Commonwealth Bank of Australia
Annual Report 2011

Plain-text annual report

DeteRmineD to be better than we’ve ever been. Annual Report 2011 Commonwealth bank of australia | aCn 123 123 124 Chairman’s Statement Chief Executive Officer’s Statement Highlights Group Performance Analysis Retail Banking Services Business and Private Banking Institutional Banking and Markets Wealth Management New Zealand Bankwest Other Divisions Investment Experience Risk Management Capital Management Description of Business Environment Sustainability Corporate Governance Directors’ Report Five Year Financial Summary Financial Statements Income Statements Statements of Comprehensive Income Balance Sheets Statements of Changes in Equity Statements of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholding Information International Representation Contact Us Corporate Directory Contents 2 5 11 15 22 24 26 28 32 36 38 40 41 45 52 55 59 66 94 96 97 98 99 100 102 104 230 231 233 237 238 239 Chairman’s Statement Introduction The Group has delivered another good result for the year despite the uncertain and challenging economic environment. The result is attributable to the Group’s strong position and the continued focus on providing solid returns and dividends to our shareholders. The Group’s strategy and focus of serving our customers remains paramount. We continue to be conservative and at the same time sensitive to change in the external environment, while competing strongly in all the markets and segments we serve. Operating and Financial Results The Group’s cash net profit after tax for the year ended 30 June 2011 was $6,835 million, which represented a 12% increase on the prior year. Cash earnings per share increased 11% on the prior year to 438.7 cents, whilst cash return on equity increased 80 basis points to 19.5%. This solid result was achieved in an environment where the impacts of the global financial crisis continue to linger. Credit growth remains low, business and consumer confidence is fragile and there is significant volatility and uncertainty in global markets. Despite the challenging market conditions, effective execution of the Group’s five strategic priorities of Customer Satisfaction, Business Banking, Trust and Team Spirit, Technology and Operational Excellence and Profitable Growth has driven a sound financial performance. The result was characterised by: • Net interest income increasing 7% to $12,658 million, reflecting a six basis point increase in net interest margin and 4% growth in average interest earning assets; • • Other banking income declining 3% to $3,983 million, with reduced retail fees and commissions, lower CommSec brokerage and Markets trading income partly offset by higher bills income and improved Treasury earnings; Funds management income increasing 8% to $2,041 million, supported by a 5% increase in average funds under administration and stronger investment performance, partly offset by the appreciation of the Australian dollar; Insurance income declining 9% to $856 million, partly reflecting the sale of the St Andrew’s insurance business. After adjusting for the sale of St Andrew’s, insurance income decreased 4% due to higher claims in the wholesale and retail life businesses; • • Operating expenses increasing 3% on the prior year to $8,891 million, with 1% of the growth driven by continued investment in projects supporting the Group’s strategic priorities. Operating expenses, excluding investment expenses, increased 2% reflecting the Group’s disciplined approach and continued focus on productivity initiatives which have delivered operational efficiencies; and • Impairment expense decreasing 38% to $1,280 million, mainly related impairments. lower Bankwest property reflecting All of the Group’s businesses performed satisfactorily in a challenging operating environment with highlights for the year; • Retail Banking Services cash net profit after tax was $2,845 million, representing a 16% increase on the prior year. The result was driven by solid growth in net interest income partially offset by lower other banking income, sound management of operational expenses and an improvement in loan impairment expense; 2 Commonwealth Bank of Australia Annual Report 2011 • • Business and Private Banking delivered a strong performance, achieving cash net profit after tax of $1,039 million, which represents a 16% increase on the prior year. The business banking segments contributed significantly to this result, with growth in lending volumes, improving deposit margins and a lower impairment expense; Institutional Banking and Markets achieved a cash net profit after tax of $1,004 million for the year ended 30 June 2011, which represented a 14% decrease on the prior year, reflecting a decrease in operating income due to lower trading income in Markets and the effect of the decline in lending balances in Institutional Banking; • related increase expenditure. • Wealth Management’s underlying profit after tax for the year was $581 million, up marginally on the prior year. A solid Funds Management and General Insurance result in claims and was partially offset by an compliance under Funds Administration increased 5% on the prior year to $189 billion; New Zealand cash net profit after tax was NZ$588 million, an increase of 28% on the prior year. The result was driven by a strong performance from ASB Bank with margins benefiting from a shift in portfolio mix towards variable rate loans and repricing initiatives in response to higher funding costs; Bankwest cash net profit after tax for the year ended 30 June 2011 was $463 million, up significantly from the $45 million loss in the prior year. The improved performance was driven by lower loan impairment expense and a 12% increase in operating performance; and • • IFS Asia cash net profit after tax was $53 million, an increase of 18% over the prior year. The key drivers of the result were a 10% increase in banking income driven by robust lending growth from the Indonesian retail business together with strong contributions from the Bank of Hangzhou and Vietnam (VIB) investments and an 18% increase in Insurance income reflecting improved sales volumes from the Indonesian life insurance business, particularly bancassurance sales. International Bank Dividends and Capital A final dividend of $1.88 per share was declared - an increase of 11% on the prior year. The total dividend for the year to 30 June 2011 was $3.20 per share, taking the cash dividend payout ratio for the year to 73.2%. The final dividend will be fully franked and will be paid on 6 October 2011. The Group’s Dividend Reinvestment Plan will continue to operate but no discount will be applied to shares issued under the plan for the 2011 final dividend. 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 maintained a strong capital position and remains one of a handful of global banks with a AA credit rating. The Tier One capital ratio was 10.01%, up 86 basis points over the year. It is this ratio under the Basel II Accord by which the Group’s capital position is measured. At 10.01%, it is well in excess of the Board’s current minimum requirement of 7%. However, this measure will almost certainly be increased under the G-20 and Basel III initiatives. This is manageable, however, and the Group’s Balance Sheet will continue to be strengthened with retained earnings liquidity requirements, however, are less certain and the Group remains actively involved in the consultation process, working closely with other industry participants and the regulators. from ongoing profits. The The Group remains well funded which has enabled it to provide ongoing support to customers. Strong deposit growth coupled with subdued credit growth has seen the Group satisfy a significant proportion of its funding requirements from domestic deposits. Customer deposits at $349 billion comprised 61% of the Group’s funding requirement, up from 58% last year. However, the Board is aware that the level of these deposits can vary, notwithstanding the attractiveness of the Bank’s terms and rates compared with other institutions and instruments. If the level of deposit funding decreases either through lower deposits or an increase in credit growth, the Group will generally fund its requirements through accessing the wholesale markets, both within and outside Australia. Inevitability the depth of these markets and the cost of funds to the Group will vary as a result of economic and other pressures affecting this market. The ongoing strength of the Group’s balance sheet, coupled with strong performance and the skill of our people, are important to ensure that this critical pool of funding remains both accessible and at an optimal cost. Corporate Governance and Board Performance In alternate years we use an external firm to assist with the assessment of Board performance and effectiveness. This year we performed the review internally. Further detail is provided in the Corporate Governance section of this Annual Report. The Risk Committee, which continues to be chaired by Harrison Young, comprises all members of the Board and reflects the ongoing importance of the assessment of risk. The membership of this committee will continue to be kept under review. Other committees of the Board have a composition that reflects individual skills and contribution to committee effectiveness. During the year, two new independent non-executive Directors joined your Board. Chairman’s Statement Chief Executive Officer You will have seen that Ralph Norris decided to retire at the end of November this year. Ralph has been Chief Executive Officer of the Bank for the past six years. They have been six years of exceptional achievement in terms of both financial and cultural performance. Ralph’s unswerving focus on customer satisfaction has driven the financial results and his attention to developing top talent has resulted not only in an excellent executive team, but also a pool of talent for succession to the most senior positions. On behalf of the Board, I would like to thank Ralph for his tremendous performance and exemplary contribution to the Group. The Board has appointed Ian Narev to succeed Ralph on December 1st this year. Ian is currently CEO Designate. You will have read of Ian’s qualifications for the position and his inclusive and impressive leadership skills as Group Executive responsible for Business and Private Banking. Ian has a background as head of strategy within the Group and prior to that with the financial services practice of McKinsey in New York, Sydney and Auckland. On top of an excellent academic grounding, Ian is a senior banker with an outstanding breadth of experience. In the course of the selection process, we also assured ourselves that Ian was benchmarked against the best available talent outside Australia. Your Board has every confidence in Ian’s ability to deliver the best possible outcomes for the Group and is ideally suited to deliver the best possible outcomes in the face of a challenging future. Finally, I would like to thank my fellow Directors very much indeed for their hard work and support during the past year. Outlook The 2011 financial year has been a challenging one for the Group and many of its customers. While the resources sector has performed well, other parts of the economy have been subject to headwinds including fragile consumer and corporate confidence, political uncertainty, a strong currency and natural disasters. Ongoing offshore instability continues to impact the domestic economy and has the potential to place further upward pressure on wholesale funding costs for domestic banks. On 1 September 2010, Brian Long was appointed a Director of the Bank. Brian was a senior partner of Ernst & Young and Chairman of both the Ernst & Young Global Advisory Council and the Oceania Area Advisory Council and has had more than 30 years experience in serving as audit signing partner on major Australian public companies. Brian brings wide accounting, auditing and governance experience to the Board. The 2011 financial year has been characterised by subdued system credit growth and intense competition. At this stage there is nothing to suggest that the 2012 financial year will see any material improvement on this front. Nor is it clear what the catalyst will be for a meaningful revival in consumer and corporate confidence which is a prerequisite to stronger demand for credit. On 16 March 2011, Launa Inman was appointed a Director of the Bank. Launa has been Managing Director of Target Australia Pty Ltd since 2005, a leading Australian retailer with more than 25,000 employees and 290 Target and Target Country stores across the country. Launa’s business and retail experience in Australia complements the mix of skills and experience on the Board. initiatives which will Against this backdrop the Group will continue to operate in a disciplined and prudent manner with a focus on driving sustainable productivity improvements in business performance. The Group’s priority is to maintain a robust and stable financial and operating platform, which will enable us to support our customers and provide superior returns to shareholders. deliver Commonwealth Bank of Australia Annual Report 2011 3 Chairman’s Statement Conclusion While I have no doubt that the 2012 financial year will be a challenging one for the Group and its customers, I am nonetheless very optimistic about the Group’s future and its ability to continue to deliver superior returns to its stakeholders. While we have much to celebrate about the achievements of the last 100 years, we also have much to look forward to. As the Group enters a new era, we have a stable and strong organisation with a business franchise which is the envy of many of our peers. However, despite these obvious advantages, we cannot afford to be complacent in the face of a rapidly changing domestic and global competitive environment. In fact we will need to be increasingly innovative and nimble if we are to take advantage of the opportunities which will these changes. Looking forward, our decisions over the last five years to invest heavily in technology and productivity initiatives, including Core Banking Modernisation, have placed us in a strong position. Our challenge now is to ensure that as an organisation we optimise these investments for the benefit of our customers and our shareholders. inevitably accompany 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 J Turner Chairman 10 August 2011 4 Commonwealth Bank of Australia Annual Report 2011 Chief Executive Officer’s Statement On 22 December 2011, the Commonwealth Bank will be 100 years old. On that day in 1911, the Commonwealth Bank of Australia was enacted by Parliament, with our first day of trading taking place on 15 July 1912. We are a proud company with a proud history. Our centenary is an important milestone, one that will allow us to reflect with pride on the difference we’ve made to millions of Australian families and businesses in this country over such a long period of time. I have had the great privilege to lead this organisation for six of those 100 years. We have achieved a significant amount in that time, thanks to the collective efforts of every one of our 52,000 staff. While there remains a lot more to be done, it is opportune to reflect on some of these achievements, on the eve of our 100 year anniversary, and how they have set us up to deal with the inevitable challenges we will continue to face, and just as importantly, how they will enable us to take advantage of the tremendous opportunities that lie ahead. I don’t need to remind you that over the past three years, the world has been through an unprecedented crisis that, at its’ darkest hour, had many fearing for the very future of the global financial system itself. Around the globe, economies struggle to recover from the ravages of the Global Financial Crisis (GFC), and after-shocks continue to be felt, most notably the sovereign debt crisis that is still being played out across Europe, as well as debt and growth concerns in the US. The GFC has precipitated significant changes across global economies and banking systems. I would like to talk to you about these changes, how they have arisen and most importantly how your company is responding to them. The story is in three parts: Navigating the GFC; The current banking landscape; and • • • Why the Group has continued to outperform. Navigating the GFC As a starting point, it is worthwhile briefly reflecting on the tumultuous events that have occurred over the past three years or so, and how the Group has responded to the greatest challenge we have had to face since we became fully privatised in the mid 1990’s. At its zenith, the GFC claimed some of the world’s largest and most well-known institutions, including famous names like Lehman Brothers, and came close to crippling countless others. Many large and venerable institutions were only able to survive thanks to the urgent intervention of regulators and multibillion dollar tax-payer funded bailouts. Against this global backdrop, Australian banks were able to navigate their way through the GFC relatively unscathed, emerging in a position of strength compared to our global peers. There are a number of reasons why this was the case, including the robustness of the Australian economy, our sound regulatory regime, decisive government action and the strength and financial discipline of the major banks themselves. Faced with the uncertainties created by the GFC, the Group adopted a set of guiding principles and implemented a range of specific measures to ensure we were able to respond to the challenge in a proactive manner, including: • Further strengthening already strong capital, liquidity and provisioning levels; • Maintaining our traditionally high lending and credit • • standards throughout the crisis; Being one of the first banks to prudently adjust loan pricing as soon as the sustained nature of higher international wholesale funding costs became apparent; and Lengthening our portfolio funding maturities and adopting other measures to ensure our funding position remained very strong. The Group’s ability to weather the GFC in such a robust fashion is evidenced by the fact we have continued to deliver sustainable financial results, highlighted by a Return on Equity (ROE) which has remained sector leading here in Australia and at the upper-end of banking institutions world-wide. As shown in the chart below, the Group’s ROE experienced only a slight dip in 2009, reflecting both the impact of higher loan impairments at the worst point in the crisis, as well as the prudent decision to increase the Group’s capital base at that time. Return on Equity (Cash) 21.5% 21.7% 20.4% 18.8% 18.7% 19.5% 15.8% 2005 2006 2007 2008 2009 2010 2011 That is not to say that the Australian banking sector navigated through the GFC without issues. A small number of larger corporate customers came under pressure, as their business models were unable to withstand the stresses imposed by the GFC. In terms of our personal customers, the level of loan impairments was relatively that unemployment in Australia remained low by world standards throughout the crisis played a critical role in ensuring that the majority of our customers were able to manage through this period reasonably well. low. Certainly, fact the Also important in this regard was the quality of our lending portfolios, a function of the consistent application of conservative values over many years. Our home lending, for example, has always been governed by prudent standards, demonstrated by the fact that: • Our portfolio average Loan-to-Value (LVR) ratio has • • consistently been maintained below 50%; For new home loan borrowers, the average LVR is about 50%, and this too, has remained consistent over time; and Almost 70% of our home loan customers are paying in advance of requirements. The strength of our home loan book is such that losses have always remained very low. Commonwealth Bank of Australia Annual Report 2011 5 Chief Executive Officer’s Statement While overall loss rates amongst our personal customers have remained relatively low through the GFC, it is true that some of our customers have experienced some form of stress or hardship. I am particularly proud of the fact that we were able to put in place a range of special assistance measures to assist these customers, including repayment holidays for home loan customers who had either lost their job or experienced other types of upheavals. In a similar vein, more recently we have extended $65 million in assistance for victims of the Queensland and Victorian floods, and through our New Zealand subsidiary ASB Bank, similar assistance measures have been made available to victims of the Christchurch earthquakes. The current banking landscape While it now appears that we are through the worst of the crisis, the current landscape remains a challenging one. The global economy is fragile and susceptible to damaging after-shocks, with the ongoing debt concerns in the Euro zone and the US being perhaps the most problematic. Growth rates are expected to remain low in the United States and across most European Union economies for some time. In Australia, the operating environment for banks is a very different one from that which prevailed in the decade or so before the GFC. Some of these changes might be seen as welcome ones, others less so. Regardless, these changed circumstances present a different set of challenges for Australian banks to deal with. For simplicity’s sake, I have grouped these changes into two broad categories which have come to characterise the new banking environment – (i) higher costs of banking and (ii) lower credit growth. (i) Higher costs of banking One of the most immediate and obvious impacts of the GFC is that banking is now a higher cost business than it was before. Probably the most visible area of increased costs is in relation to bank funding. By way of background, the funds we use to lend to our customers have traditionally come from two sources; retail deposits here in Australia and international and domestic wholesale markets. The reliance on international debt markets to finance a large proportion of our domestic lending is a function of a broader structural imbalance in the Australian economy. Australia has been running a current account deficit for many years. This has meant that as a country we have had to seek funds from overseas to help finance our growth. The GFC highlighted this structural exposure of the Australian economy to international debt markets, as the cost of borrowing money in international markets increased exponentially, as rates adjusted to what was seen as a much riskier environment to borrow and lend money. To illustrate this point, prior to the GFC, it was costing the Group about 13 basis points or 0.13% above the prevailing market swap rate to borrow money for a three year term. Today, the cost the Group incurs to borrow money for the same three year term is almost 100 basis points (1.00%). Indicative Long Term Wholesale Funding Costs (Basis Points) 144 98 17 3 13 17 1 Year 3 Years 5 Years 2007 2011 At the same time, the costs associated with the other part of our funding – retail deposits, has also risen, as all banks are now competing more aggressively for this type of funding. This is reflected in the higher interest rates now being offered for various deposit products, such as term deposits and online savings accounts. The other area that is likely to add to the cost of banking is that of international regulatory reform. Globally, regulators have sought to develop and implement a range of measures designed to strengthen global financial systems in an effort to ensure we never again face a crisis of the magnitude of the GFC. As with all reforms however, one of the greatest risks is that the regulatory response goes too far, leading to unintended consequences that, in some cases, may be worse than the problem that is trying to be resolved. We remain actively engaged with regulators both here in Australia and overseas to ensure the ultimate outcomes are measured, sensible, and improvements lead appropriate to each country’s individual circumstances. All the indications to date suggest that this will be the case. to practical Regardless of the final outcomes, it is clear that whatever measures are progressed, they will add an extra impost to the cost of banking. As far as Basel III capital requirements are concerned, there is no doubt that our capital levels will need to be maintained above pre-GFC regulatory minimums. Meeting higher capital requirements should not present any significant difficulty for the Group, given our capital levels are already very strong by international standards, and we continue to generate good organic capital growth through our consistently strong financial performance. Our Tier 1 Capital ratio now stands at 10.01%. Tier 1 Capital Ratio 10.01% 9.15% 7.58% 8.07% 2008 2009 2010 2011 6 Commonwealth Bank of Australia Annual Report 2011 Chief Executive Officer’s Statement Another area of significant regulatory change is that of liquidity. There is no doubt that we will need to hold higher levels of liquid assets, and that the definition for what qualifies as quality liquidity from the regulators perspective is likely to become more prescriptive. Holding a higher amount of these assets will add to the cost of funding customer loans. (ii) Lower credit growth Perhaps the most important lasting effect of the GFC has been the impact it has had on the collective mindsets of our customers. Given the scale and magnitude of the GFC and the fragile nature of the current global economic environment, it is only natural that people are now more cautious and conservative than they were before the crisis. One of the key manifestations of this extra caution is that people are saving more and borrowing less. As shown in the following chart, this slowdown in credit growth has been across all key sectors of the market – both personal and business. System Credit Growth (%) 25.0 20.0 15.0 10.0 5.0 0.0 2001 -5.0 -10.0 Source: RBA 2006 2011 Housing Business Total As credit growth has slowed, the national savings rate has grown. Where before people may have borrowed for a home improvement or to purchase a new car, they are now saving their money and waiting for “better times”. This increase in savings can be seen from the chart below. Household Savings Ratio (% of household disposable income) Why the Group has continued to outperform Since 2005, when I joined this organisation as Chief Executive, we have been pursuing a consistent and deliberate strategy, at the heart of which is a desire to transform this organisation into one that is truly focussed on meeting the needs of our customers. Our vision has been and remains to be Australia’s largest financial services organisation through excelling in customer service. This vision builds on and recognises our unique heritage as the Bank for all Australians. It is a strategy which aims to tap the tremendous potential we have in our franchise, by better understanding our customers, improving the service we offer them and doing so in the most efficient way possible. This is a strategy which has helped deliver strong financial returns over the past five years, and in many ways has helped us navigate through the GFC from a position of relative strength. I would like to take this opportunity to talk to you about why I think this strategy has ensured we have continued to deliver in the current environment. There are five elements to our strategy, and I will talk to each of these in turn. 1. Customer Satisfaction Five years ago, Commonwealth Bank trailed the other major banks by a considerable margin on customer satisfaction. Since then, we have closed the gap between ourselves and the top- rated peer bank from 12.5 to 3.6 percentage points. Retail MFI Customer Satisfaction 77.4% 78.8% 75.2% 2001 2003 2005 2007 2009 2011 64.9% Source: ABS The operating environment today is a vastly different one to that which prevailed here in Australia for many years. For the foreseeable future, growth is going to be harder to come by, and all institutions need to work harder and smarter to achieve it. While many factors will come into play, in my view the most successful institutions will be those who understand the needs of their customers’ best and are the most efficient at meeting these needs. I would now like to spend some time talking about why I think your Bank is ideally placed to succeed in this environment. 2006 2011 Top Rated Peer (1) CBA (1) Retail MFI Customer Satisfaction – Roy Morgan Research, Australians 14+ that have an account relationship with that MFI, “Very” or “Fairly” satisfied with the relationship at that institution. 6 month rolling average. The gains we have made in improving customer satisfaction are not just confined to Retail Banking. In Wealth Management, our FirstChoice platform is consistently ranked at or near the top for service amongst financial advisors and our FirstWrap platform ranked first for overall advisor satisfaction in its first year in the survey. Commonwealth Bank of Australia Annual Report 2011 7 14 12 10 8 6 4 2 0 -2 -4 Chief Executive Officer’s Statement In Business Banking, we are ranked outright or equal first in customer satisfaction for both medium sized businesses (those with annual turnover between $5m and $50m) and larger businesses (those with annual turnover of $50m and above). There is no doubt in my mind that we will achieve our goal of being the number one bank for customer satisfaction. The tremendous gains we have already made, the momentum we have and the commitment of our people to achieving this outcome makes it inevitable that we will get there. The more satisfied a customer is, the more likely they are to do more business with you. In an environment of constrained credit growth and tighter margins, improving the service we provide to our customers and earning more business from them will be one of the key drivers of future growth. So, it is very pleasing that over the same period, we have made significant improvements in customer satisfaction; the average number of products held by each of our customers has grown by over 20%. We now have the highest number of products per customer of any major bank in Australia at 2.64, well ahead of the average of our peers. Products per customer (1) Our Business and Private Bank is now delivering consistently strong financial results, off the back of improved customer satisfaction levels and stronger volume and market share outcomes. The business is operating with strong momentum and we are very well placed to take advantage of the eventual upturn in business sector demand. 3. Technology and Operational Excellence In an environment of softer credit growth and additional cost pressures, only the most efficient banks will be able to deliver consistently strong shareholder returns. We have a very strong track record in this regard, with a progressive improvement in our cost-to-income ratio in recent years Cost-to-Income Ratio (%) 56.7 54.5 51.5 50.5 49.3 48.9 46.4 45.7 45.5 2.70 2.60 2.50 2.40 2.30 2.20 2.10 2.00 2007 2008 2009 CBA Peer Average 2010 (2) 2011 (1) Roy Morgan Research, Australians 14+, Banking and Finance products per Banking and Finance customers, six months rolling average. (2) Average of the major four banks excluding CBA. 2. Business Banking When most people think about the Commonwealth Bank it is probably fair to say they think about things like our extensive branch network, our heritage as the “people’s bank” or our leading positions in home lending or retail deposit accounts. It is less likely they will nominate us as being particularly strong in business banking. For many years the Bank was a relatively small competitor in this segment of the market. However, over the last five years we have set about addressing our relatively underweight position in business banking as a core element of our overall Group strategy. We have made significant progress in that time: • Opened 23 new dedicated business banking centres • • • across the country (45 in total); Located over 150 new local business bankers in selected key branches; Launched CommBiz, our innovative online banking facility for business customers; Provided our customers with 24/7 access to business bankers; Considerably improved customer satisfaction; and • • Grown our market share from 12.1% in June 2006 to 2003 2004 2005 2006 2007 2008 2009 2010 2011 These gains have not been achieved through indiscriminate cost cutting, nor have they been achieved by under investing in our business. We have invested over $1 billion back into the business in each of the past four years. Through our Technology and Operational Excellence strategy, we are well advanced in achieving our goal of transforming the Group’s domestic banking operations into the most efficient in Australia. From a technology perspective, much of the focus to date has been on improving our front end, customer facing systems, to improve the productivity of our staff and to better enhance the customer experience. As a result, the Bank now offers the leading range of frontline banking systems and delivery platforms in the Australian market, including: • • • • • CommSee – our leading edge customer interface system, which was rolled out across our branch and call centre networks in 2006/07; NetBank – our market leading online and mobile banking solution, with almost six million registered users; CommBiz – our innovative secure online banking solution which has made banking so much easier for our business customers; CommSec – for 15 years the leading online retail broking platform, accounting for over 50% of all online retail trades in the market; and FirstChoice – providing customers with real time access to secure portfolio information and transacting capabilities. superannuation investment and The next stage of this efficiency evolution is our Core Banking Modernisation programme. 18.1% in June 2011. . 8 Commonwealth Bank of Australia Annual Report 2011 Chief Executive Officer’s Statement I am tremendously excited about the potential of Core Banking. This is truly a transformational undertaking which I believe will revolutionise the way we do banking in this country. Once completed in 2012, we will have transitioned our Australian banking business to a completely new core operating platform, replacing the myriad of old standalone systems previously operating across the various divisions of the Bank. Since launch in April 2008, we have achieved every key milestone we have set for ourselves, including: • Migrated over 50 million customer records to the new platform; • Migrated over 10 million deposit and transaction accounts to the new platform – the largest banking migration in Australian history; and • Replaced overnight “batch” processing with real time, 24/7 banking for millions of customers. The benefits of real time transactions are already being seen in customer service improvements and I continue to receive many positive comments from customers on the real time functionality of our new systems. technology upgrade. Supporting However, it is important not to look on Core Banking as being simply a technology component of the programme is a comprehensive change programme that is designed to ensure we achieve maximum leverage and benefit from this investment through changes to staff roles, dedicated training programmes and specialised sales and marketing processes. the With Core Banking we are building a valuable strategic asset for the Bank, which will ensure we remain at the forefront of banking efficiency and productivity for many years to come. 4. Profitable Growth Our Profitable Growth strategy is about maintaining discipline in the Group’s growth agenda, be it organically generated growth in our traditional markets or our investments in new markets. Put simply, it means ensuring we earn an appropriate level of return for all our growth strategies and investments. Our track record in this regard has been good. The Group’s acquisition of Bankwest in 2008 is an excellent example of this discipline in practice. By acquiring these businesses at a highly attractive price, the Group obtained a strong business with an important presence in one of Australia’s fastest growing states, with strong leverage to the mining and resources boom. Another key platform of our Profitable Growth strategy is that of Asia, where we have been pursuing a considered, prudent and focussed growth strategy over many years. For several years we have operated the largest foreign network in Indonesia, and we hold 20% stakes in two City Commercial Banks in China, the maximum foreign ownership allowed in that country. Over the past 12 months we have made further progress with: • • • • • • The launch of our BoComm Life Joint Venture in China; The opening of a branch in Shanghai China; The opening of the first CBA branch in India; The acquisition of a 15% shareholding International Bank; The expansion of our existing networks in other countries, with a further ten branches opened in Indonesia and 43 new ATM’s installed across Indonesia and Vietnam; and in Vietnam The opening of three County Banks in Jiyuan, DengFeng and Lankao, China. Our Asian growth story is very much focussed on selective targeted expansion in key growth regions, achieved through a patient, on the ground understanding of local markets and jurisdictions built up over many years. in a way which optimises returns and value Profitable Growth is not solely about acquisitions and overseas expansions. Profitable Growth plays just as important a role in our core domestic businesses, ensuring we continue to manage these to shareholders while meeting the needs of our customers. It ensures we are continually refining and adjusting our areas of focus, to take advantage of those opportunities which offer the greatest return at any particular point in time. We are not an organisation which chases market share for market share’s sake. Profitable growth is all about balancing shareholder value and customer needs. Our single minded focus in this regard has enabled us to navigate the GFC from a position of relative strength, and has seen us continue to outperform, as we fine- tune this organisation to meet the challenges of the new environment. 5. Trust and Team Spirit Finally, I would like to talk about our people. All of the success we have had is due to the hard work, enthusiasm and commitment of our people. They are the ones who serve our customers every day, who process the transactions, who answer the enquiries in our call centres, and who ensure loans are processed and funded in a timely manner. Every day there are millions of interactions between our staff and our customers, and the overwhelming majority of these interactions are handled professionally and with the highest level of customer service. The gains we have made in customer satisfaction are testimony to the efforts and commitment of our people. is One of the most pleasing parts of my job as CEO of the Commonwealth Bank the many customer compliments that I receive every day, highlighting the numerous examples of situations where our staff have delighted a customer so much that they have felt compelled to write to me to share the experience. read to Every day I have the opportunity to talk to staff all across this organisation, and I am constantly impressed by the level of enthusiasm they display, and of their absolute commitment to our journey to be number one in customer satisfaction. More than any other factor, the energy and drive of the people I meet every day gives me the utmost confidence that we will achieve this goal in the very near future. Commonwealth Bank of Australia Annual Report 2011 9 Chief Executive Officer’s Statement Summary The Commonwealth Bank has a proud and distinguished history. For almost a century, we have been the financial services organisation that many Australians have relied on for their banking and financial needs – from their first banking account, to a loan for their first car, to their first home loan, to saving for retirement. Over the course of those 100 years, we have undergone many changes. Today, we are a significantly more diverse organisation. From our relatively humble beginnings we are now a global banking organisation, with a strong and growing presence outside this country in New Zealand, Asia and around the world. In that time, we have faced many challenges, the most recent and perhaps most significant of these being the Global Financial Crisis. As has always been the case, this organisation not only met this challenge, but emerged from it a stronger organisation than we have ever been. The current operating environment poses its own challenges, its own set of problems and issues. The message I would like to leave you with is that I am extremely confident that as an organisation we are well placed to meet these challenges, and continue to deliver consistently strong returns to you, our shareholders. Ralph Norris Chief Executive Officer 10 August 2011 10 Commonwealth Bank of Australia Annual Report 2011 Group Performance Highlights Net Profit after Income Tax Statutory basis Cash basis Full Year Ended Half Year Ended 30/06/11 30/06/10 30/06/11 31/12/10 $M 6,394 6,835 $M 5,664 6,101 $M 3,342 3,500 $M 3,052 3,335 The Group’s net profit after tax (“statutory basis”) for the year ended 30 June 2011 was $6,394 million, up 13% on the prior year. Return on equity (“statutory basis”) was 18.4% and Earnings per share (“statutory basis”) was 411.2 cents, up 12% on the prior year. The Management Discussion and Analysis discloses the net profit after tax on both a “statutory basis” and a “cash basis”. The statutory basis is prepared in accordance with the Corporations Act 2001 and the Australian Accounting Standards, which comply with International Financial Reporting Standards (IFRS). The cash basis is used by management to present a clear view of the Group’s underlying operating results, excluding a number of items that introduce volatility and/or one off distortions of the Group’s current period performance. These items, such as hedging and IFRS volatility, are calculated consistently year on year and do not discriminate between positive and negative adjustments. A complete list of items excluded from statutory profit is provided in the reconciliation of the Net profit after tax (“cash basis”) on page 12 and described in greater detail on page 18. This result was achieved in a challenging environment where the impacts of the Global Financial Crisis (GFC) continue to linger. Credit growth remains at historic lows, business and consumer confidence is fragile and there is significant uncertainty in global markets. Despite these difficult conditions, the Group, with its well managed, diversified business model and strong and stable financial platform, has delivered another solid result. This has been supported by a continued disciplined approach to the execution of the Group’s five strategic priorities and prudent management in uncertain times. Operating income growth was impacted by a low credit growth environment, strong competition, particularly in the home lending and deposit markets, together with difficult trading conditions for the Markets and Wealth businesses. Operating expenses were managed tightly, laying the platform for continued investment in the business, including the effective execution of the Core Banking initiative which is now past the half way stage, having achieved significant milestones during the year. Impairment expense continued to decrease as credit quality gradually improved however some of the Group’s customers are finding business conditions challenging. The Group has maintained a conservative approach to provisioning. Net profit after tax (“cash basis”) for the year ended 30 June 2011 was $6,835 million, which represented an increase of 12% on the prior year. Cash earnings per share increased 11% to 438.7 cents per share. Return on Equity (“cash basis”) for the year ended 30 June 2011 was 19.5%, up 80 basis points on the prior year, reflecting increased profitability and effective capital management. Performance highlights include: • “Bank of the Year” in the 2011 Money Magazine Awards, for the second year in a row; Highlights • • • Awarded the “Australian Financial Institution of the Year – Major Banks” at the 2011 Australian Banking and Finance Awards; Continued investment in the business, including the Core Banking Modernisation initiative with customers now enjoying the benefits of real time banking; and The Group achieved a major milestone when its first teams began working out of new state-of-the-art buildings in Sydney’s Darling Harbour. This facility will be home to approximately 6,300 staff by early next year. Capital and Funding The Group maintained a strong capital position and remains one of a handful of global banks with a AA credit rating. The Tier One capital ratio was 10.01%, up 86 basis points over the year. The Group remains well funded which has enabled it to provide ongoing support to customers. Strong deposit growth coupled with subdued system credit growth has seen the Group satisfy a significant proportion of its funding requirements from domestic deposits. Customer deposits made up 61% of the Group’s total funding source at 30 June 2011, up from 58% in the prior year. Customer deposits increased $26 billion to $349 billion. Recent initiatives by global regulators have helped to clarify future capital and liquidity requirements for the Australian banking industry. The G-20 and Basel III initiatives regarding capital are manageable within the timeframes however the new liquidity rules require further clarification. The Group remains actively involved in the consultation process, working closely with other the regulators. industry participants and Dividends The final dividend declared was $1.88 per share, up 11% on the prior year. The total dividend for the year to 30 June 2011 was $3.20, taking the dividend payout ratio (“cash basis”) to 73.2%. The final dividend payment will be fully franked and will be paid on 6 October 2011 to owners of ordinary shares at the close of business on 19 August 2011 (“record date”). Shares will be quoted ex–dividend on 15 August 2011. Outlook The 2011 financial year has been a challenging one for the Group and many of its customers. While the resources sector has continued to perform well, many other parts of the economy have been impacted by a range of headwinds including fragile consumer confidence, political uncertainty, a high Australian dollar and natural disasters. Ongoing offshore instability, often flowing from the GFC, continues to impact the domestic economy and has the potential to place further upward pressure on wholesale funding costs for the domestic banking industry. The 2011 financial year has been characterised by subdued system credit growth and intense competition. At this stage there is nothing to suggest that the 2012 financial year will see any material improvement nor is it clear what the catalyst will be for a meaningful revival in consumer and corporate confidence which is prerequisite to stronger demand for credit. initiatives which will Against this backdrop the Group will continue to operate in a disciplined and prudent manner with a focus on driving sustainable productivity improvements in business performance. The Group’s priority is to maintain a robust and stable financial and operating platform, which will enable us to support our customers and provide superior returns to shareholders. deliver Commonwealth Bank of Australia Annual Report 2011 11 Highlights Group Performance Summary Net interest income Other banking income Total banking income Funds management income Insurance income Total operating income Investment experience Total income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense (1) Non-controlling interests (2) Net profit after tax ("cash basis") Hedging and IFRS volatility Bankwest non-cash items Tax on NZ structured finance transactions Other non-cash items Net profit after tax ("statutory basis") Represented by: Retail Banking Services (3) Business and Private Banking (3) Institutional Banking and Markets (3) Wealth Management New Zealand Bankwest Other (3) Net profit after tax ("cash basis") Investment experience - after tax Net profit after tax ("underlying basis") Full Year Ended Half Year Ended Statutory Full Year Ended 30/06/11 30/06/10 Jun 11 vs 30/06/11 31/12/10 Jun 11 vs 30/06/11 Jun 11 vs $M Dec 10 % $M Jun 10 % $M 12,658 3,983 16,641 2,041 856 19,538 121 19,659 (8,891) (1,280) 9,488 (2,637) (16) 6,835 (265) (147) - (29) $M Jun 10 % 11,868 4,112 15,980 1,898 945 18,823 236 19,059 (8,601) (2,075) 8,383 (2,266) (16) 6,101 17 (216) (171) (67) 7 (3) 4 8 (9) 4 (49) 3 3 (38) 13 16 - 12 large (32) large (57) $M 6,488 1,924 8,412 1,024 398 9,834 86 9,920 (4,483) (558) 4,879 (1,372) (7) 3,500 (49) (99) - (10) 6,170 2,059 8,229 1,017 458 9,704 35 9,739 (4,408) (722) 4,609 (1,265) (9) 3,335 (216) (48) - (19) 6,394 5,664 13 3,342 3,052 2,845 1,039 1,004 642 470 463 372 6,835 (81) 2,461 898 1,173 718 388 (45) 508 6,101 (178) 6,754 5,923 16 16 (14) (11) 21 large (27) 12 (54) 14 1,453 1,392 532 506 283 236 239 251 507 498 359 234 224 121 3,500 (52) 3,335 (29) 3,448 3,306 12,607 3,630 16,237 2,042 1,118 19,397 n/a 19,397 (9,060) (1,280) 9,057 (2,647) (16) n/a n/a n/a n/a n/a 6,394 6 (14) 1 6 (9) 1 n/a 1 4 (46) 11 5 - n/a n/a n/a n/a n/a 13 5 (7) 2 1 (13) 1 large 2 2 (23) 6 8 (22) 5 (77) large - (47) 10 4 5 2 (21) 1 7 large 5 79 4 (1) For purposes of presentation, Policyholder tax expense components of Corporate tax expense are shown on a net basis (30 June 2011: $166 million, 30 June 2010: $130 million and for the half years ended 30 June 2011: $66 million and 31 December 2010: $100 million). (2) Non-controlling interests include preference dividends paid to holders of preference shares in ASB Capital Limited and ASB Capital No.2 Limited. (3) Comparatives have been restated for the impact of business resegmentation. Group Return on Equity Group Return on Assets 21.5% 21.7% 20.4% 18.8% 18.7% 19.5% 15.8% 1.1% 383 4.1 352 3.5 646 668 620 1.0% 6.8 488 6.1 440 4.5 4.7 4.4 0 0 0 0 0 0 0 2005 2006 2007 2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011 ROE - Cash (%) Total Assets ($bn) Cash NPAT ($bn) ROA - Cash (%) 12 Commonwealth Bank of Australia Annual Report 2011 Highlights Shareholder Summary Dividends per share - fully franked (cents) Dividend cover - cash (times) Earnings per share (cents) Statutory basis - basic Cash basis - basic Dividend payout ratio (%) Statutory basis Cash basis Weighted average no. of shares - statutory basic (M) Weighted average no. of shares - cash basic (M) Return on equity - cash (%) Full Year Ended Half Year Ended Jun 11 vs Jun 11 vs 30/06/11 30/06/10 Jun 10 % 30/06/11 31/12/10 Dec 10 % 320 1. 4 411. 2 438. 7 78. 3 73. 2 1,545 1,548 19. 5 290 1. 4 367. 9 395. 5 79. 7 73. 9 1,527 1,531 18. 7 10 - 12 11 (140)bpts (70)bpts 1 1 80 bpts 188 1. 2 214. 7 224. 4 88. 2 84. 2 1,547 1,551 20. 0 132 1. 6 196. 5 214. 3 67. 5 61. 7 1,542 1,546 19. 