,346)(7,755)Cash and cash equivalents at end of year4,9172,1862,2653,0463,436Group201020092008$M$M$MFair value of net tangible assets disposedOther assets77-1Profit on sale (excluding realised foreign exchange losses and other related costs) (1)1-1Cash consideration received78-2Less cash and cash equivalents disposed(89)--Net cash (outflow)/inflow on disposal(11)-2 Notes to the Financial Statements Note 46 Notes to the Statements of Cash Flows (continued) (d) Non-cash Financing and Investing Activities (e) Business Acquired There were no acquisitions of controlled entities during the current year. On 19 December 2008, the Group acquired 100% of the share capital of Bank of Western Australia Limited (consisting of retail and business banking), St Andrew's Australia Pty Limited (consisting of insurance and wealth management services businesses) and HBOSA Group (Services) Pty Limited (an internal administrative support entity) for cash consideration (including transaction costs) of $2.2 billion. These businesses collectively represent the retail and business operations of HBOSA. During the 2008 financial year, on 26 July 2007, PT Commonwealth Bank acquired 83% of Arta Niaga Kencana (ANK) Bank in Indonesia. The merger was completed on 31 December 2007 and thereafter the Group owned 97% of the merged entities. On 27 November 2007, the Group completed the 100% acquisition of IWL Limited, an online broking business. These acquisitions were considered individually immaterial to the Group. Commonwealth Bank of Australia Annual Report 2010 221 Group201020092008$M$M$MShares issued under the Dividend Reinvestment Plan1,4571,0991,109Carrying ValueFair ValueCarrying ValueFair Value2009200920082008$M$M$M$MAssets acquiredCash and liquid assets4224222424Receivables due from other financial institutions283283--Assets at fair value through Income Statement: Trading5,9075,907-- Insurance212212--Derivative assets1,0141,014--Available-for-sale investments33112112Loans, bills discounted and other receivables58,15357,351241241Property, plant and equipment177225--Intangible assets98806464Deferred tax assets255610--Other assets2892881111Total assets66,81367,121392452Liabilities acquiredDeposits and other public borrowings50,40150,677202202Payables due to other financial institutions4,6734,673130130Liabilities at fair value through Income Statement250250--Derivative liabilities512512--Deferred tax liabilities54258--Other provisions8484--Insurance policy liabilities202202--Debt issues5,2215,221--Bills payable and other liabilities3573571130Loan capital1,2111,211--Total liabilities62,96563,445343362Net assets3,8483,6764990Preference share placement-(530)--Goodwill--50316Gain on acquisition-(983)--Provision for remaining consideration----Cash consideration paid (including transaction costs)-2,163-406Less: Cash and cash equivalents acquired-422-24Net consideration paid-1,741-382Less: Non-cash consideration---141Net cash outflow on acquisition-1,741-241As at time of acquisition Notes to the Financial Statements Note 46 Notes to the Statements of Cash Flows (continued) (e) Business Acquired (continued) (f) Financing Facilities Standby funding lines are considered immaterial. 222 Commonwealth Bank of Australia Annual Report 2010 201020092008Details of equity instruments issued as part of business combinationsNumber of equity instruments issued--2,327,431Fair value of equity issued ($)--140,952,360 Notes to the Financial Statements Note 47 Disclosures about Fair Values of Financial Instruments Financial assets and financial liabilities are measured on an ongoing basis either at fair value or amortised cost. AASB7 „Financial Instruments: Disclosures‟ requires the disclosure of the fair value of those financial instruments not already carried at fair value in the balance sheet. The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. (a) Comparison of Fair Values and Carrying Values The following tables summarise the carrying and fair values of financial assets and liabilities presented on the Group and the Bank‟s balance sheets. The disclosure does not cover assets or liabilities that are not considered to be financial instruments from an accounting perspective. Commonwealth Bank of Australia Annual Report 2010 223 Group20102009CarryingFairCarryingFairValueValueValueValue$M$M$M$MAssetsCash and liquid assets10,11910,11911,34011,340Receivables due from other financial institutions10,07210,07214,42114,421Assets at fair value through Income Statement: Trading22,85122,85125,40125,401 Insurance15,94015,94017,26017,260 Other6546541,6771,677Derivative assets27,68927,68926,35826,358Available-for-sale investments32,91532,91521,50421,504Loans, bills discounted and other receivables493,459492,951466,631467,774Bank acceptances of customers11,56911,56914,72814,728Other assets6,5566,5565,8955,895LiabilitiesDeposits and other public borrowings374,663374,508368,721368,668Payables due to other financial institutions12,60812,60815,10915,109Liabilities at fair value through Income Statement15,34215,34216,59616,596Derivative liabilities24,88424,88432,13432,134Bank acceptances11,56911,56914,72814,728Insurance policy liabilities14,59214,59216,05616,056Debt issues130,210127,874101,819102,231Managed funds units on issue880880914914Bills payable and other