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Annual Report 2010
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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
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53
57
63
91
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101
232
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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
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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$MAustraliaPast due 1 - 29 days3,0716832561,6255,635Past due 30 - 59 days1,349186632031,801Past due 60 - 89 days71110139137988Past due 90 - 179 days808156352071,206Past due 180 days or more75644192371,056Total Australia6,6951,1704122,40910,686OverseasPast due 1 - 29 days1,586215252352,061Past due 30 - 59 days28829719343Past due 60 - 89 days1261729154Past due 90 - 179 days14719315184Past due 180 days or more10819135163Total Overseas2,255299383132,905Total loans which were past due but not impaired 8,9501,4694502,72213,591Loans which were past due but not impaired (1)
Notes to the Financial Statements
Note 39 Credit Risk (continued)
(1) Collateral held against past due Housing Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown.
Other personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and
Other Commercial/ Industrial receivables.
(2) Certain comparative information has been restated to conform to presentation in the current period.
(3) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made
with the debtor.
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Commonwealth Bank of Australia Annual Report 2010
Bank2010OtherHomeAssetCommercialLoansPersonal (3)Financingand IndustrialTotal$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