2 42 (25) 9 5 large large - - 80 bpts Credit Ratings Fitch Ratings Moody’s Investor Services (1) Standard & Poor's Long–term AA Aa2 AA Short–term F1+ P-1 A-1+ Outlook Stable Stable Stable (1) On 18 May 2011, Moody’s Investor Services downgraded the long-term credit ratings of the Bank along with the other three major Australian banks. Market Share Percentage Home loans Credit cards (1) (2) Personal lending (APRA and other Household) (3) Household deposits Retail deposits (1) (4) Business Lending - APRA Business Lending - RBA (1) Business Deposits - APRA Asset Finance Equities trading Australian Retail - administrator view (1) (5) FirstChoice Platform (1) (5) Australia (total risk) (1) (5) Australia (individual risk) (1) (5) NZ Lending for housing NZ Retail Deposits NZ Lending to business (1) NZ Retail FUM (1) NZ Annual inforce premiums As at 30/06/11 31/12/10 30/06/10 % 25. 7 22. 6 14. 9 30. 0 26. 9 18. 1 17. 0 21. 2 14. 8 5. 9 15. 0 11. 3 12. 4 13. 3 22. 2 21. 4 9. 1 14. 4 29. 9 % 25. 9 22. 7 14. 6 30. 5 26. 7 18. 6 17. 2 21. 3 14. 6 5. 7 15. 0 11. 2 12. 5 13. 3 22. 4 21. 2 9. 2 14. 5 30. 3 % 26. 1 22. 5 14. 6 31. 3 27. 4 19. 5 17. 4 22. 9 14. 3 6. 3 14. 6 10. 9 12. 6 13. 3 22. 8 21. 6 9. 5 17. 9 31. 0 (1) Prior periods have been restated in line with market updates. (2) As at 31 May 2011. (3) Personal lending market share includes personal loans and margin loans. (4) In accordance with RBA guidelines, these measures include some products relating to both the Retail and Corporate segments. (5) As at 31 March 2011. Commonwealth Bank of Australia Annual Report 2011 13 Highlights Key Performance Indicators Group Cash profit after tax ($M) Net interest margin (%) Average interest earning assets ($M) (1) Average interest bearing liabilities ($M) (1) Funds management income to average FUA (%) Funds Under Administration (FUA) - average ($M) Insurance income to average inforce premiums (%) Average inforce premiums ($M) Operating expenses to total operating income (%) Effective corporate tax rate (%) Retail Banking Services (2) Cash net profit after tax ($M) Operating expenses to total banking income (%) Business and Private Banking (2) Cash net profit after tax ($M) Operating expenses to total banking income (%) Institutional Banking and Markets (2) Cash net profit after tax ($M) Operating expenses to total banking income (%) Wealth Management Cash profit after tax ($M) FUA - average ($M) Average inforce premiums ($M) Funds management income to average FUA (%) Insurance income to average inforce premiums (%) Operating expenses to net operating income (%) (3) New Zealand Cash profit after tax ($M) FUA - average ($M) Average inforce premiums ($M) Funds management income to average FUA (%) Insurance income to average inforce premiums (%) Operating expenses to total operating income (%) Bankwest Cash net profit after tax ($M) Operating expenses to total banking income (%) Capital Adequacy Common Equity (%) Tier One (%) Total Capital (%) Full Year Ended Half Year Ended Jun 11 vs Jun 11 vs 30/06/11 30/06/10 Jun 10 % 30/06/11 31/12/10 Dec 10 % 6,835 2. 19 576,369 538,843 1. 04 196,254 41. 5 2,063 45. 5 27. 8 2,845 38. 7 1,039 43. 7 1,004 33. 6 6,101 2. 13 553,735 521,338 1. 02 186,418 47. 1 2,005 45. 7 27. 0 2,461 39. 5 12 6 bpts 4 3 2 bpts 5 large 3 (20)bpts 80 bpts 16 (80)bpts 898 44. 9 16 (120)bpts 1,173 32. 0 (14) 160 bpts 3,500 2. 25 578,982 540,772 1. 04 198,851 39. 2 2,050 45. 6 28. 1 1,453 38. 6 532 44. 3 506 34. 2 3,335 2. 12 573,800 536,948 1. 04 194,011 44. 9 2,022 45. 4 27. 4 1,392 38. 7 507 43. 2 498 32. 9 642 718 188,866 179,802 283 359 191,252 186,849 (11) 5 3 4 bpts (470)bpts 150 bpts 21 12 4 (16)bpts (240)bpts (210)bpts 1,572 1. 01 43. 5 60. 1 388 6,616 433 0. 70 49. 2 53. 2 (45) 56. 1 large (310)bpts 6. 86 9. 15 11. 49 80 bpts 86 bpts 21 bpts 1,608 1. 05 35. 7 65. 6 236 7,599 442 0. 53 47. 9 51. 3 239 52. 3 7. 66 10. 01 11. 70 1,612 1. 05 38. 8 61. 6 470 7,388 451 0. 54 46. 8 51. 1 463 53. 0 7. 66 10. 01 11. 70 5 13 bpts 1 1 - 2 large 1 20 bpts 70 bpts 4 (10)bpts 5 110 bpts 2 130 bpts (21) 2 2 1 bpt large large 1 6 - (2)bpts 30 bpts 30 bpts 1,580 1. 04 42. 7 57. 7 234 7,162 442 0. 55 47. 6 51. 0 224 53. 7 7 (140)bpts 7. 35 9. 71 11. 50 31 bpts 30 bpts 20 bpts (1) 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. (2) Comparatives have been restated for the impact of business resegmentation. (3) Net operating income represents total operating income less volume expenses. 14 Commonwealth Bank of Australia Annual Report 2011 Financial Performance and Business Review The Group’s net profit after tax (“cash basis”) for the year ended 30 June 2011 was $6,835 million, which represented a 12% increase on the prior year. Earnings per share (“cash basis”) increased 11% on the prior year to 438.7 cents per share, whilst Return on equity (“cash basis”) increased 80 basis points to 19.5%. This solid result was achieved in an environment where the impacts of the GFC continue to linger. Credit growth remains at historic lows, business and consumer confidence is fragile and there is significant uncertainty in global markets. Despite the challenging market conditions, effective execution of the Group’s five strategic priorities has driven a sound financial performance. The result was characterised by: • Net interest income increased 7% to $12,658 million, reflecting a six basis point increase in net interest margin and 4% growth in average interest earning assets; • • Other banking income declined 3% to $3,983 million, with reduced retail fees and commissions, lower CommSec brokerage and Markets trading income partly offset by higher bills income and improved Treasury earnings derived through management of short dated interest rate exposures; Funds management income increased 8% to $2,041 million, supported by a 5% increase in average funds under administration and stronger investment performance, partly offset by the appreciation of the Australian dollar; Insurance income declined 9% to $856 million, partly reflecting the sale of the St Andrew’s insurance business. After adjusting for the sale of St Andrew’s, insurance income decreased 4% due to higher claims in the wholesale and retail life businesses; • • Operating expenses increased 3% on the prior year to $8,891 million, with 1% of the growth driven by continued investment in projects supporting the Group’s strategic investment priorities. Operating expenses, excluding expenses, increased 2% reflecting the Group’s disciplined approach and continued focus on productivity initiatives which have delivered operational efficiencies; and Impairment expense decreased 38% to $1,280 million, related mainly impairments. lower Bankwest property reflecting • The Group’s net profit after tax (“cash basis”) for the half year ended 30 June 2011 the prior half, underpinned by a 13 basis point improvement in net interest margin and lower loan impairment expense. increased 5% on More comprehensive disclosure of performance highlights by key business segments is contained on pages 22-40. Net Interest Income Net interest income increased by 7% on the prior year to $12,658 million. This was a result of growth in average interest earning assets of 4% together with a six basis point improvement in net interest margin to 2.19%. Net interest income increased by 5% on the prior half driven by average interest earning assets growth of 1% and a 13 basis point improvement in net interest margin. Group Performance Analysis Average Interest Earning Assets Average interest earning assets increased by $22 billion on the prior year to $576 billion, reflecting a $12 billion increase in average lending interest earning assets and a $10 billion increase in average non-lending interest earning assets. loan average balances, excluding Home impact of securitisation, increased by $20 billion or 7% since 30 June 2010 to $318 billion. the Average balances for business and corporate lending decreased by $8 billion since 30 June 2010 to $150 billion, largely due to institutional clients deleveraging their balance sheets, a strategic shift away from higher risk property and complex lending in Bankwest and the impact of the strengthening Australian dollar on foreign currency denominated loans. Average non-lending interest earning assets have increased $10 billion since 30 June 2010 due to higher levels of liquid assets driven by balance sheet growth and in anticipation of future regulatory requirements. Average Interest Earning Assets ($M) 553,735 4% 76,866 576,369 87,161 476,869 489,208 Jun 10 Jun 11 Lending Interest Earning Assets Non-Lending Interest Earning Assets Net Interest Margin The Group’s net interest margin increased six basis points compared to the prior year to 2.19%. The Australian contribution to Group net interest margin (which excludes the IFRS reclassification and New Zealand) decreased one basis point. The key drivers were: Asset pricing and mix: Increase in margin of five basis points, reflecting the impact of repricing on home loans (six basis points) and personal loans (one basis point), partly offset by a reduction in business lending margins (one basis point). The solid growth in home loans relative to business lending, which has a higher average margin, resulted in a negative mix impact (one basis point). Deposit pricing and mix: Decrease of two basis points as market competition for retail deposits continues to impact Investment account margins (one basis point). In addition, the favourable impact of the increasing cash rate environment on transaction and savings account margins has been offset by a reduction in replicating portfolio benefit and ongoing market competition (one basis point). Treasury and other: Decrease of four basis points driven by holding higher levels of non-lending interest earning assets. Commonwealth Bank of Australia Annual Report 2011 15 2.03% 2.04% 2.15% Funds Management Income Group Performance Analysis NIM movement since June 2010 (1) bpt 0.05% (0.02%) (0.04%) 0.04% 0.03% 2.30% 2.20% 2.10% 2.00% 2.13% 2.12% 2.19% 1.90% Jun 10 Asset Deposits (incl. Replicating Portf olio) Treasury & Other Sub-total New Zealand (1) IFRS Jun 11 The New Zealand contribution to Group net interest margin has increased three basis points compared to 30 June 2010. This reflected a shift in portfolio mix as customers switched from fixed to variable rate home loans together with repricing initiatives. Group NIM (Half Year Ended) 2.08% 2.12% 2.25% IFRS (1) Underlying 2.18% 2.13% 2.30% 2.10% 1.90% 1.70% 1.50% Dec 09 Jun 10 Dec 10 Jun11 Over the last six months, net interest margin increased 13 basis points compared to the prior half to 2.25%. Excluding the IFRS reclassification(1), the underlying net interest margin for the Group increased 11 basis points. This was mainly due to asset repricing (seven basis points). Other Banking Income Full Year Ended Half Year Ended 30/06/11 30/06/10 30/06/11 31/12/10 $M 1,946 1,467 717 351 $M 2,006 1,435 597 333 $M 961 760 291 183 $M 985 707 426 168 4,481 4,371 2,195 2,286 (498) (259) (271) (227) 3,983 4,112 1,924 2,059 Commissions Lending fees Trading income Other income IFRS reclassification of net swap costs (1) Other banking income (1) The reclassification from Net interest income to Other banking income relates to certain economic hedges which do not qualify for IFRS hedge accounting. Excluding the impact of IFRS reclassification of net swap costs, other banking income increased 3% on the prior year to $4,481 million. 16 Commonwealth Bank of Australia Annual Report 2011 Factors impacting other banking income were: • • • Commissions: decreased 3% on the prior year to $1,946 million. This was primarily driven by lower dishonour exception fees, customer migration to lower fee products and lower contract note volumes in CommSec; Lending fees: increased 2% on the prior year to $1,467 million. This was driven by higher commercial bill income, partially offset by lower early repayment and overdrawn exception fees; Trading income: increased 20% on the prior year to $717 million. This was due to improved Treasury earnings relating to the management of short dated interest rate exposures, partly offset by lower Institutional Banking and Markets earnings impacted by a challenging environment characterised by lower domestic volatility, flattening yield curves and narrowing credit spreads; and • Other income: increased 5% on the prior year to $351 million mainly due to higher leasing fee income. Excluding the impact of the IFRS reclassification of net swap costs, other banking income decreased 4% on the prior half. This was mainly driven by lower Markets income following together with a continued challenging market conditions decrease in the counterparty fair value adjustment. Full Year Ended Half Year Ended 30/06/11 30/06/10 30/06/11 31/12/10 $M 907 860 208 66 $M 789 811 224 74 $M 458 434 101 31 $M 449 426 107 35 2,041 1,898 1,024 1,017 CFS GAM Colonial First State CommInsure New Zealand and Other Funds management income Funds Management income increased 8% on the prior year to $2,041 million. This outcome was supported by a 5% increase in average funds under administration (FUA) to $196 billion. Internationally sourced fund flows were solid and FirstChoice and FirstWrap attracted their share of net flows ahead of system. Investment performance was solid but impacted by difficult market conditions, particularly through the quarter leading up to 30 June 2011. Base fee contributions were higher as a result of improved business mix. This was partially offset by the continued strengthening of the Australian dollar. Funds management income to average FUA increased by two basis points to 1.04% compared to the prior year, mainly reflecting improved business mix. Funds management income increased 1% compared to the prior half. Average FUA growth was 2%, with investment performance being subdued and to appreciate. the Australian dollar continuing Insurance Income Loan Impairment Expense Group Performance Analysis Loan impairment expense for the year was $1,280 million, representing 25 basis points of average gross loans and acceptances. Loan impairment expense decreased 38% on the prior year, largely driven by: • • • A significant reduction in Bankwest’s loan impairment expense following the detailed review and increased provisioning of the business banking portfolio in the prior year; Improved average arrears rates in the unsecured retail portfolio in this financial year resulting in a lower collective provision charge for these portfolios; and Improvement in ASB’s loan impairment expense in line with the improvement of the economic environment in New Zealand. This improvement has been partially offset by provisions set aside to assist customers impacted by the Christchurch earthquakes. Half Year Impairment Expense (annualised) as a % of Average Gross Loans and Acceptances 0.61% 0.55% 0.28% 0.28% 0.22% Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Provisions for Impairment The Group maintains a prudent and conservative approach to provisioning, with total provisions for impairment losses of $5,168 million as at 30 June 2011, which is a 5% reduction compared to 30 June 2010. The current level of provision reflects: • • • A reduction of Bankwest provisions as pre-acquisition troublesome or impaired loans run off, and the credit quality of new loans improve; Increased CBA individually assessed provisions associated with new impaired loans as the conservative coverage of impaired loans continues; and A decline in management overlay as the modelled overlay reduced in line with the reduction in the base collective provisions. This was partly offset by a slight increase in the economic overlay. Full Year Ended Half Year Ended 30/06/11 30/06/10 30/06/11 31/12/10 $M 625 231 856 - 856 $M 630 261 891 54 945 $M 285 113 398 - 398 $M 340 118 458 - 458 CommInsure New Zealand and Other St Andrew's Insurance Insurance income Insurance income decreased 9% on the prior year to $856 million. On 1 July 2010 the Group completed the sale of the St Andrew’s insurance business. Excluding St Andrew’s from the prior year, insurance income decreased by 4%. This result was impacted by higher claims in the wholesale and retail life businesses. The general insurance business saw improved performance with inforce premium growth of 7% together with improved claims despite the impact of severe weather events. Insurance income decreased 13% compared to the prior half. While inforce premiums increased 4%, the result was impacted by higher life insurance claims. Operating Expenses Operating expenses increased 3% on the prior year to $8,891 million. Of this increase, 1% was driven by continued investment in projects supporting the Group’s strategic priorities, including the Core Banking Modernisation initiative. Operating expenses, excluding investment expenses, increased only 2% on the prior year. This reflects the Group’s continued focus on productivity initiatives which have delivered operational efficiencies. This was offset by inflation-related salary increases, investment in staff (with full time equivalent employees increasing by 2%) and higher defined benefit superannuation plan expense (30 June 2011: $137 million; 30 June 2010: $103 million). Operating expenses increased 2% on the prior half mainly driven by higher technology expenses. Group Expense to Income Ratio The expense to income ratio decreased by 20 basis points over the prior year to 45.5%. Whilst income growth has slowed, the Group maintained a continued focus on technology and operational efficiencies. 47.0% 44.0% 41.0% 38.0% 45.7% 45.5% 41.4% 41.1% Jun 10 Jun 11 Group expense to income ratio Banking expense to income ratio Commonwealth Bank of Australia Annual Report 2011 17 Group Performance Analysis Collective Provisions Individual Provisions 3,461 3,327 1,192 1,211 758 830 681 704 782 630 3,043 1,049 598 808 588 1,992 956 116 920 2,169 2,125 922 139 1,108 979 177 969 Jun 10 Dec 10 Jun 11 Jun 10 Dec 10 Jun 11 Overlay Bankwest Consumer Commercial Taxation Expense The corporate tax expense was $2,637 million, representing an effective tax rate of 27.8%. The effective tax rate is below the Australian company tax rate of 30% primarily as a result of the profit earned by the offshore banking unit and offshore jurisdictions that have lower corporate tax rates. Non-cash items included in statutory profit 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 and are treated consistently with prior period disclosures. Hedging and IFRS volatility Hedging and IFRS volatility includes unrealised fair value gains or losses on economic hedges that do not qualify for hedge accounting under IFRS, including: • • cross currency currency denominated debt issues; and interest rate swaps hedging foreign foreign exchange hedges relating to future New Zealand earnings. Hedging and IFRS volatility also includes unrealised fair value gains or losses on the ineffective portion of economic hedges that qualify for hedge accounting under IFRS. Fair value gains or losses on all of 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 $265 million after tax loss was recognised in statutory profit for the year ended 30 June 2011 (2010: $17 million gain). Bankwest non-cash items Integration expenses: As part of the acquisition of Bankwest, the Group has incurred $246 million of integration expenses since acquisition. A $66 million after tax expense was recognised in the year ended 30 June 2011 (2010: $29 million expense). These items are not recognised in cash profit as they are not representative of financial performance. the Group’s expected ongoing 18 Commonwealth Bank of Australia Annual Report 2011 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. An $81 million after tax expense was recognised in the year ended 30 June 2011 (2010: $25 million gain). Loan impairment: In the prior year, a $212 million after tax loan impairment expense was recognised relating to Bankwest pre- acquisition loans. This non-cash treatment was consistent with the treatment of the gain on acquisition of Bankwest. Tax on NZ structured finance transactions A $171 million tax expense on New Zealand structured finance transactions was recognised in the prior year representing a significant one-off impact from an adverse tax ruling which ASB Bank and the New Zealand Commissioner of Inland Revenue settled in December 2009. Gains/losses on disposal of controlled entities/investments The statutory profit for the current year includes a $7 million after tax loss mainly representing the loss on sale of the St Andrew’s insurance business (2010: $23 million after tax loss from the disposal of the Group’s Fiji operations and sale of Visa shares). Treasury shares valuation adjustment in cash profit Under IFRS, 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 the underlying recognised 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 $22 million after tax gain was included in cash profit in the year ended 30 June 2011 (2010: $44 million gain). representing Policyholder tax Policyholder tax is included in the Wealth Management business results for statutory reporting purposes. In the year ended 30 June 2011, tax expense of $166 million (2010: $130 million tax expense), funds management income of $62 million (2010: $50 million income) and insurance income of $104 million (2010: $80 million income) was recognised. 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. Core Banking Modernisation Gross investment spend remained strong during the year at $1,179 million, with the primary focus being on the Core Banking Modernisation (CBM) initiative. The CBM initiative continues to make significant progress. Highlights over the year include the: • • • Launch of new retail savings and transaction account functionality, with over 1.2 million new accounts opened on the new platform; Successful migration of 10 million retail savings and transaction accounts onto the new platform, allowing these customers to enjoy the benefits of real time banking and providing the organisation with streamlined customer centric processes; and Development of business savings and transaction account functionality. Group Performance Analysis The 2012 financial year will see the launch of business savings and transaction account functionality and migration of an additional one million business savings and transaction accounts onto In addition, SAP will be the platform. implemented as the primary customer solution for the Group, with the existing customer system decommissioned. Planning for the lending phases of the initiative has begun, with development commencing in the 2012 financial year. Credit Quality During the year ended 30 June 2011, the credit quality of the business and corporate portfolios gradually improved. The retail portfolios arrears improved over the first half, however there were some increases in arrears over the second half of the year. Home loan arrears reduced over the first half of the year, but that trend reversed over the second half with 30+ day arrears increasing over the full year from 1.90% to 2.08% and 90+ day arrears increasing from 1.02% to 1.17%. The increase in arrears is due to loans originated in 2008 and early 2009, along with the impact from some home owners finding it difficult to service their higher monthly payments arising from increasing interest rates. The increase in arrears also reflects assistance provided to customers for natural disasters. Unsecured retail arrears improved substantially over the first half of the year but experienced some deterioration over the second half. Credit Card 30+ days arrears fell from 3.09% to 2.99% over the year, and 90+ days arrears increased slightly from 1.14% to 1.20%. Personal Loans showed significant improvement over the year with 30+ day arrears falling from 3.69% to 3.07% and 90+ days arrears falling from 1.52% to 1.26%. The CBA commercial and institutional portfolio improved during the year with more upgrades than downgrades. In addition, troublesome assets reduced and impaired assets remained stable throughout the year. In New Zealand, asset quality continued to improve with the broader economy. Gross impaired assets were $5,297 million as at 30 June 2011, broadly in line with 30 June 2010. Gross impaired assets as a proportion of Gross Loans and Acceptances of 1.02% remained stable compared to 30 June 2010. The impaired asset portfolio remains well provisioned with provision coverage of 40.12%. Loans 90 days past due but not impaired have increased to 0.73% of gross loans and acceptances, from 0.65% at 30 June 2010. Other Credit Quality Metrics Gross loans and acceptances ($M) Risk weighted assets (RWA) ($M) Credit risk weighted assets ($M) Gross impaired assets ($M) Net impaired assets ($M) Collective provision as a % of risk weighted assets Total provision as a % of credit risk weighted assets Collective provision as a % of gross loans and acceptances Individually assessed provisions for impairment as a % of gross impaired assets Impairment expense annualised as a % of average RWA - cash basis (1) Impairment expense annualised as a % of average gross loans and acceptances - cash basis (2) Full Year Ended Half Year Ended Jun 11 vs Jun 11 vs 30/06/11 30/06/10 Jun 10 % 30/06/11 31/12/10 Dec 10 % 518,075 281,711 246,742 5,297 3,172 1. 08 2. 09 0. 59 512,838 290,821 256,763 5,216 3,224 1. 19 2. 12 1 (3) (4) 2 (2) (11)bpts (3)bpts 0. 67 (8)bpts 518,075 281,711 246,742 5,297 3,172 1. 08 2. 09 0. 59 509,779 285,563 244,608 5,184 3,015 1. 17 2. 25 2 (1) 1 2 5 (9)bpts (16)bpts 0. 65 (6)bpts 40. 12 38. 19 193 bpts 40. 12 41. 84 (172)bpts 0. 45 0. 25 0. 71 (26)bpts 0. 41 (16)bpts 0. 40 0. 22 0. 50 (10)bpts 0. 28 (6)bpts (1) Impairment expense as a percentage of average RWA including the Bankwest non-cash loan impairment expense of $304 million was 0.81% for the year ended 30 June 2010. (2) Impairment expense 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. Commonwealth Bank of Australia Annual Report 2011 19 Interest bearing deposits Interest bearing deposits increased by $26 billion to $392 billion as at 30 June 2011, a 7% increase on the prior year. Targeted campaigns in a highly competitive market resulted in growth of $19 billion in investment deposits, representing a 12% increase on the prior year. Transaction deposits increased 8% to $79 billion. Other demand deposits decreased 2% compared to the prior year and decreased 14% compared to the prior half. This was mainly driven by lower certificates of deposits being replaced by the growth in customer deposits. Debt issues Debt issues have decreased $13 billion to $108 billion as at 30 June 2011, an 11% decrease on the prior year. The decrease in term funding was driven by the strengthening Australian dollar in addition to maturing debt being replaced by the growth in customer deposits. Refer to Note 24 for further information on debt programmes and issuance for the year ended 30 June 2011. 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 $4 billion to $38 billion as at 30 June 2011, an 8% decrease on the prior year. This was driven mainly by New Zealand replacing maturing facilities with debt issues. Non-interest bearing liabilities Non-interest bearing liabilities, including derivative liabilities, insurance policy liabilities and bank acceptances, increased $9 billion to $82 billion as at 30 June 2011, a 12% increase on the prior year. This was driven predominantly by foreign exchange volatility impacting derivative liabilities hedging term debt. Group Performance Analysis Review of Group Assets and Liabilities Asset growth of $22 billion or 3% over the prior year, was driven mainly by growth in home lending and non-lending interest earning assets, partly offset by lower business and corporate lending balances as a result of institutional clients deleveraging and strengthening of the Australian dollar. Asset growth was funded by an increase in customer deposits which now represent 61% of total funding (June 2010: 58%). Wholesale funding decreased compared to the prior year, as a result of the strong growth in customer deposits, the low credit growth environment and the strengthening of the Australian dollar. Home loans excluding securitisation Home loans excluding securitisation experienced steady growth with balances increasing $11 billion to $325 billion as at 30 June 2011, a 3% increase on the prior year. This outcome was impacted by moderating credit growth and intense price competition. The Group has maintained its competitive position through product innovation, targeted discounting and a focus on customer service. Personal loans Personal loans, including credit cards, margin lending and other personal loans, increased 2% over the prior year. Steady growth in credit card balances was influenced by new product offerings. This was offset by a decline in margin lending balances due to continued conservative investor sentiment. Other personal loans remained flat compared to the prior year. Business and corporate loans Business and corporate loans declined by $6 billion to $148 billion as at 30 June 2011, a 4% decrease on the prior year. This was driven mainly by institutional clients deleveraging, a strategic shift away from higher risk property and complex lending in Bankwest and the strengthening of the Australian dollar. This was partly offset by solid growth in business lending in Business and Private Banking. Non-lending interest earning assets Non-lending interest earning assets increased $14 billion to $88 billion as at 30 June 2011, an 18% increase on the prior year. This was primarily an increase in liquid assets in anticipation of future regulatory requirements. Other assets including bank acceptances of customers, Other assets, derivative assets, provisions for impairments, securitisation assets, insurance assets and intangibles, increased $3 billion to $86 billion as at 30 June 2011, a 4% increase on the prior year. This was impacted by higher derivative asset balances as a result of volatility in foreign exchange and interest rate markets. 20 Commonwealth Bank of Australia Annual Report 2011 Total Group Assets & Liabilities Interest earning assets Home loans including securitisation Less: securitisation Home loans excluding securitisation Personal Business and corporate Loans, bills discounted and other receivables (1) Non-lending interest earning assets Total interest earning assets Other assets Total assets Interest bearing liabilities Transaction deposits (2) Savings deposits (2) Investment deposits (2) Other demand deposits (2) Total interest bearing deposits Deposits not bearing interest Deposits and other public borrowings Debt issues Other interest bearing liabilities Total interest bearing liabilities Securitisation debt issues Non-interest bearing liabilities Total liabilities Provisions for impairment losses Collective provision Individually assessed provisions Total provisions for impairment losses Less: Off balance sheet provisions Total provisions for loan impairment Group Performance Analysis As at 30/06/11 31/12/10 30/06/10 Jun 11 vs Jun 11 vs $M $M $M Dec 10 % Jun 10 % 335,841 (11,296) 324,545 20,943 148,420 493,908 88,142 582,050 85,849 667,899 79,466 81,680 176,100 54,613 391,859 9,288 401,147 108,421 37,950 538,230 10,231 82,151 630,612 3,043 2,125 5,168 (21) 5,147 327,704 (9,583) 318,121 20,665 148,984 487,770 83,633 571,403 78,239 649,642 72,150 81,798 168,770 63,361 386,079 9,266 395,345 105,086 37,678 528,843 8,523 76,927 614,293 3,327 2,169 5,496 (25) 5,471 323,573 (9,696) 313,877 20,572 154,742 489,191 74,610 563,801 82,529 646,330 73,783 79,435 156,694 55,957 365,869 8,794 374,663 121,438 41,461 528,768 8,772 73,220 610,760 3,461 1,992 5,453 (25) 5,428 2 18 2 1 - 1 5 2 10 3 10 - 4 (14) 1 - 1 3 1 2 20 7 3 (9) (2) (6) (16) (6) 4 17 3 2 (4) 1 18 3 4 3 8 3 12 (2) 7 6 7 (11) (8) 2 17 12 3 (12) 7 (5) (16) (5) (1) Excludes provisions for impairment which are included in Other Assets. (2) Comparatives have been restated following alignment of Bankwest product classifications with the Group. Commonwealth Bank of Australia Annual Report 2011 21 Retail Banking Services Financial Performance and Business Review Retail Banking Services cash net profit after tax for the year ended 30 June 2011 was $2,845 million, representing a 16% increase on the prior year. The result was driven by solid growth in net interest income partially offset by lower other banking income, sound management of operational expenses and an improvement in loan impairment expense. Cash net profit after tax increased 4% compared to the prior half. The six month result was driven by income growth of 5% reflecting improved lending margins and volume growth, offset by a fall in other banking income, and an increase in impairment expense. CBA remains committed to excellence in customer service, with all retail channels performing strongly. Business performance and innovation highlights during the year included: • • • The successful launch of Core Banking with the migration of 10 million existing accounts to the new platform, delivering real time banking and new account functionality to Retail Deposit customers; The introduction of GoalSaver, a high interest bearing savings product, and the launch of the new premium Diamond Awards credit card; Continued growth in registered Netbank users, with 20% of monthly log-ons now happening via a mobile device; and • Ongoing commitment to improving the financial literacy skills of Australian students through expansion of the School Banking programme, now in its 80th year. Service improvement progress and product innovation in the business was recognised through: • “Best Retail Bank in Asia Pacific” and the “Best Retail Bank in Australia” at the Asian Banker Excellence in Retail Financial Services Awards; • Money Magazine “Credit Card Issuer of the Year” and • • • “Banking Website of the Year” awards; CANSTAR CANNEX “Best Online Banking” award for the second year in a row; “Innovative Mortgage Product of the Year” at the Australian Banking and Finance awards for the No Fee Variable rate home loan; and The iPhone Property Guide application won the “Best of the Best”, “Best Financial Service” and “Best Mobile Advertising or Marketing” awards at the Australian Interactive Media Industry Awards. Home Loans Home Loan income for the year ended 30 June 2011 was $2,893 million, a 20% increase on the prior year. Average volume growth was 6% in a period of reduced market activity. Net interest margin improved, benefitting from portfolio repricing and the continued roll off of fixed rate loans written at historically low margins. Funding costs continued to increase as lower cost funding rolled off and was replaced with higher priced new wholesale debt. Other banking income fell 3% primarily due to the abolition of switching fees for customers refinancing loans with CBA. Deferred establishment fees for new customers were also removed in March 2011. 22 Commonwealth Bank of Australia Annual Report 2011 Consumer Finance Consumer Finance income for the year ended 30 June 2011 was $1,700 million, an increase of 9% on the prior year. This result benefited from improved margins and volume growth in both the Credit Card and Personal Lending portfolios. Other banking income was flat as the impact from the reduction in over-limit and late payment fees was offset by higher volume related income. Other banking income decreased 5% compared to the prior half. This was a result of seasonally lower credit card spend. Retail Deposits Retail Deposit income for the year ended 30 June 2011 was $2,609 million, a decrease of 7% on the prior year. Net interest income fell by 5% with continued margin pressure from price competition and a shift towards lower margin products within the portfolio offsetting strong average balance growth of 10%. Other banking income decreased 15% primarily due to the reduction in exception fees in October 2009. Retail Deposit income was flat compared to the prior half, as volume growth eased and margins stabilised. Distribution from Distribution income for the year ended 30 June 2011 was $306 million, an increase of 11% on the prior year. This reflected increased revenue foreign exchange products and commissions received from the distribution of Business Banking and Wealth Management products through the retail network. The Group continues to focus on building deeper relationships with customers and now has the highest average products per customer(1) of the major banks. Distribution income increased by 5% compared to the prior half due to higher foreign exchange income. Operating Expenses Expenses for the year were $2,903 million, up 4% on the prior year, with the cost to income ratio falling to 38.7%. Expenses included investment spend relating to the Core Banking Modernisation initiative. Underlying expense growth was 2%, driven primarily by staff inflationary increases. Expense growth was 5% in the second half, inclusive of investment in Core Banking Modernisation. Excluding the impact of Core Banking, growth was 4%. This was primarily a result of higher credit card loyalty redemptions in the second half and increased marketing spend. Impairment Expense Impairment expense for the year ended 30 June 2011 was $558 million, a decrease of 24% on the prior year. This result was supported by improved average arrears rates in the unsecured portfolio as well as continued investment in collections and credit decisioning capabilities. In the second half impairment expense increased 21% as a result of an uplift in arrears rates and the support that the Group provided through special assistance to customers following the severe weather events during the half. (1) Roy Morgan Research, Australians 14+, Banking and Finance products per Banking and Finance customers, six months rolling average. Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax Retail Banking Services Full Year Ended 30 June 2011 Home Loans Consumer (1) Finance Retail Deposits Distribution $M 2,706 187 2,893 $M 1,281 419 1,700 $M 2,222 387 2,609 $M - 306 306 Full Year Ended 30 June 2010 (2) Consumer (1) Finance Retail Deposits Distribution Home Loans $M 2,213 192 2,405 $M 1,143 417 1,560 $M 2,340 457 2,797 $M - 276 276 (2) Half Year Ended 30 June 2011 Consumer (1) Finance Retail Deposits Distribution $M 660 204 864 $M 1,115 187 1,302 $M - 157 157 Home Loans $M 1,441 87 1,528 Total $M 6,209 1,299 7,508 (2,903) (558) 4,047 (1,202) 2,845 Total $M 5,696 1,342 7,038 (2,779) (736) 3,523 (1,062) 2,461 Total $M 3,216 635 3,851 (1,486) (305) 2,060 (607) 1,453 30/06/11 31/12/10 30/06/10 Jun 11 vs Jun 11 vs As at $M Dec 10 % Jun 10 % Balance Sheet Home loans (including securitisation) Consumer finance Other assets Total assets Home loans (net of securitisation) Transaction deposits Savings deposits Investments and other deposits Deposits not bearing interest Other liabilities Total liabilities (1) Consumer Finance includes personal loans and credit cards. (2) Comparatives have been restated for the impact of business resegmentation. $M 260,583 13,989 201 274,773 252,438 19,357 59,127 83,951 3,057 2,926 $M 255,484 13,504 243 269,231 249,466 19,060 60,519 78,558 2,984 2,307 250,428 12,961 250 263,639 243,695 19,050 59,206 71,719 2,840 2,519 168,418 163,428 155,334 2 4 (17) 2 1 2 (2) 7 2 27 3 4 8 (20) 4 4 2 - 17 8 16 8 Commonwealth Bank of Australia Annual Report 2011 23 Business and Private Banking Financial Performance and Business Review Business and Private Banking delivered a strong performance, achieving cash net profit after tax of $1,039 million for the year ended 30 June 2011, which represented a 16% increase on the prior year. The business banking segments contributed significantly to this result, experiencing growth in lending and deposit volumes, improving deposit margins and a lower impairment expense. While equities trading market volumes were lower, CommSec continued to maintain its leading share of the online non advisory market in a highly competitive environment. Compared to the prior half, cash net profit after tax increased 5%, with the first half of the year benefiting from the increasing cash rate environment and three more calendar days. Performance highlights during the year included: • • • • • • • CBA consistently held either equal first or equal second position in the whole-of-market business banking segment throughout the past year, according to DBM Business Financial Services Monitor(1), CBA was awarded “Best Cash Management Bank in Australia” for the second year running by the Asian Banker magazine. The award acknowledges commitment to customer service and operational excellence; Further improvements within CommBiz continued to make it simpler for customers to do business. These included improved security features and greater analytical functionality giving customers insights into their business, demographics and cash flow; CBA launched a new Business Debit MasterCard in January 2011 and has since issued over 20,000 cards. The card offers customers greater service, security and accessibility; Private Bank was recognised in the Australian Private Banking Council Awards, winning “Outstanding Private Banking Institution of the Year” in the $1 million to $10 million category for the third year running; CommSec was awarded the CANSTAR CANNEX “Online Share Trading Outstanding Value” award for casual and active investors, together with a Gold award for “Best Feature-Packed Online Broker” for the fourth year running in Money Magazine’s 2011 Best of the Best Awards; and Equities and Margin Lending was awarded “Margin Lender of The Year” in Money Magazine’s Bank of The Year awards in recognition of its competitive pricing and Smart Risk Management responsible lending. tool which promotes Corporate Financial Services Corporate Financial Services income increased 13% on the prior year to $1,084 million. This was driven by commercial lending balance growth of 10% and deposit balance growth of 13%. CBA has maintained outright or equal first position in customer satisfaction in both the medium and large segments among the four major banks for 10 out of the past 12 months(2). There has been ongoing investment in people, systems and processes and a focus on delivering an outstanding client experience for new and existing customers. Following a national rollout, team has continued to build on its early success. the Acquisition Finance and Advisory 24 Commonwealth Bank of Australia Annual Report 2011 Regional and Agribusiness Banking Regional and Agribusiness Banking income increased 8% on the prior year to $426 million. This reflected a 5% increase in lending balances and a 5% increase in deposit balances, whilst margins were stable. Through the Specialised Agri Solutions team, the business continued to focus on identifying and delivering innovative solutions to customers with more complex needs. The business has also strongly supported its customers who were affected by the natural disasters which occurred earlier in the year. In addition, the business continued to make targeted investment in frontline staff and brand awareness, and customer satisfaction has improved significantly. Local Business Banking Local Business Banking income increased 9% on the prior year to $774 million. This was driven by growth in both lending and deposit balances of 9%. This result reflected continued investment of business bankers within the retail branch network and a focus on broadening frontline staff capabilities. In addition, a proactive outbound contact programme has reached the majority of customers resulting in improved customer satisfaction. The business also successfully launched a new BizAwards credit card in March 2011, which provides additional benefits to customers. Private Bank Private Bank income increased 5% on the prior year to $251 million. This result was driven by growth in home lending and deposit balances. Funds under administration balances grew 16%, driven by a stronger financial advisory services offering which includes enhanced research capabilities and an expanded investment support function. Equities and Margin Lending Equities and Margin Lending income decreased 12% on the prior year to $410 million. This result reflected lower market volumes in equities trading and subdued market volumes in margin lending, while cautious investor sentiment contributed to strong balance growth in cash management products. Despite lower equities trading volumes, CommSec maintained market share above 50% and stable yields in a highly competitive market while strong market share was also maintained in margin lending. Operating Expenses Operating expenses of $1,335 million increased 3% on the prior year reflecting a disciplined approach to expense management. The business continued to make targeted investments in frontline staff and technology whilst continuing to focus on achieving operational efficiencies. Impairment Expense Impairment expense of $261 million decreased 20% on the prior year and 7% on the prior half. This trend reflects the strong underlying quality of the business lending portfolio. (1) DBM Business Financial Services Monitor (June 2011), average satisfaction rating of each financial institution’s MFI business customers across all Australian businesses, six month rolling average. Rank is among four major banks. (2) DBM Business Financial Services Monitor (June 2011), average satisfaction rating of each financial institution’s MFI business customers across all Australian businesses, six month rolling average. Rank is among four major banks. Medium segment includes business with annual turnover from $5 million to less than $50 million. Large segment includes businesses with annual turnover $50 million and above. Business and Private Banking Corporate Regional & Local Equities & Financial Agri- Business Private Margin Full Year Ended 30 June 2011 Services business Banking Bank Lending Other $M 528 556 1,084 $M 265 161 426 $M 515 259 774 $M 110 141 251 $M 177 233 410 $M 92 15 107 Corporate Regional & Local Equities & Financial Agri- Business Private Margin Full Year Ended 30 June 2010 (1) Services business Banking Bank Lending Other $M 541 419 960 $M 257 137 394 $M 461 247 708 $M 114 126 240 $M 183 284 467 $M 87 26 113 Total $M 1,687 1,365 3,052 (1,335) (261) 1,456 (417) 1,039 Total $M 1,643 1,239 2,882 (1,295) (326) 1,261 (363) 898 Corporate Regional & Local Equities & Financial Agri- Business Private Margin Half Year Ended 30 June 2011 Services business Banking Bank Lending Other Total $M 258 291 549 $M 133 82 215 $M 260 133 393 $M 54 74 128 $M 86 120 206 $M 45 3 48 $M 836 703 1,539 (682) (126) 731 (199) 532 30/06/11 31/12/10 30/06/10 Jun 11 vs Jun 11 vs As at Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax $M Dec 10 % Jun 10 % Balance Sheet Interest earning lending assets (excluding margin loans) Bank acceptances of customers Non-lending interest earning assets Margin loans Other assets (2) Total assets Transaction deposits Savings deposits Investments deposits Certificates of deposit and other Due to other financial institutions Other non-interest bearing liabilities (2) Total liabilities (3) $M 67,737 9,808 480 4,213 690 82,928 49,309 5,720 41,650 57 403 $M 63,559 9,149 473 4,489 235 77,905 43,461 5,164 38,684 171 366 63,132 10,155 295 4,771 448 78,801 45,026 4,744 37,147 162 895 16,149 113,288 14,580 102,426 15,324 103,298 7 7 1 (6) large 6 13 11 8 (67) 10 11 11 7 (3) 63 (12) 54 5 10 21 12 (65) (55) 5 10 (1) Comparatives have been restated for the impact of resegmentation. (2) Other assets include intangible assets, and Other non-interest bearing liabilities include bank acceptances. (3) Includes deposits relating to Institutional Banking and Markets as well as Business and Private Banking customers. Commonwealth Bank of Australia Annual Report 2011 25 Institutional Banking and Markets Financial Performance and Business Review Institutional Banking and Markets achieved a cash net profit after tax of $1,004 million for the year ended 30 June 2011, which represented a 14% decrease on the prior year, reflecting: • • • A 5% decrease in banking income to $2,467 million primarily due to lower trading income in Markets as a result of lower volatility and the effect of the decline in lending balances in Institutional Banking; A reduction in investment allowance tax credits; and An increase in impairment expense as a result of a write- back in provisions in the prior year. Compared to the prior half, banking income decreased 4% primarily due to a reduction in Markets trading revenue and a less favourable contribution of the counterparty fair value mark to market valuation. This was offset by lower impairment expense reflecting stabilisation in the credit quality of the portfolio. The business has maintained its focus of continuous investment through its foreign exchange platform renewal, enhanced online Transaction Banking Platform (CommBiz) and continued build- out of the Institutional Equities and Debt Capital Markets business. Customer service continues to be a key focus for Institutional Banking and Markets through deepening client relationships, growing transaction banking, increasing foreign exchange market share and developing stronger institutional investor focus. Performance highlights in our goal to provide Total Capital Solutions to clients during the year include: • • East & Partners semi-annual “Australian Institutional Banking Markets” survey has listed CBA as best in market for the last five years in the categories of “Loyalty to the Relationship” and “Understanding Customers’ Business”. Over the last five years, CBA has also been cited as the number one primary lender and ranked first in product satisfaction for 10 out of the 17 products measured against the major peer banks; DBM Business Financial Services Monitor(1) ranked CBA first or equal first in the Institutional Banking segment in 10 out of the past 12 months; • • Global Finance magazine recognised CBA as the best Australian foreign exchange provider for the third year in a row based on transaction volume, market share, scope of global coverage, customer service, competitive pricing and the use of innovative technologies; In a global poll, Bloomberg has awarded CBA ninth most accurate overall foreign exchange forecaster and fifth most accurate Asia Currency foreign exchange forecaster for the six quarters ending 30 June 2011; Insto 12th Annual Distinction Awards (March 2011) acknowledged CBA as the “Australian Issuer of the Year (Australian Bond Market)”; Insto Fixed Income Credit Research poll of institutional investors (August 2010) ranked CBA as the number one provider of Australian macroeconomic research and strategy, and Australian credit research and analysis; CBA was the multi-product lead relationship banking provider for the privatisation of Queensland Rail National; and • • • • Institutional Banking and Markets was the arranger and sole lead manager of a $3 billion Residential Mortgage Backed Security (RMBS) issue for the CBA Group, which was the largest Australian dollar RMBS tranche issued since 2007. 