liabilities7,6987,6986,0466,046Loan capital13,51313,03612,03911,900 Notes to the Financial Statements Note 47 Disclosures about Fair Values of Financial Instruments (continued) (a) Comparison of fair values and carrying values (continued) The fair value of fixed rate loans is calculated using discounted cash flow models using a discount rate reflecting market rates offered for loans of similar remaining maturities and credit worthiness of the borrower. Deposits and Other Public Borrowings Fair value of non-interest bearing, call and variable rate deposits, and fixed rate deposits repricing within six months, approximate their carrying value as they are short term in nature or payable on demand. Fair value of term deposits are estimated using discounted cash flows, applying market rates offered for deposits of similar remaining maturities. Debt Issues and Loan Capital The fair values are calculated using quoted market prices, where available. Where quoted market prices are not available, discounted cash flow and option pricing models are used. The discount rate applied reflects the terms of the instrument, the timing of the cash flows and is adjusted for any change in the Group's applicable credit rating. Other Financial Assets and Liabilities financial assets and fair value For all other approximates carrying value due to their short term nature, frequent repricing or high credit rating. liabilities The fair values disclosed above represent estimates at which these instruments could be exchanged in a current transaction between willing parties. However, many of the instruments lack an available trading market and it is the intention to hold to maturity. Thus it is possible that realised amounts may differ to amounts disclosed above. Due to the wide range of valuation techniques and the numerous estimates that must be made, it may be difficult to make a reasonable comparison of the fair value information disclosed here, against that disclosed by other financial institutions. For financial instruments not carried at fair value, an estimate of fair value has been derived as follows: Loans, Bills Discounted and Other Receivables The carrying value of loans, bills discounted and other receivables is net of accumulated collective and individually assessed provisions for impairment. Customer 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 the majority of variable rate loans, excluding impaired loans, the carrying amount is considered a reasonable estimate of fair value. For Institution variable rate loans the fair value is calculated using discount cash flow models with a discount rate reflecting market rates offered on similar loans to customers with similar credit worthiness. The fair value of impaired loans is calculated by discounting estimated future cash flows using the loan's original effective interest rate. 224 Commonwealth Bank of Australia Annual Report 2010 Bank20102009CarryingFairCarryingFairValueValueValueValue$M$M$M$MAssetsCash and liquid assets8,7118,7119,6849,684Receivables due from other financial institutions9,7669,76613,98613,986Assets at fair value through Income Statement: Trading18,77518,77520,98820,988 Other--6060Derivative assets27,36327,36325,53625,536Available-for-sale investments65,77965,77960,65960,659Loans, bills discounted and other receivables377,195376,679353,408354,061Bank acceptances of customers11,56911,56914,72614,726Loans to controlled entities31,05530,89233,35233,394Other assets4,8084,8084,0904,090LiabilitiesDeposits and other public borrowings307,844307,511305,170304,886Payables due to other financial institutions12,42212,42214,94214,942Liabilities at fair value through Income Statement4,6134,6133,4853,485Derivative liabilities23,68923,68929,44229,442Bank acceptances11,56911,56914,72614,726Due to controlled entities52,41152,41081,08480,646Debt issues107,039104,35262,89463,675Bills payable and other liabilities5,3625,3623,9473,947Loan capital13,57513,04412,17411,626 Notes to the Financial Statements Note 47 Disclosures about Fair Values of Financial Instruments (continued) (b) Valuation Methodology A significant number of financial instruments are carried on balance sheet at fair value. The best evidence of fair value is a quoted market price in an active market. Therefore, where possible, fair value is based on quoted market prices. Where no quoted market price for an instrument is available, the fair value is based on present value estimates or other valuation techniques based on current market conditions. These valuation 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. techniques The tables below categorises financial assets and liabilities that are recognised and measured at fair value, and the valuation methodology according to the following hierarchy. Valuation Inputs Quoted Prices in Active Markets – Level 1 Financial instruments, the valuation of which are determined by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions on an arm‟s length basis. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis. Valuation Technique Using Observable Inputs – Level 2 Financial instruments that have been valued using inputs other than quoted prices as described for level 1 but which are observable for the asset or liability, either directly or indirectly. The valuation techniques include the use of discounted cash flow analysis, option pricing models and other market accepted valuation models. Valuation Technique Using Significant Unobservable Inputs – Level 3 Financial instruments, the valuation of which incorporates a significant input for the asset or liability that is not based on observable market data (unobservable input). Unobservable inputs are those not readily available in an active market due to market illiquidity or complexity of the product. These inputs are generally derived and extrapolated from observable inputs to match the risk profile of the financial instrument, and are calibrated against current market assumptions, historic transactions and economic models, where available. These inputs may include the timing and amount of future cash flows, rates of estimated credit losses, discount rates and volatility. (1) Investments in unlisted equity instruments with a carrying value of $154 million for the Group were included in AFS investments as at 30 June 2010. An amount of $149 million was included for the Bank. Due to the unlisted nature of the investments, their fair value could not be reliably measured and they are carried at cost. There is no immediate intention to dispose of these investments. They have not been included in the table above. Commonwealth Bank of Australia Annual Report 2010 225 GroupLevel 1Level 2Level 3Total$M$M$M$MAssetsAssets at fair value through Income Statement:Trading17,9954,7758122,851Insurance4,52611,414-15,940Other-654-654Derivative assets13727,5381427,689Available-for-sale investments ("AFS") (1)28,0084,752132,761Total assets50,66649,1339699,895LiabilitiesLiabilities at fair value through Income Statement3,82111,521-15,342Derivative liabilities6924,808724,884Life investment contracts-11,411-11,411Total liabilities3,89047,740751,637Fair Value as at 30 June 2010BankLevel 1Level 2Level 3Total$M$M$M$MAssetsAssets at fair value through Income Statement:Trading16,4232,344818,775Derivative assets23927,123127,363Available-for-sale investments ("AFS") (1)19,78045,849165,630Total assets36,44275,31610111,768LiabilitiesLiabilities at fair value through Income Statement3,821792-4,613Derivative liabilities6923,613723,689Total liabilities3,89024,405728,302Fair Value as at 30 June 2010 Notes to the Financial Statements Note 47 Disclosures about Fair Values of Financial Instruments (continued) (b) Valuation Methodologies (continued) Level 3 movement analysis for the year ended 30 June 2010 The following tables summarise the movements in level 3 financial assets and financial liabilities during the year. (1) Recognised in other operating income. (1) Recognised in other operating income. There have been transfers between level 1 and level 2 of the hierarchy due to the increased or decreased observability of the valuation inputs used to price the instruments and the liquidity of the market. Transfers into and out of level 3 were primarily attributable to changes in the observability of the significant valuation inputs. The Group‟s exposure to financial instruments measured at fair value based in full or in part on non-market observable inputs is restricted to a small number of financial instruments which comprise an insignificant component of the portfolios to which they belong, such that any change in the assumptions used to value the instruments to a reasonably possible alternative do not have a material effect on the portfolio balance, the Group‟s or the Bank‟s results. 226 Commonwealth Bank of Australia Annual Report 2010 GroupAssets at FairValue throughIncome StatementDerivativeDerivativeTrading AssetsAFS LiabilitiesTotal$M$M$M$M$MAs at 1 July 200911721(8)112Purchases-12-(4)8Sales(38)--2(36)Gains/(losses) in the period:Recognised in the Income Statement (1)21(1)13Transfers in--1-1Transfers out-(1)-21As at 30 June 201081141(7)89Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2010 (1)31(1)(2)1BankAssets at FairValue through Income StatementDerivativeDerivativeTrading AssetsAFSLiabilitiesTotal$M$M$M$M$MAs at 1 July 200982-(8)2Purchases---(4)(4)Sales---22Gains/(losses) in the period:Recognised in the Income Statement (1)-1-12Transfers in--1-1Transfers out-(2)-2-As at 30 June 2010811(7)3Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2010 (1)-2-(2)- Notes to the Financial Statements Note 48 Securitisation The Group enters into transactions in the normal course of business by which it transfers financial assets directly to third parties or to special purpose entities (SPEs). These transfers may give rise to the full or partial derecognition of those financial assets: Full derecognition occurs when the contractual right to receive cash flows from the financial assets is transferred, or the right is retained but an obligation is assumed to pass on the cash flows from the asset, which transfers substantially all the risks and rewards of ownership; and Partial derecognition occurs when financial assets are sold or transferred in such a way that some but not substantially all of the risks and rewards of ownership are transferred but control is retained. These financial assets are recognised on the balance sheet to the extent of continuing involvement. The table below provides break down of the assets held by securitisation vehicles and exposures the