26 Commonwealth Bank of Australia Annual Report 2011 Institutional Banking Net interest income decreased 5% on the prior year to $1,073 million as a result of a 10% decrease in average loan balances, higher funding costs and reduced margins on deposits from transactional banking customers. This was partly offset by the recognition of deferred fees from the early repayment of debt facilities and improved deposit volumes from transactional banking customers. Other banking income increased 2% on the prior year to $755 million driven by increased leasing fee income and a favourable contribution from hedging credit exposures. Other banking income increased 19% on the prior half due to higher leasing fee income and gains from the sale of an equity investment in the second half of the year. Markets Net interest income increased 6% on the prior year to $220 million primarily due to modest growth in interest earning assets. Other banking income decreased 19% on the prior year to $419 million due to a challenging trading environment as a result of flattening yield curves, lower domestic market volatility, narrowing spreads and weaker activity in equity capital markets. This was partly offset by the favourable contribution of the counterparty fair value mark to market valuation as credit spreads tightened. Compared to the prior half, other banking income was down 42% due to a less favourable contribution of the counterparty fair value mark to market valuation and lower trading income as market activity remained subdued. Operating Expenses Operating expenses decreased slightly on the prior year to $828 million representing a disciplined approach to cost management across the business while continuing to focus on maintaining a in through competitive advantage technology and people. investment targeted Impairment Expense Impairment expense increased 30% on the prior year to $324 million. This was impacted by the write-back of provisions on a small number of single names in the prior year. Impairment expense decreased 32% on the prior half due to continued stabilisation in the credit quality of the portfolio. Corporate Tax Expense Corporate tax expense for the year ended 30 June 2011 was $311 million. The effective tax rate of 23.7% benefited from profit generated from offshore jurisdictions attracting lower corporate finance tax rates and transactions. tax credits associated with asset (1) DBM Business Financial Services Monitor (June 2011), average satisfaction rating of each financial institution’s MFI business customers across all Australian businesses, six month rolling average. Rank is among four major banks. Institutional Banking segment includes businesses with annual turnover of $100 million and above. Institutional Banking and Markets Full Year Ended 30 June 2011 Institutional Banking Markets $M 1,073 755 1,828 $M 220 419 639 Total $M 1,293 1,174 2,467 (828) (324) 1,315 (311) 1,004 Full Year Ended 30 June 2010 (1) Institutional Banking Markets $M 1,127 742 1,869 $M 207 515 722 Total $M 1,334 1,257 2,591 (830) (249) 1,512 (339) 1,173 Half Year Ended 30 June 2011 Institutional Banking Markets Total $M 528 410 938 $M 115 154 269 $M 643 564 1,207 (413) (131) 663 (157) 506 Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax Balance Sheet Interest earning lending assets Bank acceptances of customers Non-lending interest earning assets Other assets (2) Total assets Certificates of deposit and other Investments deposits Due to other financial institutions Liabilities at fair value through Income Statement Debt issues Loan capital Other non-interest bearing liabilities (2) Total liabilities 30/06/11 31/12/10 30/06/10 Jun 11 vs Jun 11 vs As at $M 48,097 925 32,664 15,452 97,138 8,241 6,982 13,457 4,234 3,490 544 26,683 63,631 $M 51,414 996 34,953 11,395 98,758 14,421 8,064 11,684 3,891 1,475 555 25,526 65,616 $M Dec 10 % Jun 10 % 54,892 1,414 29,434 8,755 94,495 12,834 5,082 10,055 3,974 2,506 627 23,820 58,898 (6) (7) (7) 36 (2) (43) (13) 15 9 large (2) 5 (3) (12) (35) 11 76 3 (36) 37 34 7 39 (13) 12 8 (1) 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. Commonwealth Bank of Australia Annual Report 2011 27 Wealth Management Financial Performance and Business Review Underlying profit after tax for the year was $581 million, up marginally on the prior year. A solid Funds Management and General Insurance result was partially offset by an increase in claims and compliance related expenditure. Funds under Administration increased 5% on the prior year to $189 billion as at 30 June 2011. This was supported by solid internationally sourced fund flows, partly offset by the outflow of cash mandates and the run-off of the legacy book. FirstChoice and FirstWrap have achieved an above market share of net flows in the retail domestic market. Cash net profit after tax was $642 million, which represents a 9% decrease on the prior year mainly due to the unwinding of mark to market losses on the Guaranteed Annuities portfolio in the prior years. Cash net profit after tax in the second half decreased 21% to $283 million, reflecting subdued investment market returns, higher compliance costs and an increase in Life insurance claims. CFS Global Asset Management (CFSGAM) CFSGAM provides asset management services to wholesale and institutional investors. CFSGAM continues to execute strategies to capitalise on global growth opportunities and enhance its domestic business. Underlying profit after tax of $275 million increased 17% on the prior year, reflecting strong investment performance and higher base fee contributions due to improved business mix even as the Australian dollar strengthened. Funds under Management as at 30 June 2011 were $149 billion, up 3% on the prior year mainly driven by improving equity markets offset by foreign exchange movements. Investment performance continues to be strong with 76%, 74% and 83% of funds outperforming benchmark over one, three and five year periods respectively. Highlights include: • • • • (Small)” the Year in excess of 60 global International Equity Group” and industry CFSGAM received accolades including First State Investments being named “Best Fund “Best Management Group of the in Professional Adviser Awards 2011 (UK); “Fund Manager of the Year” in Australia at the Standard & Poor’s the Year awards, recognising range of high-quality competencies of the business; Chadstone Shopping Centre won the Laing O’Rourke award for best Shopping Centre Development for the West Mall at the Property Council of Australia Innovation and Excellence Awards in Sydney; and Investment Manager of the strength and First State Infrastructure was awarded “Best Infrastructure Provider” at the Global Pension Awards 2011 (UK). Cash net profit after tax of $281 million represents an increase of 6% on the prior year. Cash net profit after tax in the second half decreased 19% to $126 million driven by a decline in equity markets and further strengthening of the Australian dollar. Colonial First State (CFS) Colonial First State provides wealth creation solutions for retail customers and market leading platforms for advisers, offering product packaging, administration, distribution and advice. Underlying profit after tax of $141 million decreased 4% on the prior year, reflecting solid funds growth and stable margins offset by increasing compliance costs and claims. 28 Commonwealth Bank of Australia Annual Report 2011 FirstChoice and Custom Solutions platforms performed well in a challenging retail market with positive net flows of $3.4 billion. Highlights include: • • • FirstChoice retaining the largest flagship platform as at March 2011(1) with a market share of 11% and ranked second for net flows in the year to March 2011 with 24% of the market; CFS won the “Best Fund Manager” service level award from Wealth Insights for the fourth year running. FirstWrap had the highest overall satisfaction rating from advisers with FirstChoice ranking second; and FirstChoice Wholesale Superannuation introduced lowered minimum entry limits, positioning it well for pending “Future of Financial Advice” reforms. Personal Cash net profit after tax of $143 million represents a decrease of 1% on the prior year. Cash net profit after tax in the second half decreased 14% to $66 million due to slowing markets and compliance activities. CommInsure CommInsure is a provider of life and general insurance in Australia. CommInsure’s strategy continues focus on improving service and streamlining processes. to Underlying profit after tax of $254 million decreased 11% on the prior year: • Life Insurance performance declined due to higher claims in income protection and wholesale risk, balanced by strong growth in bank channels; • General Insurance performance improved due to volume growth and improved claims despite the impact of weather events in the second half of the year; and • Legacy funds management income declined in line with expectations. Highlights include: • Awarded the Plan for Life/Association of Financial Advisers “Life Insurance Company of the Year” and the “Service Quality Award” the second consecutive year, recognising excellence in new business/underwriting and claims services; for • General Insurance business awarded the “Australian Service Excellence Award” in the NSW Medium Business category; and • Delivery of enhancements to Retail Life products aimed at improving flexibility and affordability for customers by allowing existing insurance policies to be integrated with the FirstChoice and FirstWrap platforms. Cash net profit after tax of $305 million represents a decrease of 20% on the prior year, mainly due to the unwinding of mark to market losses on the Guaranteed Annuities portfolio in the prior years. Cash net profit after tax in the second half decreased 22% to $134 million impacted by claims experience in both the Life and General Insurance business. Operating Expenses Total operating expenses of $1,280 million increased 7% on the prior year. Expense growth reflects strategic investment in the business to support offshore growth and expansion as well as meeting the compliance related costs in the retail advice and platform businesses. (1) March 2011 Plan for Life quarterly market release. Wealth Management Full Year Ended 30 June 2011 Colonial CFSGAM First State CommInsure $M 907 - 907 (151) 756 (391) 365 (90) 275 6 281 $M 860 - 860 (171) 689 (489) 200 (59) 141 2 143 $M 209 625 834 (199) 635 (276) 359 (105) 254 51 305 Other $M (1) - (1) - (1) (124) (125) 36 (89) 2 (87) Full Year Ended 30 June 2010 Colonial CFSGAM First State CommInsure $M 789 - 789 (126) 663 (358) 305 (69) 236 30 266 $M 811 - 811 (160) 651 (444) 207 (60) 147 (3) 144 $M 226 630 856 (187) 669 (267) 402 (116) 286 94 380 Other $M (2) - (2) (1) (3) (127) (130) 40 (90) 2 (88) Half Year Ended 30 June 2011 Colonial CFSGAM First State CommInsure $M 458 - 458 (80) 378 (201) 177 (44) 133 (7) 126 $M 434 - 434 (87) 347 (259) 88 (26) 62 4 66 $M 101 285 386 (103) 283 (140) 143 (42) 101 33 134 Other $M - - - (1) (1) (61) (62) 18 (44) 1 (43) Total $M 1,975 625 2,600 (521) 2,079 (1,280) 799 (218) 581 61 642 Total $M 1,824 630 2,454 (474) 1,980 (1,196) 784 (205) 579 123 702 Total $M 993 285 1,278 (271) 1,007 (661) 346 (94) 252 31 283 St Andrew's (1) Insurance $M - 54 54 (22) 32 (14) 18 (5) 13 3 16 Funds management income Insurance income Total operating income Volume expenses Net operating income Operating expenses Net profit before tax Corporate tax expense Underlying profit after tax Investment experience after tax Cash net profit after tax Funds management income Insurance income Total operating income Volume expenses Net operating income Operating expenses Net profit before tax Corporate tax expense Underlying profit after tax Investment experience after tax Cash net profit after tax Funds management income Insurance income Total operating income Volume expenses Net operating income Operating expenses Net profit before tax Corporate tax expense Underlying profit after tax Investment experience after tax Cash net profit after tax (1) The St Andrew’s insurance business was sold effective 1 July 2010. Commonwealth Bank of Australia Annual Report 2011 29 Wealth Management Summary Funds under administration - average (1) Funds under administration - spot (1) Funds under management - average (1) Funds under management - spot (1) Retail Net funds flows (Australian Retail) Funds Under Management (FUM) (1) Australian equities Global equities Cash and fixed interest Property and Infrastructure (2) Total Full Year Ended Half Year Ended 30/06/11 30/06/10 Jun 11 vs 30/06/11 31/12/10 Jun 11 vs $M 188,866 188,511 150,396 148,639 (349) $M Jun 10 % 179,802 179,614 144,624 144,298 246 5 5 4 3 large $M 191,252 188,511 151,411 148,639 317 $M Dec 10 % 186,849 191,454 149,723 152,791 2 (2) 1 (3) (666) large Full Year Ended Half Year Ended 30/06/11 30/06/10 Jun 11 vs 30/06/11 31/12/10 Jun 11 vs $M Jun 10 % $M Dec 10 % $M 22,336 50,860 50,946 24,497 21,499 45,685 54,180 22,934 $M 22,336 50,860 50,946 24,497 23,716 52,831 52,097 24,147 4 11 (6) 7 3 (6) (4) (2) 1 (3) 148,639 144,298 148,639 152,791 Full Year Ended Half Year Ended 30/06/11 30/06/10 Jun 11 vs 30/06/11 31/12/10 Jun 11 vs Sources of Profit from CommInsure Life insurance operating margins Planned profit margins Experience variations Funds management operating margins General insurance operating margins Operating margins Investment experience after tax Cash net profit after tax $M 164 (36) 112 14 254 51 305 $M Jun 10 % 157 2 120 7 286 94 380 4 large (7) 100 (11) (46) (20) $M 86 (40) 53 2 101 33 134 Full Year Ended 30 June 2011 Opening Balance Sales/New $M Dec 10 % 78 4 59 12 153 18 171 10 large (10) (83) (34) 83 (22) Closing Balance Annual Inforce Premiums - Risk Business Retail life Wholesale life General insurance Sub-total St Andrew's Insurance Total Annual Inforce Premiums - Risk Business Retail life Wholesale life (3) General insurance Sub-total St Andrew's Insurance Total Annual Inforce Premiums - Risk Business Retail life Wholesale life General insurance Total 30/06/10 Business Lapses Other 30/06/11 $M 782 323 408 1,513 71 1,584 $M 208 67 100 375 - 375 $M (130) (46) (72) (248) - (248) Full Year Ended 30 June 2010 Opening Balance Sales/New $M - - - - (71) (71) $M 860 344 436 1,640 - 1,640 Closing Balance 30/06/09 Business Lapses Other 30/06/10 $M 697 435 360 1,492 68 1,560 $M 200 66 107 373 23 396 $M (115) (178) (59) (352) (20) (372) $M - - - - - - Half Year Ended 30 June 2011 Opening Balance Sales/New $M 782 323 408 1,513 71 1,584 Closing Balance 31/12/10 Business Lapses Other 30/06/11 $M 820 331 424 1,575 $M 103 41 49 193 $M (63) (28) (37) (128) $M - - - - $M 860 344 436 1,640 (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) Lapses include a $130 million reduction as a result of the loss of the wholesale portfolio for the Australian Super business. 30 Commonwealth Bank of Australia Annual Report 2011 Wealth Management Full Year Ended 30 June 2011 Inflows Outflows Net Flows Investment Closing Income & (6) Other Balance 30/06/11 $M 13,690 2,496 3,589 19,775 39 19,814 18,658 1,948 33 40,453 12,857 53,310 $M (11,194) (1,599) (7,210) (20,003) (160) (20,163) (23,069) (352) (156) (43,740) (9,462) (53,202) $M 2,496 897 (3,621) (228) (121) (349) (4,411) 1,596 (123) (3,287) 3,395 108 $M 2,982 425 1,319 4,726 73 4,799 2,985 145 173 8,102 687 8,789 $M 49,118 7,436 20,640 77,194 1,105 78,299 39,624 18,908 3,083 139,914 48,597 188,511 Full Year Ended 30 June 2010 Inflows Outflows Net Flows $M 12,418 1,713 4,021 18,152 42 18,194 17,638 955 36 36,823 11,748 48,571 $M (9,019) (1,497) (7,303) (17,819) (129) (17,948) (24,631) (1,759) (145) (44,483) (7,275) (51,758) $M 3,399 216 (3,282) 333 (87) 246 (6,993) (804) (109) (7,660) 4,473 (3,187) Half Year Ended 30 June 2011 Inflows Outflows Net Flows $M 6,969 1,404 1,749 10,122 20 10,142 10,617 188 17 20,964 4,827 25,791 $M (5,589) (807) (3,358) (9,754) (71) (9,825) (13,026) (63) (74) (22,988) (5,690) (28,678) $M 1,380 597 (1,609) 368 (51) 317 (2,409) 125 (57) (2,024) (863) (2,887) Investment Closing Income & (6) Other Balance 30/06/10 $M 4,286 557 1,274 6,117 86 6,203 2,951 (751) (94) 8,309 5,282 13,591 $M 43,640 6,114 22,942 72,696 1,153 73,849 41,050 17,167 3,033 135,099 44,515 179,614 Investment Closing Income & (6) Other Balance 30/06/11 $M 9 (48) 25 (14) 1 (13) 850 260 (103) 994 (1,050) (56) $M 49,118 7,436 20,640 77,194 1,105 78,299 39,624 18,908 3,083 139,914 48,597 188,511 Opening Balance 30/06/10 $M 43,640 6,114 22,942 72,696 1,153 73,849 41,050 17,167 3,033 135,099 44,515 179,614 Opening Balance 30/06/09 $M 35,955 5,341 24,950 66,246 1,154 67,400 45,092 18,722 3,236 134,450 34,760 169,210 Opening Balance 31/12/10 $M 47,729 6,887 22,224 76,840 1,155 77,995 41,183 18,523 3,243 140,944 50,510 191,454 Funds Under Administration FirstChoice Custom Solutions (1) Standalone (including Legacy) (2) Retail products (3) Other retail (4) Australian retail Wholesale Property Other (5) Domestically sourced Internationally sourced Total Wealth Management Funds Under Administration FirstChoice Custom Solutions (1) Standalone (including Legacy) (2) Retail products (3) Other retail (4) Australian retail Wholesale Property Other (5) Domestically sourced Internationally sourced Total Wealth Management Funds Under Administration FirstChoice Custom Solutions (1) Standalone (including Legacy) (2) Retail products (3) Other retail (4) Australian retail Wholesale Property Other (5) Domestically sourced Internationally sourced Total Wealth Management (1) Custom Solutions includes the FirstWrap product. (2) Includes cash management trusts. (3) 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 2011 31 New Zealand Financial Performance and Business Review The New Zealand result incorporates ASB Bank and Sovereign Insurance businesses. The CBA branch results relating to the Institutional Banking and Markets business in New Zealand are not included. New Zealand cash net profit after tax(1) for the year ended 30 June 2011 was NZ$588 million, an increase of 28% on the prior year. The result was driven by a strong performance from ASB Bank with margins benefiting from a shift in portfolio mix towards variable rate loans and repricing initiatives. Sovereign’s growth in inforce premiums, positive claims experience and lower lapse rates were offset by the Christchurch earthquakes. impacts of the Cash net profit after tax(1) in the second half increased 1% to NZ$295 million with the result impacted by the Christchurch earthquakes. Following the earthquakes in Christchurch, ASB Bank donated NZ$1.5 million to earthquake relief funds and launched a NZ$250 million investment programme, which included NZ$1 million in community assistance grants. This was in addition to support offered by both ASB Bank and Sovereign to their customers and people. ASB Bank ASB Bank cash net profit after tax(1) for the year ended 30 June 2011 was NZ$504 million, up 42% on the prior year. Net interest income for the year ended 30 June 2011 was NZ$1,107 million, up 22% on the prior year reflecting: • • • Improving home loan margins as a result of a continued shift by customers from fixed to variable rate loans and repricing initiatives. Home loan balances remained steady at NZ$37 billion; Business lending margins also benefited from a shift in portfolio mix from fixed to variable rate loans and from risk based pricing lending balances declined slightly as customers continued to deleverage; and initiatives. Business Deposit margins remained under pressure in a competitive local market with customers moving towards higher yielding investment deposits. Balances have increased 3% to NZ$32 billion. Other banking income for the year ended 30 June 2011 was NZ$367 million, up 7% on the prior year due to higher trading income, partially offset by lower early repayment adjustment fees from customers. Operating expenses for the year ended 30 June 2011 were NZ$733 million, up 10% on the prior year. The increase was driven by investment in strategic initiatives to benefit and support ASB Bank’s customers (including Christchurch) and enhanced risk management, partially offset by disciplined expense management and efficiency gains. Impairment expense decreased 42% on the prior year to NZ$72 million, as asset quality improved in line with the broader economic conditions. Cash net profit after tax(1) for the second half was NZ$258 million, up 5% on the prior half, reflecting ongoing margin improvement, partially offset by higher operating expenses. 32 Commonwealth Bank of Australia Annual Report 2011 Key highlights for ASB Bank include: • Continued commitment to customer satisfaction has seen ASB Bank ranked first in an independent survey(2) for being “the most dedicated to providing the customer with the best possible service”; • Multiple awards for innovation, including New Zealand’s “Best use of Social Media” for the world-first Virtual Branch on Facebook and CANSTAR CANNEX Innovation Excellence Award for the online savings tool “Save the Change”; Recognition in the inaugural New Zealand Randstad Awards for ASB Bank as the employer offering the most job security; and • • Ongoing commitment to the communities in which ASB Bank operates, including working together with St John to create safer communities; and school banking and financial literacy, with more than 100,000 children now having taken part in the ASB GetWise programme. Sovereign Insurance Sovereign cash net profit after tax(1) for the year ended 30 June 2011 was NZ$86 million, a decrease of 17% on the prior year. The major drivers of the result were: • • • • • Policy valuation gains recognised in the prior year due to legislation changes in life tax and premium changes in legacy disability income products; The non-recurrence of a gain on the revaluation of deferred tax on policy liabilities in the prior year as a result of the reduction of the New Zealand corporate tax rate from 30% to 28%; Claims due to the Christchurch earthquake, partially offset by; 5% growth in inforce premiums; and Positive claims experience and a continued improvement in risk and health lapse rates. Cash net profit after tax(1) for the second half was NZ$41 million, down 9% on the prior half primarily due to the impact of the Christchurch earthquakes. Key highlights for Sovereign include: • Being accepted as a Qualifying Financial Entity, enabling Sovereign to provide a high level of support for its advisors in complying with new legislation, streamline distribution processes and offer customers a greater level of customer protection; financial advisor • Winning an Innovation Excellence Award from CANSTAR CANNEX for Sovereign’s Best Doctors programme, a service initiative unique in New Zealand; and • Continuing its reputation as New Zealand’s most financially secure life insurance company by retaining an AM Best A+(3) financial strength rating, the only life insurer in New Zealand to achieve this rating. (1) Includes allocated capital charges and other CBA costs. (2) Source: Colmar Brunton Poll, a member of the Millward Brown Group. (3) Source: A.M. Best Company Net interest income Other banking income (2) Total banking income Funds management income Insurance income Total operating income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Underlying profit after tax Investment experience after tax Cash net profit after tax Net interest income Other banking income (2) Total banking income Funds management income Insurance income Total operating income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Underlying profit after tax Investment experience after tax Cash net profit after tax Net interest income Other banking income (2) Total banking income Funds management income Insurance income Total operating income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Underlying profit after tax Investment experience after tax Cash net profit after tax New Zealand Full Year Ended 30 June 2011 ASB Sovereign NZ$M 1,107 367 1,474 54 - 1,528 (733) (72) 723 (219) 504 - 504 NZ$M - - - - 257 257 (218) - 39 34 73 13 86 (1) Other NZ$M (10) (30) (40) (2) 19 (23) 32 - 9 - 9 (11) (2) Total NZ$M 1,097 337 1,434 52 276 1,762 (919) (72) 771 (185) 586 2 588 Full Year Ended 30 June 2010 ASB Sovereign NZ$M 908 342 1,250 61 - 1,311 (666) (125) 520 (166) 354 - 354 NZ$M - - - - 251 251 (205) - 46 45 91 12 103 (1) Other NZ$M (9) (31) (40) (3) 15 (28) 42 - 14 1 15 (11) 4 Total NZ$M 899 311 1,210 58 266 1,534 (829) (125) 580 (120) 460 1 461 Total A$M 840 286 1,126 40 211 1,377 (704) (54) 619 (150) 469 1 470 Total A$M 716 278 994 46 213 1,253 (667) (100) 486 (99) 387 1 388 Half Year Ended 30 June 2011 ASB Sovereign NZ$M NZ$M (1) Other NZ$M Total NZ$M Total A$M 569 189 758 27 - 785 (378) (36) 371 (113) 258 - 258 - - - - 126 126 (107) - 19 18 37 4 41 (12) (17) (29) (1) 15 (15) 13 - (2) - (2) (2) (4) 557 172 729 26 141 896 (472) (36) 388 (95) 293 2 295 421 148 569 20 105 694 (356) (26) 312 (77) 235 1 236 (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 2011 33 New Zealand Balance Sheet Home lending Assets at fair value through Income Statement Other lending assets Non-lending interest earning assets Other assets Total assets Deposits Liabilities at fair value through Income Statement Debt issues Due to other financial institutions (1) Other liabilities Total liabilities Assets ASB Bank Other Total assets Liabilities ASB Bank Other Total liabilities Sources of Profit from Insurance Activities The Margin on Services profit from ordinary activities after income tax is represented by: Planned profit margins (2) Experience variations (2) Operating margins Investment experience after tax Cash net profit after tax New Zealand - Funds Under (2) Administration Opening balance Inflows Outflows Net Flows Investment income & other Closing balance New Zealand - Annual Inforce Premiums Opening balance Sales/New business Lapses Other movements Closing balance 30/06/11 31/12/10 30/06/10 Jun 11 vs Jun 11 vs As at NZ$M 37,444 4,165 15,148 4,003 4,597 65,357 31,921 7,671 6,910 6,368 7,314 60,184 63,050 2,307 65,357 59,103 1,081 60,184 NZ$M 37,508 4,232 15,740 3,665 4,714 65,859 31,279 10,426 5,680 6,934 6,525 60,844 63,496 2,363 65,859 59,686 1,158 60,844 NZ$M 37,778 5,815 15,960 1,543 4,723 65,819 30,889 13,261 3,805 6,488 6,640 61,083 63,557 2,262 65,819 60,010 1,073 61,083 Dec10 % Jun 10 % - (2) (4) 9 (2) (1) 2 (26) 22 (8) 12 (1) (1) (2) (1) (1) (7) (1) (1) (28) (5) large (3) (1) 3 (42) 82 (2) 10 (1) (1) 2 (1) (2) 1 (1) Full Year Ended Half Year Ended 30/06/11 30/06/10 Jun 11 vs 30/06/11 31/12/10 Jun 11 vs NZ$M NZ$M Jun 10 % NZ$M NZ$M Dec 10 % 58 15 73 13 86 60 31 91 12 103 (3) (52) (20) 8 (17) 29 8 37 4 41 29 7 36 9 45 - 14 3 (56) (9) Full Year Ended Half Year Ended 30/06/11 30/06/10 Jun 11 vs 30/06/11 31/12/10 Jun 11 vs NZ$M 8,771 2,528 (1,529) 999 637 10,407 NZ$M Jun 10 % NZ$M NZ$M Dec 10 % 7,389 3,233 (2,439) 794 588 8,771 19 (22) (37) 26 8 19 9,580 1,151 (439) 712 115 10,407 8,771 1,377 (1,090) 287 522 9,580 9 (16) (60) large (78) 9 Full Year Ended Half Year Ended 30/06/11 30/06/10 Jun 11 vs 30/06/11 31/12/10 Jun 11 vs NZ$M NZ$M Jun 10 % NZ$M NZ$M Dec 10 % 554 87 (55) (2) 584 516 97 (59) - 554 7 (10) (7) large 5 570 42 (27) (1) 584 554 45 (28) (1) 570 3 (7) (4) - 2 (1) Includes deposits due to Group companies. (2) Comparatives have been restated to conform to the presentation in the Wealth Management business. 34 Commonwealth Bank of Australia Annual Report 2011 This page has been intentionally left blank Commonwealth Bank of Australia Annual Report 2011 35 Retail Home loan balances increased 10% on the prior year with above system growth driven by new products and targeted marketing campaigns. Full year and second half margins improved on prior periods following repricing in November 2010, partly offset by increased funding costs. Retail deposit balances increased below system growth, reflecting a strategy of margin management over pricing for growth. Business Business lending balances decreased 13% on the prior year due to higher risk exposures being managed down. Lending margins increased on the prior year due to improved product mix. Business deposit balances increased 2% on the prior year driven by growth in Transaction Accounts, partly offset by a second half decrease in lower margin money market balances driving an improvement in deposit margins. Operating Expenses to efficiency gains, Operating expenses decreased 1% over the prior year to $869 lower consultancy and million due discretionary spend. For the six months to 30 June 2011, costs increased 3% on the prior half due to increased marketing spend and the continued refresh of the branch network. Impairment Expense Impairment expense for the year was $109 million, down 86% compared to the prior year. Business lending experienced more stable client ratings, exits and reductions of troublesome asset exposures and non- recurrence of property in related Queensland and New South Wales. Retail lending benefited from higher recoveries driving an overall lower impairment charge. impairments, primarily Home loan arrears remained flat on the prior year, while credit card arrears increased slightly, mainly as a result of the Queensland floods. (1) Source: Roy Morgan Research six months rolling average Main Financial Institution score. (2) Source: DBM Business Financial Services Monitor (June 2011), average satisfaction rating of each financial institution’s MFI business customers across all Australian businesses, six month rolling average on a scale of 0 to 10. Rank is among four major banks. Bankwest Financial Performance and Business Review Bankwest cash net profit after tax for the year ended 30 June 2011 was $463 million, up significantly from the $45 million loss in the prior year. The improved performance was driven by a loan increase 12% impairment expense. in operating performance and lower Key drivers of the year’s performance were: • Banking income increased to $1,640 million, up 5% compared to the prior year, mainly due to improved deposit margins and above system home loan balance growth; • Operating expenses decreased by 1% from the prior year due to a continuing focus on discretionary expenditure and efficiency gains from the integration of processes with CBA. The expense to income ratio continues to improve, now at 53%; and • Impairment expense of $109 million, 86% lower than the prior year due to the non-recurrence of property related impairment that impacted the prior year. Lending balances increased 1% on the prior year, with the increase in home lending partly offset by the strategic run-off of complex business lending. Lending margins increased on the prior year with higher funding costs in the first half offset by improved margins in the second half due to pricing initiatives. Deposit balances increased 2% on the prior year, however were down 1% on the first half following a reduction in lower margin investment deposits. Deposit margins increased on the prior year due to improved pricing of Term Deposits and Institutional Clients. Bankwest retains an absolute focus on customer satisfaction, with a commitment to value, innovation and service. A number of initiatives during the year have supported this vision, these include: • • • • Continued reinvigoration of the Bankwest brand in Western Australia (WA), with new WA-specific marketing strategies; Further investment in the WA branch network, with four new branches, 38 branches refurbished and innovative new customer concepts such as an Express Kiosk; The implementation of a Drought Assistance Initiative to support WA Rural & Regional customers who were impacted by record low winter rainfalls in 2010; and The successful launch of new internet and mobile phone banking services. The success of the above initiatives has been reflected in: • Winning the AFR Smart Investor 2010 “Bank of the Year • • • • Award”; An outstanding achievement award from the International Interactive Media Council for the new public website; Five products receiving gold awards in Money Magazine’s 2011 Best of the Best Awards, including “Best Everyday Branch Access Account” and “Cheapest Business Transaction Account”; The CANSTAR CANNEX 2011 “Innovation Excellence Award” for the Business Zero Transaction Account; and An improvement in both Retail and Business customer satisfaction, with the Retail score increasing 4.7% to 83.6% at June 2011(1) and the Business score increasing 0.2 to 6.8 at June 2011(2). 36 Commonwealth Bank of Australia Annual Report 2011 Bankwest Full Year Ended Half Year Ended 30/06/11 $M 1,420 220 1,640 (869) (109) 662 (199) 463 30/06/10 (3) $M 1,336 233 1,569 (880) (754) (65) 20 (45) Jun 11 vs 30/06/11 31/12/10 Jun 11 vs Jun 10 % 6 (6) 5 (1) (86) large large large $M 741 102 843 (441) (60) 342 (103) 239 $M 679 118 797 (428) (49) 320 (96) 224 Dec 10 % 9 (14) 6 3 22 7 7 7 30/06/11 31/12/10 30/06/10 Jun 11 vs Jun 11 vs As at $M 45,673 22,722 8,433 76,828 8,731 7,033 26,956 59 9,064 16,644 3,068 71,555 $M 43,070 23,956 8,813 75,839 8,034 7,189 27,766 25 8,637 15,682 3,647 70,980 $M Dec 10 % Jun 10 % 41,681 25,975 7,028 74,684 8,409 6,848 26,584 130 10,211 15,382 2,304 69,868 6 (5) (4) 1 9 (2) (3) large 5 6 (16) 1 10 (13) 20 3 4 3 1 (55) (11) 8 33 2 Net interest income Other banking income Total banking income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Cash net profit after tax Balance Sheet Home lending (including securitisation) Other lending assets Other assets Total assets Transaction deposits Savings deposits Investments deposits Certificates of deposit and other Debt issues Due to other financial institutions (1) Other liabilities Total liabilities (2) (1) Includes amounts due to Group companies (30 June 2011: $16.5 billion, 31 December 2010: $15.7 billion, 30 June 2010: $15.4 billion). (2) Comparatives have been restated following alignment of Bankwest product classifications with the Group. (3) Net interest income has been restated following an allocation of capital costs previously held centrally in Other. Integration Progress – Bankwest and St Andrew’s The integration of the Bankwest and the remaining St Andrew’s businesses into the Group that began in the 2009 financial year is now largely complete. Major outcomes achieved include: • • • • • • • Integration of various support functions, including property and procurement; Alignment of risk models, data definitions, market rate risk and pricing models, and operating models; Upgrade and integration of general ledger and financial reporting capabilities; Reciprocal ATM access with customers of both CBA and Bankwest having access to over 4,000 ATMs, the largest network of any bank nationally, without paying any additional fees; Bankwest and CBA IT interoperability links; Aligning various IT and business contract arrangements between Bankwest and CBA, including cheque processing supplier; and Establishment of strong and collaborative cross divisional working arrangements between Bankwest and CBA, building strong foundations for the future. The total integration expenditure incurred to complete the programme was $246 million. Costs synergies of $240 million (annualised run rate) have largely been delivered, including the benefits associated with restructuring and the cessation of the Bankwest east coast branch rollout. Integration Expenditure (1) Restructuring Property Operations IT expenditure Other Total Year Ended 30/06/11 $M 2 28 40 24 - 94 Total $M 18 41 87 93 7 246 (1) These costs are recognised as non-cash items as they are one off in nature and therefore are not representative of the Group’s ongoing performance. Commonwealth Bank of Australia Annual Report 2011 37 Other Divisions Financial Performance and Business Review IFS Asia International Financial Services Asia (IFS Asia) incorporates the Asian retail and SME banking operations (Indonesia, China, Vietnam and India), investments in Chinese and Vietnamese retail banks, the joint venture Chinese life insurance business and the life insurance operations 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. IFS Asia cash net profit after tax for the year ended 30 June 2011 was $53 million, an increase of 18% over the prior year. The key drivers of the result were as follows: • • • • • • Banking income increased 10% to $204 million driven by strong lending growth from the Indonesian retail business the Bank of together with strong contributions Hangzhou and Vietnam (VIB) investments; Insurance income increased by 18% to $47 million, reflecting improved sales volumes from the Indonesian life insurance business, particularly bancassurance sales; partially offset by, from International Bank An increase of 12% in operating expenses to $184 million, largely due to the continued expansion of the Indonesian businesses. After adjusting for foreign exchange movements, cash net profit after tax increased 36% compared to the prior year. IFS Asia cash net profit after tax for the half year ended 30 June 2011 was $27 million, an increase of 4% on the prior half. Strong revenue growth from Bank of Hangzhou and VIB was partly offset by the adverse impact of the strengthening Australian dollar. After adjusting for foreign exchange movements, cash net profit after tax increased 8% compared to the prior half. IFS Asia continued its investment during the year with the key activities being: • • Expansion of the PT Bank Commonwealth branch and ATM network in Indonesia bringing the total number of branches and ATMs to 84 and 129 respectively, from 74 and 89 in 2010; PTBC lending balances grew 54% during the year, with growth of 86% in SME, 154% in Consumer and 29% in Commercial. Net interest margin increased 84 basis points in 2011; • • • Opening of three County Banks in China in Jiyuan, DengFeng and Lankao, following the signing of a strategic cooperation agreement with the Henan Government (China’s most populated Province); BoCommLife was ranked third of the foreign and joint venture insurers for bancassurance new business premium in Shanghai; Development of the bancassurance model between PT Bank Commonwealth and PT Commonwealth Life in in PT Indonesia. 42% of new business sales Commonwealth Life for the year were sourced via the PT Bank Commonwealth branch network, up from 27% in the prior year. Total bancassurance new business sales increased 124% on the prior year; PT Bank Commonwealth in Indonesia maintained its number one ranking among foreign banks for customer service as rated by Synovate for the sixth consecutive year; • 38 Commonwealth Bank of Australia Annual Report 2011 PT Commonwealth Life in Indonesia received several awards during the year in recognition of its strong financial performance and excellent customer service. The awards included being the highest ranked life insurance company in Indonesia by Infobank Magazine, the “Best Mid Size Life Insurance Company 2011” by Investor Magazine and “Best Call Centre 2011” by Service Excellence Magazine; Bank of Hangzhou was ranked number two (out of 147) among City Commercial Banks the prestigious Chinese Banker magazine; Acquisition of 15% shareholding in VIB on 1 September 2010. VIB appointed two CBA nominated Directors to the Board following the completion of the transaction. CBA received Prime Ministerial approval to move to 20% ownership in VIB in July 2011; and in a review by • Official opening of the CBA India Branch in August 2010. Fiji The Fiji business was sold on 15 December 2009. 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 2011 was $403 million, a 10% decrease on the prior year. Total banking income decreased 8% to $812 million driven by: • Lower Asset and Liability Management earnings from the impact of the rising interest rate environment on interest rate positioning and reduced loan prepayment fees; partially offset by • Wider spreads achieved on liquid portfolios in Liquidity Operations; and • Increased Capital Management earnings from growth in retained earnings. Group wide Eliminations/Unallocated Group wide Eliminations/Unallocated intra group elimination entries arising on consolidation, centrally raised provisions and other unallocated revenue and expenses. includes Group wide Eliminations/Unallocated cash net loss after tax for the year ended 30 June 2011 was $84 million, a $92 million decrease compared to the prior year. This was primarily driven by the release of centrally held impairment provisions of $100 million in the prior year. Other Divisions Full Year Ended 30 June 2011 Corporate Eliminations (3) / IFS Asia Centre Unallocated Total $M 80 124 204 - 47 251 (184) (10) 57 (5) (2) 50 3 53 $M 718 94 812 - - 812 (267) - 545 (142) - 403 - 403 $M (87) (81) (168) 26 (27) (169) - 36 (133) 47 (14) (100) 16 (84) Full Year Ended 30 June 2010 Corporate Eliminations Unallocated IFS Asia Centre (4) $M 62 124 186 - 40 226 (164) (11) 51 (7) (2) 42 3 45 $M 883 1 884 - - 884 (268) - 616 (167) - 449 - 449 (3) / (2) $M (70) (106) (176) 28 2 (146) - 100 (46) 20 (14) (40) 48 8 $M 711 137 848 26 20 894 (451) 26 469 (100) (16) 353 19 372 Total $M 875 19 894 28 42 964 (432) 89 621 (154) (16) 451 51 502 Fiji $M 9 3 12 - 6 18 (12) 1 7 (1) - 6 - 6 Half Year Ended 30 June 2011 (3) / Corporate Eliminations IFS Asia Centre Unallocated Total $M 40 64 104 (1) 22 125 (89) (8) 28 (2) - 26 1 27 $M 351 14 365 - - 365 (84) - 281 (70) - 211 - 211 $M (31) (35) (66) 12 (14) (68) - 98 30 (29) (7) (6) 19 13 $M 360 43 403 11 8 422 (173) 90 339 (101) (7) 231 20 251 Net interest income (1) Other banking income (1) Total banking income Funds management income Insurance income Total operating income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Non-controlling interests Underlying profit after tax Investment experience after tax Cash net profit after tax Net interest income (1) Other banking income (1) Total banking income Funds management income Insurance income Total operating income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Non-controlling interests Underlying profit after tax Investment experience after tax Cash net profit after tax Net interest income (1) Other banking income (1) Total banking income Funds management income Insurance income Total operating income Operating expenses Loan impairment expense Net profit before tax Corporate tax expense Non-controlling interests Underlying profit after tax Investment experience after tax Cash net profit after tax (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 IFRS hedge accounting (June 2011: $498 million; June 2010: $259 million; half year to 30 June 2011: $271 million). (2) Net interest income has been restated following an allocation of capital costs to Bankwest. (3) Represents Group wide eliminations. (4) Comparatives have been restated for the impact of business resegmentation. Commonwealth Bank of Australia Annual Report 2011 39 Investment Experience Full Year Ended Half Year Ended 30/06/11 30/06/10 Jun 11 vs 30/06/11 31/12/10 Jun 11 vs Investment Experience Wealth Management New Zealand Other Investment experience before tax Corporate tax expense Investment experience after tax $M 83 1 37 121 (40) 81 $M 183 1 52 236 (58) 178 Jun 10 % (55) - (29) (49) (31) (54) $M 52 1 33 86 (34) 52 $M 31 - 4 35 (6) 29 Shareholder Investment Asset Mix (%) Local equities International equities Property Sub-total Fixed interest Cash Sub-total Total Shareholder Investment Asset Mix ($M) Local equities International equities Property Sub-total Fixed interest Cash Sub-total Total As at 30 June 2011 (1) Australia New Zealand % 1 - 13 14 23 63 86 % 1 - - 1 51 48 99 100 100 Asia % - - - - 96 4 100 100 As at 30 June 2011 (1) Australia New Zealand $M 9 - 242 251 424 1,171 1,595 1,846 $M 2 1 - 3 280 267 547 550 Asia $M - - - - 80 3 83 83 (1) Includes Shareholders’ funds in the CFS Global Asset Management, Colonial First State and CommInsure businesses. Dec 10 % 68 large large large large 79 Total % - - 10 10 32 58 90 100 Total $M 11 1 242 254 784 1,441 2,225 2,479 40 Commonwealth Bank of Australia Annual Report 2011 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. At management level, risk governance is undertaken by a structured hierarchy of committees and forums across the Group, each with specified accountabilities. A more detailed description of the risk governance structure is set out in the Corporate Governance section of the Annual Report. Risk Management Organisation The Group Chief Risk Officer (CRO), who heads the Risk Management function, oversees independent risk management for the Group. This unit is comprised of both 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 enable enterprise wide risk management. The CRO reports to the Chief Executive Officer (CEO) and has direct reporting requirements to the Risk Committee. Risk management professionals deployed in each Business Unit measure risks and take actions to ensure businesses adhere to risk policies and procedures. They also provide insights to assist the business in making decisions that optimise their risk- adjusted returns. the independent risk management Whilst is an important component of the risk management framework, business managers are the consequential owners of the risks taken in their businesses. As risk owners, they are expected to staff their businesses with employees who are appropriately knowledgeable about risk and its management. function The Group’s risk appetite framework creates transparency over risk management and strategy decisions and, in turn, promotes a strong risk culture. Governance processes and disciplines are connected to the Group’s, and aligned businesses, risk appetite statements. These promote risk management function from the Group’s Business Units and the Group Audit and Assurance (GAA) function. independence of the Independent review of the risk management framework is carried out by GAA. They audit the actions of businesses and risk management teams. In addition, risk management and GAA support “whistle blower” protocols to 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 Risk Appetite The risk appetite of the Group represents the types and degree of risk that it is willing to accept for its shareholders in undertaking its strategic and business actions. 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’s view is that a well articulated risk appetite is important in giving the Group’s stakeholders a clear expectation of 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, liquidity, risk culture, and other risk mitigants. Risk Management 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 current capital adequacy and future contingent capital plans are also aligned with the risk appetite. The Group’s risk culture is to take risks that are adequately rewarded and that support its aspiration of achieving solid and sustainable growth in shareholder value. Supporting this culture, the Group will: • Operate responsibly, meet the financial needs of its customers, provide excellent customer service and maintain impeccable professional standards and business ethics; Differentiate between relatively clearly discernable distribution of possible outcomes), which is to be assessed on its merits, and uncertainty (which has an unknown distribution of possible outcomes that is hard to discern), which is to be minimised; (with a risk • • Make business decisions only after careful consideration of including consideration of potential upside and risk, downside scenarios; Understand the risks it takes on (or the nature of uncertainties involved), undertaking strategic initiatives or exposure to new products and services 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; • • • • Maintain a control environment that, within practical constraints, minimises risks to the sustainability of its business; and • Promote a culture aimed at the achievement of best practice the recognition, assessment, pricing and in management of risk. Risk policies and tolerances support the Group and business risk appetite statements by: • Summarising the principles and practices to be used by the Group in managing its major risks; • Quantifying the risks, financial operating principally credit risk, market risk (both traded and non- traded) and operational risk; and limits for • 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 are considered during a review. 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. Commonwealth Bank of Australia Annual Report 2011 41 Risk Management 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 Credit Risk including Concentration Risk Governing Policies Group Credit Policy; Country Risk Policy; Aggregation Policy; Large Credit Exposure Policy; Industry Sector Concentration Policy; and Securitisation Policy. How Policy Supports Risk Appetite 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 (VaR and stress testing limits); Interest Rate Risk in the Banking Book (Market Value Sensitivity and Net Interest Earnings at Risk limits); Seed Trust Market Risk limits; Lease Residual Value Risk limits; Investment mandates for Insurance Asset and Liability Management Risk (VaR and stress testing limits); and Non-Traded Equity limits. Liquidity and Funding Risk Group Liquidity and Funding Policy. Quantitative limits/tolerances: Operational Risk Operational Risk Policy and Framework. Liquid asset holdings under name crisis scenario; and Source of funding (e.g. wholesale) limits and term funding limits. 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. 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; Risk management 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. Strategic Business Risk Strategic Framework. Management via a suite of management controls including: Strategic planning; Strategic implementation; and Financial management. Reputational Risk Cultural Framework and Statement of Professional Practice. Management via: Support from risk professionals embedded throughout the Group; and Crisis management testing of leadership team. 42 Commonwealth Bank of Australia Annual Report 2011 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 credit exposures), and concentrations of exposure to countries, industry sectors and geographical regions. Exposure to risk also arises through securitisation activity. counterparties (large 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 as well as legal requirements. 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. Further risk management and 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. Market risk also includes risks associated with funding and liquidity management. Risk Management expected. For the general insurance business, variability arises mainly through weather related incidents and similar events, 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. It is essential in the control of claims on an end-to-end basis, from underwriting to policy termination or claim payment. 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 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 that the for Transferring a portion of the risk carried to reinsurers. • Further information on the Life Insurance Business is included in Note 33 to the Financial Statements. Further information on market risk is included in Note 40 to the Financial Statements. Compliance Risk 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. Operational Risk Operational risk is defined as the risk of economic loss arising from inadequate or failed internal processes, people, systems or from external events. fraud, includes business continuity and technology risks. legal, regulatory, It The Group’s operational risk management framework supports the achievement of its financial and business goals. The following objectives have been approved by the Risk Committee: • Maintenance of an effective internal control environment • • and system of internal control; Demonstration of effective governance, consistent approach across the Group; Transparency, escalation and resolution of risk and control incidents and issues; and including a to operational risk management • Making decisions based upon an informed risk-return analysis and appropriate standards of professional practice. 