bank has to securitisation vehicles that the Group has established. (1) Derivatives are measured on the basis of Potential Credit Exposure (PCE), a credit risk measurement of maximum risk over the term of the transaction, or current fair value where PCE is not accessible. (2) Unfunded amounts apply to financial arrangements the Group holds with securitisation SPE‟s that the SPE is yet to fully draw down upon. Commonwealth Bank of Australia Annual Report 2010 227 Group20102009Assets held within Group SPEs$M$MResidential mortgages - Group originated mortgages backing securities held for potential repurchase with central banks45,67346,643Residential mortgages - Group originated9,69612,568Other175231Total securitisation assets of SPEs55,54459,442GroupFundedUnfunded (2)Total30/06/1030/06/0930/06/1030/06/0930/06/1030/06/09Exposure to Securitisation SPEs$M$M$M$M$M$MResidential mortgage backed securities held for potential repurchase with central banks45,16946,550--45,16946,550Other residential mortgage backed securities3,5673,595--3,5673,595Other derivatives (1)1,0111,43437431,0481,477Liquidity support facilities9169427877981,7031,740Other facilities989062220160310Total50,76152,6118861,06151,64753,672 Notes to the Financial Statements Note 49 Controlled Entities (a) Shares in and Loans to controlled entities The above amounts are not expected to be recovered within twelve months of the Balance Sheet date. (b) Principal subsidiaries The material subsidiaries of the Bank, based on contribution to the consolidated entity‟s profit, size of investment or nature of activity are: 228 Commonwealth Bank of Australia Annual Report 2010 Bank20102009$M$MShares in controlled entities18,75421,319Loans to controlled entities31,05533,352Total shares in and loans to controlled entities49,80954,671Extent of BeneficialEntity NameInterest if not 100%Incorporated inAustralia(a) BankingCommonwealth Bank of AustraliaAustraliaBank of Western Australia LimitedAustraliaBWA Group Services Pty LimitedAustraliaSwan Trust Series 2007-1EAustraliaSwan Trust Series 2006-1EAustraliaSwan Trust Series 2008-1DAustraliaSwan Trust Series 2004-1PAustraliaSwan Trust Series 2010 -1PAustraliaMedallion Trust Series 2003-1GAustraliaMedallion Trust Series 2004-1GAustraliaMedallion Trust Series 2005-1GAustraliaMedallion Trust Series 2005-2GAustraliaMedallion Trust Series 2006-1GAustraliaMedallion Trust Series 2007-1GAustraliaMedallion Trust Series 2008-1RAustraliaSHIELD Series 50AustraliaMIS Funding No.1 Pty LimitedAustraliaChristmas Break Pty LimitedAustraliaCBA USD Investments PartnershipAustraliaGT Funding No.6 Ltd PartnershipAustraliaPERLS III TrustAustraliaCommonwealth Investments Pty Limited AustraliaCommonwealth Securities LimitedAustraliaIWL LimitedAustraliaIWL Broking Solutions LimitedAustraliaJDV LimitedAustraliaAustralian Investment Exchange LimitedAustraliaCBFC Leasing Pty LimitedAustraliaCBFC LimitedAustraliaCBCL Australia LimitedAustraliaSparad (No.24) Pty LimitedAustraliaSecuritisation Advisory Services Pty LimitedAustraliaHomepath Pty LimitedAustraliaTankstream Rail (BY-3) Pty LtdAustraliaTankstream Rail (BY-4) Pty LtdAustraliaCBA International Finance Pty LimitedAustraliaGT Operating No.2 Pty LimitedAustraliaGT Operating No.4 Pty LimitedAustraliaColonial Finance LimitedAustraliaVH-VZH Pty LtdAustraliaVH-VZG Pty LtdAustraliaVH-VZF Pty LtdAustraliaSAFE No1 Pty LimitedAustraliaCBA AIR Pty LtdAustraliaReliance Achiever PartnershipAustraliaTankstream Rail (SW-3) Pty LtdAustraliaTankstream Rail (SW-4) Pty LtdAustraliaTankstream Rail (BY-2) Pty LtdAustralia Notes to the Financial Statements Note 49 Controlled Entities (continued) (b) Principal Subsidiaries (continued) Commonwealth Bank of Australia Annual Report 2010 229 Extent of BeneficialEntity NameInterest if not 100%Incorporated in(b) Insurance and Funds ManagementColonial Holding Company LimitedAustraliaCommonwealth Insurance Holdings LimitedAustraliaCommonwealth Insurance LimitedAustraliaJacques Martin Pty LimitedAustraliaJacques Martin Administration and Consulting Pty LimitedAustraliaColonial First State Group LimitedAustraliaCFS Managed Property LimitedAustraliaColonial First State Asset Management (Australia) LimitedAustraliaFirst State Media Holdings Pty LimitedAustraliaCommonwealth Managed Investments LimitedAustraliaColonial First State Property LimitedAustraliaColonial First State Property Retail TrustAustraliaColonial First State Property Management LimitedAustraliaColonial First State Capital Management Pty LimitedAustraliaFirst State Investment Managers (Asia) LimitedAustraliaCapital 121 Pty LimitedAustraliaCommonwealth Financial Planning LimitedAustraliaFinancial Wisdom LimitedAustraliaWhittaker Macnaught Pty LimitedAustraliaAvanteos Pty LimitedAustraliaAvanteos Investments LimitedAustraliaColonial First State Investments LimitedAustraliaSt Andrew's Australia Pty LimitedAustraliaSt Andrew's Insurance (Australia) Pty LimitedAustraliaSt Andrew's Life Insurance Pty LtdAustraliaCommwealth International Holdings Pty LimitedAustralia Notes to the Financial Statements Note 49 Controlled Entities (continued) (b) Principal Subsidiaries (continued) Non-operating and minor operating controlled entities and investment vehicles holding policyholder assets are excluded from the above list. 230 