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. 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 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 consistent with the Australian Standard on Compliance Programmes. It is designed to help the Group meet its obligations under the Corporations Act 2001, the Group’s Australian Financial Services Licence and Australian Credit incorporates a number of components, Licences. CRMF including Group policies, a Compliance Obligations Register and a Compliance Review programme to monitor compliance with policies. 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: • in each Business Unit have Line management the responsibility to ensure their business is, and remains compliant with, legislative, regulatory, industry code and organisational requirements; and • Group and Business Unit regulatory risk and compliance teams work together to monitor, oversee and report on compliance to management, compliance committees and the Board. Commonwealth Bank of Australia Annual Report 2011 43 Risk Management Strategic Business Risk Strategic business risk is defined as the risk of economic loss resulting from changes in the business environment caused by the following factors: Social trends. Competitive forces at work; or • Macroeconomic conditions; • • Strategic business risk is taken into account as business strategies and objectives are defined. The Board receives reports on business plans, major projects and change initiatives and monitors progress and reviews successes compared to plans. Reputational Risk Reputational risk arises from the negative perception on the part of customers, counterparties, shareholders, investors, debt holders, market analysts, regulators and other relevant parties of the Group. 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 a function of the adequacy of the Group’s control of its risk management processes, as well as the manner and efficiency with which management responds influences on Group-related transactions. In many but not all respects, adverse reputational risk outcomes flow from the failure to manage other types of risk. to external Stress Testing Framework Stress testing is used, 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 strategic planning and capital assessment at Board level; Regular risk management exercises; Business contingency planning; and • • • Ad-hoc risk stress testing is also regularly undertaken to identify and assess the risk profile of the Group. Requests from regulators or external agencies. The stress testing framework includes: • Group-wide stress scenarios which inform and engage the Board in assessing capital requirements and other key financial outcomes under various severe but plausible scenarios. These tests are conducted across businesses with the results aggregated to the Group level; and • Risk Management testing, which supports enhanced risk identification, assessment and management within the Group’s Risk Appetite. related stress Such stress testing facilitates a more robust understanding of the Group’s risks and facilitates better management policies and predictability of capital requirements in more extreme circumstances. Stress testing also provides an input into the formation of internal views of the adequacy of the Group’s capital, liquidity, and provisions and the development of capital and liquidity contingency plans which detail how the Group would respond to potential future adverse scenarios. 44 Commonwealth Bank of Australia Annual Report 2011 Specific risk types for which stress tests are conducted on a routine basis for business risk management purposes include: • • • • Credit risk stress tests on a number of retail and commercial portfolios (which includes stressing the property prices of the exposures underlying security); Traded market risk, non-traded interest rate risk, non- traded equity risk and non-traded insurance risk portfolios; Liquidity stress tests that determine survival horizons are performed and reported to the Asset and Liability Committee (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; Funding indicators monitor a range of balance sheet focussing on external market conditions, metrics changing and concentration; and business patterns activity of • Operational risk to assess the potential for operational risk outcomes. 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: • • • • • • • • • • • • to provide a roadmap Developed a refreshed three year risk management strategic plan future for development of the risk management framework; Updated the risk appetite statements for the Group and for each of the Group’s major Business Units; Explicitly considered risk behaviours into remuneration policy and practices; Enhanced the Group’s policy framework by including the articulation of appropriate lower level sub-limits that are consistent with Group level limits; Refreshed credit risk assessment models; Continued to integrate subsidiary entities into the Group’s risk management framework and practices; Undertaken various risk optimisation strategies and portfolio reviews that have provided insight into key risk dependencies and resulted in adjusting risk exposure levels based on available risk-adjusted returns; Implemented projects that will substantially enhance core risk systems, data and processes; Strengthened the monitoring of deteriorating credits, the provisioning process and risk-based pricing models; Enhanced the structured learning framework for credit risk management professionals as well as risk training for front line staff; Completed annual reviews of policies relating to Credit Risk, Market Risk, Operational Risk, Compliance Risk and the Insurance Risk Management Framework; Enhanced the Group’s risk modelling and stress testing frameworks to meet the demands of an ever-changing macroeconomic environment; and the credit decisioning process, • Monitored and responded to regulatory changes and future regulatory changes. The Group has likely increased its participation in global financial forums and taken actions the influence Government to help shape future regulatory reform. regulators and to Capital Management The Bank is an Authorised Deposit-taking Institution (ADI) and is subject to regulation by the Australian Prudential Regulation Authority (APRA) under the authority of the Banking Act 1959. APRA has set minimum regulatory capital requirements for banks that are consistent with the International Convergence of Capital Measurement and Capital Standards: A Revised Framework (Basel II) issued by the Basel Committee on 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, 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. The tangible component of the investment in the insurance and funds management operations is 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. These include share issues and buybacks, dividend and dividend reinvestment plan (DRP) 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 ALCO. Three year capital forecasts are conducted on a quarterly basis and a detailed capital and strategic plan is presented to the Board annually. The Group’s capital ratios throughout the 2010 and 2011 financial years were in compliance with both APRA minimum capital adequacy requirements and the Board Approved minimums. Capital Management The Bank is required to inform APRA immediately of any breach or potential breach of its minimum prudential capital adequacy requirements, including details of remedial action taken or planned to be taken. Dividends Banks may not pay dividends if, immediately after payment, they are unable to meet the minimum capital requirements. 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 the Group’s internal 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, excluding Bankwest, was granted advanced Basel II accreditation by APRA on 10 December 2007. From 1 January 2008, the advanced internal ratings based approach (AIRB) for credit risk and the advanced measurement approaches (AMA) for operational risk were adopted in the calculation of RWA. 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. IRRBB 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 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. future earnings potential and secondly; as 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. This has increased the flexibility with which the Group manages its decision making and capital management. the Group with Regulatory Changes There are a number of regulatory changes in progress that will impact the measurement of capital for the Group in regards to Banking, General and Life Insurance and Conglomerate Groups. Commonwealth Bank of Australia Annual Report 2011 45 Capital Management Banking - Basel Committee Changes Supervision of Conglomerate Groups On 16 December 2010, the Basel Committee on Banking Supervision (BCBS) published details of its main banking reforms to strengthen global capital and liquidity regulations with the aim of promoting a more resilient banking sector. The “Basel III: A global regulatory framework for more resilient banks and banking systems” reforms are designed to increase the quality, consistency and transparency of capital, to enhance the risk coverage framework, and to reduce systemic and pro- cyclical risks. The regulations will increase the common equity minimum requirement from 2% to 4.5%. They introduce a capital conservation buffer of 2.5%, taking the minimum common equity requirement to 7%. Tier One and Total Capital minimum requirements (inclusive of the capital conservation buffer) will increase to 8.5% and 10.5% respectively. The reforms also introduce a minimum leverage ratio of Tier One Capital to total exposures of 3%. The reforms will be phased in from 1 January 2013 to 1 January 2019. Banking - APRA Changes APRA has begun work on developing draft prudential standards to implement the changes outlined by the BCBS. is expected APRA to release a consultation paper on implementation in Australia in August 2011. Draft prudential standards are expected by December 2011, and final standards are expected in December 2012. The BCBS and APRA conducted several recent Quantitative Impact Studies (QIS) to assess the impact of the proposed changes. The results of these studies are expected to be used to calibrate appropriate capital levels. Basel II enhancements announced in July 2009, relating to securitisation and market risk, will be implemented from 1 January 2012. General and Life Insurers APRA released a Discussion Paper titled “Review of capital standards for general insurers and life insurers” in May 2010, followed by more detailed technical papers in July 2010. APRA is seeking to improve the risk sensitivity of its capital standards, and to introduce a definition and measurement of the capital base for insurers that is consistent with ADIs. A QIS to assess the impact of the proposed changes was completed in 2010 and after some refinements, APRA requested a further QIS be completed in 2011. The final standards are expected to be released by APRA in 2012 with implementation to commence in 2013. The Reserve Bank of New Zealand (RBNZ) issued draft solvency standards for life insurance operations in August 2010. Following a period of consultation with the industry, the RBNZ is close to finalising the standard which will take effect during 2012. 46 Commonwealth Bank of Australia Annual Report 2011 its current prudential supervision APRA released a Discussion Paper titled “Supervision of Conglomerate Groups” in March 2010. APRA is seeking to extend 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. framework A QIS to assess the impact of the proposed changes was completed in February 2011. Draft capital standards are expected in 2012 with implementation to commence in 2013. Pillar 3 Disclosures Full details on the market disclosures required under Pillar 3, per prudential standard APS 330 “Public Disclosure of Prudential Information”, are provided on the Group’s website. 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 year ended 30 June 2011. The Group’s Common Equity, Tier One Capital and Total Capital ratios as at 30 June 2011 were 7.66%, 10.01% and 11.70% respectively. The Group’s Common Equity and Tier One Capital increased by 31 and 30 basis points respectively over the prior half, primarily influenced by both solid cash profit after tax (net of dividend and DRP) and an overall net reduction in RWA. The Group’s Total Capital ratio increased 20 basis points over the prior half to 11.70%, with the benefits from the improvement in Tier One Capital partially offset by the planned redemption of a Lower Tier Two instrument. RWA were $282 billion at 30 June 2011, a decrease of $4 billion since 31 December 2010. This decrease was primarily influenced by a $7 billion reduction in Interest Rate Risk in the Banking Book (IRRBB) RWA with the balance sheet duration moving closer to its neutral risk position. This was achieved through treasury risk management activities and change in loan and deposit pricing terms. Compared to the prior year, the Group’s Common Equity and Tier One Capital increased 80 and 86 basis points respectively, reflecting a solid profit performance and reduction in RWA. Total Capital increased 21 basis points compared to the prior year. The benefits from the growth in Tier One Capital being partially offset by the planned redemption of a number of Lower Tier Two instruments, and foreign currency translation impacts of these instruments. The Group’s Common Equity, Tier One and Total Capital ratios as at 30 June 2011 under the Financial Services Authority (the UK regulator) method of calculating regulatory capital as a percentage of RWA were 10.9%, 13.7% and 15.0% respectively. This has been provided for comparative purposes as the Group is not regulated by the Financial Services Authority. Capital Initiatives The following significant initiatives were undertaken during the year to actively manage the Group’s capital: Tier One Capital • • • The DRP for the 2010 final dividend was satisfied in full by an on market purchase and transfer of shares. As such there was no impact on the Group’s capital ratios. The DRP participation rate was 25.8% and follows the removal of the 1.5% discount; The allocation of $513 million of ordinary shares in order to satisfy the DRP in respect of the interim dividend for the 2011 financial year, representing a participation rate of 25.1%; and The redemption of $65 million in Exchangeable Floating Rate notes, classified as Innovative Tier One Capital, in February 2011. Tier Two Capital • • Redemption of five separate subordinated Lower Tier Two debt issues totalling $795 million, the majority of which took place in November 2010; and Redemption of a $152 million (NZ$ 200 million) Lower Tier Two debt issue in June 2011. Regulatory Capital Requirements for Other Major ADI’s in the Group ASB Bank Limited ASB Bank Limited’s (ASB) operations are included in the Group’s capital requirements however, ASB operates as a stand-alone Bank under Basel II advanced status and is subject to regulation by the RBNZ. The RBNZ applies a similar methodology regulatory capital requirements. in calculating to APRA ASB had a Tier One ratio of 11.2% and a Total Capital ratio of 12.8% at 30 June 2011. ASB Bank was in compliance with its regulatory capital requirements at all times during the year. Once Basel III reforms are implemented, ASB will be required to report a common equity ratio. Bankwest Bankwest’s operations are included in the Group’s capital requirements however, Bankwest operates as a stand-alone Bank under Basel II standardised status and is separately regulated by APRA. There is a programme to extend the Group’s advanced accreditation to determine regulatory capital for Bankwest. Bankwest’s capital ratios, at 30 June 2011, are in excess of both APRA minimum requirements and Board approved minimum levels. The Tier One ratio was 9.1% and Total Capital was 12.9%. Bankwest was in compliance with its regulatory capital requirements at all times during the year. Once Basel III reforms are implemented, Bankwest will be required to report a common equity ratio. Capital Management 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 for life insurance companies –‘solvency’ and ‘capital adequacy’. The capital adequacy test for statutory funds is always equal to or greater than the solvency test(1). 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 capital requirements for general insurance businesses in accordance with APRA Prudential Standards. the Australian Securities and Fund managers in Australia are subject to ‘Responsible Entity’ regulation by Investment Commission (ASIC). The regulatory capital requirements vary depending on the type of Australian Financial Services Licence or Authorised Representatives’ Licence held, but a requirement of up to $5 million of net tangible assets applies. APRA supervises approved trustees of superannuation funds and requires them to also maintain net tangible assets of at least $5 million. These requirements are not cumulative where an entity is both an approved trustee for superannuation purposes and a responsible entity. The Group’s insurance and funds management companies held assets in excess of regulatory capital requirements at 30 June 2011. The Group’s Australian and New Zealand insurance and funds management businesses held $1,014 million of assets in excess of regulatory solvency requirements at 30 June 2011 (31 December 2010: $1,147 million; 30 June 2010: $1,007 million). (1) The Shareholders’ fund is subject to a separate capital requirement. Commonwealth Bank of Australia Annual Report 2011 47 Capital Management Capital Adequacy Risk Weighted Capital Ratios Common Equity (1) Tier One Tier Two Total Capital Regulatory Capital Ordinary Share Capital Treasury shares (2) Ordinary Share Capital and Treasury Shares Other Equity Instruments Trust Preferred Securities 2006 (3) Total Other Equity Instruments Reserves (4) Cash flow hedge reserve Employee compensation reserve Asset revaluation reserve Available-for-sale investments reserve Foreign currency translation reserve related to non-consolidated subsidiaries Total Reserves Retained Earnings and current period profits Expected dividend (5) Estimated reinvestment under Dividend Reinvestment Plan (6) Retained earnings adjustment for non-consolidated subsidiaries (7) Other Net Retained Earnings Non-controlling Interest (8) ASB Perpetual Preference Shares (8) Non-controlling interests less ASB Perpetual Preference Shares Total Fundamental Tier One Capital As at 30/06/11 31/12/10 30/06/10 % 7. 66 10. 01 1. 69 11. 70 % 7. 35 9. 71 1. 79 % 6. 86 9. 15 2. 34 11. 50 11. 49 As at 30/06/11 31/12/10 30/06/10 $M 23,602 294 23,896 939 (939) - 392 402 (135) (191) (245) 149 372 11,826 (2,930) 733 227 (189) 9,667 528 (505) 23 $M 23,083 301 23,384 939 (939) - 269 490 (100) (189) (22) 118 566 10,534 (2,045) 511 230 (63) 9,167 524 (505) 19 $M 23,081 298 23,379 939 (939) - 1,089 417 (125) (194) (173) 8 1,022 9,938 (2,633) - 392 (52) 7,645 523 (505) 18 33,958 33,136 32,064 (1) Represents Fundamental Tier One Capital net of Tier One deductions. (2) Represents shares held by the Group’s life insurance operations and employee share scheme trusts. (3) Trust Preferred Securities 2006 issued 15 March 2006 of USD700 million. These instruments qualify as Tier One Innovative Capital of the Group. (4) 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. (5) Represents expected dividends required to be deducted from current period earnings. (6) Dividend Reinvestment Plan (DRP) in respect of the June 2011 final dividend is to be satisfied through the issue of shares, with the assumed reinvestment rate based on reinvestment experience as approved by APRA. The DRP in respect of the December 2010 interim dividend was satisfied by the issue of shares. The DRP in respect of the June 2010 final dividend was satisfied in full by an on market purchase and transfer of shares. (7) Represents cumulative current year profit and retained earnings adjustment for subsidiaries not consolidated for regulatory purposes. This includes adjustments to the extent to which retained earnings from non-consolidated subsidiaries have not been repatriated to the Bank in dividends (June 2011: $525 million, December 2010: $522 million, June 2010: $360 million). The retention of these profits are used to fund the future growth of these operations. This has been offset by the one-off write back adjustments upon adoption of IFRS of $752 million. (8) Non-controlling interest classified as Tier One Innovative Capital under Basel II regulations. Comprised predominantly of ASB Perpetual Preference Shares of NZD550 million issued by New Zealand subsidiary entities. These shares are non-redeemable and carry limited voting rights. 48 Commonwealth Bank of Australia Annual Report 2011 Capital Adequacy (continued) Regulatory Capital Tier One Capital Deductions - 100% Goodwill and other intangibles (excluding software) (1) Capitalised expenses Capitalised computer software costs Defined benefit superannuation plan surplus (2) General reserve for credit losses top up (3) Deferred tax Tier One Capital deductions - 100% Tier One Capital Deductions - 50% (4) Equity investments in other companies and trusts (5) Equity investments in non-consolidated subsidiaries (net of intangibles) (6) Expected impairment losses (before tax) in excess of eligible credit provisions (net of deferred tax) (7) Other deductions Tier One Capital deductions - 50% Total Tier One Capital Deductions Fundamental Tier One Capital After Deductions Residual Tier One Capital Innovative Tier One Capital Non-cumulative preference shares (8) Non-controlling Interests (9) Eligible loan capital Total Innovative Tier One Capital Non-Innovative Residual Tier One Capital (10) Less: Residual capital in excess of prescribed limits transferred to Upper Tier Two Capital (11) Total Residual Tier One Capital Capital Management As at 30/06/11 31/12/10 30/06/10 $M $M $M (8,306) (252) (1,297) (53) (132) (287) (8,382) (242) (1,100) (255) (106) (47) (8,470) (288) (950) (221) (90) (96) (10,327) (10,132) (10,115) (317) (526) (817) (396) (328) (539) (748) (390) (323) (518) (830) (328) (2,056) (12,383) (2,005) (12,137) (1,999) (12,114) 21,575 20,999 19,950 2,598 505 128 3,231 3,407 - 6,638 2,626 505 198 3,329 3,407 - 6,736 2,728 505 236 3,469 3,407 (225) 6,651 Total Tier One Capital 28,213 27,735 26,601 (1) Represents total Goodwill and other intangibles (excluding capitalised computer software costs) which is required to be deducted from Tier One Capital. (2) In accordance with APRA regulations, the surplus (net of tax) in the Bank’s defined benefit superannuation fund which is included in Shareholders’ equity must be deducted from Tier One Capital. (3) Capital deduction at 30 June 2011 of $132 million after tax (31 December 2010: $106 million, 30 June 2010: $90 million) 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. (4) Represents 50% Tier One and 50% Tier Two Capital deductions under Basel II. (5) Represents the Group’s non-controlling interest in other companies and unit trusts. (6) 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 $1,452 million in Non-Recourse Debt issued by Colonial Finance Limited (December 2010: $1,446 million, June 2010: $1,495 million) and the Colonial Hybrid Issue $700 million (December 2010: $700 million, June 2010: $700 million). (7) 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. (8) APRA approved Innovative Tier One Capital instruments (PERLS III and Trust Preferred Securities 2003 and 2006). (9) Non-controlling interest classified as Tier One Innovative Capital under Basel II regulations. Comprised predominantly of ASB Perpetual Preference Shares of NZ$550 million issued by New Zealand subsidiary entities. These shares are non-redeemable and carry limited voting rights. (10) 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. (11) 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. Commonwealth Bank of Australia Annual Report 2011 49 Capital Management Capital Adequacy (continued) Regulatory Capital Tier Two Capital Upper Tier Two Capital Residual capital in excess of prescribed limits transferred from Tier One Capital (1) Prudential general reserve for credit losses (net of tax) (2) Asset revaluation reserve (3) Upper Tier Two note and bond issues Other Total Upper Tier Two Capital Lower Tier Two Capital Lower Tier Two note and bond issues (4) (5) Holding of own Lower Tier Two Capital Total Lower Tier Two Capital Tier Two Capital Deductions 50% Deductions from Tier Two Capital (6) Total Tier Two Capital Total Capital As at 30/06/11 31/12/10 30/06/10 $M $M $M - 620 86 336 124 - 618 85 350 108 225 603 87 382 83 1,166 1,161 1,380 5,728 (89) 5,639 (2,056) 4,749 32,962 5,990 (35) 5,955 (2,005) 5,111 32,846 7,454 (16) 7,438 (1,999) 6,819 33,420 (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. 50 Commonwealth Bank of Australia Annual Report 2011 Capital Adequacy (continued) Risk Weighted Assets Credit Risk Subject to Advanced IRB approach Corporate SME Corporate SME Retail Sovereign Bank Residential mortgage Qualifying revolving retail Other retail Impact of the regulatory scaling factor (1) Total risk weighted assets subject to Advanced IRB approach Specialised lending exposures subject to slotting criteria Subject to Standardised approach Corporate SME Corporate SME Retail Sovereign Bank Residential mortgage Other retail Other Total risk weighted assets subject to standardised approach Securitisation Equity exposures Total risk weighted assets for credit risk exposures Market risk Interest rate risk in the banking book Operational risk Total risk weighted assets (2) (1) APRA requires RWA amounts that are derived from IRB risk weight functions be multiplied by a factor of 1.06. (2) RWA include the consolidation of Bankwest which operates under the Basel II Standardised methodology. Capital Management As at 30/06/11 31/12/10 30/06/10 $M $M $M 39,180 22,471 4,435 2,517 7,216 55,709 6,398 7,253 8,711 40,129 22,071 4,896 2,557 6,686 56,412 6,761 6,398 8,755 44,252 26,216 5,170 2,800 7,492 55,882 6,772 6,322 9,294 153,890 35,990 154,665 34,339 164,200 35,483 8,048 7,389 4,461 103 1,238 23,515 2,574 4,751 52,079 2,670 2,113 8,040 7,597 4,377 99 1,583 22,605 2,510 4,619 51,430 1,894 2,280 8,872 7,746 4,684 215 1,136 22,436 2,530 5,472 53,091 1,569 2,420 246,742 244,608 256,763 3,162 9,699 22,108 281,711 3,873 17,033 20,049 3,503 10,272 20,283 285,563 290,821 Commonwealth Bank of Australia Annual Report 2011 51 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, risk management and stockbroking. The domestic competitive landscape includes the four major banks, regional banks, building societies and credit unions, foreign retail banks, local and global investment banks, fund managers, private equity firms, insurance companies, brokers and third party distributors. investment, insurance, Banking While the Australian economy has performed well over the past year, the domestic banking environment has encountered headwinds characterised by strong competition, muted credit growth, elevated funding costs, fragile business and consumer confidence, regulatory uncertainty, a subdued global economy and the financial impact of natural disasters. Despite the challenging operating conditions, all major Australian banks have reported improved financial results reflected in higher cash profits, driven by modest growth in operating income and lower impairments. In addition, major banks have retained strong capital and liquidity positions, largely through organic growth, which should see them well placed to meet upcoming Basel III requirements. The structure of the Australian financial industry has continued to evolve over the course of the year. The resilience of the Australian financial sector has proven attractive to international investment banks, some are returning to the market after they withdrew during the GFC, and regional banks and specialist players are beginning to re-establish themselves. Lower domestic credit growth has resulted in strong competition for lending, whilst elevated wholesale funding costs have continued to put pressure on deposit margins as banks compete for this source of funding. In the short to medium term significant challenges and uncertainties remain for both the domestic and global financial systems. Domestic credit growth is likely to remain subdued, and the impact of recent natural disasters will dampen economic growth in the short term. In addition, concerns about sovereign debt credit risk, particularly in Europe, continue to impact global financial markets. This is likely to result in a continuation of conservative capital and liquidity settings. Funds Management Domestic funds management margins remain under pressure with further Australian regulatory changes expected to reduce fees and requirements and associated compliance costs. Consolidation of the industry is set to continue as industry participants seek scale to counteract margin pressure and expand capabilities. increase capital Insurance Government policy supporting the beneficial treatment of life insurance inside superannuation is expected to drive strong growth in the life insurance sector, increasing overall coverage. At the same time, life insurance distribution dynamics continue to evolve, with bancassurance, master trusts and industry funds emerging as the strongest growth channels. To meet the growing needs of these channels, insurance manufacturers are placing a greater emphasis on technology and service efficiency. The general insurance market remains concentrated but is highly competitive, particularly with the entry of low cost operators. Industry profitability during the financial year has been negatively impacted by significant weather related event claims. New Zealand The Group’s banking activities in New Zealand are conducted through the ASB Group and insurance activities through Sovereign Group. Competition in the New Zealand banking sector remains intense, with the four main banks being owned by Australian parents and accounting for 90% of the total banking system. In addition, Kiwibank, the New Zealand Government and New Zealand Post owned and operated bank launched in March 2002, continues to compete aggressively in the retail sector. The non-bank financial sector remains weak due to elevated funding costs arising from the GFC. There have been some collapses and further consolidation of this segment is expected. The Christchurch earthquake is likely to dampen New Zealand economic growth in the short term. Lending growth has been subdued and this is expected to continue, with forecast economic growth only returning to above 3% in the 2013 financial year. Competition for retail deposits remains strong as banks move to secure increased domestic funding whilst at the same time reduce reliance on wholesale funding. for long term growth outlook The funds management industry remains positive, underpinned by the proposal increase to both simplify superannuation and compulsory superannuation contributions to 12% by the 2020 financial year. the Australian The demand for simple, transparent low fee products is expected to continue as retail commissions are removed and investors focus on net-of-fee performance. Australia’s ageing population and widening retirement funding gap is expected to drive demand for products which address market volatility, inflationary threats and longevity risks, and there continues to be significant demand from global investors for well managed international funds. 52 Commonwealth Bank of Australia Annual Report 2011 Description of Business Environment Financial System Regulation in Australia Supervisory Arrangements Australia has, by international standards, a high quality financial system which financial products and services consistently regardless of the type of financial institutions providing them. regulates 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 the Australian Competition and Consumer Centre and 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 responsibilities and functions is set out below. The 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. The Australian Prudential Regulation Authority (APRA) has responsibility for the prudential supervision of banks, building societies and credit unions, insurance funds companies, (pension funds). Unless an institution is authorised under the Banking Act 1959 or exempted by APRA, it is prohibited from engaging in the general business of deposit-taking. friendly societies and superannuation life and general The Australian Securities and Investments Commission (ASIC) has responsibility for regulating and enforcing Company and financial services laws that protect consumers, investors and creditors, including the Corporations Act 2001. The Corporations Act 2001 provides for a single licensing regime for sales, advice and dealings in financial products and services, consistent and comparable financial product disclosure and a single authorisation procedure for financial exchanges and clearing and settlement facilities. ASIC is also responsible for the National Consumer Credit Protection Act and the responsible lending framework it imposes upon credit providers. 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 community through the administration of the Trade Practices Act 1974. (DFAT), a In addition to the above, the Department of Foreign Affairs and federal government department, has Trade responsibility to decisions of the United Nations Security Council (UNSC) relating to sanctions, including the freezing of terrorist assets. legislation giving effect implementing for The Bank and its subsidiary Bank of Western Australia are Authorised Deposit-taking Institutions (ADIs) under the Banking Act 1959 and are subject to prudential regulation by APRA. In carrying out its prudential responsibilities, APRA closely monitors the operations of banks to ensure that they operate within the prudential framework and that sound management practices are followed. APRA currently supervises 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 programme of specialised on-site visits to assess the adequacy of individual banks’ systems for identifying, measuring and controlling risks associated with the conduct of these activities. In addition, APRA has established arrangements under which each bank’s external auditor reports to APRA regarding observance of prudential standards and other supervisory requirements. The prudential framework applied by APRA is embodied in a series of prudential standards and other requirements including: (i) Capital Adequacy APRA has approved the Bank’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, Certificates of Deposit / Bills of other banks and 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 Group’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. Commonwealth Bank of Australia Annual Report 2011 53 Description of Business Environment Supervisory Arrangements (continued) The Commonwealth 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. (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 Treasurer. (vi) Fit and 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 prudential risk 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. Accounting Policies and Estimates The Group’s accounting policies including critical accounting policies and estimates are set out in Note 1 to the Financial Statements. 54 Commonwealth Bank of Australia Annual Report 2011 Sustainability Sustainability Commitment Innovative product development For the Group, sustainability is about being a successful business today while ensuring long term value is delivered to customers, people, shareholders and the wider community. The Group’s sustainability approach centres around five foundations that are key to the business – Customers, People, Community, Environment and Governance. This section of the report covers the first four foundations: Customers, People, Community and the Environment. Details about the Group’s Governance approach can be found in the Corporate Governance section of this report. The sustainability information in this section, including the sustainability scorecard of key metrics, captures data from Australian domestic operations only (excluding Bankwest), unless otherwise stated. More detailed information about the Group’s approach to sustainability, as well as initiatives and achievements, will be covered in the Sustainability Report 2011, available in October on www.commbank.com.au/sustainability-reporting. Customers Customer satisfaction remains a key focus for the Group and during the year a number of initiatives were introduced to support the Group’s retail, business and wealth management customers, providing financial solutions and improvements to the customer experience. innovative As illustrated in the metrics table on page 58, customer satisfaction performance was solid across retail, business and wealth management customer segments. Refer to the CEO Statement and Business Unit performance highlights for more information on the Group’s customer satisfaction achievements over the year. Responsible Banking The Group’s Emergency Assistance Packages were activated to support both retail and business customers, as well as the broader community, in all Australian states affected by natural disasters. The Group’s flood and cyclone financial assistance totalled $65 million and included: • • Compassionate Assistance Fund of up to $50 million and CommInsure ex gratia payments of $8 million; Community Flood Assistance Grants Programme of $5 million; and Cash donations of $2 million to flood relief appeals. • In addition, • • • $1 billion was set aside for loans to business and agribusiness customers; No interest was charged for the first three months on new or increased overdraft facilities; and Hardship assistance was offered Emergency Assistance packages. through Special Following the earthquake in Christchurch, ASB Bank donated NZ$1.5 million to earthquake relief funds and launched a NZ$250 million investment programme. This was in addition to the support offered by both ASB and Sovereign to their customers and people. During the year the Group developed and launched a number of new products for retail and business customers. These included: • • • • • The introduction of GoalSaver, a high interest bearing savings product; The launch of the new premium Diamond Awards credit card; Bankwest launched their first Express Store; A No Fee Variable Interest Rate Home Loan is available in the branch, over the phone, online or through a broker; and The Business Debit Mastercard; customers can access money from business transaction accounts at ATMs and pay for purchases using EFTPOS. Customer-supporting technology The Group’s Core Banking Modernisation project, initiated in 2008, is changing the Group’s core banking processes and systems. The world class technology platform is enhancing the way the Group provides services to customers and the way business is undertaken. The programme continued its rollout and achieved significant milestones during the year. Migrating ten million accounts to a new platform, delivering real-time banking and new account functionality to Retail deposit customers. Youth financial literacy Improving financial literacy among Australians is one of the Group’s key goals. During the year, the Group continued its focus on: • • • The ‘one million kids’ programme which aims to improve the financial literacy of more than one million Australian school children; The Commonwealth Bank Foundation’s StartSmart programme, a series of classroom sessions and workshops designed to help young Australians build better money management skills; and The Group’s online game, Coinland. To date over 115,000 children have created an account to experience the online world and have fun while learning the basics of money management with the help of characters such as the Dollarmites and Platy. People During the year, a number of initiatives were developed to benefit the Group’s people, with a particular focus on diversity (including gender, leadership and disability support), indigenous employment and culture. Diversity In June 2011, the Group launched its Diversity Policy, outlining the Group’s approach to creating and maintaining an inclusive and collaborative workplace culture. The Diversity Policy provides the strategy and measurable objectives with a key focus on gender diversity. With over 61% of employees in the Group being female, the aim is to increase the representation of women in senior management levels from 26.6% in December 2009 to 35% by December 2014. Solid progress was made towards that goal, with women comprising 28.2% of senior management roles, as at June 2011. Commonwealth Bank of Australia Annual Report 2011 55 Sustainability Disability Support The Group launched its updated Disability Action Plan (DAP) in December 2010. The DAP outlines the Group’s strategies for supporting staff and customers with a disability, mental illness or other serious health condition. During the year, the Group appointed a Diversity Support Manager, focusing on leading the Group’s approach and providing advice and support to implementing strategies across the business. Indigenous Employment Strategy The Indigenous Employment Strategy remained a key focus. The Group has made good progress towards its target of creating 350 additional positions for indigenous Australians by June 2012, with 30 new indigenous employees joining the Group over the period. People and Culture Survey The Group continued its focus on developing a culture of trust and team spirit and helping foster people engagement and pride within the organisation. In the 2011 people engagement survey, the Group recorded a People and Culture Indicator (PCI) result of 4.30 and Gallup GrandMean score of 4.30. This put the Group in the 73rd percentile in the Gallup Worldwide database. Safety, Absenteeism and Turnover The Group’s Lost Time Injury Frequency Rate (LTIFR) has improved over the past several years due to the continued implementation of the safety management system. In the 12 months to June 2011 the LTIFR was 1.9, down from 2.9 in the prior year. Group absenteeism was broadly in line with the prior year, while voluntary turnover declined from 12.73% in 2010 to 12.65% in 2011. Community The Group continued its ongoing work with a range of Australian communities through its programmes and partnerships across health and welfare, the arts, environment, sport and indigenous affairs. Natural disaster relief appeal The Queensland floods and Cyclone Yasi impacted not only the Group’s customers but also the wider community. In recognition of both the economic and social significance of community groups, a Community Flood Assistance Grants Program was launched by the Group to help support a number of groups. Not- for-profit community groups that had suffered damage or loss of uninsured equipment were invited to apply for a grant of up to $20,000. This was the only programme of its size and scale offered to community groups in flood-affected areas around from Australia. The programme Queensland, Victoria, New South Wales and Western Australia representing health, arts and history, children’s wellbeing, sport and social welfare. A total of 381 groups received grants totaling over $5 million. received applications The Group also donated $2 million to flood relief appeals and accepted donations through all Commonwealth Bank branches and online channels. The Australian community showed its unwavering support for people in need, with the Group collecting in excess of $44 million in donations from staff and customers. Community Partnerships The Group continued its support for cricket from the grandstands to grassroots through its ongoing sponsorship of the One Day International Cricket Series and its assistance for local cricket 56 Commonwealth Bank of Australia Annual Report 2011 clubs. In November 2010, the Group’s Grants for Grassroots cricket programme rolled out for the second year, with over 200 local men’s, women’s, and children’s cricket clubs around Australia receiving a $1,000 cash grant plus $750 worth of equipment. The number of grant applications increased by 43% from the previous year’s programme. The Fours and Sixes for Local Pitches initiative, which supported cricket clubs that had been affected by the Queensland floods, saw the Group donate $4,000 for every four and $6,000 for every six hit during the Commonwealth Bank Series match at the Gabba in Brisbane in January 2011. As a result, a total of $188,000 was raised to help cricket clubs rebuild and get players back on the pitch. The Group’s Staff Community Fund, Australia’s longest running workplace giving programme, drove a month-long campaign for the Humour Foundation. This raised more than $180,000 for the Clown Doctors, an organisation that brings fun and humour to children’s hospitals around Australia, using magic, mime and mimicry. During Legacy Badge Week the Group sold Legacy Badges in all branches nationally, helping raise over $90,000. As the major sponsor of Clean Up Australia Day, the Group hosted over 65 cleanup sites nationally in 2011. The Group continued its major sponsorship of the Australian of the Year Awards in 2011. In conjunction with these awards, the Group developed a new programme – Launching Local Heroes. This programme supports eight inspiring Australians – one from each state and territory, all nominated for the Australian of the Year Awards 2011, to have an even greater impact in the community. The Group aims to bring the arts to a broader range of people from all backgrounds through enduring partnerships with Opera Australia, Australian Chamber Orchestra, Bangarra Dance Theatre and, since June 2010, the Museum of Contemporary Art. in Australian communities The Group continued its support of important health initiatives. During the year, the Group helped raise more than $452,000 for the Breast Cancer Institute of Australia from fundraising and the sale of the Australian Women’s Health Diary in Commonwealth Bank branches. The Group also continued its support of the Prostate Cancer Foundation of Australia and their national ‘BBQ for Prostate Cancer’ awareness campaign. During September 2010, International Prostate Cancer Awareness Month, the Group surpassed $1 million of funds raised since the start of the partnership in 1999. For more programmes the Group supports visit information on the full range of community www.commbank.com.au/about-us. Indigenous Commitment During the year the Group has supported various indigenous initiatives and programmes including participating in National Aborigines and Islanders Day Observance Committee (NAIDOC) week, fundraising and support for the Australian Indigenous Mentoring Experience (AIME), and the Bawaka cultural programme in Arnhem Land, which has been attended by some 60 employees including the Group’s CEO. The Group is committed to supporting the indigenous enterprise sector in Australia and working with the Australian Indigenous to provide a direct Minority Supplier Council’s (AIMSC) link between Corporate business-to-business purchasing Australia, Government agencies and indigenous-owned businesses as well as increase its supply chain diversity. Environment Property Environmental Performance located The Group continued its shift to environmentally responsible commercial properties with the construction of Commonwealth in Sydney's Darling Walk precinct. Bank Place, Commonwealth Bank Place consists of two commercial A-grade office spaces, the North and South Towers, each with eight levels and retail areas on the ground floor. The first teams took occupancy in June 2011. is Commonwealth Bank Place targeting a number of environmental performance ratings including a six star Green Star rating for its base building office design, a five star Green Star rating for office interiors and a five star NABERS Energy rating for energy use. The buildings adopt a range of sustainability principles including state-of-the-art technology and innovative features to help reduce energy consumption of the facility by 50% and water consumption by 90%, while targeting 80% of waste to be recycled or diverted from landfill. The buildings encompass multiple working style spaces to cater for Activity Based Working, where employees choose to work in the space best suited to the task they are doing at the time. To maximise mobility, connectivity and efficiency, employees will be equipped with the latest technology, including laptops with a built-in webcam for video calls, a unified communication system, LCD collaboration screens and smart boards, while having access to a secure wireless network anywhere in the building. More than 6,000 of the Group’s people will be located in Commonwealth Bank Place’s North and South Tower buildings by early 2012. Managing Carbon Emissions The Group continued to progress towards its 20% carbon reduction target during the year, with a number of initiatives and pilot programmes implemented to reduce the Group’s energy and fuel consumption. Additional activities are set to be implemented throughout the remainder of the calendar year and beyond to further reduce the impacts of increased energy and fuel prices. The Group remains confident in achieving its 20% carbon emissions reduction target, from 2008-09 emission levels, by mid 2013. Reporting The Group is subject to the National Greenhouse and Energy Reporting (NGER) scheme. This provides a consistent reporting framework for Australia’s greenhouse gas emissions. The Energy Efficiency Opportunities (EEO) Act provides a framework for identifying cost-effective energy savings. In October 2010, the Group submitted its response to the NGER scheme and in December 2010 published its Energy Efficiency Opportunities Report 2010. The Group once again voluntarily reported its carbon emissions to the Carbon Disclosure Project (CDP) in May 2011. It was announced as a global sector leader in the Carbon Disclosure Leadership Index by achieving third place in world-standing for carbon disclosure within the 2010 CDP Global 500 Report released in September 2010. Sustainability Future Developments The Group is committed to sustainability and is maintaining its focus on delivering long term value and ensuring its policies and practices support customers, staff, the community and rigorous corporate governance. the environment, The Group will publish its annual Sustainability Report in October 2011 to share its sustainability performance. The Sustainability Report 2011 will be available online at: www.commbank.com.au/sustainability-reporting. Commonwealth Bank of Australia Annual Report 2011 57 Sustainability How the Group Performed Metric (1) Customers Roy Morgan Research main financial institution customer satisfaction (2) Rank DBM Business Financial Services 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) 2011 2010 2009 75.2% 4th 7.1 Equal 2nd 84.7% 1st 6.0 12.65% 4.30 4.30 1.9 75.6% 2nd 7.0 Equal 1st 86.5% 1st 5.9 12.73% 4.32 4.31 2.9 73.0% 3rd - - 84.1% 1st 5.9 11.37% 4.37 4.36 2.4 172,087 176,806 172,752 (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 six months 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 three main Australian banks (Westpac, NAB, and ANZ).The competitor set changed in 2010/11 to reflect the four major banks, rank adjustments have been applied historically. (3) The average satisfaction of each financial institution’s MFI business customers surveyed by DBM Business Financial Services Monitor. Respondents rate their overall satisfaction with that institution on a scale from 0 to 10 where 0 is ‘Extremely Dissatisfied’ and 10 is ‘Extremely Satisfied’. The metric is reported as a 6 month rolling average as at June 2011. The ranking refers to the Group’s position relative to the other three major Australian banks. The Group began reporting business customer satisfaction using the new industry currency, DBM Business Financial Services Monitor in August 2010, however DBM have provided top line back data from June 2010. (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 CBA employees excluding those of Bankwest, ASB Bank and other overseas banking 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 2010 figure (previously reported as 2.5) has been adjusted. (10) Emissions relate to the 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, business use of hire cars and domestic ATMs. Due to the electricity billing cycle, 26% of the 2010-11 electricity data was estimated to meet publication deadlines. 58 Commonwealth Bank of Australia Annual Report 2011 Introduction This statement outlines 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, designed to properly balance performance and conformance. This enables 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 ASX 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 (CEO); 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. It has regard to the interests of the Group’s customers, people, shareholders and the broader community in which the Group operates at all times. Delegation of Authority The Board delegates to the CEO the authority to achieve the its Group’s objective of creating through providing shareholders its best-in-industry and customers performance in safety, community reputation and environmental impact. long term value financial services sustained providing for to The CEO is responsible for the day to day management of the Group and maintaining a comprehensive set of management delegations under the Group’s Delegation of Authorities framework. These delegations cover commitments around project investment, operational expenditure and non-financial activities or processes. They are designed to accelerate decision-making and improve both efficiency and customer service. An overview of the Group’s Corporate Governance framework is outlined below. Corporate Governance Framework Independent advice and assurance available Board of Directors Delegated authority CEO Independent Directors CEO Accountable through reporting obligations Provides advice to the CEO on key decisions made under management delegation Management delegated authority Board Committees Executive Committee Audit Risk Board Performance and Renewal People & Remuneration Commonwealth Bank of Australia Annual Report 2011 59 Corporate Governance Composition There are currently eleven 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 Chairman Board Performance and Renewal Chairman People & Remuneration Member 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 B J Long (1) L K Inman (2) Non-Executive, Independent Executive Non-Executive, Independent Non-Executive, Independent, Non-Executive, Independent Non-Executive, Independent Non-Executive, Independent Non-Executive, Independent Non-Executive, Independent Non-Executive, Independent Non-Executive, Independent Chief Executive Officer - - Member - - - - - - - - Member - - - - - - - Audit - - - Risk Member Member Member Member Member - - - Chairman - Member Member Member Member Member - Member - - - - Chairman Member Member Chairman Member Member - Member (1) Mr Long was appointed to the Board with effect from 1 September 2010. He was elected at the Annual General Meeting held 26 October 2010. (2) Ms Inman was appointed to the Board with effect from 16 March 2011. In accordance with the Bank’s Constitution and the ASX Listing Rules, she will stand for election at the Annual General Meeting to be held on 8 November 2011. Constitution The Constitution of the Bank specifies that: • • • The CEO 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 eleven; and At each Annual General Meeting (AGM) one third of Directors (other than the CEO) 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. Directors are required to conduct themselves in accordance with the ethical policies of the Group. They are required to be meticulous in their disclosure of any material contract or relationship in accordance with the Corporations Act 2001. This disclosure extends to the interests of family companies and spouses. Directors are also 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 2001 and the Group’s policies. Each Director 60 Commonwealth Bank of Australia Annual Report 2011 may from time to time have personal dealings with the Group. Each Director could be 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 the 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. Education in an Directors participate induction programme upon appointment and in a refresher programme on a regular basis. This programme of continuing education ensures that the Board is kept up to date with developments in the industry both locally and globally. It also includes sessions with local and overseas experts in the particular fields relevant to the Group’s operations. Review The Board has an annual process for reviewing its own performance, policies and practices. These reviews seek to identify where improvements can be made. They also assess the quality and effectiveness of information made available to Directors. The review process includes an assessment of the performance of the Board Committees and each Director. Every two years, this process is facilitated by an external consultant, with an internal review conducted in the intervening years. the performance After consideration of assessment, the Board will determine its endorsement of the Directors to stand for re-election at the next AGM. results of the 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 CEO’s performance and remuneration which is conducted by the Board in the absence of the CEO. in accordance with Performance evaluations the above processes have been undertaken during the year. Details on management performance evaluations are contained in the Remuneration Report section of the Directors’ Report. Board Performance and Renewal Committee the composition and effectiveness of The Board Performance and Renewal Committee reviews annually the corporate governance procedures of the Group. It the considers Commonwealth Bank of Australia Board and also the boards of the major wholly owned subsidiaries. The policy of the Board is that the Committee shall consist solely of independent Non- Executive Directors, with the CEO attending the meeting by invitation. A copy of the Board Performance and Renewal Committee Charter appears on the Group’s website. 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. These are aimed at creating a Board capable of challenging, stretching and motivating management to achieve sustained, outstanding 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. Each Director should: • • • • • • 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 an appropriate mix of skills, diversity and experience required currently and for the future strategy of the Group; Be excellently prepared and education; Provide important and significant insights, input and questions to management from their experience and skill; and receive all necessary 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. Corporate Governance The Board Performance and Renewal Committee will assess the skills, experience and personal qualities of these candidates as well as take into consideration other attributes including diversity to ensure that any appointment decisions are made in line with the objectives of the Board and the Group’s Diversity Policy. A copy of the Policy is available on the Group’s website. Information on the Group’s diversity strategy can also be found in the Sustainability section of this report. 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, will stand for election at the next AGM, in accordance with the Constitution. 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. These include 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 of Committees and functions of Directors include: • • • • • • • The Board will consist of a majority of independent Non- Executive Directors; 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 Chairman; The Board will meet on a regular and timely basis. The agenda will provide adequate information about the affairs of the Group. It also enables the Board to guide and monitor management, and assist in its involvement in discussions and decisions on strategy. Strategic matters 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 Group 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 Commonwealth Bank of Australia Annual Report 2011 61 Corporate Governance 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 adopting guidelines which further limit any such dealings by Directors, their spouses, any dependent child, family company or family trust. The guidelines provide, that in addition to the requirements 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 AGM until 14 days after the AGM. The guidelines also require that Directors do not deal on the basis of considerations of a short term nature or to the extent of trading in those securities. Similar restrictions apply to Executives of the Group, which is in addition to the prohibition of any trading (including hedging) in positions prior to vesting of shares or options. Directors and Executives who report to the CEO 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 replaced the guidelines. This policy applied to all Directors, employees and 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 Remuneration Report. Audit Arrangements Audit Committee The purpose of the Audit Committee is to assist the Board in fulfilling its statutory and fiduciary responsibilities. It provides an objective and independent review of the effectiveness of the external reporting of financial information and the internal control environment of the Group, as well as obtaining an understanding of the tax and accounting risks which face the Group. The Audit Committee is responsible for the oversight of accounting policies, professional accounting requirements, internal audit (GAA), external audit, APRA statutory and regulatory reporting 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. the Committee that These include: • least The Audit Committee shall comprise at three members. All members must be Non-Executive, Independent Directors and be financially literate. At least one member should have relevant qualifications and experience as the ASX Corporate to Governance Principles and Recommendations; referred in 62 Commonwealth Bank of Australia Annual Report 2011 The chairman of the Audit Committee 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; • Meetings will be at least quarterly and as required. The external auditor will be invited to all meetings. • • Meetings will be held from time to time with GAA and the external auditor without management or others being present; The Committee has the power to call attendees as required, including open access to management, GAA, external audit 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 • • It 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. Auditor PricewaterhouseCoopers (PwC) was appointed as the external auditor of the Bank at the 2007 AGM, effective from the beginning of the 2008 financial year. The PwC audit partner will attend the 2011 AGM and be available to respond to shareholder questions relating to the external audit. The Group requires that the partner managing the external audit be changed after a period of no longer than five years, in line with current regulations. The Group and its external auditor must continue to comply with U.S Auditor independence requirements. U.S. Securities and Exchange Commission (SEC) rules still apply to various activities that the Group continues to undertake in the United States, notwithstanding the Bank’s de-registration under the Exchange Act. Non-Audit Services the Audit The External Auditor Services Policy requires Committee (or its delegate) to approve all audit and non-audit services before engaging the external auditors to perform the work. The policy also prohibits the external auditors from providing certain services to the Group or its affiliates. The objective of this policy is to avoid prejudicing the independence of the external auditors. The policy is designed to ensure that the external 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 themselves and the Group; Require an indemnification from the Group to themselves; Seek contingency fees; nor Corporate Governance • 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 external auditor shall not provide certain services including the following services: The CEO and the Chief Financial Officer have given the Board their declaration in accordance with section 295A of the Corporations Act 2001 and confirmation that the declaration is founded on a sound system of risk management and internal control and also that the system is operating effectively in all material respects in relation to financial risks. • • • • 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 or contribution-in- kind reports; Actuarial services unless approved in accordance with independence guidelines; Internal audit outsourcing services; • • Management functions, including acting as an employee Risk Committee The Risk Committee oversees the Group’s risk management framework. This includes credit, market (including traded interest rate risk in the banking book, lease residual values, non-traded equity and structural foreign exchange), liquidity, funding, operational, risks assumed by the Group in the course of carrying on its business. the It 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 • • • • • • • and secondment arrangements; Human resources; Broker-dealer, investment adviser or investment banking services; Legal services; Expert services for the purpose of advocating the interests of the Group; Services relating to marketing, planning or opining in favour of the tax treatment of certain transactions; Tax services in connection with certain types of tax transactions; Tax services to individuals, and any immediate family members of any individuals, in a Financial Reporting Oversight Role; and Certain corporate recovery and similar services. • In general terms, the permitted services are: • • • • the Audit services to the Group or an affiliate; Related services connected with lodgement of statements or documents with the ASX, ASIC, APRA or other regulatory or supervisory bodies; Services reasonably related to the performance of the audit services; Agreed-upon procedures or comfort letters provided by the external auditor to third parties in connection with the Group’s financing or related activities; and • Other services pre-approved by the Audit Committee. 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 GAA. 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”. Strategic risks are governed by the Board, with input from the various Board sub-committees. Tax and accounting risks are governed by the 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 (that underpin the Internal Capital Adequacy Assessment Process), liquidity and funding. These are overseen and reviewed by the Board on at least an annual basis. 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 Risk Committee charter states that the Committee will meet at least quarterly, and as required. In practice this is at least six times a year. To allow it to form a view on the independence of the function, the Risk Committee meets with the Group Chief Risk Officer (CRO) in the absence of other management at least annually or at the will of the Committee or the CRO. The chairman of the Risk Committee provides a report to the Board following each 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. Commonwealth Bank of Australia Annual Report 2011 63 Corporate Governance 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. Continuous Disclosure Market matters which could be expected to have a material effect on the price or value of the Company’s securities must be disclosed under the Corporations Act 2001 and the ASX Listing Rules. The Group’s “Guidelines for Communication between the Bank and Shareholders” is available on the Group’s website. These set 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 in place throughout the Group to ensure that all material matters which may potentially require disclosure are promptly reported to the CEO, 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 also been formed to provide advice on 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. Shareholder Communication The Group believes it is very 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; AGM; • • • • • 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 website at www.commbank.com.au. • range of communication The Group employs a wide approaches. These include 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 the market via ASX announcements and publicised on the website to enable interested parties to participate. In order to make its general meetings more accessible to shareholders, the Group moves the location between Australian capital cities each year and live webcasts are available for viewing online. These actions are aimed at encouraging shareholder participation at general meetings. to 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. 64 Commonwealth Bank of Australia Annual Report 2011 Ethical Policies The values of the Group are trust, honesty and integrity. The Board carries out its legal duties in accordance with these values and having appropriate regard to the interests of the Group’s customers, shareholders, people 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. This 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 programmes; 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 our people. The Group has also established insider trading guidelines for our people 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 our people to carry out their duties in accordance with the values of the Group. These include: 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 • Information on the Group’s diversity strategy can be found in the Sustainability section of this report. Supporting Professional Development. Behaviour Policy to complying with The Group is strongly committed to maintaining an ethical workplace and legal and ethical responsibilities. Policy requires our people to report fraud, corrupt conduct, mal-administration or serious and substantial waste by others. A system has been established which allows our people to remain anonymous, if they wish, for reporting of these matters. The policy has been extended to include reporting of auditing and accounting issues. These are reported to the Chief Compliance Officer by the Chief Security Officer, who administers the reporting and investigation system. The Chief the Audit Security Officer reports any such matters Committee, noting the status of resolution and actions to be taken. to Corporate Governance Code of Conduct 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 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. Commonwealth Bank of Australia Annual Report 2011 65 Directors’ Report The Directors of the Commonwealth Bank of Australia submit their report, together with the financial report of the Commonwealth Bank of Australia (the Bank) and of the Group, being the Bank and its controlled entities, for the year ended 30 June 2011. The names of the Directors holding office during the financial year are set out below, together with details of Directors’ experience, qualifications, special responsibilities and organisations in which each of the Directors have declared an interest. David J Turner, Chairman Mr Turner was appointed to the Board in August 2006 and has been Chairman since February 2010. He is Chairman of the Board Performance and Renewal Committee and a member of the Risk Committee and the People & Remuneration Committee. Director: Great Barrier Reef Foundation and O’Connell Street Associates. Other Interests: Institute of Chartered Accountants in England and Wales (Fellow). Mr Turner is a resident of New South Wales. Age 66. Mr Turner has extensive experience in finance, international business and governance. He was Chairman of Cobham plc from May 2008 until May 2010. He was CEO of Brambles Limited from October 2003 until his retirement in June 2007 and formerly CFO from 2001 to 2003. He was also Finance Director of GKN plc, Finance Director of Booker plc and spent six years with Mobil Oil. Mr Turner has also been a Non Executive Director of Whitbread plc, Director of the Iron Trades Insurance Group and Member of the Quotations Committee of the London Stock Exchange. 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. Sir John A Anderson, KBE Sir John joined the Board in 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 “Outstanding Leadership inaugural Blake Medal the Contributions to New Zealand”. for Chairman: Australian Bankers’ Association and Comm- Foundation Pty Limited. Director: Business Council of Australia and Financial Markets Foundation for Children. Interests: New Zealand Other (Fellow) and New Zealand Computer Society (Fellow). Institute of Management Mr Norris is a resident of New South Wales. Age 62. Chairman: Television New Zealand Limited, New Zealand Venture Investment Fund, National Property Trust Limited 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 66. Colin R Galbraith, AM Mr Galbraith has been a member of the Board since June 2000 and is a member of the Risk Committee, Audit Committee and Board Performance and 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. Interests: CARE Australia Other Melbourne Hospital Neuroscience Foundation (Trustee). (Director) and Royal Mr Galbraith is a resident of Victoria. Age 63. 66 Commonwealth Bank of Australia Annual Report 2011 Directors’ Report Director: The Global Foundation, Victorian Opera Company Limited, Tabcorp Ltd and Santos Ltd. Other Interests: Institute of Chartered Accountants in Australia (Fellow), Institute of Chartered Accountants in England and Wales (Fellow), Australian Institute of Company Directors (Fellow), Chief Executive Women Inc. (Member), Walter and Eliza Hall Institute Financial Sustainability Committee (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 57. Director: Allens Arthur Robinson, Brambles Industries Limited, Infrastructure NSW 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 50. Jane S Hemstritch Ms Hemstritch was appointed to the Board effective October 2006. She the People & Remuneration Committee and a member of the Risk Committee. is Chairman of 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 Asia Pacific business portfolio. 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. Carolyn H Kay Ms Kay has been a member of the Board since March 2003 and is also a member of the Audit, People & Remuneration and Risk Committees. Ms Kay holds Bachelor Degrees in Law and Arts and a Graduate Diploma in Management. She has over 25 years of experience in Finance, particularly in International Finance, including working as both a banker and a lawyer at Morgan Stanley, JP Morgan and Linklaters & Paines in London, New York and Australia. Brian J Long Mr Long was appointed to the Board effective September 2010. Director: Cantarella Bros, Pty Ltd He is a member of the Audit and Risk Committees. Chairman: Ten Network Holdings Limited Mr Long retired as a partner of Ernst & Young in June 2010. Until that time he was the Chairman of both the Global Advisory Council and of the Oceania Area Advisory Council. He was one of the firm’s most experienced audit partners with over 30 years experience in serving as audit signing partner on major Australian public companies including those in the financial services, property, insurance and media sectors. Other Interests: Institute of Chartered Accountants in Australia (Fellow), Chairman of United Way Australia, Member of Council and Chairman of Audit Committee for each of the National Library of Australia and the University of NSW. Mr Long is a resident of New South Wales. Age 65. Andrew M Mohl Mr Mohl was appointed to the Board effective July 2008 and is a member of the Risk and People & Remuneration Committees. Chairman: Federal Government Export Finance and Insurance Corporation. 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 of AMP Financial Services and Managing Director and Chief Investment Officer of AMP Asset Management. Mr Mohl was a former Group Chief Economist, Chief Manager, Retail Banking and Managing Director of 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. Director: AMP Foundation. Interests: Coaching services Other to Chief executives, Member of the Board of Governors for the Committee of Economic Development of Australia, the Advisory Council of the Australian School of Business at the University of New South Wales and the Corporate Council of the European Australian Business Council. Mr Mohl is a resident of New South Wales. Age 55. Commonwealth Bank of Australia Annual Report 2011 67 Directors’ Report 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. Harrison H Young Mr Young has been a member of the Board since February 2007. He is Chairman of the Risk Committee and a member of the Audit Committee. From 2003 to 2007, Mr Young was Chairman of Morgan Stanley Australia, and from 1997 to 2003 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. Launa K Inman Ms Inman was appointed to the Board effective March 2011. She is a member of the Risk Committee. Ms Inman has been Managing Director of Target Australia Pty Limited since 2005. Prior to that appointment, Ms Inman was Managing Director of Officeworks. Ms Inman won the 2003 Telstra Australian Business Woman of the Year and was winner of the Commonwealth Government Private and Corporate Sector Award. Director: Australian Foundation Investment Company Limited, and Centre for Social Impact. Other Interests: Chairman of the Advisory Council of the Global Foundation, Committee for Melbourne (Counsellor) and Pacific Institute (Patron). Mr Ryan is a resident of Victoria. Age 68. Chairman: NBN Co Limited and Better Place (Australia) Pty Limited. Director: Bank of England and Financial Services Volunteer Corps. Mr Young is a resident of Victoria. Age 66. Other Interests: Australian Institute of Company Directors (Member), Chief Executive Women Inc. (Member), Australian Institute of Management (Member) and World Retail Congress Advisory Board (Member). Ms Inman is a resident of Victoria. Age 55 Other Directorships The Directors held directorships on listed companies within the last three years as follows: Director D J Turner J A Anderson Company Cobham plc PGG Wrightson Ltd (NZ) National Property Trust (NZ) C R Galbraith OneSteel Limited J S Hemstritch Tabcorp Holdings Limited Santos Limited S C H Kay Brambles Industries Limited B J Long F D Ryan Ten Network Holdings Limited Australian Foundation Investments Company Limited 08/08/2001 Date Appointed 01/12/2007 Date of Ceasing (if applicable) 06/05/2010 01/04/2010 01/04/2011 25/10/2000 13/11/2008 16/02/2010 01/06/2006 01/07/2010 - - - - - - - - 68 Commonwealth Bank of Australia Annual Report 2011 Directors’ Meetings 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: Directors’ Report Director D J Turner R J Norris J A Anderson C R Galbraith J S Hemstritch S C H Kay B J Long (2) A M Mohl F D Ryan H H Young L K Inman(3) No. of Meetings Held (1) 11 11 11 11 11 11 9 11 11 11 3 No. of Meetings Attended 11 11 10 11 11 11 9 11 11 10 3 (1) The number of meetings held during the time the Director was a member of the Board and was eligible to attend. (2) Mr Long was appointed effective 1 September 2010. (3) Ms Inman was appointed effective 16 March 2011. Committee Meetings Risk Committee Audit Committee People & Remuneration Committee No. of Meetings Held (1) 6 6 6 6 6 6 5 6 6 6 1 No. of Meetings Attended 6 6 5 6 6 5 5 6 5 6 1 No. of Meetings Held (1) - - - 6 - 6 5 - 6 6 - No. of Meetings Attended - - - 6 - 6 5 - 6 6 - No. of Meetings Held (1) 9 - - - 9 9 - 9 - - - No. of Meetings Attended 9 - - - 9 8 - 9 - - - Board Performance and Renewal Committee No. of Meetings Held (1) 7 7 7 No. of Meetings Attended 7 7 7 Director D J Turner R J Norris J A Anderson C R Galbraith J S Hemstritch S C H Kay B J Long A M Mohl F D Ryan H H Young L K Inman Director D J Turner J A Anderson C R Galbraith (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 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, 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. Commonwealth Bank of Australia Annual Report 2011 69 Directors’ Report Consolidated Profit Highlights included: • • • • • “Bank of the Year” in the 2011 Money Magazine Awards, for the second year in a row; Awarded the “Australian Financial Institution of the Year – Major Banks” at the 2011 Australian Banking and Finance Awards; Continued investment spend, including the Core Banking Modernisation these customers now enjoying the benefits of real time banking; initiative with The Group achieved a major milestone when its first teams began working out of new state-of-the-art buildings in Sydney’s Darling Harbour. This facility will be home to over 6,000 staff by early next year; and Bankwest was awarded the AFR Smart Investor 2010 “Bank of the Year award”. There were no other significant changes in the state of affairs of the Group during the financial year. Events Subsequent to Balance Sheet date On 22 July 2011, the Board announced the appointment of Ian Narev to the role of Chief Executive Officer of the Bank upon the retirement of Ralph Norris at the end of November 2011. The Bank expects to issue approximately $733 million of ordinary shares in respect of the DRP for the final dividend for the year ended 30 June 2011. 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. Business Strategies and Future Developments Accommodation Strategy The Group continues to implement its property strategy to consolidate the Sydney metropolitan teams across three main precincts: Sydney Central Business District, Sydney Olympic Park and Parramatta. The first teams took occupancy in Commonwealth Bank Place in June 2011 and more than 6,000 of the Group’s people will be located there by early 2012. The buildings in which employees are now being accommodated are either newly constructed 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 likely strategic developments would be information on unreasonably prejudicial to the interests of the Group. The Group’s net profit after income tax and non controlling interests for the year ended 30 June 2011 was $6,394 million (2010: $5,664 million). This result was achieved in a challenging environment where the impacts of the GFC continue to linger. Credit growth remains at historic lows, business and consumer confidence is fragile and there is significant uncertainty in global markets. Despite these difficult conditions, the Group, with its well managed, diversified business model and strong and stable financial platform, has delivered another solid result. This has been supported by a continued disciplined approach to the execution of the Group’s five strategic priorities and prudent management in uncertain times. Operating income growth was impacted by a low credit growth environment, strong competition, particularly in the home lending and deposit markets, together with difficult trading conditions for the Markets and Wealth businesses. Operating expenses were managed tightly, laying the platform for continued investment in the business, including the effective execution of the Core Banking Modernisation initiative which is now past the half way stage, having achieved significant milestones during the year. Impairment expense continued to decrease as credit quality gradually improved however some of the Group’s customers are finding business conditions challenging. The Group has maintained a conservative approach to provisioning. 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 188 cents per share amounting to $2,930 million. The dividend will be payable on 6 October 2011 to shareholders on the register at 5pm EST on 19 August 2011. Dividends paid in the year ended 30 June 2011 were as follows: • • In respect of the year to 30 June 2010, a fully franked final dividend of 170 cents per share amounting to $2,633 million was paid on 1 October 2010. The payment was fully comprised of cash disbursements of $2,633 million. This included $679 million in respect of the DRP which was satisfied in full by an on market purchase and transfer of shares; and In respect of the year to 30 June 2011, a fully franked interim dividend of 132 cents per share amounting to $2,045 million was paid on 1 April 2011. The payment comprised direct cash disbursements of $1,532 million, with $513 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. 70 Commonwealth Bank of Australia Annual Report 2011 Environmental Reporting Directors’ and Officers’ Indemnity Directors’ Report The Group is subject to the Federal Government’s National Greenhouse and Energy Reporting (NGER) scheme. 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 NGER requirements, and its energy and emissions data has the management and reporting systems legislation. recently updated to comply with The Group is also subject to the Energy Efficiency Opportunities Act 2006 (EEO Act), which encourages large energy-using businesses to improve their energy efficiency. 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 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 and the Chief Executive Officer in the Commonwealth Bank or in a related body corporate are set out in the Remuneration Report within this report. No options have previously been granted to the Directors or Chief Executive Officer. Refer to the Remuneration Report within this report for further details. Options outstanding As at the date of this report there are 36,100 options outstanding in relation to Commonwealth Bank ordinary shares. The expiry date of the share options is 3 September 2011 and the exercise price is $30.12. There were 50,000 Commonwealth Bank ordinary shares issued since the end of the financial year as a result of options being exercised. Persons holding outstanding options and rights in relation to Commonwealth Bank ordinary shares are not entitled to participate in any share issue or interest of the Commonwealth Bank or any other body corporate as a result of those options or share rights. The names of all persons who currently hold options and share rights are entered in the register kept by the Bank pursuant to section 170 of the Corporations Act 2001. This register may be inspected free of charge. Directors’ Interests in Contracts A number of Directors have given written notices, stating that they hold office in specified companies and accordingly are to be regarded as having an interest in any contract or proposed contract that may be made between the Bank and any of those companies. The Directors, as named on pages 66 to 68 of this report, and the Secretaries of the Bank, being J D Hatton and C F Collingwood, are indemnified pursuant to the Constitution of Commonwealth Bank of Australia (the Constitution), as are all senior managers of the Bank. Deeds of Indemnity have been executed by the Bank, consistent with the Constitution, in favour of each Director of the Bank. An Indemnity Deed Poll has been executed by the Bank, consistent with the Constitution, in favour of each: • • • secretary and senior manager of the Bank; director, secretary and senior manager of a related body corporate of the Bank; and person who, at the prior formal request of the Bank, acts as director, secretary or senior manager of a body corporate which is not a related body corporate of the Bank (in which case the indemnity operates only excess of protection provided by that body corporate). In the case of a partly-owned subsidiary of the Bank, where a director, secretary or senior manager of that entity is a nominee of a third party body corporate which is not a related body corporate of the Bank the Indemnity Deed Poll will not apply to that person unless the Bank's CEO has certified that the indemnity shall apply to that person. Directors’ and Officers’ Insurance The Bank has, during the financial year, paid an insurance premium in respect of an insurance policy for the benefit of the Bank and those named and referred to above including the directors, secretaries, officers and certain employees of the Bank and related bodies corporate as defined in the insurance liabilities policy. The permitted to be indemnified by the Bank and the Group 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. indemnity against insurance grants Rounding and presentation of amounts The Bank is of the kind of entity referred to in ASIC Class Order 98/100 (as amended) pursuant to section 341(1) of the Corporations Act 2001. As a result, amounts in this Directors’ Report and the accompanying financial statements have been rounded to the nearest million dollars except where otherwise indicated. The financial information included in this Annual Report, unless otherwise indicated, has been prepared and presented in accordance with Australian Accounting Standards. This ensures compliance with International Financial Reporting Standards. The Group manages its’ business performance using a “cash basis” profit measure. The key items that are excluded from statutory profit for this purpose are non-recurring or not considered representative of the Group’s ongoing financial performance. Profit on an “underlying basis” is used primarily in the Wealth Management businesses. It provides a profit measure that excludes the volatility of equity markets on shareholder funds for a measure of core operating performance. Commonwealth Bank of Australia Annual Report 2011 71 Directors’ Report – 2011 Remuneration Report Message from the People & Remuneration Committee Chairman Dear Shareholder The People & Remuneration Committee has conducted reviews of various aspects of remuneration in 2011, as a cornerstone of our governance of CBA Group’s remuneration arrangements. This year we have also closely monitored the evolving regulatory environment and emerging remuneration market practices, both in Australia and other jurisdictions in which we operate. The Committee reviewed the Remuneration Framework for the CEO and the Group Executives. We also considered potential alternative frameworks. in that, remuneration this evolving environment, our We concluded executive framework still provides an appropriate balance of short term and long term remuneration, and focuses executives on achieving our business strategy and strategic priorities. We met with representatives from the Australian Prudential Regulation Authority (APRA) twice during the year to discuss the Group’s remuneration arrangements and the Committee’s role in managing risk within these arrangements. During the year we also conducted detailed reviews of the remuneration principles and policies that apply throughout the Commonwealth Bank, as well as the governance of the employee equity plans under which many of our deferred awards are delivered. At the same time we reviewed our Committee Charter, and recommended only minor adjustments to the Board for approval. Our Charter sets out the Committee’s role and responsibilities. We have introduced improvements to our remuneration framework and practices to provide for the systematic review of performance, risk and compliance across the Group. Further, we have strengthened the Board’s existing broad scope to manage individual performance, risk management and compliance remuneration outcomes and adjustments. through During the year we also conducted a detailed review of our funding policy for our corporate superannuation fund, the OSF. Our revised policy best ensures our superannuation obligations will continue to be properly funded, to the benefit of all employees who choose to be members. This superannuation benefit continues to be an important part of our overall employee value proposition for our employees in Australia. Throughout the year, the Committee dealt directly with its independent remuneration consultant for input on the various reviews we have undertaken, as well as in relation to the CEO and Group Executives’ remuneration plans and outcomes. While the Committee’s remuneration consultant provides insight into market practice, remuneration levels and the very complex components of the Committee ultimately formulates its own decisions, independent of its consultant and also independent of management. remuneration, The Committee’s focus continues to be on achieving the most effective remuneration framework for our varied businesses, with transparency in design, strong governance and risk oversight. We do this to ensure the Group continues to earn the respect of the community and our customers, while paying our people to drive sustainable value for our shareholders. Jane Hemstritch Committee Chairman 72 Commonwealth Bank of Australia Annual Report 2011 Directors’ Report – 2011 Remuneration Report The Information Provided in this Report This report details the Group’s remuneration frameworks and 2011 outcomes for Key Management Personnel and Other Executives. The information is set out in four sections: Section Information 2011 Remuneration in Review Provides an update of how our remuneration 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 Other Executives required for disclosure. Statutory Remuneration Disclosures Discloses the 2011 remuneration for Key Management Personnel and Other Executives. Glossary of Key terms Provides a reference of key terms used in this report Page 73 76 86 91 This report has been prepared and audited in accordance with the requirements of the Corporations Act 2001. 2011 Remuneration in Review Our remuneration and governance frameworks are designed to deliver on the Board’s remuneration philosophies for: Non-Executive Directors; CEO and Group Executives; and • • • Other executives, including those disclosed in this remuneration report. This section provides shareholders with an update of how those frameworks are meeting the continuing 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 terms of our business strategy, and creating sustainable shareholder value. in Non-Executive Directors Key developments for 2011: • • • Brian Long was appointed to the Board effective 1 September 2010, and joined both the Audit and Risk Committees; Launa Inman was appointed to the Board effective 16 March 2011, and joined the Risk Committee; and AON Hewitt continued as Independent Remuneration Consultant to the People & Remuneration Committee. Non-Executive Director Remuneration to We continue line-up of skilled, retain a strong knowledgeable and experienced Directors. 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, and managed within a cap approved by shareholders. 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. However, Non-Executive Directors continue to align their remuneration to the performance of our share price and dividend yield. They do this by receiving at least 20% of their annual fees as Commonwealth Bank shares. CEO and Group Executives Key developments for 2011: • • The Committee reviewed the remuneration framework for the CEO and Group Executives; and Barbara Chapman was appointed as Chief Executive and Managing Director of the Group’s New Zealand subsidiary ASB Bank Limited, with effect from 26 April 2011. Key achievements for 2011: • Our 2011 financial performance was solid; • We have delivered profitable growth through innovative new product offerings, disciplined margin and cost management, and continued selective expansion into Asia; • We are progressing towards our customer satisfaction goals; • We have achieved key milestones in our technology and operations excellence strategy; and • Our employees are engaged and committed to our business strategy. 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. Executive Remuneration Philosophy 1. We provide target remuneration which is market competitive, without putting upward pressure on the market. The executive components: remuneration framework has three • Fixed Remuneration (including base remuneration and employer superannuation); Short term incentives; and • • Together, these components make up an executive’s total target remuneration. Long term incentives. 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 range of executive remuneration surveys. 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 high calibre people. Commonwealth Bank of Australia Annual Report 2011 73 Directors’ Report – 2011 Remuneration Report 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. 2. We clearly articulate the link between individual and Group performance and individual reward. We clearly articulate to each executive the performance 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 2011 financial year were conducted in July 2011. Similarly, performance evaluations for the 2010 financial year were conducted in July 2010. • Long Term Incentives Drive Performance Over Four Years. Long term incentives focus the CEO and Group Executives on Group performance over the longer term. Performance hurdles for our long term incentive plan have been 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 measured over a four year period. For the long term incentive award made during the 2011 financial year: • One quarter of the award measures our customer satisfaction results relative to the peers with which we compete for customers. Our research demonstrates a direct relationship between high levels of customer satisfaction and high levels of shareholder returns; and • The other three quarters measures our Total Shareholder Return relative to a set of peer companies with which we compete for capital. Shareholder return is a cornerstone of our remuneration philosophy. This mix has a greater weighting on shareholder return than the previous year’s award. This recognises the considerable achievements already made in Customer Satisfaction by 1 July 2010 (the beginning of the performance period), and sets meaningful goals to focus executives’ performance for the four years to 30 June 2014. 3. 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 or even eliminated in light of any risk management issues. Risk management is also built into our remuneration 74 Commonwealth Bank of Australia Annual Report 2011 that drives short the framework. Profit After Capital Charge (PACC) performance measure 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. term is Risk is also managed by deferring half of the 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 incentive where eventual term performance outcomes are materially lower than expected. 4. We align rewards with shareholder interests and our business strategy. We explained 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 2011 are strong. Our one year Total Shareholder Return is ranked in the top 25% of our peers. The peer group financial services companies we compete with for customers and capital. We continue to make progress in Customer Satisfaction across all segments of our business compared with the position of a few years ago. includes large the 5. We provide flexibility to meet changing needs and emerging market practice. 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. The framework provides flexibility to tailor remuneration arrangements in specialised parts of our business. This includes the Other Executives disclosed in this report, whose performance related remuneration arrangements recognise the unique market practice of that business segment. 6. We provide appropriate entitlements on termination that do not deliver any windfall payment. Employment arrangements for the CEO, Group Executives and the Other Executives 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. Termination entitlements are set out on page 90 of this report. They are appropriate and do not deliver windfall payments on termination. As part of these arrangements, executives who resign or are dismissed forfeit their long term incentive awards. Where an executive is retrenched or retires, the performance periods of any outstanding long term incentive awards continue unchanged, and the Board retains discretion to pro- rate where appropriate. 