Commonwealth Bank of Australia Annual Report 2010 Extent of BeneficialEntity NameInterest if not 100%Incorporated inNew Zealand(a) BankingASB Holdings LimitedNew ZealandASB Bank LimitedNew ZealandASB Funding LimitedNew ZealandCBA Funding (NZ) LimitedNew ZealandASB Capital LimitedNew ZealandASB Capital No.2 LimitedNew ZealandCBA NZ Holding LimitedNew ZealandCBA USD Funding LimitedNew ZealandMedallion NZ Series Trust 2009-1RNew ZealandCBA Real Estate Funding (NZ) LimitedNew Zealand(b) Insurance and Funds ManagementASB Group (Life) LimitedNew ZealandSovereign Group LimitedNew ZealandSovereign LimitedNew ZealandColonial First State Investments (NZ) LimitedNew ZealandKiwi Income Properties LimitedNew ZealandKiwi Property Management LimitedNew ZealandOther Overseas(a) Banking CommBank Management Consulting (Asia) Co LimitedHong KongCBA Funding Trust 1Delaware USACBA Capital Trust 1Delaware USACBA Capital Trust IIDelaware USAPT Bank Commonwealth97%IndonesiaCBA (Europe) Finance LimitedUnited KingdomBurdekin Investments LimitedCayman IslandsCTB Australia LimitedHong KongCBA (Delaware) Finance IncorporatedDelaware USACBA Asia LimitedSingaporeNewport LimitedMaltaCommBank Europe LimitedMaltaCommTrading LimitedMaltaCommInternational LimitedMaltaWatermark LimitedHong KongCommCapital S.a.r.lLuxembourg(b) Insurance and Funds ManagementFirst State Investments (Bermuda) LimitedBermudaFirst State (Hong Kong) LLCUnited StatesFirst State Investment Holdings (Singapore) LimitedSingaporeFirst State Investments (UK Holdings) LimitedUnited KingdomPT Commonwealth Life80%Indonesia Notes to the Financial Statements Note 49 Controlled Entities (continued) (c) Disposal of Controlled Entities During the year, the Group disposed of its banking and insurance operations in Fiji. For further details refer to Note 46 (c). (d) Acquisition of Controlled Entities There were no acquisitions of controlled entities during the current year. On 19 December 2008, the Group acquired 100% of the share capital of Bank of Western Australia Limited (consisting of retail and business banking), St Andrew's Australia Pty Limited (consisting of insurance and wealth management services businesses) and HBOSA Group (Services) Pty Ltd (an internal administrative support entity) for cash consideration (including transaction costs) of $2.2 billion. These businesses collectively represent the retail and business operations in HBOSA Group. Refer to Note 46 (e) for further details. Note 50 Subsequent Events On 1 July 2010, the Tax consolidated Group began to apply the new tax regime for financial instruments – Taxation of Financial Arrangements „TOFA‟. Further details are set out in Note 5 – Income Tax Expense. On 2 July 2010, class action proceedings were commenced against the Bank in relation to Storm Financial. At this stage the size of the class action has not been defined and damages sought have not been quantified. The Group is also aware from media reports and other public announcements that class action proceedings may be commenced against it and other Australian banks with respect to exception fees. At this stage such proceedings have not commenced. The Dividend Reinvestment Plan for the final dividend for the 2010 financial year will be satisfied fully or partially by an on-market purchase and transfer of shares. 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. Commonwealth Bank of Australia Annual Report 2010 231 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 also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board, as confirmed in Note 1(a); (c) the Financial Statements and notes thereto give a true and fair view of the Bank‟s and the Group‟s financial position as at 30 June 2010 and of their performance for the year ended on that date; (d) 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 (e) the Directors have been given the declarations required under Section 295A of the Corporations Act 2001 for the financial year ended 30 June 2010. Signed in accordance with a resolution of the Directors. D J Turner Chairman 11 August 2010 R J Norris Managing Director and Chief Executive Officer 11 August 2010 232 Commonwealth Bank of Australia Annual Report 2010 PricewaterhouseCoopers ABN 52 780 433 757 Darling Park Tower 2 201 Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999 Independent auditor’s report to the members of the Commonwealth Bank of Australia Report on the financial report We have audited the accompanying financial report of the Commonwealth Bank of Australia which comprises the balance sheet as at 30 June 2010, and the income statement, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors‟ declaration for both the Commonwealth Bank of Australia and the Group (the consolidated entity). 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 Commonwealth Bank of Australia 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 the financial statements comply 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. 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. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Liability limited by a scheme approved under Professional Standards Legislation Commonwealth Bank of Australia Annual Report 2010 233 Independent auditor’s report to the members of the Commonwealth Bank of Australia (continued) Auditor’s opinion In our opinion: (a) the financial report of the Commonwealth Bank of Australia is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Commonwealth Bank of Australia and consolidated entity‟s financial position as at 30 June 2010 and of their performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the consolidated financial report and notes also comply 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 70 to 88 of the directors‟ report for the year ended 30 June 2010. The directors of the Commonwealth Bank of Australia 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 the Commonwealth Bank of Australia for the year ended 30 June 2010, 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 the Commonwealth Bank of Australia for the year ended 30 June 2010 included on the Commonwealth Bank of Australia web site. The Commonwealth Bank of Australia 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 the financial report 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 Sydney 11 August 2010 234 Commonwealth Bank of Australia Annual Report 2010 Shareholding Information Top 20 Holders of Fully Paid Ordinary Shares as at 6 August 2010 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 Limited Citicorp Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Cogent Nominees Pty Limited ANZ Nominees Limited AMP Life Limited Australian Foundation Investment Company Limited UBS Wealth Management Australia Nominees Pty Limited Bond Street Custodians Limited Queensland Investment Corporation Australian Reward Investment Alliance Perpetual Trustee Co Ltd (Hunter) Invia Custodian Pty Limited Tasman Asset Management Ltd Argo Investments Limited Milton Corporation Limited Suncorp Custodian Services Pty Ltd UBS Nominees Pty Ltd Number of Shares 210,455,886 154,853,734 136,450,456 66,664,831 31,979,790 24,434,228 15,756,788 11,330,429 8,472,900 7,462,650 4,905,305 4,405,934 3,795,781 3,211,879 2,516,548 2,501,887 2,347,895 2,250,879 2,062,211 2,008,282 % 13.59 10.00 8.81 4.30 2.06 1.58 1.02 0.73 0.55 0.48 0.32 0.28 0.25 0.21 0.16 0.16 0.15 0.15 0.13 0.13 The top 20 shareholders hold 697,868,293 shares which is equal to 45.06% 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. Details of trading activity are published in most daily newspapers, generally under the abbreviation of CBA or C‟wealth Bank. The Bank does not have a current on-market buy-back of its shares. Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 6 August 2010 Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Less than marketable parcel of $500 Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 583,890 178,891 16,469 6,896 245 786,391 13,890 74.25 22.75 2.09 0.88 0.03 100.00 1.80 194,747,354 366,828,549 112,842,109 129,735,672 744,623,690 1,548,777,374 59,082 12.57 23.69 7.29 8.38 48.08 100.00 0.00 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 On a poll only one official representative may exercise the Equity holders 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 holders 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. Commonwealth Bank of Australia Annual Report 2010 235 Shareholding Information Top 20 Holders of Perpetual Exchangeable Repurchaseable Listed Shares III (“PERLS III”) as at 6 August 2010 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Name of Holder RBC Dexia Investor Services Australia Nominees Pty Limited J P Morgan Nominees Australia Limited UBS Wealth Management Australia Nominees Pty Ltd AMP Life Limited National Nominees 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 Truckmate (Australia) Pty Limited Kerlon Pty Ltd Bond Street Custodians Limited UCA Cash Management Fund Limited Equity Trustees Limited Cogent Nominees Pty Limited Mifare Pty Limited Fleischmann Holdings Pty Ltd Number of Shares 181,561 177,733 166,258 155,309 97,801 75,482 67,477 52,734 51,282 50,000 49,750 40,304 35,000 30,000 29,283 25,996 25,908 25,354 25,000 22,500 % 3.11 3.05 2.85 2.66 1.68 1.29 1.16 0.90 0.88 0.86 0.85 0.69 0.60 0.51 0.50 0.45 0.44 0.43 0.43 0.39 The top 20 PERLS III shareholders hold 1,384,732 shares which is equal to 23.73% 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): 6 August 2010 Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Less than marketable parcel of $500 Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 17,676 512 37 35 4 18,264 21 96.78 2.81 0.20 0.19 0.02 100.00 0.11 2,973,093 1,008,064 292,698 940,267 618,159 5,832,281 41 50.98 17.28 5.02 16.12 10.60 100.00 0.00 Voting Rights 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 page 235 for the Bank‟s ordinary shares. The holders will not be entitled to vote at a general meeting of the Bank except in the following circumstances: 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; 236 Commonwealth Bank of Australia Annual Report 2010 On a proposal for the disposal of the whole of the Bank‟s property, business and undertaking; During the winding up of the Bank; or As otherwise required under the Listing Rules from time to time, in which case the holders will have the same rights as to manner of attendance and as to voting in respect of each preference share as those conferred on ordinary shareholders in respect of each ordinary share. At a general meeting of the Bank, holders