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. Directors’ Report – 2011 Remuneration Report 2011 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 2011 financial year. The table sets out base remuneration, employer superannuation, the portion of the 2011 short term incentive that is not required to be deferred, and the value of previous years’ deferred short term incentive and long term incentive awards that vested during the 2011 financial year. The information provided in table (a) is different to the information provided in the statutory remuneration table on page 87, which has been prepared in accordance with the accounting requirements and shows the accounting expense incurred for the 2011 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 87. (a) Remuneration in relation to the 2011 financial year 2011 STI for Base Remuneration (1) & Superannuation Performance to (2) 30 June 2011 Previous years' awards that vested during 2011 (3) Total cash 2010 Deferred payments STI Awards LTI Awards $ $ $ $ $ 3,120,000 1,638,000 4,758,000 1,944,465 5,780,000 800,000 865,000 1,350,000 1,050,000 1,250,000 900,000 1,150,000 1,330,000 1,400,000 508,667 523,542 827,213 548,888 647,657 488,250 488,750 613,463 798,350 1,308,667 1,388,542 2,177,213 1,598,888 1,897,657 1,388,250 1,638,750 1,943,463 2,198,350 487,510 527,692 671,608 607,646 767,552 543,683 703,589 831,515 895,477 - 1,190,000 1,360,000 1,190,000 1,700,000 357,410 1,530,000 684,162 2,067,546 Managing Director and CEO Ralph Norris Current Executives Simon Blair David Cohen David Craig Michael Harte Ross McEwan Ian Narev Grahame Petersen Ian Saines Alden Toevs (1) Base Remuneration and Superannuation make up an executive's Fixed Remuneration. (2) This is the 50% of the 2011 short term incentive (STI) for performance during the 12 months to 30 June 2011, payable following year-end. The remaining 50% is deferred until 1 July 2012. (3) The value of deferred and/or long term incentive awards that vested during the 2011 financial year. This is calculated as the value of the award that vested, plus any dividends (for equity awards) or interest (for cash awards) accrued during the vesting period. (b) Cash payments from table (a) and non-cash remuneration expenses for the CEO Cash remuneration received in relation to 2011 - refer to table (a) above 2011 STI deferred for 12 months at risk Annual leave and long service leave accruals Other Payments Share based payments: accounting expense for 2011 for LTI awards made over the past 4 years 2009 GLSP: Expense reflecting the final vesting level for the award (see page 85) 2010 GLRP: Expense for 2 awards that may vest subject to improved customer satisfaction performance 2010 GLRP: Expense for 2 awards that may vest subject to improved relative TSR performance 2011 GLRP: Expense for 1 award that may vest subject to improved relative TSR performance 2011 GLRP: Total Accounting Expense as per page 87 Expense for 1 award that may vest subject to improved customer satisfaction performance Financial 2011 award $ 4,758,000 1,638,000 330,579 91,965 vests n/a 2013 n/a n/a (963,268) 2012 1,009,764 2013 & 2014 1,157,657 2013 & 2014 489,404 126,071 8,638,172 2015 2015 Commonwealth Bank of Australia Annual Report 2011 75 Directors’ Report – 2011 Remuneration Report Remuneration Arrangements This section details the Group’s remuneration arrangements for Key Management Personnel (KMP) and Other Executives during the year ended 30 June 2011. Name Position 1. Key Management Personel Non-Executive Directors David Turner John Anderson Colin Galbraith Jane Hemstritch Launa Inman Carolyn Kay Brian Long Andrew Mohl Fergus Ryan Harrison Young Chairman Director Director Director Director (from 16 March 2011) Director Director (from 1 September 2010) Director Director Director Managing Director and CEO Ralph Norris Managing Director and CEO Group Executives Simon Blair Barbara Chapman David Cohen David Craig Michael Harte Ross McEwan Ian Narev Group Executive, International Financial Services Group Executive, Human Resources and Group Services (until 26 April 2011) Group General Counsel Acting Group Executive Human Resources (from 26 April 2011) Group Executive, Financial Services and Chief Financial Officer Group Executive, Enterprise Services and Chief Information Officer Group Executive, Retail Banking Services Group Executive, Business and Private Banking Grahame Petersen Group Executive, Wealth Management Ian Saines Alden Toevs 2. Other Executives Martin Lau Mark Lazberger Stuart Paul Alistair Thompson Group Executive, Institutional Banking and Markets Group Chief Risk Officer Director, Greater China Equities, First State Investments (FSI) CEO, Colonial First State Global Asset Management (CFSGAM) Joint Managing Director Global Emerging Markets Asia Pacific (FSI) Deputy Head of Asia Pacific (FSI) Term Full Year Full Year Full Year Full Year Part Year Full Year Part Year Full Year Full Year Full Year Full Year Full Year Part Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Governance & Risk Management People & Remuneration Committee The Group adheres to high standards of corporate 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 the Group’s website at is available on 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; 76 Commonwealth Bank of Australia Annual Report 2011 • • • • roles may affect remuneration arrangements and all reward outcomes for the CEO, senior direct reports to the CEO and other financial individuals whose 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 2011 the Committee consisted of: • • • • Jane Hemstritch (Chairman); Carolyn Kay; Andrew Mohl; and David Turner. Directors’ Report – 2011 Remuneration Report Independent Remuneration Consultants Throughout the year, the People & Remuneration Committee retained AON Hewitt as independent remuneration their consultant. Board AON Hewitt is engaged directly by the Committee and any input is provided directly to the Committee Chairman who has the discretion to share this with Management. Audit Committee Risk Committee During the 2011 financial year the Committee received input directly from AON Hewitt on matters including regulatory developments, emerging and current market practice, alternative short and long term incentive schemes and benchmarking in relation to the remuneration review of the CEO and Group Executives. While the Committee takes note of the input from AON Hewitt, the Committee itself is responsible for making decisions within the terms of its Charter, including making recommendations in relation to the CEO and Group Executives’ remuneration for approval ultimately by the Board. 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. Position Chairman Non-Executive Director Chairman Member Chairman Member Fees ($) 695,000 210,000 50,000 25,000 50,000 25,000 50,000 25,000 10,000 10,000 People & Remuneration Chairman Committee Board Performance & Renewal Committee Member Chairman Member The Board Performance and Renewal Committee reviews the Non-Executive Directors’ fee schedule annually and assesses fee levels in comparison to market trends. 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. 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 from the date the shares are granted. Remuneration Arrangements in Detail Service Agreements Non-Executive Directors’ Remuneration Non-Executive remuneration is fixed and Directors 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 2011, which did not change during the financial year. 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, two 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 on page 86. Commonwealth Bank of Australia Annual Report 2011 77 Directors’ Report – 2011 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. Performance conditions for 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 remuneration. incentive programmes are designed Our to discourage excessive risk taking. The Committee has discretion to reduce deferred incentive awards where performance outcomes are materially lower than expected. Remuneration for the Other Executives 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. The Board retains discretion to reduce the deferred portion if warranted on the basis of realised performance. Long term incentive awards are subject to performance hurdles over a period of four years. Executives only receive value from this component if performance hurdles are met at the end of the four year period. Performance hurdles are aligned to: • • our business strategy, through the Customer Satisfaction performance hurdle; and shareholders’ interests, through the relative Total Shareholder Return performance hurdle. CEO and Group Executives’ Remuneration in Detail Setting Performance Objectives 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. 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 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 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. 78 Commonwealth Bank of Australia Annual Report 2011 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 2011, short term incentive performance measures included: • • Financial objectives: − Cash Net Profit After Tax (Cash NPAT); − Profit After Capital Charge (PACC); and − Profitable Growth. Increasing customer satisfaction and our reputation; Non financial objectives: − − Excellence in technology and operations; and − Employee engagement, teamwork and effective talent management. Financial objectives have a substantial weighting, and non- financial objectives vary by role. Executives managing business units typically have a 50% weighting on direct financial outcomes, while for executives managing support functions the typical weighting is 30%. 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 determines the short term incentive outcome for each executive, within an overall cap. Directors’ Report – 2011 Remuneration Report Depending on performance outcomes, executives may receive 0% to 150% of their 2011 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 2011 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 retains discretion to vest deferred amounts, for example in cases of retirement with Board approval. 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. Other Executives’ Remuneration Arrangements receive remuneration The Other Executives each (including superannuation/pension benefits), a short term incentive and a long term incentive. Their remuneration is set considering the size and responsibility of their role as well as external benchmarks, and is reviewed annually. fixed Mark Lazberger’s short term incentive is determined against a balanced scorecard of financial and non-financial performance measures aligned the business objectives. Financial measures receive the highest individual weightings, and include Cash NPAT and PACC. Non-financial measures include customer satisfaction, employee engagement and teamwork, talent management, and technology and operations. to One third of Mark Lazberger’s short term incentive is received as Commonwealth Bank Shares restricted for three years and subject to service conditions. He also receives a long term incentive, which is described on page 84. Short term incentives for Martin Lau, Stuart Paul and Alistair Thompson are determined predominantly by one to five year performance against investment benchmarks relevant to the business they operate in. Qualitative factors and behaviours are also considered when determining the amount of their short term incentives. Commonwealth Bank of Australia Annual Report 2011 79 Directors’ Report – 2011 Remuneration Report 2011 Performance Outcomes The following table provides a summary of performance for the year ended 30 June 2011 against the financial and non-financial performance objectives. Performance Objective Cash NPAT and PACC 2011 Achievements Our 2011 financial performance was solid Each year the Board sets challenging financial targets for the CEO and Group Executives, with reference to profit based measures of PACC and Cash NPAT. PACC is an internal measure of profit that takes into account the risk to capital taken to achieve that profit and the Board determined that 2011 performance against this measure was strong. Cash NPAT is $6,835 million, also representing solid 2011 performance. The following graph demonstrates our Cash NPAT performance for 2011 and each of the past four years. 6,835 6,101 4,527 4,733 4,415 n o i l l i M $ 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Profitable Growth We have delivered profitable growth through innovative new product offerings, disciplined margin and cost management, and continued selective expansion into Asia Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Customer Satisfaction and Reputation Profitable growth is growth which will provide our shareholders with increased returns on their investment by broadening our base in growth markets where the Group can leverage its assets and capabilities, including selected Asian markets, selected business banking segments, and other core domestic sectors. In our retail and business banking areas, we increased volumes in a number of core products and launched innovative new offerings, which supported 16% profit growth in those business units. We have incrementally expanded our capabilities and introduced new products in our corporate and institutional offerings, strengthened our business banking offerings including CommBiz enhancements, and built up our Private Bank financial advisory services. In Asia we progressed our long-term growth strategy, including acquiring a 15% shareholding in Vietnam International Bank and opening three County Banks in China. We are progressing towards our customer satisfaction goals The Group vision is “to be Australia’s finest financial services organisation through excelling in customer service”. The more satisfied a customer is, the more likely they are to do more business with us. The 2011 customer satisfaction performance targets were based on the Board’s assessment of Group performance in customer satisfaction across key segments of our business. • • • Customer satisfaction in retail banking is measured by Roy Morgan Research(1). During the 2011 financial year the Bank attained the highest score in customer satisfaction for customers who use us as their main financial institution since the inception of the survey, although overall customer satisfaction declined in the second half of the year; Customer satisfaction in our wealth management business is measured by the Wealth Insights 2011 Service Level Report, Platforms. This survey measures wealth management service performance of master trusts/wraps in Australia. Under this survey our FirstChoice and FirstWrap platforms are now consistently ranked at or near the top for service amongst financial advisors; In Institutional Banking, we consistently top the East and Partners survey, ranking number one in the two most important service measures for institutional clients: loyalty to the relationship; and our understanding of each customer’s business; and 80 Commonwealth Bank of Australia Annual Report 2011 Directors’ Report – 2011 Remuneration Report Performance Objective 2011 Achievements Technology & Operational Excellence Trust & Team Spirit • In Business Banking, customer satisfaction is measured by DBM’s Business Financial Services Monitor(2) (BFSM). CBA has maintained outright or equal first position in customer satisfaction in both the medium and large segments among the four major banks for 10 out of the past 12 months. At the same time as achieving improvements in customer satisfaction, the average number of products(3) held by each of our Retail customers has also grown. We now have the highest number of products-per- customer of any major bank in Australia at 2.64, ahead of the average of our peers. We have also been recognised with awards including 2011 Money Magazine’s Bank of the Year (for the third time in four years), and Australian Banking and Finance’s Australian Financial Institution of the Year. We achieved key milestones in our Technology & Operations Excellence strategy The Group’s Technology and Operational Excellence initiatives are designed to improve efficiency and productivity levels, while at the same time enhancing the service proposition to customers through more innovative and responsive systems, processes and procedures. The Core Banking Modernisation programme, a four year programme on schedule for completion by the end of 2012, is a key feature of this strategy. The programme will transition our Australian banking business to a completely new customer-centric core operating platform, replacing the myriad of obsolete systems previously operating across the various divisions of the Bank. We made significant progress in this area during 2011, including: • Migrating ten million existing retail bank accounts to the new core banking platform; • Integrating NetBank with our Core Banking systems to provide real-time transactions for personal accounts; and • Starting to integrate the frontline customer interface with core banking to provide better customer service. Our employees are engaged and committed to our business strategy Our continuing success is due to the hard work, enthusiasm and commitment of our people, and their commitment to our priorities. We continue to embed a collaborative and customer service culture across the Group. The Board assesses the Group’s achievements in this area, with reference to the Group’s results in the Gallup worldwide benchmark. The 2011 People & Culture Survey indicates we have maintained strong levels of people engagement. Our people describe our culture as customer focused, collaborative and caring supported by strong positive views of our senior leaders. Gender diversity is a commercial imperative to tap into the entire potential workforce. It is also increasingly seen as an asset to organisations and linked to better economic performance. We believe that women in leadership is a lead indicator of broader diversity in leadership. Our goal, announced in June 2010, is to increase the representation of women in Executive Management and above to 35 per cent by December 2014. Since announcing this goal the Group has lifted the proportion of women in Executive Management by 2%. (1) Roy Morgan Research, Australians 14+ that have an account relationship with CBA, “Very” or “Fairly” satisfied with their relationship with that financial institution, six months to October 2011. (2) DBM Business Financial Services Monitor (June 2011), average satisfaction rating of each financial institution’s MFI business customers across all Australian businesses, 6 month rolling average. Rank is among four major banks. Medium segment includes businesses with annual turnover from $5m to less than $50m. Large segment includes businesses with annual turnover $50m and above. (3) Roy Morgan Research, Australians 14+, Banking and Finance products per Banking and Finance customers, six months rolling average to June 2011. Commonwealth Bank of Australia Annual Report 2011 81 Directors’ Report – 2011 Remuneration Report Long Term Incentives Long term incentives reward sustained performance over the longer term, and are subject to performance hurdles designed to build shareholder value and achieve the Group’s long term business objectives. An overview of the CEO and Group Executives’ long term incentive awards in progress during the 2011 financial year is set out in the following table. Further information is provided in the table below regarding the equity plans under which each award has been made. Overview of long term incentive awards outstanding during the 2011 Financial Year Performance Period Ends Equity Plan 1 July 2011 Group Leadership Share Plan (GLSP) Performance Hurdles Progress • Growth in PACC • • NPAT growth relative to peer group Customer Satisfaction ranking relative to peer group Based on performance against the respective hurdles, 25% of the award vested on 1 July 2011 Each award is split and tested: 30 June 2012 Group Leadership Reward Plan (GLRP) • • 50% Total Shareholder Return relative to peer group In progress 50% Customer Satisfaction ranking relative to peer group Each award is split and tested: 30 June 2013 Group Leadership Reward Plan (GLRP) • • 50% Total Shareholder Return relative to peer group In progress 50% Customer Satisfaction ranking relative to peer group Each award is split and tested: 30 June 2014 Group Leadership Reward Plan (GLRP) • • 25% Customer Satisfaction ranking relative to peer group In progress 75% Total Shareholder Return relative to peer group 2011 Financial Year GLRP Award CEO and Group Executives received long term incentive awards under the GLRP during the 2011 financial year. These GLRP awards may deliver value to executives after a four year performance period, subject to meeting performance hurdles. The timing and performance hurdle mix for the GLRP award made during the 2011 financial year are set out in the following diagram. Award Granted 4 year performance period Customer Satisfaction hurdle = 25% Total Shareholder Return hurdle = 75% The key features of the GLRP awards during the 2011 financial year are set out in the following table. Feature Description Instrument Reward Rights. Each Reward Right entitles the executive to receive one Commonwealth Bank ordinary share in the future, subject to meeting performance hurdles set out below. Determining the number of Reward Rights Performance Period The number of Reward Rights each executive receives depends on their long term incentive target. The number of Reward Rights received is calculated taking into account the expected number of shares to vest at the end of the performance period. The performance period for awards made in 2011 is four years, starting at the beginning of the financial year in which the award is made. 82 Commonwealth Bank of Australia Annual Report 2011 Directors’ Report – 2011 Remuneration Report Feature Description Performance Hurdles One quarter of each award is subject to a performance hurdle which measures the Group’s Customer Satisfaction achievements relative to a peer group. The remaining three quarters is subject to a performance hurdle which measures the Group’s Total Shareholder Return relative to a separate peer group. Vesting Framework Peer Groups for the long term incentive awarded during the 2011 financial year • • The peer group for the Customer Satisfaction performance hurdle includes Australia & New Zealand Banking Group Limited (ANZ), National Australia Bank Limited (NAB), and Westpac Banking Corporation (WBC) and other key competitors for our wealth business such as AMP Limited and Macquarie Group Limited. 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 at the time of grant for the most recent award included: AGL Energy Limited, AMP Limited, Australia and New Zealand Banking Group Limited, AXA Asia Pacific Holdings Limited, Brambles Industries Limited, Coca Cola Amatil Limited, CSL Limited, Foster’s Group Limited, Insurance Australia Group Limited, Leighton Holdings Limited, Macquarie Group Limited, National Australia Bank Limited, QBE Insurance Group Limited, Stockland, Suncorp-Metway Limited, Telstra Corporation Limited, Wesfarmers Limited, Westfield Group, Westpac Banking Corporation and Woolworths Limited. Vesting Framework for the long term incentive awarded during the 2011 financial year (i) Customer Satisfaction hurdle (25% of the award) • For this part of the GLRP awarded during 2011: - - - - - Full vesting applies if the Group is ranked first relative to our peers in each of the three surveys; 75% will vest if the Group is ranked first across two of the three surveys; 50% will vest if the Group is ranked at least second across the three surveys; The Board will exercise discretion to determine the portion to vest where our ranking has improved, but in a different variation than those described above; and None of the Reward Rights in this portion of the award will vest where the Board determines that our overall Customer Satisfaction at the end of the performance period is worse than it was at the beginning. (ii) Total Shareholder Return hurdle (75% of the award) • • • • 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); If the Group is ranked at the median, half the Reward Rights will vest; Vesting increases on a sliding scale if the Group is ranked between the median and below the 75th percentile; and No Reward Rights in this part of the award will vest if the Group’s Total Shareholder Return is ranked below the median of the peer group. The Board retains discretion to take into account unforeseen changes or events, and to prevent any unintended outcomes. 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; • • DBM, Business Financial Services Monitor, which measures business banking customer satisfaction; and • Wealth Insights 2011 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. Board discretion Where an executive leaves prior to the end of the performance period, they will generally forfeit that award unless the Board determines otherwise, in which case the terms of any portion that is not forfeited will continue unchanged, including any performance conditions. Any portion of the award that vests may be satisfied by cash rather than shares. The Board also retains sole discretion to determine the amount of any award that may vest (if any) to prevent any unintended outcomes, or in the event of a corporate restructuring or event, e.g. a takeover. Expiry At the end of the applicable performance period, any Reward Rights that have not vested will expire. Commonwealth Bank of Australia Annual Report 2011 83 Directors’ Report – 2011 Remuneration Report The Board retains discretion to take into account unforeseen changes, and prevent any unintended outcomes. Long Term Incentive Plans for Other Executives In line with our philosophy of providing flexible and effective reward structures linked to our business strategy, the Group provides tailored long term incentive arrangements for the Other Executives in this report. Mark Lazberger participates in the Colonial First State Global term Asset Management incentive plan. Under this plan participants share in the growth of CFSGAM profit over a three year period. (CFSGAM) cash-settled long The purpose of this plan is retention and motivation of key employees with specific and unique skill sets highly valued in the market, and alignment of their reward with the success of the business. The decision of investors to grant an investment mandate to CFSGAM is dependent on their confidence in the investment capability, experience and long term tenure of individual fund managers. Awards made under this plan during 2011 have a three year vesting period and are not subject to further performance hurdles once awarded. Martin Lau, Stuart Paul and Alistair Thompson participate in a profit share arrangement in the Global Emerging Markets Asia Pacific (GEM AP) business in CFSGAM. The purpose of the profit share arrangement is to reward and retain key talent in that business. Each year allocations are made from a pool that reflects a percentage of profit generated by this part of the CFSGAM business. Allocations to participants are co-invested in GEM AP funds and allocations may vest after three years. 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 Securities Trading Policy. 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. The Group introduced the GLRP for long term incentive awards to the CEO and Group Executives during the 2010 financial year. Prior years’ long term incentive awards were made under the Group Leadership Share Plan (GLSP). The GLSP is now closed to new offers, and the final award completed its performance period on 1 July 2011. 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 GLSP award made during the 2008 financial year reached the end of its performance period during the 2011 financial year. Performance and vesting results are set out on page 85; and The GLSP award made during the 2009 financial year reached the end of its performance period on 1 July 2011 (i.e. during the 2012 financial year). The number of shares each executive ultimately receives under the GLSP is determined in three steps: • • • in PACC The Group’s growth is measured and determines the size of the rights pool. The rights pool was subject to a cap of $34.0 million for the 2008 financial year award, and for the 2009 financial year award the cap is $36.1 million; 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; and 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 ultimately receives is 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. 84 Commonwealth Bank of Australia Annual Report 2011 Directors’ Report – 2011 Remuneration Report Group Performance Relating to Long Term Incentives Group Leadership Reward Plan (GLRP) Group Leadership Share Plan (GLSP) Executives only receive value from their long term incentive awards when performance hurdles are met. During the 2011 financial year, the long term incentive award made under the GLSP during the 2008 financial year reached its performance test date. The performance hurdles relating to this award are described in the previous section. Performance outcomes relating to the 2008 financial year GLSP award • • • The Group achieved PACC growth over the performance period of $2.4 billion. Based on this performance, the maximum rights pool was achieved in relation to the 2008 financial year GLSP award; The Group’s NPAT growth over the performance period was greater than the average of the peer group, which was a requirement before any vesting could occur; and The Board determined that the Group’s overall Customer Satisfaction ranking was third against the peer group. The Board reviewed the performance outcomes following the end of the performance period relating to the 2008 financial year GLSP award. They also considered whether there were any issues that may warrant the Board exercising discretion in relation to vesting outcomes. Based on this review, no discretion was exercised, and 50% of the available rights pool vested. This resulted in a total distribution of $14.8 million during the 2011 financial year. Performance relating to the 2009 financial year GLSP award The GLSP award granted during the 2009 financial year reached the end of its three-year performance period on 1 July 2011. • • • The Group achieved strong PACC growth over the performance period of $2.2 billion. Based on this performance, the maximum rights pool was achieved in relation to the 2009 financial year GLSP award; The Group’s NPAT growth over the performance period was greater than the average of the peer group, which was a requirement before any vesting could occur; and The Group’s customer satisfaction ranking for Wealth customers was first out of the peer group, while the satisfaction ranking for business customers was equal second in the peer group and for retail customers, fifth in the peer group. The Board determined that the Group’s overall Customer Satisfaction ranking was fourth against the peer group. Since the year end, the Board has reviewed this performance against the financial and customer satisfaction hurdles. In considering overall performance the Board also noted that: • • • The Group’s Total Shareholder Return for the three years exceeded its peers’; The Group’s return on equity has been amongst the highest of any major international bank; and Retail customer satisfaction improved from 70% to 75% over the period. After consideration, the Board has exercised its discretion to determine that 25% of the available pool will vest. This will result in a total distribution of $8.5 million during the 2012 financial year. 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 Customer Satisfaction and Total Shareholder Return. We continue to make progress in Customer Satisfaction across all segments of our business. 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 five year period to June 2011 are shown in the following graphs. Share Price $70 $60 $50 $40 $30 $20 $10 $0 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Share Price CBA Dividends Per Share $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 2.56 2.66 2.28 3.20 2.90 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Commonwealth Bank of Australia Annual Report 2011 85 Directors’ Report – 2011 Remuneration Report Statutory Remuneration Disclosures Remuneration of Non-Executive Directors Individual remuneration details for Non-Executive Directors for the year ended 30 June 2011. Short Term Benefits Post employment Benefits Share-based payments (1) Cash $ Super- annuation (2) $ Retiring Non-executive Allowance Paid $ Directors' (3) Share Plan $ Total Accounting (4) Expense $ 608,360 353,933 196,000 180,232 216,000 205,111 228,000 205,618 54,071 228,000 214,692 168,175 192,000 179,700 228,000 216,506 228,000 216,506 50,000 47,854 17,640 16,221 19,440 18,460 20,520 18,506 4,866 20,520 19,322 15,136 34,720 33,613 20,520 19,486 20,520 19,486 - - - - - - - - - - - - - - - - - - 151,000 88,483 49,000 45,058 54,000 51,278 57,000 51,404 13,518 57,000 53,673 809,360 490,270 262,640 241,511 289,440 274,849 305,520 275,528 72,455 305,520 287,687 42,044 225,355 52,000 48,925 57,000 54,127 57,000 54,127 278,720 262,238 305,520 290,119 305,520 290,119 Chairman David Turner (5) 2011 2010 Non-Executive Directors John Anderson 2011 2010 Colin Galbraith (6) 2011 2010 Jane Hemstritch 2011 2010 Launa Inman 2011 Carolyn Kay 2011 2010 Brian Long 2011 Andrew Mohl 2011 2010 Fergus Ryan (6) 2011 2010 Harrison Young 2011 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) Former Directors’ 2010 comparative remuneration expense included John Schubert (former Chairman) $1,085,980, and Reg Clairs $401,126. (5) David Turner was appointed Chairman on 10 February 2010, and his 2010 fees represent only a part-year as Chairman. (6)These Directors are entitled to a retirement allowance, which was frozen in 2002. The entitlements are Colin Galbraith ($159,092) and Fergus Ryan ($168,263). 86 Commonwealth Bank of Australia Annual Report 2011 Directors’ Report – 2011 Remuneration Report Remuneration of Executives The following table sets out remuneration disclosures for the CEO, Group Executives (who are KMP), and the Other Executives for the year ended 30 June 2011. The table has been prepared in accordance with the accounting requirements and does not represent the remuneration each individual executive actually received during the year. Details of the remuneration the CEO and Group Executives received in relation to the 2011 performance year are set out in the tables on page 75. In the table below, where a component of remuneration (such as an equity award) vests over a number of years and some of the vesting period fell during 2011, we are required to show the portion of the expense relating to the 2011 year. In some cases, where performance differs from expectations we may be required to recognise a greater or lesser final expense. This has occurred during the 2010 and 2011 financial years in relation to vesting of the GLSP awards that were awarded during the 2008 and 2009 financial years. The 2010 year figure under ‘LTI Performance Rights at Risk’ shows the impact of a higher than expected financial performance for the 2008 award, while the 2011 year figure in the same column shows a partial reversal in the 2011 year of amounts previously recognised for the 2009 award due to lower than expected customer satisfaction performance. Short Term Benefits Post Long- employme term nt benefits Share-based payments LTI LTI LTI Non Cash STI STI Superannu Performance Reward Performance Total Monetary (2) Fixed Payment (3) At Risk ($) ($) Deferred At Risk (4) ($) Other (5) ation (6) fixed Other (7) ($) ($) ($) Rights At Risk (8) ($) Shares/Rights (9) At Risk ($) Units At Risk (10) ($) Accounting (11) Expense ($) Cash Fixed (1) ($) Managing Director and CEO Ralph Norris 2011 2010 (12) Group Executives Simon Blair 2011 2010 Barbara Chapman (13) 2011 2010 David Cohen 2011 2010 David Craig 2011 2010 Michael Harte 2011 2010 Ross McEwan 2011 2010 Ian Narev 2011 2010 Grahame Petersen 2011 2010 Ian Saines 2011 2010 Alden Toevs 2011 2010 Other Executives (14) Martin Lau 2011 Mark Lazberger 2011 2010 Stuart Paul 2011 Alistair Thompson 2011 3,316,557 3,128,875 - - 1,638,000 1,638,000 91,965 1,852,500 1,852,500 441 50,000 50,000 84,022 85,891 (963,268) 6,415,735 2,782,896 2,771,804 807,534 746,742 13,398 14,078 508,667 464,453 508,667 464,453 23,057 - 50,000 49,338 21,483 17,219 - - 734,524 865,094 13,398 13,231 431,420 517,969 431,420 517,969 38,297 20,744 41,096 6,346 25,000 151,926 (166,344) 1,334,602 877,521 811,941 13,398 25,237 523,542 502,734 523,542 24,958 502,734 - 50,000 50,000 22,152 15,811 (203,063) 1,334,602 437,060 228,441 652,789 630,874 775,585 493,756 1,411,998 1,047,974 13,398 13,231 827,213 639,844 827,213 31,764 639,844 - 50,000 50,000 65,468 27,859 (225,625) 1,506,616 1,035,096 791,291 1,103,630 970,037 16,835 14,341 548,888 578,906 548,888 578,906 51,653 24,475 25,000 25,000 28,200 15,540 (203,063) 1,334,602 903,749 671,174 1,292,055 1,205,475 13,398 13,045 647,657 731,250 647,657 731,250 45,257 12,815 50,000 50,000 59,553 30,344 (258,717) 1,815,846 1,126,515 718,201 943,236 845,414 13,515 13,182 488,250 517,969 488,250 517,969 34,944 10,505 25,000 43,182 17,179 11,743 (129,358) 374,100 800,825 516,871 1,185,050 1,100,413 15,929 14,666 488,750 670,313 488,750 33,277 670,313 - 50,000 50,000 76,738 53,602 (258,717) 1,709,081 1,033,458 914,029 1,347,899 1,274,982 13,398 11,832 613,463 792,188 613,463 39,327 792,188 - 87,313 85,101 44,610 73,266 (129,358) 374,100 1,215,626 832,237 1,445,329 1,415,581 14,047 14,341 798,350 853,125 798,350 98,862 50,000 36,948 (187,618) 1,302,760 853,125 1,011,765 50,000 536,909 506,339 837,902 - - - - - - - - - - - - - 8,638,172 16,157,746 2,369,866 1,984,724 2,182,946 4,077,409 2,607,635 3,736,815 4,036,525 4,716,659 3,023,780 4,212,981 3,623,375 121,487 5,429,713 - - - - - - - - 2,681,841 2,850,935 3,113,235 5,182,417 3,845,741 4,235,894 4,357,028 6,079,087 290,887 - 290,887 - 797,177 791,835 15,929 12,038 816,015 807,934 408,007 403,967 422,754 537,824 - - 422,754 537,824 - - - - - - - 58,177 - 25,000 681,773 25,000 1,261,296 78,327 177,482 - - - - - - - - 6,997,852 7,637,803 - - 2,750,000 2,500,000 5,493,901 5,802,070 - - 7,284,428 8,208,263 4,635,522 5,888,652 (1) Cash Fixed remuneration is the total cost of salary, including annual leave accruals and any salary sacrificed benefits. For Ralph Norris annual leave accrual was $246,557. (2) Non Monetary Fixed represents the cost of car parking (including associated fringe benefits tax). Commonwealth Bank of Australia Annual Report 2011 87 Directors’ Report – 2011 Remuneration Report (3) 2011 Cash STI payment includes, for the CEO and Group Executives 50%, Mark Lazberger 66.6%, and the remaining Other Executives all of their STI award in recognition of performance for the year ended 30 June 2011. (4) STI Deferred includes the compulsory 12 month deferral of 50% (2010: 50%) of the CEO and Group Executives’ STI payments, and for Mark Lazberger the compulsory three year deferral of 33.4% (2010: 33.4%) of his STI payment, in each case for performance for the year ended 30 June 2011. (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 interest accrued in relation to the CEO and Group Executives’ 2010 STI deferred award which vested on 1 July 2011. (6) Superannuation arrangements include superannuation or pension contributions, including any voluntary contributions. (7) Includes long service entitlements accrued during the year. For Mark Lazberger this also includes amounts relating to his sign-on arrangements. For Alden Toevs, the 2010 comparative figure includes amounts relating to retention arrangements. (8) This includes the 2011 expense for Performance Rights awarded under the GLSP during the 2009 financial year (now closed to new offers). (9) This includes the 2011 expense for Reward Shares/Rights awarded during the 2010 and 2011 financial years under the GLRP. (10) For Ross McEwan the 2010 figure includes the 2010 expense for a cash-based long term incentive award received during the 2007 financial year. For Mark Lazberger, this represents awards made under the CFSGAM long term incentive plan. For Martin Lau, Stuart Paul and Alistair Thompson, this represents awards made under the GEM AP profit share scheme. (11) The percentage of 2011 remuneration related to performance was: Ralph Norris 59%, Simon Blair 61%, Barbara Chapman 62%, David Cohen 62%, David Craig 61%, Michael Harte 59%, Martin Lau 95%, Mark Lazberger 72%, Ross McEwan 60%, Ian Narev 61%, Stuart Paul 94%, Grahame Petersen 56%, Ian Saines 60%, Alistair Thompson 88% and Alden Toevs 62%. None of the remuneration was received as options. (12) CEO and Group Executive Cash Fixed for 2010 reflects voluntary pay-cuts of 10% and 5% respectively from 1 July 2009 to 31 December 2009 during the worst of the global financial crisis. (13) The remuneration disclosed for Barbara Chapman relates to the period she was a KMP of the Group, prior to her appointment to the role of Chief Executive and Managing Director of the Group’s New Zealand subsidiary ASB Bank Limited. (14) The five executives who received the highest remuneration for the year ended 30 June 2011 as defined in the Section 300A of the Corporations Act 2001, include Martin Lau, Mark Lazberger, Stuart Paul, Alistair Thompson and Ralph Norris. STI Allocations to Executives for the Year Ended 30 June 2011 Managing Director and CEO Ralph Norris Group Executives Simon Blair Barbara Chapman David Cohen David Craig Michael Harte Ross McEwan Ian Narev Grahame Petersen Ian Saines Alden Toevs Other Executives Mark Lazberger Martin Lau Stuart Paul Alistair Thompson STI Target Maximum STI Potential (1) STI Paid (2) STI Portion (3) Deferred ($) (%) (%) ($) (%) ($) 3,120,000 150% 50% 1,638,000 50% 1,638,000 800,000 880,000 865,000 1,350,000 1,050,000 1,250,000 900,000 1,150,000 1,330,000 1,400,000 n/a n/a n/a n/a 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% n/a n/a n/a n/a 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 67% 100% 100% 100% 508,667 431,420 523,542 827,213 548,888 647,657 488,250 488,750 613,463 798,350 50% 508,667 50% 431,420 50% 523,542 50% 827,213 50% 548,888 50% 647,657 50% 488,250 50% 488,750 50% 613,463 50% 798,350 816,015 33% 408,007 290,887 - - 422,754 - - 537,824 - - (1) The maximum STI is represented as a percentage of Fixed Remuneration. The minimum STI potential is $nil. (2) Includes the annual cash award immediately payable in recognition of performance for the year ended 30 June 2011. (3) This represents the portion of STI that is deferred. The Executive will need to be an employee of the Group at the end of the respective deferral period to receive this payment. 88 Commonwealth Bank of Australia Annual Report 2011 Directors’ Report – 2011 Remuneration Report Equity Awards Received as Remuneration The following table sets out the number and value of equity awards that were granted, exercised, or forfeited/lapsed during 2011. It also shows the number of awards made in previous years that vested during 2011. Further information about equity holdings of KMP are provided in Note 44 to the financial statements. Previous years' awards that vested during 2011 (1) Forfeited or lapsed during 2011 Granted during 2011 (Units) ($) (Units) (Units) ($) 85,976 3,561,986 - - - - - - - - - 117,056 - - Name Managing Director and CEO Ralph Norris Class Reward Shares/Rights Deferred Shares Ordinary Shares Group Executives Simon Blair Reward Shares/Rights 22,046 913,358 - - - Deferred Shares Ordinary Shares - - - - - - - - - - Barbara Chapman Reward Shares/Rights 24,250 1,004,670 - - - Deferred Shares Ordinary Shares - - - - - - 24,100 - - David Cohen Reward Shares/Rights 23,837 987,563 - - - Deferred Shares Ordinary Shares - - - - - - 24,100 - - David Craig Reward Shares/Rights 37,202 1,534,533 - - - Deferred Shares Ordinary Shares - - - - - - 27,543 - - Michael Harte Reward Shares/Rights 28,935 1,198,781 - - - Deferred Shares Ordinary Shares - - - - - - 24,100 - - Ross McEwan Reward Shares/Rights 34,446 1,427,090 - - - Deferred Shares Ordinary Shares - - - - - - 34,429 - - Ian Narev Reward Shares/Rights 24,801 1,027,502 - - - Deferred Shares Ordinary Shares - 6,610 - - - - - - - Grahame Petersen Reward Shares/Rights 31,690 1,312,909 - - - Deferred Shares Ordinary Shares - - - - - - 30,986 - - Ian Saines Reward Shares/Rights 36,650 1,518,402 - - - Deferred Shares Ordinary Shares - 12,653 - - - - - - - Alden Toevs Reward Shares/Rights 38,579 1,598,332 - - - Other Executive (2) Mark Lazberger Deferred Shares Ordinary Shares Reward Shares Deferred Shares Ordinary Shares - 37,784 - - - - - - - - - 23,463 - - 8,180 404,010 - - - - - - - - (1) Previous year’s awards that vested include long term incentive and other deferred awards. There are no instruments on issue for the executives shown that would require the exercise of a right to receive an ordinary share. (2) Martin Lau, Stuart Paul and Alistair Thompson have no equity holdings under any CBA Employee Share Plans. Commonwealth Bank of Australia Annual Report 2011 89 Directors’ Report – 2011 Remuneration Report Equity Awards Outstanding during 2011 – Fair Value Assumptions The fair value of LTI awards granted has been calculated using a Monte-Carlo simulation method incorporating the assumptions below: Assumptions Expected Fair Exercise Performance Expected Dividend Expected Risk free Grant Value Price Period Life Yield Volatility Award type GLRP - Reward Rights (1) GLRP - Reward Rights (2) GLRP - Reward Rights (1) GLRP - Reward Rights (2) GLRP - Reward Shares (1) GLRP - Reward Shares (2) GLRP - Reward Shares (1) GLRP - Reward Shares (2) GLSP - Performance Rights Date 10/03/2011 10/03/2011 27/09/2010 27/09/2010 25/09/2009 25/09/2009 25/09/2009 25/09/2009 3/12/2008 ($) $51.30 $36.51 $52.86 $37.62 $51.30 $36.52 $51.30 $37.24 $26.20 ($) Nil Nil Nil Nil Nil Nil Nil Nil Nil End 30/06/2014 30/06/2014 30/06/2014 30/06/2014 30/06/2012 30/06/2012 30/06/2013 30/06/2013 1/07/2011 (years) 3.3 3.3 3.8 3.8 2.8 2.8 3.8 3.8 2.6 (%) (%) Nil Nil Nil Nil Nil Nil Nil Nil 6.75 30 30 30 30 30 30 30 30 30 rate (%) 5.5 5.5 5.5 5.5 5.1 5.1 5.4 5.4 4.7 (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 current KMP and the Other Executives Name Managing Director & CEO Ralph Norris (3) Group Executives Simon Blair Barbara Chapman (4) David Cohen David Craig Michael Harte Ross McEwan Ian Narev Grahame Petersen Ian Saines Alden Toevs Other Executive Mark Lazberger Martin Lau Stuart Paul Alistair Thompson Contract (1) Type Permanent Permanent Permanent Permanent Permanent Permanent Permanent Permanent Permanent Permanent Permanent Permanent Permanent Permanent Permanent Notice 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 3 months 9 months 6 months 9 months Severance (2) n/a 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months n/a 3 months 9 months 6 months 9 months (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. (3) Termination benefits for Ralph Norris when he retires on 30 November 2011 will be consistent with the Group’s remuneration policy as outlined in this report. (4) Termination arrangements for Barbara Chapman relate to her period as a KMP in her role as Group Executive Human Resources and Group Services until 26 April 2011. 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 KMP Information on loans to KMP, including loan amounts, interest charged, and loan balances outstanding are set out in Note 44 to the financial statements. 90 Commonwealth Bank of Australia Annual Report 2011 Directors’ Report – 2011 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. 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 (KMP) 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 Reward Rights Salary Sacrifice Short Term Incentive (STI) Total Shareholder Return (TSR) Shares in the Bank granted under the GLRP during the 2010 financial year and subject to performance hurdles. Rights to ordinary shares in the Bank granted under the GLRP during the 2011 financial year 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. Commonwealth Bank of Australia Annual Report 2011 91 Directors’ Report Company Secretaries Auditor Independence The details of the Bank’s Company Secretaries, including their experience and qualifications are set out below. John Hatton has been Company Secretary of the Commonwealth Bank of Australia since 1994. From 1985 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 (PwC) for audit and non-audit services provided during the year, as set out in Note 34 to the Financial Statements are as follows: Project assurance services Taxation services Controls review and related work Other Total non-audit services (1) Total audit and audit related services 2011 $’000 2,780 3,051 135 693 6,659 22,442 (1) An additional amount of $1,713,328 was paid to PwC for non audit services provided to entities not consolidated into the Financial Statements. Auditor’s Declaration of Independence We have obtained an independence declaration from our external auditor as presented on the following page. 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 PwC and has concluded that the provision of those services did not compromise the auditor independence requirements of the Corporations Act 2001. 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 PwC during the year was compatible with the the general standard of Corporations Act 2001. independence imposed by The Directors are satisfied that the provision of the non-audit services during the year did not compromise the auditor independence requirements of the Corporations Act 2001. The reasons for this are as follows: • • 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 and audit related services. The above Directors’ statements are in accordance with the advice received from the Audit Committee. Incorporation of Additional Material This report incorporates the Chairman’s Statement (pages 2 to 4), Highlights (pages 11 to 14), Analysis sections for Retail Banking Services (pages 22 to 23), Business and Private Banking (pages 24 to 25), Institutional Banking and Markets (pages 26 to 27), Wealth Management (pages 28 to 31), New Zealand (pages 32 to 34), Bankwest (pages 36 to 37) Other Divisions (pages 38 to 39) and Shareholding Information (pages 233 to 236) sections of this Annual report. D J Turner Chairman 10 August 2011 R J Norris Managing Director and Chief Executive Officer 10 August 2011 92 Commonwealth Bank of Australia Annual Report 2011 Auditor’s Independence Declaration As lead auditor for the audit of the Commonwealth Bank of Australia for the year ended 30 June 2011, 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 period. Rahoul Chowdry Partner PricewaterhouseCoopers Sydney 10 August 2011 PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 DX 77 Sydney, Australia www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Commonwealth Bank of Australia Annual Report 2011 93 Five Year Financial Summary Net interest income Other operating income (1) Total operating income Operating expenses Impairment expense Operating profit before goodwill and income tax expense Corporate tax expense Non-controlling interests Net profit after tax ("cash basis") Defined benefit superannuation plan income/(expense) (2) Treasury shares valuation adjustment Hedging and IFRS volatility Visa Initial Public Offering gain after tax Investment and restructuring One-off expenses Tax on NZ Structured finance transactions Loss on disposal of controlled entities/investments Bankwest non cash items Net profit after income tax attributable to Equity holders of the Bank Contributions to profit (after tax) Retail Banking Services Business and Private Banking Institutional Banking and Markets Premium Business Services Wealth Management New Zealand Bankwest International Financial Services Other (2) Net profit after tax ("underlying basis") Investment experience after tax Net profit after tax ("cash basis") Defined benefit superannuation plan income/(expense) (2) Treasury shares valuation adjustment Hedging and IFRS volatility Visa Initial Public Offering gain after tax Investment and restructuring One-off expenses Tax on NZ Structured finance transactions Loss on disposal of controlled entities/investments Bankwest non cash items Net profit after tax ("statutory basis") Balance Sheet Loans, bills discounted and other receivables Total assets Deposits and other public borrowings Total liabilities Shareholders' equity Net tangible assets Risk weighted assets Average interest earning assets Average interest earning liabilities Assets (on Balance Sheet) - Australia Assets (on Balance Sheet) - New Zealand Assets (on Balance Sheet) - Other (1) Includes investment experience. 