of preference shares are entitled: 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. Top 20 Holders of Perpetual Exchangeable Resaleable Listed Securities IV (“PERLS IV”) as at 6 August 2010 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 RBC Dexia Investor Services Australia Nominees Pty Limited UBS Wealth Management Australia Nominees Pty Limited Questor Financial Services Limited National Nominees Limited Cogent Nominees Pty Limited UCA Cash Management Fund Limited Invia Custodian Pty Limited Avanteos Investments Limited HSBC Custody Nominees (Australia) Limited Eastcote Pty Ltd ANZ Nominees Limited Bond Street Custodians Limited Australian Executor Trustees Limited The Australian National University Investment Section Bournda Downs Pty Limited Perpetual Trustee Co Ltd (Hunter) Count Financial Limited Number of Shares 358,360 292,795 173,319 172,412 148,051 127,358 92,710 83,000 71,567 66,298 55,641 50,009 50,000 36,692 32,685 32,301 31,082 27,000 26,555 25,250 % 4.89 4.00 2.37 2.35 2.02 1.74 1.27 1.13 0.98 0.91 0.76 0.68 0.68 0.50 0.45 0.44 0.42 0.37 0.36 0.34 The top 20 PERLS IV shareholders hold 1,953,085 shares which is equal to 26.66% 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): 6 August 2010 Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Less than marketable parcel of $500 Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 15,516 738 47 38 5 16,344 1 94.93 4.52 0.29 0.23 0.03 100.00 0.00 3,311,409 1,561,018 375,183 1,058,086 1,019,304 7,325,000 2 45.21 21.31 5.12 14.45 13.91 100.00 0.00 At a general meeting of the Bank, holders of PERLS IV are entitled: 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. 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 page 235. Commonwealth Bank of Australia Annual Report 2010 237 Shareholding Information Top 20 Holders of Perpetual Exchangeable Resaleable Listed Securities V (“PERLS V”) as at 6 August 2010 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Name of Holder RBC Dexia Investor Services Australia Nominees Pty Limited UBS Wealth Management Australia J P Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited Questor Financial Services Limited Invia Custodian Pty Limited Australian Executor Trustees Limited Avanteos Investments Limited National Nominees Limited Netwealth Investments Limited Bond Street Custodians Limited Dimbulu Pty Ltd Avanteos Investments Limited UBS Nominees Pty Ltd ANZ Nominees Limited Citicorp Nominees Pty Limited W Mitchell Investments Pty Ltd JMB Pty Ltd Peters (Meat) Export Pty Ltd ABN AMRO Clearing Sydney Nominees Pty Ltd Number of Shares 297,212 150,938 136,565 128,761 103,393 68,222 63,809 60,106 57,910 54,838 52,651 50,000 46,540 43,136 41,912 41,701 37,500 33,925 30,000 28,078 % 2.97 1.51 1.37 1.29 1.03 0.68 0.64 0.60 0.58 0.55 0.53 0.50 0.47 0.43 0.42 0.42 0.38 0.34 0.30 0.28 The top 20 PERLS V shareholders hold 1,527,197 shares which is equal to 15.29% of the total shares on issue. Stock Exchange Listing PERLS V 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 V): 6 August 2010 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 V 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 V 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 page 235. At a general meeting of the Bank, holders of PERLS V are entitled: 238 Commonwealth Bank of Australia Annual Report 2010 Number of Shareholders Percentage Shareholders Number of Shares Percentage Issued Capital 32,724 1,052 63 49 4 33,892 2 96.55 3.10 0.19 0.15 0.01 100.00 0.01 5,520,454 2,103,708 489,844 1,263,594 622,400 10,000,000 2 55.21 21.04 4.90 12.64 6.22 100.00 0.00 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 page 235 for the Bank‟s ordinary shares and page 236 for the preference shares. Australia Head Office Commonwealth Bank of Australia Ground Floor, Tower 1 201 Sussex Street Sydney NSW 2000 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 Charles Pink Sovereign Group Limited 33-45 Hurstmere Road Takapuna, Auckland Telephone: (64 9) 487 9000 Facsimile: (64 9) 486 1913 Managing Director Charles Anderson 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 Tony Zhang CommBank Management Consulting (Shanghai) Co., Ltd 3805-3806, K Wah Center 1010 Huaihai Zhong Road Shanghai 200031 Telephone: (86 21) 6103 6500 Facsimile: (86 21) 6103 6598 General Manager, China Strategic Projects and Shanghai Office Randy Chow Shanghai Branch Office Level 11 Azia Centre 1233 Lujiazui Ring Road Pudong Shanghai 200120 Telephone: (86 21) 6123 8918 Facsimile: (86 21) 6123 8955 Branch Manager Shanghai Stanley Lo First State Cinda Fund Management Co. Ltd. 24th Floor China Merchants Bank Building No 7088, Shen Nan Road Shenzhen 518040 Telephone: (852) 2846 7555 Facsimile: (852) 2868 4742/4783 Regional Managing Director, Asia and Japan Michael Stapleton International Representation 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 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 (Hong Kong) Limited Level 6, Three Exchange Square Central Hong Kong Telephone: (852) 2846 7555 Facsimile: (852) 2868 4742/4783 Regional Head Asia Michael Stapleton First State Investments (Singapore) One Temasek Avenue #17-01 Millenia Tower Singapore 039192 Telephone: (65) 6538 0008 Facsimile: (65) 6538 0800 Regional Head Asia Michael Stapleton India CBA Mumbai Branch Level 2, Hoechst House Nariman Point Mumbai 400021 Telephone: (91 22) 6139 0100 Fascimile: (91 22) 6139 0200 Chief Executive Officer 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 Tony Costa PT Commonwealth Life Suite 1101-1102 11/F Sentra Mulia Jl. H.R. Rason Said, Kav X-6 No 8 Jakarta 12940 Telephone: (62 21) 250 0350 Facsimile: (62 21) 522 7642 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 12-1 Toranomon 5-chome Minato-ku, Tokyo 105-0001 Telephone: (81 3) 5400 7280 Facsimile: (81 3) 5400 7288 General Manager Japan Richard Harris Vietnam CBA Representative Office Suite 202-203A The Central Building 31 Hai Ba Trung, Hanoi Telephone: (84 4) 3824 3213 Facsimile: (84 4) 3824 3961 Deputy Chief Representative Hahn Nuygen CBA HCMC Branch office Ground Floor Han Nam Office 65 Nguyen Du St., Dist. 1 Ho Chi Minh City Telephone: (84 8) 3824 1525 Facsimilie: (84 8) 3824 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 Chief Executive Officer Gary Withers Edinburgh 23 St Andrew Square Edinburgh EH2 1BB Telephone: (44 131) 473 2200 Facsimile: (44 131) 473 2222 Managing Partners Stuart Paul & Angus Tulloch Commonwealth Bank of Australia Annual Report 2010 239 Contact Us 132 221 General Enquiries For your everyday banking including paying bills using BPAY® our automated service is available 24 hours a day, 7 days a week. Lost or Stolen Cards To report a lost or stolen card 24 hours a day, 7 days a week. From overseas call +61 132 221. Operator assistance is available 24 hours a day, 7 days a week. ® Registered to BPAY Pty Ltd ABN 69 079 137 518 132 224 Home Loans & Investment Home Loans To apply for a new home loan/investment home loan or to maintain an existing loan. Available from 8am to 10pm, 7 days a week. 131 431 Personal Loan Sales To apply for a new personal loan. Available from 8am to 8pm, 7 days a week. 1800 805 605 Customer Relations Available from 8am to 8pm (Sydney Time), Monday to Friday, for share trading and stock market enquiries, and 8am to 8pm 7 days a week for Commsec Cash Management. A 24 hour lost and stolen card line is available 24 hours, 7 days a week. 131 709 CommSec Margin Loan 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 8pm (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 companies. Available from 8am to 6pm (Sydney Time), Monday to Friday. 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 If you would like to pay us a compliment or are dissatisfied with any aspect of the service you have received. 1300 245 463 (1300 AGLINE) AgriLine Internet Banking You can apply for a home loan, credit card, personal loan, term deposit or a savings account on the internet by visiting our website at www.commbank.com.au available 24 hours a day, 7 days a week. Do your everyday banking on our internet banking service NetBank at www.commbank.com.au/netbank available 24 hours a day, 7 days a week. To apply for access to NetBank, call 132 828. Available 24 hours a day, 7 days a week. Do your business banking on our Business Internet Banking Service CommBiz at www.commbank.com.au/CommBiz available 24 hours a day, 7 days a week. To apply for access to CommBiz, call 132 339. Available 24 hours a day, 7 days a week. Special Telephony Services Customers who are hearing or speech impaired can contact us via the National Relay Service (www.relayservice.com.au) (24 hours a day, 7 days a week). Telephone Typewriter (TTY) service users can be connected to any of our telephone numbers via 133 677. Speak and Listen (speech-to-speech relay) users can also connect to any of our telephone numbers by calling 1300 555 727. Internet relay users can be connected to our telephone numbers via National Relay Service. 131 519 CommSec (Commonwealth Securities) 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 240 Commonwealth Bank of Australia Annual Report 2010 A dedicated team of Agribusiness Specialists will help you with your financial needs. With our Business Banking team living in regional and rural Australia, they understand the challenges you face. Available from 8am to 6pm, 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 1300 362 081 Commonwealth Private Outstanding personal service and trusted advice for clients with significant financial resources and complex financial needs. For a confidential discussion about how Commonwealth Private can help you, call 1300 362 081 between 8am to 5:30pm (Sydney time), visit Monday www.commonwealthprivate.com.au Friday or to 132 015 Commonwealth Financial Services For enquiries 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 Corporate Directory Registered Office Ground Floor, Tower 1 201 Sussex Street Sydney NSW 2000 Telephone (61 2) 9378 2000 Facsimile (61 2) 9118 7192 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 cba@linkmaketservices.com.au Telephone numbers for overseas Shareholders New Zealand 0800 442 845 United Kingdom 0845 769 7502 Fiji 008 002 054 Other International (61 2) 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 cba@linkmaketservices.com.au Electronic versions of Commonwealth Bank‟s past and current Annual Reports are available on www.commbank.com.au/shareholder/annualreports Commonwealth Bank of Australia Annual Report 2010 241 

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