2,107 1,911 2011 2010 2009 $M $M $M 12,658 7,001 19,659 (8,891) (1,280) 9,488 (2,637) (16) 6,835 - (22) (265) - - - - (7) (147) 6,394 2,845 1,039 1,004 n/a 581 469 463 n/a 353 6,754 81 6,835 - (22) (265) - - - - (7) (147) 6,394 11,868 7,191 19,059 (8,601) (2,075) 8,383 (2,266) (16) 6,101 - (44) 17 - - - (171) (23) (216) 5,664 2,461 898 1,173 n/a 592 387 (45) n/a 457 5,923 178 6,101 - (44) 17 - - - (171) (23) (216) 5,664 10,186 6,632 16,818 (7,765) (3,048) 6,005 (1,560) (30) 4,415 (10) (28) (245) - - (23) - - 614 4,723 736 166 n/a 514 438 113 n/a 537 4,611 (196) 4,415 (10) (28) (245) - - (23) - - 614 4,723 500,057 667,899 401,147 630,612 37,287 26,217 281,711 576,369 538,843 581,695 54,993 31,211 493,459 646,330 374,663 610,760 35,570 24,688 290,821 553,735 521,338 561,618 56,948 27,764 466,631 620,372 368,721 588,930 31,442 20,738 288,836 481,248 454,258 528,354 59,606 32,412 2008 $M 7,907 6,434 14,341 (7,021) (930) 6,390 (1,626) (31) 4,733 9 60 (42) 295 (264) - - - - 2007 $M 7,036 6,161 13,197 (6,427) (434) 6,336 (1,782) (27) 4,527 5 (75) 13 - - - - - - 4,791 4,470 721 771 n/a 789 n/a n/a 555 (1) 4,746 (13) 4,733 9 60 (42) 295 (264) - - - - 1,766 n/a n/a 1,445 548 n/a n/a 461 211 4,431 96 4,527 5 (75) 13 - - - - - - 4,791 4,470 361,282 487,572 263,706 461,435 26,137 16,422 205,501 385,667 363,049 410,225 54,312 23,035 315,465 440,157 219,068 415,713 24,444 15,158 245,347 332,492 311,236 360,188 55,160 24,809 (2) Due to the change in expectations on the size and impact of defined benefit superannuation plan (income)/expense, from 1 July 2009 this amount has been included as part of total expenses (“cash basis”) and is recorded in the Other segment. 94 Commonwealth Bank of Australia Annual Report 2011 Shareholder summary Dividends per share - fully franked (cents) Dividends cover - statutory (times) Dividends cover - cash (times) Earnings per share (cents) Basic Statutory Cash basis Fully diluted Statutory Cash basis Dividend payout ratio (%) Statutory Cash basis Net tangible assets per share ($) Weighted average number of shares (statutory basic) (M) Weighted average number of shares (statutory fully diluted) (M) Weighted average number of shares (cash basic) (M) Weighted average number of shares (cash fully diluted) (M) Number of shareholders Share prices for the year ($) Trading high Trading low End (closing price) Performance ratios (%) Return on average Shareholders' equity Statutory Cash basis Return on average total assets Statutory Cash basis Capital adequacy - Tier One Capital adequacy - Tier Two Capital adequacy - Deductions Capital adequacy - Total Net interest margin Other information (numbers) Full-time equivalent employees Branches/services centres (Australia) Agencies (Australia) ATM's (proprietary) EFTPOS terminals Productivity Total income per full-time (equivalent) employee ($) Employee expense/Total income (%) Total operating expenses/Total income (%) Five Year Financial Summary 2011 2010 2009 2008 2007 320 1.3 1.4 411.2 438.7 395.1 420.6 78.3 73.2 16.8 1,545 1,668 1,548 1,671 290 1.3 1.4 367.9 395.5 354.2 379.8 79.7 73.9 15.9 1,527 1,640 1,531 1,644 228 1.3 1.3 328.5 305.6 313.4 292.4 73.1 78.2 13.7 1,420 1,548 1,426 1,554 266 1.3 1.3 363.0 356.9 348.7 343.1 74.1 75.0 12.4 1,307 1,424 1,313 1,430 256 1.3 1.3 344.7 347.1 339.7 342.1 75.2 74.2 11.7 1,281 1,344 1,289 1,351 792,765 784,382 776,283 741,072 696,118 55.77 47.05 52.30 18.4 19.5 1.0 1.0 10.01 1.69 - 11.70 2.19 46,060 1,160 3,795 4,173 60.00 36.20 48.64 17.5 18.7 0.9 1.0 9.15 2.34 - 11.49 2.13 45,025 1,147 3,884 4,149 46.69 24.03 39.00 16.8 15.8 0.9 0.8 8.07 2.35 - 10.42 2.10 44,218 1,142 3,859 4,075 62.16 37.02 40.17 19.8 20.4 1.0 1.0 8.17 3.41 - 11.58 2.02 39,621 1,009 3,814 3,301 56.16 42.98 55.25 20.7 21.7 1.1 1.1 7.14 3.41 (0.79) 9.76 2.08 37,873 1,010 3,833 3,242 170,855 165,621 167,025 187,377 171,138 424,186 418,057 386,381 362,384 344,520 24.9 45.5 24.3 45.7 23.3 45.4 25.5 48.9 24.7 49.3 Commonwealth Bank of Australia Annual Report 2011 95 Financial Statements 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 Tax Liabilities 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 96 Commonwealth Bank of Australia Annual Report 2011 97 98 99 100 102 104 118 120 121 127 130 131 131 132 132 134 139 142 146 149 151 153 153 153 154 154 155 155 156 158 159 166 168 169 175 176 177 180 182 182 183 185 186 186 203 206 210 214 215 218 220 222 226 226 229 Income Statements For the year ended 30 June 2011 Interest income Interest expense Net interest income Other banking income Net banking operating income Funds management income Investment revenue/(expense) Claims and policyholder liability (expense)/revenue Net funds management operating income Premiums from insurance contracts Investment revenue/(expense) Claims and policyholder liability expense from insurance contracts Net insurance operating income Total net operating income Gain on acquisition of controlled entities Impairment expense Operating expenses Net profit before income tax Corporate tax expense Policyholder tax (expense)/benefit Net profit after income tax Non-controlling interests Net profit attributable to Equity holders of the Bank Note 2 2 2 2 2 2,14 2 2 5 5 Financial Statements 2011 $M 37,304 (24,697) 12,607 3,630 16,237 1,996 854 (808) 2,042 1,884 547 2010 $M 32,215 (20,293) 11,922 4,208 16,130 1,906 975 (953) 1,928 1,794 687 (1,313) 1,118 (1,251) 1,230 Group 2009 $M 31,519 (21,218) 10,301 3,914 14,215 1,618 (859) 731 1,490 1,651 (232) (650) 769 2011 $M 32,945 (23,163) 9,782 5,617 15,399 Bank 2010 $M 27,754 (18,603) 9,151 5,260 14,411 - - - - - - - - - - - - - - - - 19,397 19,288 16,474 15,399 14,411 - (1,280) (9,060) 9,057 (2,481) (166) 6,410 (16) 6,394 - (2,379) (8,716) 8,193 (2,383) (130) 5,680 (16) 5,664 983 (3,048) (7,960) 6,449 (1,860) 164 4,753 (30) 4,723 - (1,080) (6,113) 8,206 (1,726) - 6,480 - 6,480 - (1,193) (5,917) 7,301 (1,686) - 5,615 - 5,615 Group 2009 The above Income Statements should be read in conjunction with the accompanying notes. 2011 2010 Note Cents per share Earnings per share: Basic Fully diluted 7 7 411. 2 395. 1 367. 9 354. 2 328. 5 313. 4 Commonwealth Bank of Australia Annual Report 2011 97 Financial Statements Statements of Comprehensive Income For the year ended 30 June 2011 Profit from ordinary activities after income tax for the financial year Other comprehensive income/(expense): Actuarial gains and losses from defined benefit superannuation plans Gains and losses on cash flow hedging instruments: Recognised in equity Transferred to Income Statement Gains and losses on available-for-sale investments: Recognised in equity Transferred to Income Statement on disposal Transferred to Income Statement on impairment Revaluation of properties Foreign currency translation reserve Income tax on items transferred directly to/from equity: Foreign currency translation reserve Available-for-sale investments revaluation reserve Revaluation of properties Cash flow hedge reserve Other comprehensive income/(expense) net of income tax Total comprehensive income for the financial year Total comprehensive income for the financial year is attributable to: Equity holders of the Bank Non-controlling interests Total comprehensive income for the financial year 2011 $M 2010 $M Group 2009 $M 2011 $M Bank 2010 $M 6,410 5,680 4,753 6,480 5,615 (89) (64) (739) (89) (64) (754) 769 124 (24) - 6 (546) 16 (28) - - (526) 5,884 5,868 16 5,884 (239) 828 (1,630) (21) 327 (24) 2 50 (19) (1) (77) (9) (193) 581 6,261 6,245 16 6,261 10 (24) 37 (25) 168 94 (37) 9 497 (1,661) 3,092 3,062 30 3,092 (748) 650 264 (24) - 9 (204) 10 (73) - 23 (182) 6,298 6,298 - 6,298 11 208 160 (16) - 39 (67) 1 (33) (7) (71) 161 5,776 5,776 - 5,776 The above Statements of Comprehensive Income should be read in conjunction with the accompanying notes. 98 Commonwealth Bank of Australia Annual Report 2011 Balance Sheets As at 30 June 2011 Assets Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables Bank acceptances of customers Shares in and loans to controlled entities Property, plant and equipment Investment in associates Intangible assets Deferred tax assets Other assets Assets held for sale Total assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative liabilities Bank acceptances Due to controlled entities Current tax liabilities Deferred tax liabilities Other provisions Insurance policy liabilities Debt issues Managed funds units on issue Bills payable and other liabilities Loan capital Total liabilities Net assets Shareholders' Equity Share capital: Ordinary share capital Other equity instruments Reserves Retained profits Shareholders' equity attributable to Equity holders of the Bank Non-controlling interests Total Shareholders' equity Note 2011 $M Financial Statements Group 2010 $M 10,119 10,072 22,851 15,940 654 27,689 32,915 493,459 11,569 - 2,351 1,490 9,420 1,270 6,482 2011 $M 10,979 10,123 Bank 2010 $M 8,711 9,766 17,765 18,775 - 300 30,731 75,699 387,888 10,734 47,357 1,526 1,343 3,726 1,112 4,917 - - 27,363 65,779 377,195 11,569 49,809 1,506 1,194 3,382 1,242 4,706 13,241 10,393 20,469 14,998 824 30,317 45,171 500,057 10,734 - 2,366 1,712 9,603 1,300 6,681 667,866 646,281 604,200 580,997 33 49 33 49 667,899 646,330 604,233 581,046 401,147 374,663 332,964 307,844 15,899 10,491 33,976 10,734 - 1,222 301 1,277 13,652 118,652 1,048 10,652 619,051 11,561 630,612 37,287 23,602 939 392 11,826 36,759 528 37,287 12,608 15,342 24,884 11,569 - 1,056 221 1,197 14,592 130,210 880 10,025 597,247 13,513 610,760 35,570 23,081 939 1,089 9,938 35,047 523 35,570 15,686 4,700 32,817 10,734 52,353 1,133 - 957 - 12,422 4,613 23,689 11,569 52,411 1,016 - 934 - 94,385 107,039 - 9,348 555,077 11,808 566,885 37,348 23,896 1,895 1,964 9,593 - 10,733 532,270 13,575 545,845 35,201 23,379 1,895 2,047 7,880 37,348 35,201 - - 37,348 35,201 8 9 10 11 12 13 49 15 43 16 5 17 18 19 20 21 11 22 22 23 33 24 25 26 28 28 27 27 30 The above Balance Sheets should be read in conjunction with the accompanying notes. Commonwealth Bank of Australia Annual Report 2011 99 Financial Statements Statements of Changes in Equity For the year ended 30 June 2011 Group Shareholders' equity attributable Ordinary share Other equity to Equity Non- Total Retained holders controlling Shareholders' capital instruments Reserves profits of the Bank interests equity $M 520 16 - - - - (13) 523 16 - - - - (11) 528 $M 31,442 6,261 (3,621) 1,457 127 (20) (76) 35,570 5,884 (4,707) 511 16 4 9 37,287 As at 30 June 2009 Total comprehensive income for the financial year Transactions with equity holders in their capacity as equity holders: Dividends paid Dividend reinvestment plan (net of issue costs) Other equity movements: Share based payments (Purchase)/sale and vesting of treasury shares Other changes As at 30 June 2010 Total comprehensive income for the financial year Transactions with equity holders in their capacity as equity holders: Dividends paid Dividend reinvestment plan (net of issue costs) Other equity movements: Share based payments (Purchase)/sale and vesting of treasury shares Other changes As at 30 June 2011 $M 21,642 $M 939 - - 1,457 2 (20) - - - - - - - 23,081 939 - - 511 6 4 - - - - - - - 23,602 939 $M 516 645 - - 125 - (197) 1,089 (437) - - 10 - $M 7,825 5,600 $M 30,922 6,245 (3,621) (3,621) - - - 134 9,938 6,305 1,457 127 (20) (63) 35,047 5,868 (4,707) (4,707) - - - 511 16 4 20 36,759 (270) 392 290 11,826 The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. 100 Commonwealth Bank of Australia Annual Report 2011 Statements of Changes in Equity (continued) For the year ended 30 June 2011 As at 30 June 2009 Total comprehensive income for the financial year Transactions with equity holders in their capacity as equity holders: Dividends paid Dividend reinvestment plan (net of issue costs) Other equity movements: Share based payments Sale/(purchase) and vesting of treasury shares Other changes As at 30 June 2010 Total comprehensive income for the financial year Transactions with equity holders in their capacity as equity holders: Dividends paid Dividend reinvestment plan (net of issue costs) Other equity movements: Share based payments Sale/(purchase) and vesting of treasury shares Other changes As at 30 June 2011 Financial Statements Ordinary share Other equity Bank Shareholders' equity attributable to Equity Retained holders capital instruments Reserves profits of the Bank $M 21,825 $M 1,895 - - 1,457 2 95 - 23,379 - - 511 6 - - - - - - - - 1,895 - - - - - - $M 1,697 225 - - 125 - - 2,047 (93) - - 10 - - $M 6,009 5,551 (3,587) - - - (93) 7,880 6,391 (4,678) - - - - $M 31,426 5,776 (3,587) 1,457 127 95 (93) 35,201 6,298 (4,678) 511 16 - - 23,896 1,895 1,964 9,593 37,348 The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. Dividends per share attributable to shareholders of the Bank: Ordinary shares Trust preferred securities 2011 2010 Note Cents per share Group 2009 6 320 6,020 290 6,715 228 8,142 Commonwealth Bank of Australia Annual Report 2011 101 Financial Statements Statements of Cash Flows (1) For the year ended 30 June 2011 Cash flows from operating activities Interest received Interest paid Other operating income received Expenses paid Income taxes paid Net decrease/(increase)in assets at fair value through Income Statement (excluding life insurance) Net increase/(decrease) in liabilities at fair value through Income Statement: Life insurance: Investment income Premiums received (2) Policy payments (2) Other liabilities at fair value through Income Statement Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities arising from cash flow movements Movement in available-for-sale investments: Purchases Proceeds from sale Proceeds at or close to maturity Net change in deposits with regulatory authorities Net increase in loans, bills discounted and other receivables Net decrease/(increase) in receivables due from other financial institutions not at call Net (increase)/decrease in securities purchased under agreements to resell Life insurance business: Purchase of insurance assets at fair value through Income Statement Proceeds from sale/maturity of insurance assets at fair value through Income Statement Net decrease/(increase) in other assets Net increase in deposits and other public borrowings Net increase/(decrease) in payables due to other financial institutions not at call Net (decrease)/increase in securities sold under agreements to repurchase Net decrease/(increase) in other liabilities Changes in operating assets and liabilities arising from cash flow movements Net cash provided by/(used in) operating activities 46(a) Cash flows from investing activities Payments for acquisition of controlled entities Net proceeds from disposal of controlled entities Net proceeds from disposal of entities and businesses (net of cash disposals) Dividends received 46(c) Net amounts received from/(paid to) controlled entities Proceeds from sale of property, plant and equipment Purchases of property, plant and equipment Payments for acquistions of investments in associates/joint ventures Purchase of intangible assets Sale/(purchase) of assets held for sale Net cash (used in)/provided by investing activities Note 2011 $M 36,961 (24,278) 5,725 (8,474) (2,370) 2010 $M 31,663 (19,387) 5,573 (7,766) (2,022) Group 2009 $M 31,745 (20,986) 5,551 (7,334) (2,043) 2011 $M 32,542 (22,814) 3,558 (5,837) (2,087) Bank 2010 $M 27,197 (17,625) 3,181 (4,988) (1,628) 4,452 (2,466) 4,864 1,531 (3,962) 552 2,200 (3,374) (4,317) 335 2,094 (3,901) (1,200) 275 2,063 (3,144) 287 - - - 13 7,077 2,923 11,278 6,906 - - - 1,260 3,435 (62,733) (60,021) (37,200) (49,182) (36,325) 4,440 45,417 (72) 4,107 44,201 - 4,996 22,189 25 3,919 34,718 (14) 4,095 26,635 2 (11,489) (28,999) (52,878) (11,842) (25,159) 1,115 2,725 (5,575) 1,134 2,641 (2,834) 776 (507) (2,194) 751 (4,101) (5,660) (11,950) 5,914 201 31,893 8,384 254 8,852 14,478 (77) 47,394 - - 41 29,066 - - 193 5,321 5,112 (1,157) (8,012) 4,532 (1,112) (1,698) (575) 10,590 17,667 - 19 15 26 - 27 (443) (164) (533) 12 (1,041) (2,814) (240) (29,592) (26,669) - (11) (22) 71 - 70 (293) (414) (454) 542 (511) 6,985 344 (19,788) (8,510) (1,741) - - 76 - 9 (987) (144) (405) (22) (1,963) (618) 7,597 14,503 - - - 2,210 394 7 (277) (148) (487) 12 (2,650) 1,309 (24,299) (20,864) - 44 - 1,648 (23,823) 61 (230) (396) (427) 346 (3,214) 1,711 (22,777) (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 Statements of Cash Flows should be read in conjunction with the accompanying notes. 102 Commonwealth Bank of Australia Annual Report 2011 Financial Statements Statements of Cash Flows (continued) (1) For the year ended 30 June 2011 Note Cash flows from financing activities Proceeds from issue of shares (net of issue costs) Dividends paid (excluding Dividend Reinvestment Plan) Net proceeds from issuance of debt securities Net sale/(purchase) of treasury shares Issue of loan capital Redemption of loan capital Other Net cash (used in)/provided by financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 46(b) 2011 $M 6 (4,188) (8,321) 4 - (1,064) (52) (13,615) 3,011 4,917 7,928 2010 $M 2 (2,149) 30,128 (20) 3,707 (1,760) 3 29,911 2,731 2,186 4,917 Group 2009 $M 4,830 (2,620) 10,253 (14) 500 (1,250) (54) 11,645 (79) 2,265 2,186 2011 $M 5 (4,157) (8,092) - - (911) (214) (13,369) 2,845 3,046 5,891 Bank 2010 $M 2 (2,119) 43,042 95 3,707 (1,760) 284 43,251 (390) 3,436 3,046 (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. The above Statements of Cash Flows should be read in conjunction with the accompanying notes. Commonwealth Bank of Australia Annual Report 2011 103 Notes to the Financial Statements Note 1 Accounting Policies 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 2011, were approved and authorised for issue by the Board of Directors on 10 August 2011. 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 2011 has been prepared in accordance with Australian Accounting Standards (the standards), which include Australian Interpretations by virtue of AASB 1048 ‘Interpretation and the Application of Standards’, and Corporations Act 2001. the requirements of The basis of the standards is the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). As a result of complying with the standards, the Group Financial Statements comply with IFRS, and interpretations as issued by the International Financial Reporting Interpretations Committee (IFRIC). (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. The assets and liabilities are presented in order of liquidity on the Balance Sheet. 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 certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant are discussed in Note 1 (jj). Comparatives Where necessary, comparative information has been restated to conform with changes in presentation in the current year. 104 Commonwealth Bank of Australia Annual Report 2011 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 to assess performance and allocate segments, resources. in order All transactions between segments are conducted on an arm’s length basis, with inter-segment revenue and costs being eliminated in “Other”. Changes in Accounting Policies The Group has continued to apply the accounting policies used for the 2010 Annual Report and has adopted the following amendments to the standards, which are of a technical or clarifying nature and do not have a material impact on the Bank or the Group: • • • • • AASB 2009-5 Accounting Standards Improvements Project’; ‘Further Amendments from arising to Australian the Annual AASB 2009-8 ‘Amendments to Australian Accounting Standards - Group Cash-settled Share-based Payment Transactions’; AASB 2009-10 ‘Amendments to Australian Accounting Standards – Classification of Rights Issues’; AASB Interpretation 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ and AASB 2009-13 ‘Amendments from to Australian Accounting Standards arising Interpretation 19’; and AASB 2010-3 ‘Amendments to Australian Accounting Standards arising from the Annual Improvements Project’. Future Accounting Developments The following amendments to existing standards have been published and are mandatory for accounting periods beginning on or after 1 January 2011 or later periods, but have not been adopted. They are not expected to result in significant changes to the Group’s accounting policies. • • • • • • • • • to Australian the Annual ‘Further Amendments from arising AASB 124 ‘Related Party Disclosures’ and AASB 2009-12 ‘Amendments to Australian Accounting Standards’; AASB 2010-4 Accounting Standards Improvements Project’; AASB 2010-5 ‘Amendments to Australian Accounting Standards’; AASB 2010-6 ‘Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets’; AASB 2010-8 ‘Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets’; AASB 2011-1 ‘Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project’; AASB 11 ‘Joint Arrangements’; AASB 13 ‘Fair Value Measurement’; and AASB 1054 ‘Australian Additional Disclosures’. Notes to the Financial Statements Note 1 Accounting Policies (continued) AASB 9 ‘Financial Instruments’ contains new requirements for classification, measurement and de-recognition of financial assets and liabilities, replacing the corresponding requirements Instruments: Recognition and in AASB 139 Measurement’. It will introduce significant changes in the way that the Group accounts for financial instruments. ‘Financial Adoption of the standard is not mandatory until accounting periods beginning on or after 1 January 2013 however early adoption is permitted. The key changes include: • • Financial assets: financial assets will be classified as either amortised cost or fair value through Income Statement, except for certain non-trading equity investments which through Other may be classified as Comprehensive Income (OCI); and Financial liabilities: gains and losses on own credit arising from financial liabilities designated at fair value through profit or loss will be excluded from the Income Statement and instead taken to OCI. fair value By June 2012, it is expected that IFRS 9 ‘Financial Instruments’ will include new requirements for impairment, offsetting and hedge accounting. It will introduce significant changes in the way that the Group accounts for financial instruments. The key changes proposed relate to: • • Impairment: both expected losses and incurred losses will be reflected in impairment allowances for loans and advances; Hedge accounting: hedge accounting will be more closely aligned with financial risk management; and • Offsetting: the conditions for offsetting financial assets and financial liabilities in the Balance Sheet will be clarified. AASB 10 ‘Consolidated Financial Statements’ introduces control as the single basis for consolidation for all entities, regardless of the nature of the investee. AASB 10 replaces those parts of AASB 127 ‘Consolidated and Separate Financial Statements’ that address when and how an investor should prepare consolidated replaces SIC-12 ‘Consolidation – Special Purpose Entities’ in its entirety. financial statements and This approach comprises a series of indicators of control, requiring an analysis of all facts and circumstances and the application of judgement in making the control assessment. Concurrent with the issue of AASB 10, the following standards were also issued: • • • • AASB 11 ‘Joint Arrangements’; AASB 12 ‘Disclosure of Interests in Other Entities’; AASB 127 ‘Separate Financial Statements’, amended for the issuance of AASB 10; and AASB 128 ‘Investments in Associates’, amended for conforming changes based on the issuance of AASB 10 and AASB 11. Each of these standards has an effective date for annual periods beginning on or after 1 January 2013, with early adoption permitted so long as each of the standards in this package is also applied early. The key changes include: • • Using control as for consolidation, the single basis irrespective of the nature of the investee, eliminating the risks and rewards approach included in SIC-12; The definition of control includes three elements: power over an investee, exposure or rights to variable returns of the investee, and the ability to use power over the investee to affect the investor’s returns; and • An investor would reassess whether it controls an investee if there is a change in facts and circumstances. AASB 12 ‘Disclosure of Interests in Other Entities’ applies to entities that have an interest in subsidiaries, joint arrangements, associates or unconsolidated structured entities. It serves to integrate the disclosure requirements of interests in other entities, currently included in several standards, and also adds additional requirements in a number of areas. The disclosure requirements are extensive and significant effort will be required to accumulate the necessary information. AASB 119 ‘Employee Benefits’ has been amended, which will result in changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. These changes could affect a number of performance indicators, and significantly increase the volume of disclosures. The key changes include: • • Annual expense for a funded benefit plan will include net interest expense or income, calculated by applying the discount rate to the net defined benefit asset or liability. This will replace the finance charge and expected return on plan assets, and may increase the benefit expense; and Benefit cost will be split between (i) the cost of benefits accrued in the current period (service cost) and benefit changes (past-service cost, settlements and curtailments); and (ii) finance expense or income. The amendment is effective for periods beginning on or after 1 January 2013, with early adoption being permitted. AASB 101 ‘Presentation of Financial Statements’ has been amended. The amendment changes the disclosure of items presented in OCI in the Statement of Comprehensive Income. The key changes include: • Items are presented separately, in two groups in OCI, based on whether or not they may be recycled to profit or loss in the future; and • Where OCI items have been presented before tax, the amount of tax related to the two groups will need to be shown. The amendment is effective for annual periods beginning on or after 1 July 2012, with early adoption permitted. In addition to the above, the IASB plans to issue new standards on Leases, Insurance Contracts and Revenue Recognition. The Group will consider the financial impacts of these new standards as they are finalised. (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 the decision- making in relation to financial and operating policies, so as to require those entities to conform with the Bank’s objectives. The effects of all transactions between entities in the Group 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. Commonwealth Bank of Australia Annual Report 2011 105 Notes to the Financial Statements Note 1 Accounting Policies (continued) 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. 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, the investments in subsidiaries that have been impaired are reviewed for possible reversal of the impairment. Interests in Associates and Joint Ventures Accounted for Using the Equity Method Associates and joint ventures are entities over which the Group 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 Group’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 OCI. (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: 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 Fee 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. 106 Commonwealth Bank of Australia Annual Report 2011 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 the entity operates (the functional currency). The consolidated financial statements are presented in Australian dollars, which is the Bank’s functional and presentation currency. in which 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 value through equity, such as equities classified as available-for- sale financial assets, are recognised in equity through OCI. 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 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 at transaction date; and • All resulting exchange differences are recognised in the foreign currency translation reserve. When a foreign operation is disposed of, 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 include 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 is recognised in the Income Statement using the effective interest method. the outstanding balance. Interest Note 1 Accounting Policies (continued) 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, as well as 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. The Group has not classified any of its financial assets as 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, 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; 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. Notes to the Financial Statements 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 is The Group enters 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 the Income Statement. 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 the Group derecognises assets., or when control is retained the assets are recognised to the extent of the Group’s continuing involvement. transferred, (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. Commonwealth Bank of Australia Annual Report 2011 107 Notes to the Financial Statements Note 1 Accounting Policies (continued) 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 sub-categories: 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 at fair value through Income Statement at inception, to either eliminate an accounting mismatch or as they are managed on a fair value basis. (j) Available-for-Sale Investments Available-for-sale investments are public and other debt and equity securities that are not classified 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. Equity investments classified as available for sale, whose 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 recognised in income when earned. Available-for-sale investments are tested for impairment in line with Note 1 (n). 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. (k) Repurchase Agreements Securities sold under agreements to repurchase, are recognised within the available-for-sale investments or assets at fair value for through accordingly. Income Statement categories and accounted 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 108 Commonwealth Bank of Australia Annual Report 2011 (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 original effective interest rate. Restructured Facilities When the original contractual terms of facilities (primarily loans) are modified, they become classified as restructured. These facilities 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 facility will be returned to the non-performing classification. Facilities are generally kept as non-performing until they are returned to a performing basis. Assets Acquired Through Securities Enforcement (AATSE) 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 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). (m) Leases 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 leases in the Balance Sheet, as loans at an amount equal to the net investment in the lease. Note 1 Accounting Policies (continued) 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 leases in the Balance Sheet as property, plant and equipment and depreciates the assets accordingly. Operating lease revenue is recognised in the Income Statement on a straight line basis over the lease term. 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. This can arise 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 Sheet 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. 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. Notes to the Financial Statements 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, Intangibles and Other Non-Financial Assets Goodwill and intangible assets that have an indefinite useful life, are not subject to amortisation and are tested annually for impairment, or more in circumstances indicate that the carrying amount may not be recoverable. if events or changes frequently 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. If any such indications exist, 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. An impairment loss is recognised whenever the carrying amount of an asset or its Cash Generating Unit (CGU) exceeds its recoverable amount. Impairment losses are recognised in the Income Statement. The recoverable amount of an asset or CGU is the greater of the fair value less cost to sell, or value in use. For the purpose 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. Assets (other than goodwill) that have previously been impaired, are reviewed for possible reversal of the impairment at each reporting date. A previously recognised impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. However, the reversal is not to an amount higher than the carrying amount that would have been determined, net of amortisation or depreciation, if no impairment loss had been recognised in prior years. Off Balance Sheet Items 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’. Commonwealth Bank of Australia Annual Report 2011 109 Notes to the Financial Statements Note 1 Accounting Policies (continued) The receivable for an off balance sheet item, only crystallises when the facility is drawn upon. Generally. therefore, it will not be appropriate to provision for these assets under an incurred loss model. The Group however, 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 five 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 recognised 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 twelve months. They are measured at the lower of carrying amount and fair value less costs to sell, unless the nature of the assets requires they be measured in line with another accounting standard. 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. Computer software is capitalised at cost and classified as property, plant and equipment where it is integral to the operation of associated hardware. The useful lives of major depreciable asset categories are as follows: 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 110 Commonwealth Bank of Australia Annual Report 2011 Depreciation rates and methods are reviewed on a timely basis 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 an indication of impairment exists and 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) Business Combinations Business combinations are accounted for using the acquisition method. Cost is measured as the aggregate of the fair values of assets given, equity instruments issued, or liabilities incurred or assumed at the date of exchange. transaction-by-transaction basis, Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at the fair value on the acquisition date. The acquirer can elect, on a to measure any non- controlling interest either at fair value, or at the non-controlling interest’s proportionate share of the fair value of the identifiable assets and liabilities. The excess of the cost of acquisition over the fair value of the acquirer’s share of the identifiable net assets acquired, is recorded as goodwill. If the cost of acquisition is less than the acquirer’s share of the fair value of the identifiable net assets of the business acquired, the difference is recognised directly in the consolidated Income Statement, but only after a reassessment of the identification and measurement of the net assets acquired. (t) 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 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 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 have been recognised following the acquisition of Bankwest and represent the value of the deposit base acquired in the business combination. Initially recognised at fair value, they are subsequently amortised over the estimated useful life of seven years. Brand Names Initially Brand names are recognised when acquired in a business combination. they are recognised at 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 cash flows. fair value, Note 1 Accounting Policies (continued) 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 (u) Deposits From Customers Deposits and other public borrowings include certificates of term deposits, savings deposits, other demand deposits, deposits and debentures. They are initially recognised at fair value, including directly attributable transaction costs and subsequently measured at amortised cost. Interest and yield related fees are recognised on an effective interest basis. (v) 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. (w) 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 Balance Sheet date. In a limited number of instances, valuation techniques are based on non-market data. (x) 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 OCI, in which case it is recognised in the Statement of 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. Deferred tax is provided using the balance sheet liability method, the carrying temporary differences between providing amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. for Notes to the Financial Statements 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 Group has formally notified the Australian Taxation Office of its adoption of the tax consolidation regime. In addition, 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 standalone 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. 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. (y) Employee Benefits Annual Leave The provision outstanding liability to employees at Balance Sheet date. for annual represents leave the current 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 a subsidy to a registered health fund with respect to retired and current employees, and employee incentives under employee share plans and bonus schemes. Commonwealth Bank of Australia Annual Report 2011 111 Notes to the Financial Statements Note 1 Accounting Policies (continued) 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 two defined benefit sponsors The Group 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 OCI. 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. (z) Provisions Provision for Dividends A provision for dividend payable is recognised when dividends are declared by the Directors. Provisions for Restructuring Provisions for restructuring are recognised where there is a detailed for restructure and a demonstrated commitment to that plan. formal 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. 112 Commonwealth Bank of Australia Annual Report 2011 (aa) 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. (bb) 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. (cc) 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, purchase 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. (dd) 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. Note 1 Accounting Policies (continued) Derivative financial instruments are recognised initially at the fair value of consideration given or received. Subsequent gains or losses are recognised Income Statement, unless the designated within a cash flow hedging relationship. in 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 recognised 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. 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. Notes to the Financial Statements 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 hedged 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. Net Investment Hedges Gains and losses on derivative contracts relating to the effective portion of the net investment hedge are recognised in the foreign currency translation reserve in equity. Ineffective portions are recognised immediately in the Income Statement. Gains and losses accumulated in equity are included in the Income Statement when the foreign subsidiary or branch is disposed of. 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. It is then accounted for as a stand-alone derivative instrument at fair value. (ee) 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. (ff) 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. Commonwealth Bank of Australia Annual Report 2011 113 Notes to the Financial Statements Note 1 Accounting Policies (continued) Disclosure Premiums and Claims 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. Investment Assets 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 revenue. 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. 114 Commonwealth Bank of Australia Annual Report 2011 Premiums and claims are separated on a product basis into their revenue, expense and change in liability components, unless the separation is not practicable, or the components cannot be reliably measured. (i) Life insurance contracts Premiums received for providing services and bearing risks are recognised as revenue. Premiums with a regular due date are recognised as revenue on a due and receivable basis. Premiums with no due date are recognised on a cash received basis. Insurance contract claims are recognised as an expense when a liability has been established. (ii) 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 revenue. Claims under represent withdrawals of investment deposits and are recognised as a reduction in investment contract liabilities. investment contracts Life Insurance Liabilities and Profit Life insurance contract policy liabilities are calculated in a way that allows for the systematic release of planned profit margins as services are provided to policy owners and the revenues relating to those services are received. Selected profit carriers including premiums and anticipated policy payments are used to determine profit recognition. insurance contract and Investment assets are held in excess of those required to meet life liabilities. Investment earnings are directly influenced by market conditions and as such this component of profit varies from year to year. investment contract Participating Policies insurance contract policy Life participating policies include shareholder profit margins and an allowance supportable bonuses. liabilities attributable to the value of future planned future for The value of supportable bonuses and planned shareholder profit margins account for all profit on participating policies based on best estimate assumptions. Under the MOS 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 Sheet 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. Notes to the Financial Statements Note 1 Accounting Policies (continued) Life Investment Contract Acquisition Costs Claims Expense 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 ‘Revenue’ to the extent that only incremental transaction costs (for example commissions and volume bonuses) are deferred. The liability calculated in accordance with AASB 139 is no less than the contract surrender value. investment contract Managed Funds Units on Issue – Held by Non-controlling Unit-Holders The life insurance statutory funds and other funds include controlling interests in trusts and companies, and the total amounts of each underlying asset, liability, revenue and expense of the controlled entities are recognised in the Group’s consolidated Financial Statements. When a controlled unit trust is consolidated, the share of the unit-holder liability attributable to the Group is eliminated but amounts due to external unit-holders 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. Claims expense and a liability for outstanding claims are recognised in respect of all business. The liability covers claims reported but not yet paid, incurred but not reported claims (IBNR) and the anticipated direct and indirect costs of settling those claims. The liability for outstanding claims is determined having regard to an independent actuarial assessment. The liability is measured as the estimate of the present value of the expected future payments against claims incurred at the Balance Sheet date, with an additional risk margin to allow for the inherent uncertainty in the estimate. These payments are estimated on the basis of the ultimate cost of settling claims, which is affected by factors arising during the period to settlement, such as inflation. The expected future payments are discounted to present value at the Balance Sheet date using market-determined, risk-adjusted discount rates. A risk margin is applied to the outstanding claims liability, sufficient to ensure the probability of adequacy of the liabilities to a 75% confidence level. Acquisition Costs Acquisition costs include brokerage and other selling and underwriting costs incurred in obtaining general insurance premiums. A portion of acquisition costs relating to unearned premium revenue is recognised as an asset. Deferred acquisition costs are amortised over the financial years expected to benefit from the expenditure and are stated at the lower of cost and recoverable value. (gg) Asset Securitisation The Group conducts an asset securitisation programme through which it packages and sells assets as securities to investors. The Group is entitled to any residual income of the programme after all payments due to investors and costs of the programme 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 programme by the Group in accordance with APRA Prudential Guidelines. 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 Income Statement as an the recognised expense, both gross and net of reinsurance. The deficiency is recognised by writing down any related deferred acquisition costs, with any excess being recorded on the Balance Sheet as an unexpired risk liability. immediately in Reinsurance Premium ceded to reinsurers is recognised as an expense from the attachment date over the period of indemnity of the reinsurance contract, the pattern of reinsurance service received. Accordingly, a portion of outwards reinsurance premium is treated at the Balance Sheet date as deferred reinsurance. in accordance with Derivatives return the risks and rewards of ownership of the securitised assets to the Group and consequently the Group cannot derecognise is these assets. An recognised inclusive of the derivative and any related fees. imputed liability For further details on the treatment of consolidated securitised entities, refer to Note 1 (c). (hh) 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. Commonwealth Bank of Australia Annual Report 2011 115 Notes to the Financial Statements (ii) Earnings Per Share Basic earnings per share is calculated by dividing the Group’s profit attributable to ordinary equity holders, by the weighted average number of ordinary shares outstanding during the financial year. Diluted earnings per share is calculated by dividing the Group’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. (jj) 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. 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 no objective evidence of impairment exists for an individually assessed financial asset, but for which a loss event has occurred which is likely to result in a loss within a group of financial assets. Credit losses arise primarily from loans, but also from other credit instruments such as bank acceptances, contingent liabilities, guarantees and other financial instruments and AATSE. Individually Assessed Provisions Individually assessed provisions are raised where there is objective evidence of impairment, that is 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. 116 Commonwealth Bank of Australia Annual Report 2011 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. 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. 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. The Group’s actuaries arrive at conclusions regarding the statistical analysis using their experience and judgement. Additional information on the accounting policy is set out in Note 1 (ff). Consolidation of Special Purpose Entities The Group assesses, at inception and periodically, 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 required in the context of the Group’s securitisation programme and structured transactions. 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. Notes to the Financial Statements Superannuation Obligations The Group currently sponsors two defined benefit plans as described in Note 1(y) and Note 42. For each of these plans, actuarial valuations of the plan’s obligations and the fair value measurements of the plan’s assets are performed semi-annually in accordance with the requirements of AASB 119 ‘Employee Benefits’. 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 Note 1 Accounting Policies (continued) 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 to counterparty credit risk, volatility, correlation and extrapolation. Periodically, the Group calibrates the valuation technique and tests it for validity using prices from any observable current market instrument (i.e. without the same modification or repackaging) or based on any available observable market data. transactions in 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 (CGUs) 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. Additional information on goodwill impairment testing is included in Note 16. 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 deferral of the exercise 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 require significant judgement with respect to outcomes that are uncertain. For such uncertainties, the Group has estimated its tax provisions based on its expected outcomes. Commonwealth Bank of Australia Annual Report 2011 117 Notes to the Financial Statements Note 2 Profit Profit before income tax has been determined as follows: Interest Income Loans and bills discounted Other financial institutions Cash and liquid assets Assets at fair value through Income Statement Available-for-sale investments Controlled entities Total interest income (1) Interest Expense Deposits (3) Other financial institutions Liabilities at fair value through Income Statement (3) Debt issues Controlled entities Loan capital Total interest expense (2) Net interest income Other Operating Income Lending fees Commissions Trading income Net gain/(loss) on disposal of available-for-sale investments Net loss on other non-fair valued financial instruments Net hedging ineffectiveness Net (loss)/gain on other fair valued financial instruments: Fair value through Income Statement (4) Reclassification of net interest on swaps (5) Non-trading derivatives (6) Dividends - Controlled entities Dividends - Other Net loss on sale of property, plant and equipment Funds management and investment contract income: Fees receivable on trust and other fiduciary activities Other Insurance contracts income Other (7) Total other operating income Total net operating income Gain on acquisition of controlled entities Impairment expense Loan impairment expense Available-for-sale debt securities impairment expense Total impairment expense (Note 14) 2011 $M 2010 $M Group 2009 $M 2011 $M Bank 2010 $M 34,192 29,849 28,438 26,319 22,382 92 291 877 1,852 - 37,304 141 192 793 1,240 - 32,215 434 510 1,236 901 - 31,519 87 235 749 3,987 1,568 32,945 115 150 616 3,102 1,389 27,754 17,347 13,830 14,216 16,914 13,329 222 590 5,891 - 647 24,697 12,607 1,467 1,946 717 24 (4) 4 (2) (498) (301) - 5 (6) 1,662 380 1,118 278 6,790 164 764 4,920 - 615 20,293 11,922 1,435 2,006 597 27 (52) (62) 8 (259) 217 - 5 (4) 1,493 435 1,230 290 7,366 19,397 19,288 - - 1,280 - 1,280 2,379 - 2,379 509 1,021 4,767 - 705 21,218 10,301 1,396 2,027 741 (12) (9) (18) (66) (275) (187) - 14 (11) 1,291 199 769 314 6,173 16,474 983 2,683 365 3,048 184 218 4,920 263 664 23,163 9,782 1,333 1,426 639 24 (11) 14 2 (382) (348) 2,155 36 (6) - - - 735 5,617 15,399 - 1,080 - 1,080 145 130 4,002 360 637 18,603 9,151 1,250 1,413 588 14 (15) (60) (13) (148) 147 1,641 7 (4) - - - 440 5,260 14,411 - 1,193 - 1,193 (1) Total interest income for financial assets that are not at fair value through profit or loss is $36,427 million (2010: $31,422 million, 2009: $30,283 million) for the Group and $32,196 million (2010: $27,138 million) for the Bank. (2) Total interest expense for financial liabilities that are not at fair value through profit or loss is $24,107 million (2010: $19,669 million, 2009: $20,197 million) for the Group and $22,945 million (2010 $18,473 million) for the Bank. (3) Certain comparative information has been restated to conform to presentation in the current period. (4) The net gain on financial assets and liabilities designated at fair value was $102 million (2010: $140 million) for the Group and $77 million (2010: $31 million) for the Bank. (5) Relates to certain economic hedges which do not qualify for IFRS hedge accounting. (6) Non-trading derivatives are held for risk management purposes. (7) The Group result in 2011 includes $10 million loss on disposal of controlled entities, refer to note 46 for further details. 118 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 2 Profit (continued) Staff Expenses Salaries and wages Share-based compensation Superannuation - defined contribution plans Superannuation - defined benefit plan Provisions for employee entitlements Payroll tax Fringe benefits tax Other staff expenses Total staff expenses Occupancy and Equipment Expenses Operating lease rentals Depreciation: Buildings Leasehold improvements Equipment Operating lease assets Repairs and maintenance Other Total occupancy and equipment expenses Information Technology Services Application, maintenance and development Data processing Desktop Communications Amortisation of software assets IT equipment depreciation Total information technology services Other Expenses Postage Stationery Fees and commissions: Fees payable on trust and other fiduciary activities Other Advertising, marketing and loyalty Amortisation of intangible assets (excluding software and merger related amortisation) Non-lending losses Other Total other expenses Total expenses Investment and restructuring Integration expenses Merger related amortisation (1) One-off expenses Total investment and restructuring Total operating expenses Profit before income tax Net hedging ineffectiveness comprises: Gain/(Loss) on fair value hedges: Hedging instruments Hedged items Cash flow hedge ineffectiveness Net hedging ineffectiveness (1) Merger related amortisation relates to Bankwest core deposits and customer lists. 2011 $M 2010 $M 4,081 3,845 156 48 137 88 213 38 110 130 48 103 58 202 40 157 Group 2009 $M 3,405 125 44 14 88 188 36 94 2011 $M Bank 2010 $M 2,761 2,536 96 (33) 137 54 153 30 77 82 (27) 103 39 140 31 106 4,871 4,583 3,994 3,275 3,010 532 35 103 82 42 87 112 993 235 267 120 221 183 78 527 30 98 90 45 84 103 977 209 227 141 199 178 75 1,104 1,029 112 84 537 318 457 15 83 317 1,923 8,891 94 75 - 169 9,060 9,057 (417) 427 (6) 4 115 97 497 367 398 27 103 408 2,012 8,601 40 75 - 115 8,716 8,193 771 (838) 5 (62) 488 29 85 89 37 80 102 910 167 202 141 179 122 62 873 121 100 453 359 475 17 86 391 2,002 7,779 112 37 32 181 7,960 6,449 543 (569) 8 (18) 406 392 27 81 54 19 65 71 723 151 266 114 188 143 63 925 89 62 - 490 320 - 65 149 1,175 6,098 15 - - 15 6,113 8,206 (391) 410 (5) 14 26 75 57 24 67 63 704 135 225 131 160 134 57 842 88 74 - 584 285 - 78 237 1,346 5,902 15 - - 15 5,917 7,301 738 (810) 12 (60) Commonwealth Bank of Australia Annual Report 2011 119 Notes to the Financial Statements Note 3 Income from Ordinary Activities Banking Interest income Fees and commissions Trading income Net gain/(loss) on disposal of available-for-sale investments recognised in Income Statement Net loss on other non-fair valued financial instruments Net hedging ineffectiveness Net (loss)/gain on other fair valued financial instruments: Fair value through Income Statement Reclassification of net interest on swaps (1) Non-trading derivatives Dividends Net loss on sale of property, plant and equipment Other Funds Management, Investment Contract and Insurance Contract Revenue Funds management and investment contract income including premiums Insurance contract premiums and related income Funds management claims and policyholder liability revenue Investment income Total income 2011 $M 37,304 3,413 717 24 (4) 4 (2) (498) (301) 5 (6) 2010 $M 32,215 3,441 597 27 (52) (62) 8 (259) 217 5 (4) 278 40,934 290 36,423 Group 2009 $M 31,519 3,423 741 (12) (9) (18) (66) (275) (187) 14 (11) 314 2011 $M 32,945 2,759 639 24 (11) 14 2 (382) (348) 2,191 (6) 735 Bank 2010 $M 27,754 2,663 588 14 (15) (60) (13) (148) 147 1,648 (4) 440 35,433 38,562 33,014 1,996 1,884 - 1,401 5,281 46,215 1,906 1,794 - 1,662 5,362 41,785 1,618 1,651 731 - 4,000 39,433 - - - - - - - - - - 38,562 33,014 (1) Relates to certain economic hedges which do not qualify for IFRS hedge accounting. 120 Commonwealth Bank of Australia Annual Report 2011 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. 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 25 basis points during the year while rates in New Zealand decreased by 25 basis points. 2011 2010 Group 2009 Average Interest Average Average Interest Average Average Interest Average Balance Rate Balance Rate Balance $M $M % $M $M % $M $M Rate % Interest earning assets Cash and liquid assets Australia Overseas Receivables due from other financial institutions Australia Overseas Assets at fair value through Income Statement - Trading Australia Overseas Assets at fair value through Income Statement - Other Australia Overseas Available-for-sale investments Australia Overseas Loans, bills discounted and other receivables Australia (1) (3) Overseas (3) Intragroup assets Australia Overseas Total interest earning assets and interest income including intragroup 4,583 7,522 6,324 8,113 15,028 5,186 - 1,442 33,362 5,601 194 97 50 42 711 138 - 28 1,776 76 436,988 52,220 30,493 3,151 2,506 - 22 - 578,875 36,778 4. 2 1. 3 0. 8 0. 5 4. 7 2. 7 - 1. 9 5. 3 1. 4 7. 0 6. 0 0. 9 - 6. 4 0. 9 3,674 7,644 7,253 6,645 15,587 5,944 117 1,157 23,360 5,485 146 46 63 78 585 175 12 21 1,166 74 419,667 57,202 25,872 3,470 - 12,343 - 20 566,078 31,728 (12,343) (20) 4. 0 0. 6 0. 9 1. 2 3. 8 2. 9 8,353 6,683 9,205 7,238 17,614 4,378 10. 3 1. 8 799 2,507 10,553 7,831 324 186 227 207 922 231 3 80 628 273 5. 0 1. 3 6. 2 6. 1 - 0. 2 5. 6 0. 2 344,534 61,553 23,098 4,584 - 12,023 - 158 493,271 30,921 (12,023) (158) Intragroup eliminations (2,506) (22) Total interest earning assets and interest income (2) Securitisation home loan assets 576,369 36,756 6. 4 553,735 31,708 5. 7 481,248 30,763 9,705 574 5. 9 10,967 534 4. 9 12,279 742 (1) Excludes amortisation of acquisition related fair value adjustments made to fixed interest financial instruments. (2) Used for calculating net interest margin. (3) Certain comparative information has been restated to conform to presentation in the current period. 3. 9 2. 8 2. 5 2. 9 5. 2 5. 3 0. 4 3. 2 6. 0 3. 5 6. 7 7. 4 - 1. 3 6. 3 1. 3 6. 4 6. 0 Commonwealth Bank of Australia Annual Report 2011 121 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) Non-interest earning assets Bank acceptances Australia Overseas Assets at fair value through Income Statement - Insurance Australia Overseas Property, plant and equipment Australia Overseas Other assets Australia Overseas Provisions for impairment Australia Overseas Total non-interest earning assets Total assets Percentage of total assets applicable to overseas operations (%) 2011 2010 Group 2009 Average Average Average Balance Balance Balance $M $M $M 11,332 12,559 16,983 - - - 13,656 2,069 1,854 181 41,661 8,782 (5,205) (299) 74,031 660,105 13.8 15,512 2,166 1,933 191 42,444 6,152 (4,904) (338) 75,715 640,417 14.4 17,370 2,316 1,744 199 48,487 9,393 (2,492) (299) 93,701 587,228 17.3 122 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) Interest bearing liabilities $M $M % $M $M % $M $M Balance Rate Balance Rate Balance Rate % Average Interest Average Average Interest Average Average Interest Average 2011 2010 Group 2009 Time deposits Australia (1) (2) Overseas (2) Savings deposits Australia (1) (2) Overseas (2) Other demand deposits Australia (1) (2) Overseas (2) Payables due to other financial institutions Australia Overseas Liabilities at fair value through Income Statement Australia (2) Overseas (2) Debt issues Australia Overseas Loan capital Australia Overseas Intragroup borrowings Australia Overseas 185,243 32,708 10,984 1,121 76,644 6,772 82,040 2,462 3,912 10,763 4,526 8,729 2,482 205 2,477 79 136 86 215 375 107,136 5,534 5,316 25 7,130 5,244 - 2,506 382 272 - 22 Interest bearing liabilities and interest expense including intragroup 541,349 24,177 Intragroup eliminations (2,506) (22) Total interest bearing liabilities and interest expense 538,843 24,155 Securitisation debt issues 8,920 517 5. 9 3. 4 3. 2 3. 0 3. 0 3. 2 3. 5 0. 8 4. 8 4. 3 5. 0 0. 5 5. 4 5. 2 - 0. 9 4. 5 0. 9 4. 5 5. 8 168,832 32,455 72,396 7,215 82,867 2,799 5,296 9,448 3,580 12,494 91,223 18,678 9,370 4,685 12,343 - 8,673 1,255 1,797 204 1,953 87 110 54 150 614 4,291 105 367 255 20 - 533,681 19,935 (12,343) (20) 521,338 19,915 9,927 459 5. 1 3. 9 2. 5 2. 8 2. 4 3. 1 2. 1 0. 6 4. 2 4. 9 4. 7 0. 6 3. 9 5. 4 0. 2 - 3. 7 0. 2 3. 8 4. 6 133,580 30,160 69,758 7,117 74,952 3,451 4,974 13,871 3,831 13,595 65,109 20,763 9,455 3,642 12,023 - 8,398 1,625 1,574 342 2,256 160 160 349 159 862 3,624 417 507 202 158 - 466,281 20,793 (12,023) (158) 454,258 20,635 12,042 684 6. 3 5. 4 2. 3 4. 8 3. 0 4. 6 3. 2 2. 5 4. 2 6. 3 5. 6 2. 0 5. 4 5. 5 1. 3 - 4. 5 1. 3 4. 6 5. 7 (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. Non-interest bearing liabilities Deposits not bearing interest Australia Overseas Liabilities on Bank acceptances Australia Overseas Insurance policy liabilities Australia Overseas Other liabilities Australia Overseas Total non-interest bearing liabilities Total liabilities Shareholders' equity Total liabilities and Shareholders' equity Total liabilities applicable to overseas operations (%) 2011 2010 Group 2009 Average Average Average Balance Balance Balance $M $M $M 6,989 1,535 6,638 1,458 5,940 1,438 11,332 12,559 16,983 - - - 13,114 1,361 33,517 8,425 76,273 624,036 36,069 660,105 13.4 14,432 1,548 32,914 6,069 75,618 606,883 33,534 640,417 16.0 16,510 1,766 42,939 6,163 91,739 558,039 29,189 587,228 18.3 Commonwealth Bank of Australia Annual Report 2011 123 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) Avg Bal Interest Yield Avg Bal Interest 2011 Net interest margin Total interest earning assets excluding securitisation Total interest bearing liabilities excluding securitisation Net interest income and interest spread (excluding securitisation) Benefit of free funds Net interest margin $M 576,369 538,843 $M 36,756 24,155 12,601 $M 553,735 521,338 $M 31,708 19,915 11,793 % 6. 38 4. 48 1. 90 0. 29 2. 19 2011 Geographical analysis of key categories Loans, bills discounted and other receivables Australia (1) Overseas (1) Total Other interest earning assets Australia Overseas Total Total interest bearing deposits Australia (1) Overseas (1) Total Other interest bearing liabilities Australia (1) Overseas (1) Total Avg Bal Interest Yield Avg Bal Interest $M $M % $M $M 436,988 52,220 489,208 59,297 27,864 87,161 343,927 41,942 385,869 122,704 30,270 152,974 30,493 3,151 33,644 2,731 381 3,112 15,943 1,405 17,348 6,049 758 6,807 6. 98 6. 03 6. 88 4. 61 1. 37 3. 57 4. 64 3. 35 4. 50 4. 93 2. 50 4. 45 419,667 57,202 476,869 49,991 26,875 76,866 324,095 42,469 366,564 109,469 45,305 154,774 25,872 3,470 29,342 1,972 394 2,366 12,423 1,546 13,969 4,918 1,028 5,946 Group 2010 Yield % 5. 73 3. 82 1. 91 0. 22 2. 13 Group 2010 Yield % 6. 16 6. 07 6. 15 3. 94 1. 47 3. 08 3. 83 3. 64 3. 81 4. 49 2. 27 3. 84 (1) Certain comparative information has been restated to conform to presentation in the current period. Overseas intra-group borrowings have been adjusted into the interest spread and margin calculations to more appropriately reflect the overseas cost of funds. 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. Changes in Net Interest Income: Volume and Rate Analysis The following tables show 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). Change in net interest income Due to changes in average volume of interest earning assets Due to changes in interest margin Change in net interest income June 2011 vs June 2010 $M 488 320 808 Group June 2010 vs June 2009 $M 1,535 130 1,665 124 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) Changes in net interest income: Volume and rate analysis Interest Earning Assets Cash and liquid assets Australia Overseas Receivables due from other financial institutions Australia Overseas Assets at fair value through Income Statement - Trading Australia Overseas Assets at fair value through Income Statement - Other Australia Overseas Available-for-sale investments Australia Overseas Loans, bills discounted and other receivables Australia (1) Overseas (1) Intragroup loans Australia Overseas Changes in interest income including intragroup Intragroup eliminations Changes in interest income Securitisation home loan assets Interest Bearing Liabilities and Loan Capital Time deposits Australia (1) Overseas (1) Savings deposits Australia (1) Overseas (1) Other demand deposits Australia (1) Overseas (1) Payables due to other financial institutions Australia Overseas Liabilities at fair value through Income Statement Australia (1) Overseas (1) Debt issues Australia Overseas Loan capital Australia Overseas Intragroup borrowings Australia Overseas Changes in interest expense including intragroup Intragroup eliminations Changes in interest expense Changes in net interest income Securitisation debt issues June 2011 vs June 2010 June 2010 vs June 2009 Volume Rate Total Volume Rate Total $M $M $M $M $M $M 37 (1) (8) 12 (24) (21) (6) 5 516 2 1,138 (301) 11 (10) 765 (1) 1,370 (69) 908 9 121 (13) (22) (11) (38) 9 42 (173) 769 (67) (104) 30 (10) 11 314 (1) 727 488 (54) 11 52 (5) (48) 150 (16) (6) 2 94 - 3,483 (18) 11 (10) 4,285 (1) 3,678 109 48 51 (13) (36) 126 (37) (12) 7 610 2 4,621 (319) 22 (20) 5,050 (2) 5,048 40 (183) 16 (33) (12) (92) 64 (37) (34) 701 (57) 4,834 (294) - 3 4,323 (3) 4,392 (72) 5 (156) (131) (117) (245) (120) 46 (25) (163) (142) (2,060) (820) - (141) (3,516) 141 (3,447) (136) 1,403 (143) 2,311 (134) 2,014 106 (1,739) (476) 564 14 546 3 64 23 23 (66) 256 (13) 119 (13) (10) 11 3,928 (1) 3,513 320 112 685 1 524 (8) 26 32 65 (239) 1,025 (80) 15 17 (20) 22 4,242 (2) 4,240 808 58 63 4 212 (25) 8 (68) (4) (68) 1,341 (27) (4) 57 3 - 2,762 (3) 2,804 1,535 (109) 160 (142) (515) (48) (58) (227) (5) (180) (674) (285) (136) (4) (141) - (3,620) 141 (3,524) 130 (116) (178) (140) (164) (129) (337) (56) 9 (59) 538 (199) 2,774 (1,114) - (138) 807 138 945 (208) 275 (370) 223 (138) (303) (73) (50) (295) (9) (248) 667 (312) (140) 53 (138) - (858) 138 (720) 1,665 (225) (1) Certain comparative information has been restated to conform to presentation in the current period. Commonwealth Bank of Australia Annual Report 2011 125 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) Geographical analysis of key categories Australia Interest spread (1) Benefit of interest-free liabilities, provisions and equity (2) Net interest margin (3) Overseas Interest spread (1) Benefit of interest-free liabilities, provisions and equity (2) Net interest margin (3) Group Interest spread (1) Benefit of interest-free liabilities, provisions and equity (2) Net interest margin (3) 2011 % 2010 % 1. 95 0. 30 2. 25 1. 50 0. 25 1. 75 1. 90 0. 29 2. 19 2. 04 0. 19 2. 23 1. 09 0. 27 1. 36 1. 91 0. 22 2. 13 Group 2009 % 1. 93 0. 21 2. 14 1. 32 0. 40 1. 72 1. 84 0. 26 2. 10 (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. 126 Commonwealth Bank of Australia Annual Report 2011 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: Profit before Income Tax Prima facie income tax at 30% Effect of amounts which are non-deductible/ (assessable) in calculating taxable income: Taxation offsets and other dividend adjustments Tax adjustment on policyholder income Bankwest - Gain on acquisition Tax losses not previously brought to account Tax losses assumed by the Bank under UIG 1052 Offshore tax rate differential Offshore banking unit Investment allowance Effect of changes in tax rates (1) Income tax under/(over) provided in previous years (2) Other Total income tax expense Corporate tax expense Policyholder tax expense/(benefit) Total income tax expense Income tax expense attributable to profit from ordinary activities Australia Current tax expense Deferred tax expense/(benefit) Total Australia Overseas Current tax expense Deferred tax expense/(benefit) Total overseas Total income tax expense Effective Tax Rate Total – corporate (2) Retail Banking Services – corporate (4) Business and Private Banking – corporate (4) Institutional Banking and Markets – corporate (4) Wealth Management – corporate New Zealand – corporate (1) (2) Bankwest – corporate (3) 2011 $M 9,057 2,717 (7) 116 - (6) - (55) (17) (2) 3 (71) (31) 2,647 2,481 166 2,647 2011 $M 2,246 59 2,305 336 6 342 2010 $M 8,193 2,458 (18) 91 - (4) - (66) (32) (57) (12) 164 (11) 2,513 2,383 130 2,513 2010 $M 1,903 150 2,053 435 25 460 Group 2009 $M 6,449 1,935 (59) (115) 76 - - (55) (56) (28) - 5 (7) 1,696 1,860 (164) 1,696 Group 2009 $M 2,265 (886) 1,379 201 116 317 2011 $M 8,206 2,462 Bank 2010 $M 7,301 2,190 (646) (493) - - (2) (29) (6) (17) - 1 (47) 10 1,726 1,726 - 1,726 2011 $M 1,684 5 1,689 40 (3) 37 - - - (31) (11) (32) (31) - (22) 116 1,686 1,686 - 1,686 Bank 2010 $M 1,363 275 1,638 34 14 48 2,647 2,513 1,696 1,726 1,686 2011 % 27. 9 29. 7 28. 6 23. 7 28. 1 24. 0 34. 7 2010 % 29. 6 30. 1 28. 8 22. 4 28. 0 56. 9 22. 5 Group 2009 % 28. 1 29. 7 28. 1 large 30. 1 23. 8 35. 4 2011 % 21. 0 n/a n/a n/a n/a n/a n/a Bank 2010 % 23. 1 n/a n/a n/a n/a n/a n/a (1) The New Zealand corporate tax rate was reduced from 30% to 28% for tax years starting on or after 1 April 2011. This charge is effective for the Group from 1 July 2011. (2) The year ended 30 June 2010 includes the impact of the tax on New Zealand structured finance transactions of $171 million. (3) Comparative effective tax rates have been adjusted for the allocation of capital charges from the Corporate Centre to Bankwest. (4) Comparative effective tax rates have been adjusted for the impact of business resegmentation. Commonwealth Bank of Australia Annual Report 2011 127 Notes to the Financial Statements Note 5 Income Tax (continued) Deferred tax asset balances comprise temporary differences attributable to: Amounts recognised in the Income Statement: Provision for employee benefits Provisions for impairment on loans, bills discounted and other receivables Other provisions not tax deductible until expense incurred Recognised value of tax losses carried forward Financial instruments Other Total amount recognised in the Income Statement Amounts recognised directly in equity: Foreign currency translation reserve Cash flow hedge reserve Employee compensation reserve Avaliable-for-sale investments reserve Total amount recognised directly in equity Total deferred tax assets (before set off) Set off of tax (1) Net deferred tax assets Deferred tax liability balances comprise temporary differences attributable to: Amounts recognised in the Income Statement: Impact of TOFA adoption Lease financing Defined benefit superannuation plan surplus Intangible assets Financial instruments Other 2011 $M 2010 $M Group 2009 $M 375 1,387 202 1 15 183 2,163 - 224 11 4 239 2,402 (1,102) 1,300 30 370 (93) 134 77 572 364 1,476 193 3 259 291 338 1,336 243 6 424 422 2,586 2,769 3 212 12 3 230 2,816 (1,546) 1,270 - 347 (51) 145 639 371 3 255 3 9 270 3,039 (1,386) 1,653 - 299 (33) 176 567 273 Total amount recognised in the Income Statement Amounts recognised directly in equity: 1,090 1,451 1,282 Revaluation of properties Foreign currency translation reserve Cash flow hedge reserve Defined benefit superannuation plan surplus Avaliable-for-sale investments reserve Total amount recognised directly in equity Total deferred tax liabilities (before set off) Set off of tax (1) Net deferred tax liabilities (Note 22) Deferred tax assets opening balance: Movement in temporary differences during the year: Provisions for employee benefits Provisions for impairment on loans, bills discounted and other receivables Other provisions not tax deductible until expense incurred Recognised value of tax losses carried forward Financial instruments Other Set off of tax (1) Deferred tax assets closing balance Deferred tax liabilities opening balance: Movement in temporary differences during the year: Impact of TOFA adoption Property asset revaluations Lease financing Defined benefit superannuation plan surplus Intangible assets Financial instruments Other Set off of tax (1) Deferred tax liabilities closing balance (Note 22) 70 14 21 116 92 313 73 - 55 135 53 316 1,403 (1,102) 301 1,767 (1,546) 221 1,270 1,653 11 (89) 9 (2) (234) (109) 444 26 140 (50) (3) (214) (122) (160) 1,300 1,270 63 - 36 171 2 272 1,554 (1,386) 168 76 44 813 51 - 529 254 (114) 1,653 221 168 266 30 (3) 23 (61) (11) (543) 201 444 301 - 10 48 (54) (31) 142 98 (160) 221 - 4 12 (323) 152 168 3 (114) 168 2011 $M 322 823 87 1 12 130 1,375 - 216 11 2 229 1,604 (492) 1,112 30 167 (93) - 15 85 204 55 - 6 116 111 288 492 (492) - Bank 2010 $M 313 813 109 3 202 195 1,635 - 186 12 29 227 1,862 (620) 1,242 - 144 (51) - 238 50 381 57 - 7 135 40 239 620 (620) - 1,242 1,628 9 10 (22) (2) (187) (66) 128 1,112 - 30 (2) 23 (61) - (153) 35 128 - 18 (76) (30) (2) (71) 12 (237) 1,242 40 - 6 32 (54) - 203 10 (237) - (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. 128 Commonwealth Bank of Australia Annual Report 2011 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: Deferred tax assets not taken to account Tax losses and other temporary differences on revenue account Tax losses on capital account Total Expiration of deferred tax assets not taken to account At Balance Sheet date carry-forward losses expired as follows: From one to two years From two to four years After four years Losses that do not expire under current tax legislation Total Potential deferred tax assets of the Group arose from: 2011 2010 $M 101 40 141 $M 110 14 124 Group 2009 $M 100 - 100 Group 2011 $M 85 17 102 2011 2010 2009 2011 $M $M $M $M - 18 83 40 141 - 2 108 14 124 - 1 99 - 100 - 2 83 17 102 Bank 2010 $M 99 - 99 Bank 2010 $M - 2 97 - 99 Tax losses and temporary differences in offshore centres. Capital losses arising under the tax consolidation system; and • • 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 for Australian tax purposes. The 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 (2010: $84 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(x). The amount receivable by the Bank under the tax funding agreement was $280 million as at 30 June 2011 (2010: $439 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 allows a closer alignment of the tax and accounting recognition and measurement of financial arrangements and their related flows. Following adoption, deferred tax balances from financial arrangements progressively reverse over a four year period. Commonwealth Bank of Australia Annual Report 2011 129 Notes to the Financial Statements Note 6 Dividends Ordinary Shares Interim ordinary dividend (fully franked) (2011: 132 cents; 2010: 120 cents, 2009: 113 cents) Interim ordinary dividend paid - cash component only Interim ordinary dividend paid - dividend reinvestment plan Total dividend paid Other Equity Instruments Dividend paid Total dividend provided for, reserved or paid Other provision carried Dividend proposed and not recognised as a liability (fully franked) (2011: 188 cents, 2010: 170 cents, 2009: 115 cents) (1) Provision for dividends Opening balance Provision made during the year Provision used during the year Closing balance (Note 23) 2011 $M 2010 $M 1,532 513 2,045 42 2,087 37 2,930 29 4,678 (4,670) 37 1,067 774 1,841 47 1,888 29 2,633 18 3,588 (3,577) 29 Group 2009 $M 1,257 405 1,662 57 1,719 18 1,747 5 3,691 (3,678) 18 2011 $M 1,532 513 2,045 - 2,045 37 2,930 29 4,678 (4,670) 37 Bank 2010 $M 1,067 774 1,841 - 1,841 29 2,633 18 3,588 (3,577) 29 (1) The 2011 final dividend will be satisfied by cash disbursements and the issue of ordinary shares through the Dividend Reinvestment Plan (DRP). The 2010 final dividend was satisfied by cash disbursements of $2,633 million including the on market purchase and transfer of $679 million of shares to participating shareholders under the 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. 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 2011 to frank dividends for subsequent financial years, is $510 million (2010: $446 million). This figure is based on the franking accounts of the Bank at 30 June 2011, 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. 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 2011. Dividend History Half year ended 31 December 2008 30 June 2009 31 December 2009 30 June 2010 31 December 2010 30 June 2011 (3) Cents Per Share Date Paid 113 23/03/2009 115 01/10/2009 120 01/04/2010 170 01/10/2010 132 01/04/2011 188 - Half-year Full Year Payout Ratio (1) % 65.3 82.4 63.7 96.6 67.5 88.2 Payout Ratio (1) % - 73.1 - 79.7 - 78.3 DRP Participation Rate (2) % 24.4 39.4 42.0 25.8 25.1 - DRP Price $ 28.45 44.48 53.56 51.75 52.92 - (1) Dividend Payout Ratio: dividends divided by statutory earnings. (2) DRP Participation Rate: the percentage of total issued share capital participating in the DRP. (3) Dividend expected to be paid on 6 October 2011. 130 Commonwealth Bank of Australia Annual Report 2011 Note 7 Earnings Per Share Earnings per ordinary share Basic Fully diluted Notes to the Financial Statements 2011 2010 Cents per share 411.2 395.1 367.9 354.2 Group 2009 328.5 313.4 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 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). Reconciliation of earnings used in calculation of earnings per share Profit after income tax Less: Other equity instrument dividends Less: Non-controlling interests Earnings used in calculation of basic earnings per share Add: Profit impact of assumed conversions of loan capital Earnings used in calculation of fully diluted earnings per share Weighted average number of ordinary shares used in the calculation of basic earnings per share Effect of dilutive securities - executive share plans and convertible loan capital instruments 2011 $M 6,410 (42) (16) 6,352 235 6,587 2011 M 1,545 123 2010 $M 5,680 (47) (16) 5,617 190 5,807 Group 2009 $M 4,753 (57) (30) 4,666 187 4,853 Number of Shares 2010 M 1,527 113 2009 M 1,420 128 Weighted average number of ordinary shares used in the calculation of fully diluted earnings per share 1,668 1,640 1,548 Note 8 Cash and Liquid Assets Australia Notes, coins and cash at banks Money at short call Securities purchased under agreements to resell Bills received and remittances in transit Total Australia Overseas Notes, coins and cash at banks Money at short call Securities purchased under agreements to resell Bills received and remittances in transit Total overseas Total cash and liquid assets 2011 $M 1,894 - 4,116 183 6,193 3,530 1,105 2,400 13 7,048 13,241 Group 2010 $M 3,090 1 3,141 111 6,343 2,195 1,019 540 22 3,776 10,119 2011 $M 1,604 - 4,117 10 5,731 2,499 967 1,782 - 5,248 10,979 Bank 2010 $M 2,737 - 3,175 74 5,986 1,290 905 530 - 2,725 8,711 Commonwealth Bank of Australia Annual Report 2011 131 Notes to the Financial Statements Note 9 Receivables Due from Other Financial Institutions Australia Placements with and loans to other financial institutions Total Australia Overseas Deposits with regulatory authorities (1) Other placements with and loans to other financial institutions Total overseas Total receivables from other financial institutions (1) Required by law for the Group to operate in certain regions. 2011 $M 5,203 5,203 116 5,074 5,190 10,393 Group 2010 $M 5,355 5,355 44 4,673 4,717 10,072 2011 $M 5,204 5,204 16 4,903 4,919 10,123 Bank 2010 $M 5,337 5,337 3 4,426 4,429 9,766 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 Trading Insurance Other financial assets designated at fair value Total assets at fair value through Income Statement (1) 2011 $M 20,469 14,998 824 36,291 Group 2010 $M 22,851 15,940 654 39,445 2011 $M 17,765 - 300 Bank 2010 $M 18,775 - - 18,065 18,775 (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). Trading Australia Market quoted: Australian public securities Commonwealth and State Government Local and semi-government Bills of exchange Certificates of deposit Medium term notes Equity investments and other securities Non-market quoted: Commercial paper Other securities Total Australia Overseas Market quoted: Government securities Eurobonds Certificates of deposit Floating rate notes Commercial paper Other securities Non-market quoted: Government securities Corporate bonds Floating rate notes Commercial paper Other securities Total overseas Total trading assets 2011 $M 8,160 3,264 521 149 1,955 1,100 - 80 Group 2010 $M 6,078 2,990 579 4,352 1,273 422 321 45 2011 $M 8,160 3,264 521 149 1,955 1,095 - 79 Bank 2010 $M 6,078 2,990 579 4,352 1,273 418 321 44 15,229 16,060 15,223 16,055 2,424 352 1,201 532 127 4 73 406 31 84 6 3,354 247 1,473 339 335 4 66 910 43 12 8 1,475 352 - 532 127 - - - - 50 6 1,792 247 - 339 335 - - - - - 7 5,240 20,469 6,791 22,851 2,542 17,765 2,720 18,775 The above amounts are expected to be recovered within twelve months of the Balance Sheet date. 132 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 10 Assets at Fair Value through Income Statement (continued) Investments Investments Investments Investments Backing Life Backing Life Backing Life Backing Life Risk Investment Risk Investment Contracts Contracts Total Contracts Contracts Insurance Equity Security Investments: Direct Indirect Total equity security investments Debt Security Investments: Direct Indirect Total debt security investments Property Investments: Direct Indirect Total property investments Other Assets Total life insurance investment assets 2011 $M 405 629 1,034 688 2,011 2,699 16 293 309 138 2011 $M 781 3,403 4,184 630 4,496 5,126 88 536 624 884 4,180 10,818 2011 $M 1,186 4,032 5,218 1,318 6,507 7,825 104 829 933 1,022 14,998 2010 $M 315 618 933 824 1,979 2,803 15 366 381 175 2010 $M 660 3,508 4,168 571 5,100 5,671 60 868 928 881 Total 2010 $M 975 4,126 5,101 1,395 7,079 8,474 75 1,234 1,309 1,056 4,292 11,648 15,940 Of the above amounts, $1,876 million is expected to be recovered within twelve months of the Balance Sheet date (2010: $2,102 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(ff) for further details. Other (1) Government securities Fair value structured transactions Receivables due from financial institutions Term loans Total other assets at fair value through Income Statement 2011 $M 300 - 465 59 824 Group 2010 $M - 100 447 107 654 2011 $M 300 - - - 300 Bank 2010 $M - - - - - (1) Designated at Fair Value through Income Statement at inception as they are managed by the Group on a fair value basis or to eliminate an accounting mismatch. Of the above amounts $524 million is expected to be recovered within twelve months of the Balance Sheet date by the Group (2010: $654 million). All amounts are expected to be recovered after twelve months of the Balance Sheet date by the Bank. 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 $1 million for the year (2010: $4 million), and was insignificant for the Bank for the year ending 30 June 2011. 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 $nil (2010: $1 million), and was insignificant for the Bank for the year ending 30 June 2011. These values have been calculated by determining the changes in credit spread implicit in the fair value of the instrument. The maximum exposure to credit risk of loans and receivables designated at Fair Value through Income Statement is equal to the carrying value. Commonwealth Bank of Australia Annual Report 2011 133 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 which meet the criteria for hedge accounting. 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 (dd). 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 $10 million net gain for the Group (2010: $67 million net loss) and $19 million net gain for the Bank (2010: $72 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 $6 million loss for the Group (2010: $5 million gain) and $5 million loss for the Bank (2010: $12 million gain). Amounts accumulated in Other Comprehensive Income in respect of cash flow hedges are recycled to the Income Statement when the forecast transaction occurs. Underlying cash flows from cash flow hedges are expected to occur in the following periods: Exchange Rate Interest Rate Related Contracts Related Contracts 2011 2010 2011 2010 2011 $M (13) (6) (12) (156) (229) (416) $M (43) - - 9 8 (26) $M (13) (92) (189) 191 (43) (146) $M (85) (65) (198) (158) (44) (550) $M (26) (98) (201) 35 (272) (562) Exchange Rate Interest Rate Related Contracts Related Contracts 2011 $M - (6) (12) (154) (238) (410) 2010 $M - - - 9 (1) 8 2011 2010 2011 $M (1) (36) (139) 127 (84) (133) $M (105) (19) (85) (163) (87) (459) $M (1) (42) (151) (27) (322) (543) Group Total 2010 $M (128) (65) (198) (149) (36) (576) Bank Total 2010 $M (105) (19) (85) (154) (88) (451) 6 months 6 months - 1 year 1 - 2 years 2 - 5 years After 5 years Net deferred (losses)/gains 6 months 6 months - 1 year 1 - 2 years 2 - 5 years After 5 years Net deferred (losses)/gains 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. 134 Commonwealth Bank of Australia Annual Report 2011 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: 2011 Group 2010 Face Value Fair Value Fair Value Face Value Fair Value Fair Value Asset Liability Asset Liability Derivative assets and liabilities Held for trading Held for hedging Other derivatives Total derivative assets/(liabilities) $M 2,491,015 379,464 13,841 2,884,320 $M 27,315 2,858 144 30,317 $M $M (25,337) 2,319,176 (8,194) (445) 294,529 29,997 (33,976) 2,643,702 $M 23,091 4,260 338 27,689 2011 $M (20,695) (3,865) (324) (24,884) Group 2010 Derivatives held for trading Exchange rate related contracts: Forward contracts Swaps Futures Options purchased and sold Face Value Fair Value Fair Value Face Value Fair Value Fair Value Asset Liability Asset Liability $M $M $M $M $M $M 898,879 435,868 4,310 33,308 5,178 12,818 1 684 (6,423) 1,076,395 (10,386) 377,637 - (966) 1,282 4,215 5,611 6,882 1 509 (4,471) (6,344) - (513) Total exchange rate related contracts 1,372,365 18,681 (17,775) 1,459,529 13,003 (11,328) Interest rate related contracts: Forward contracts Swaps Futures Options purchased and sold Total interest rate related contracts Credit related contracts: Swaps Total credit related contracts Equity related contracts: Swaps Options purchased and sold Total equity related contracts Commodity related contracts: Swaps Futures Options purchased and sold Total commodity related contracts 67,367 876,728 99,877 58,742 1,102,714 8,176 8,176 274 914 1,188 4,224 1,018 1,330 6,572 7 7,985 2 350 8,344 47 47 - 15 15 200 1 27 228 (6) (7,051) (2) (301) 60,710 709,749 51,394 24,302 (7,360) 846,155 (49) (49) - (55) (55) (74) - (24) (98) 10,317 10,317 83 244 327 1,649 - 1,199 2,848 7 9,377 1 416 9,801 110 110 - 7 7 167 - 3 170 (8) (8,823) (2) (284) (9,117) (99) (99) - (49) (49) (99) - (3) (102) Total derivative assets/(liabilities) held for trading 2,491,015 27,315 (25,337) 2,319,176 23,091 (20,695) Derivative assets and liabilities held for trading are expected to be recovered or due to be settled within twelve months of the Balance Sheet date. Commonwealth Bank of Australia Annual Report 2011 135 Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) Derivatives held for hedging Fair value hedges Exchange rate related contracts: Forward contracts Swaps Total exchange rate related contracts Interest rate related contracts: Swaps Futures Total interest rate related contracts Equity related contracts: Swaps Total equity related contracts Total fair value hedges Cash flow hedges Exchange rate related contracts: Swaps Total exchange rate related contracts Interest rate related contracts: Swaps Total interest rate related contracts Total cash flow hedges Net investment hedges Exchange rate related contracts: Forward contracts Total exchange rate related contracts Total net investment hedges 2011 Group 2010 Face Value Fair Value Fair Value Face Value Fair Value Fair Value Asset Liability Asset Liability $M $M $M $M $M $M 19 36,765 36,784 28,624 1,784 30,408 457 457 1 1,338 1,339 458 - 458 53 53 - (3,874) (3,874) (552) (5) (557) (8) (8) 19 30,493 30,512 33,933 2,600 36,533 635 635 - 2,013 2,013 1,041 - 1,041 32 32 (1) (1,605) (1,606) (456) (21) (477) (32) (32) 67,649 1,850 (4,439) 67,680 3,086 (2,115) 24,986 24,986 286,801 286,801 311,787 28 28 28 116 116 892 892 (2,691) (2,691) 19,267 19,267 (1,060) (1,060) 207,553 207,553 1,008 (3,751) 226,820 - - - (4) (4) (4) 29 29 29 70 70 1,104 1,104 1,174 - - - (180) (180) (1,567) (1,567) (1,747) (3) (3) (3) Total derivative assets/(liabilities) held for hedging 379,464 2,858 (8,194) 294,529 4,260 (3,865) The majority of derivative assets and liabilities held for hedging are expected to be recovered or due to be settled after twelve months of the Balance Sheet date. Other derivatives Exchange rate related contracts: Forward contracts Swaps Total exchange rate related contracts Interest rate related contracts: Forward contracts Swaps Futures Options purchased and sold Total interest rate related contracts Identified embedded derivatives Total other derivatives 2011 Group 2010 Face Value Fair Value Fair Value Face Value Fair Value Fair Value Asset Liability Asset Liability $M $M $M $M $M $M 644 4,559 5,203 77 8,201 - 5 8,283 355 13,841 5 63 68 - 59 - - 59 17 144 (45) (317) (362) - (71) - (5) (76) (7) (445) 5,707 3,337 9,044 4,222 15,195 1,108 6 20,531 422 29,997 84 130 214 - 108 - 1 109 15 338 (63) (74) (137) - (159) (3) (5) (167) (20) (324) The majority of other derivative assets and liabilities are expected to be recovered or due to be settled after twelve months of the Balance Sheet date. 136 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) Derivative assets and liabilities Held for trading Held for hedging Other derivatives Total derivative assets/(liabilities) 2011 Bank 2010 Face Value Fair Value Fair Value Face Value Fair Value Fair Value Asset Liability Asset Liability $M 2,671,461 350,377 442 $M 28,036 2,687 8 $M $M (24,928) 2,499,704 (7,864) (25) 278,367 493 $M 23,300 4,054 9 $M (20,195) (3,456) (38) 3,022,280 30,731 (32,817) 2,778,564 27,363 (23,689) Derivatives held for trading Exchange rate related contracts: Forward contracts Swaps Futures Options purchased and sold Derivatives held with controlled entities Total exchange rate related contracts Interest rate related contracts: Forward contracts Swaps Futures Options purchased and sold Derivatives held with controlled entities 2011 Bank 2010 Face Value Fair Value Fair Value Face Value Fair Value Fair Value Asset Liability Asset Liability $M $M $M $M $M $M 896,291 434,185 4,310 33,257 137,187 1,505,230 66,634 856,631 98,861 58,419 69,672 5,154 12,756 1 684 1,405 20,000 6 7,181 1 349 210 (6,402) 1,073,995 (10,135) 375,656 - (966) (482) 1,282 4,184 169,602 5,596 6,836 1 508 895 (4,448) (6,178) - (512) (389) (17,985) 1,624,719 13,836 (11,527) (6) (6,194) - (298) (244) 60,345 664,946 46,932 24,084 65,030 7 8,472 - 414 284 (8) (7,826) - (283) (301) Total interest rate related contracts 1,150,217 7,747 (6,742) 861,337 9,177 (8,418) Credit related contracts: Swaps Total credit related contracts Equity related contracts: Swaps Options purchased and sold Total equity related contracts Commodity related contracts: Swaps Futures Options purchased and sold Derivatives held with controlled entities Total commodity related contracts Total derivative assets/(liabilities) held for trading 8,121 8,121 274 914 1,188 4,224 1,018 1,324 139 6,705 46 46 - 15 15 200 1 27 - 228 (49) (49) - (55) (55) (74) - (22) (1) (97) 10,317 10,317 83 244 327 1,649 - 1,189 166 3,004 110 110 - 7 7 167 - 3 - 170 (99) (99) - (49) (49) (99) - (3) - (102) 2,671,461 28,036 (24,928) 2,499,704 23,300 (20,195) Derivative assets and liabilities held for trading are expected to be recovered or due to be settled within twelve months of the Balance Sheet date. Commonwealth Bank of Australia Annual Report 2011 137 Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) Derivatives held for hedging Fair value hedges Exchange rate related contracts: Forward contracts Swaps Total exchange rate related contracts Interest rate related contracts: Swaps Futures Derivatives held with controlled entities Total interest rate related contracts Equity related contracts: Swaps Total equity related contracts 2011 Bank 2010 Face Value Fair Value Fair Value Face Value Fair Value Fair Value Asset Liability Asset Liability $M $M $M $M $M $M 19 36,765 36,784 23,378 1,784 280 25,442 457 457 1 1,338 1,339 246 - 71 317 53 53 - (3,874) (3,874) (486) (5) - (491) (8) (8) 19 30,493 30,512 30,061 2,600 667 33,328 635 635 - 2,013 2,013 828 - 93 921 32 32 (1) (1,605) (1,606) (405) (21) - (426) (32) (32) Total fair value hedges 62,683 1,709 (4,373) 64,475 2,966 (2,064) Cash flow hedges Exchange rate related contracts: Swaps Derivatives held with controlled entities Total exchange rate related contracts Interest rate related contracts: Swaps Derivatives held with controlled entities Total interest rate related contracts Total cash flow hedges Total derivative assets/(liabilities) held for hedging 24,327 2,512 26,839 259,864 991 260,855 287,694 105 123 228 739 11 750 978 (2,680) (9) (2,689) (802) - (802) 18,835 2,638 21,473 190,558 1,861 192,419 70 22 92 979 17 996 (3,491) 213,892 1,088 (160) (7) (167) (1,224) (1) (1,225) (1,392) 350,377 2,687 (7,864) 278,367 4,054 (3,456) The majority of derivative assets and liabilities held for hedging are expected to be recovered or due to be settled after twelve months of the Balance Sheet date. Other derivatives Interest rate related contracts: Swaps Options purchased and sold Derivatives held with controlled entities Total interest rate related contracts Identified embedded derivatives Total other derivatives 2011 Bank 2010 Face Value Fair Value Fair Value Face Value Fair Value Fair Value Asset Liability Asset Liability $M $M 94 5 2 101 341 442 1 - 2 3 5 8 $M (13) (5) - (18) (7) (25) $M $M 72 6 6 84 409 493 - 1 4 5 4 9 $M (11) (5) (2) (18) (20) (38) The majority of other derivative assets and liabilities are expected to be recovered or due to be settled after twelve months of the Balance Sheet date. 138 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 12 Available-for-Sale Investments Australia Market quoted: Australian public securities: Local and semi-government Shares and equity investments Certificates of deposit Eurobonds Medium term notes Floating rate notes Other securities Non-market quoted: Australian public securities: Local and semi-government Medium term notes Shares and equity investments Mortgage backed securities (1) Other securities Total Australia Overseas Market quoted: Government securities Shares and equity investments Certificates of deposit Eurobonds Medium term notes Floating rate notes Other securities Non-market quoted: Government securities Corporate bonds Other securities Total overseas Total available-for-sale investments 2011 $M Group 2010 $M 2011 $M Bank 2010 $M 14,768 418 4,640 1,707 10,029 4,535 207 83 132 15 2,139 3 38,676 5,288 23 692 16 1 - 120 19 208 128 12,503 283 2,595 1,843 8,228 1,235 205 84 54 166 1,066 2 28,264 1,259 26 879 2,368 - 85 34 - - - 6,495 45,171 4,651 32,915 13,376 354 4,466 601 10,029 - 4 - 784 5 12,153 222 - - 8,228 - 4 - 872 156 41,318 39,973 - - 70,937 61,608 4,005 - 690 16 1 - - - - 50 4,762 75,699 863 - 875 2,369 - 64 - - - - 4,171 65,779 (1) Included within Mortgage backed securities of the Bank are $37,105 million (2010: $37,105 million) of residential mortgage backed securities held within securitisation vehicles for potential repurchase by the Reserve Bank of Australia. The following amounts are expected to be recovered within twelve months of the Balance Sheet date: for Group $12,499 million (2010: $10,317 million); for Bank $9,132 million (2010: $5,408 million). Revaluation of Available-for-sale investments resulted in a gain of $124 million (2010: $327 million) for the Group and a gain of $264 million (2010: $160 million) 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: $24 million net gain (2010: $22 million), Bank $24 million net gain (2010: $16 million). Proceeds received from settlement at or close to maturity of Available-for-sale investments for the Group were $45,417 million (2010: $44,201 million) and for the Bank were $34,718 million (2010: $26,635 million). Proceeds from sale of Available-for-sale investments for the Group were $4,440 million (2010: $4,107 million) and for the Bank were $3,919 million (2010: $4,095 million). Commonwealth Bank of Australia Annual Report 2011 139 Notes to the Financial Statements Note 12 Available-for-Sale Investments (continued) Australia Australian Public Securities: Local and semi-government Certificates of deposit Eurobonds Medium term notes Floating rate notes Mortgage backed securities Other securities and equity investments Total Australia Overseas Government securities Certificates of deposit Corporate bonds Floating rate notes Other securities and equity investments Total overseas Total available-for-sale investments Group As at 30 June 2011 Gross Gross Amortised Unrealised Unrealised Cost $M Gains $M Losses $M 14,582 4,640 1,695 10,126 4,511 2,148 546 38,248 5,301 692 222 77 181 6,473 44,721 286 - 15 62 55 1 103 522 24 - 2 1 13 40 562 (17) - (3) (27) (29) (10) (8) (94) (18) - - - - (18) (112) Fair Value $M 14,851 4,640 1,707 10,161 4,537 2,139 641 38,676 5,307 692 224 78 194 6,495 45,171 Maturity Distribution and Weighted Average Yield 0 to 3 months 3 to 12 months 1 to 5 years 5 to 10 years 10 or more years Maturing Total $M % $M % $M % $M % $M % $M $M Maturity Period at 30 June 2011 Group Non- Australia Australian Public Securities: Local and semi-government Certificates of deposit Eurobonds Medium term notes Floating rate notes Mortgage backed securities Other securities and equity investments Total Australia Overseas Government securities Certificates of deposit Corporate bonds Floating rate notes Other securities and equity investments Total overseas Total available-for- sale investments 7,294 5.62 6,123 6.05 1,232 6.07 - - - - 205 7.47 - 2,746 120 80 363 - - 5.03 5.33 5.56 5.06 - 199 4.78 202 1,894 248 839 1,181 - - 3,508 - 4,364 5.05 5.09 5.36 5.46 5.44 - - - 2,188 520 0.59 0.30 1,664 172 1.56 0.30 - - - - - - - - - 1,339 9,037 2,993 - - 5.93 5.54 5.35 - 10 0.01 - 224 78 - 6.39 3.95 20,673 - 6,328 968 2.67 487 4.36 - - - - - - - - - - - - - - - 2,139 5.33 - 3,371 - - - - - - 3,371 - - - - - - - - - - - - - - - - - - - 60 4.13 25 0.06 86 0.12 2,768 6,276 - - 1,861 6,225 - - 1,356 22,029 - - 487 6,815 - - - - - - 432 432 - - - - 23 23 14,851 4,640 1,707 10,161 4,537 2,139 641 38,676 5,307 692 224 78 194 6,495 455 45,171 140 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 12 Available-for-Sale Investments (continued) Australia Australian Public Securities: Local and semi-government Certificates of deposit Eurobonds Medium term notes Floating rate notes Mortgage backed securities Other securities and equity investments Total Australia Overseas Government securities Certificates of deposit Eurobonds Floating rate notes Other securities and equity investments Total overseas Total available-for-sale investments Group As at 30 June 2010 Gross Gross Amortised Unrealised Unrealised Cost $M Gains Losses $M $M Fair Value $M 12,363 2,596 1,826 8,261 1,218 1,081 542 27,887 1,258 879 2,355 86 52 4,630 32,517 245 - 17 61 17 4 114 458 1 - 17 - 8 26 484 (21) (1) - (40) - (19) - (81) - - (4) (1) - (5) (86) 12,587 2,595 1,843 8,282 1,235 1,066 656 28,264 1,259 879 2,368 85 60 4,651 32,915 Maturity Distribution and Weighted Average Yield 0 to 3 months 3 to 12 months 1 to 5 years 5 to 10 years 10 or more years Maturing Total $M % $M % $M % $M % $M % $M $M Maturity Period at 30 June 2010 Group Non- Australia Australian Public Securities: Local and semi-government Certificates of deposit Eurobonds Medium term notes Floating rate notes Mortgage backed securities Other securities and equity investments Total Australia Overseas Government securities Certificates of deposit Eurobonds Floating rate notes Other securities and equity investments Total overseas Total available-for- sale investments 6,155 5. 64 4,975 6. 03 1,092 5. 84 4. 55 4. 73 4. 79 5. 47 - - 215 354 952 1,212 275 - 5. 82 4. 94 5. 04 4. 86 3. 95 - - 530 6,389 960 - - 5. 73 5. 27 4. 05 - 150 2,241 361 379 - - 2 3. 27 197 4. 91 8 0. 01 3,133 - 3,205 - 14,042 - 5,277 452 785 136 - - 1,373 4,506 1. 97 0. 40 3. 63 - - - - 683 94 1,762 64 - 2,603 5,808 1. 64 0. 67 0. 41 2. 10 - - - 124 5. 07 - 23 21 36 204 14,246 - 5. 50 1. 16 4. 68 - - - - - - 302 6. 95 - - - - - - - - - - - 447 4. 00 - - 447 5,724 - - - - - - - - - - - - 1,066 5. 21 - 2,158 - - - - - - 2,158 - - - - - - - - - - - - - - - 449 449 - - - - 24 24 12,587 2,595 1,843 8,282 1,235 1,066 656 28,264 1,259 879 2,368 85 60 4,651 473 32,915 Commonwealth Bank of Australia Annual Report 2011 141 Notes to the Financial Statements Note 13 Loans, Bills Discounted and Other Receivables Australia Overdrafts Home loans (1) Credit card outstandings Lease financing Bills discounted (2) Term loans Other lending Other securities Total Australia Overseas Overdrafts Home loans Credit card outstandings Lease financing Term loans Other lending Total overseas Gross loans, bills discounted and other receivables Less Provisions for Loan Impairment (Note 14): Collective provision Individually assessed provisions Unearned income: Term loans Lease financing 2011 $M 21,930 306,250 10,798 4,404 14,820 96,097 1,310 4 Group 2010 $M 19,924 292,140 10,200 4,657 14,379 101,794 1,288 564 2011 $M 20,892 259,685 9,495 2,633 14,820 75,509 777 - Bank 2010 $M 18,767 249,134 8,881 2,194 14,379 77,105 748 562 455,613 444,946 383,811 371,770 629 29,591 572 468 20,468 - 51,728 507,341 (3,022) (2,125) (1,153) (984) (7,284) 652 31,433 589 570 23,052 27 56,323 501,269 (3,436) (1,992) (1,213) (1,169) (7,810) - 374 - 100 8,119 - 8,593 392,404 (1,905) (1,081) (1,088) (442) (4,516) - 392 - 68 9,383 25 9,868 381,638 (1,964) (978) (1,106) (395) (4,443) Net loans, bills discounted and other receivables 500,057 493,459 387,888 377,195 (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 programme after all payments due to investors and costs of the programme 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 $11,296 million (2010: $9,696 million) and for the Bank were $7,691 million (2010: $5,963 million). The carrying value of liabilities associated with non- derecognised assets for the Group were $10,231 million (2010: $8,772 million) and for the Bank were $7,507 million (2010: $6,117 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. The following amounts, based on behavioural terms and current market conditions, are expected to be recovered within twelve months of the Balance Sheet date for Group $180,038 million (2010: $173,459 million) and for Bank $128,375 million (2010: $118,520 million). 142 Commonwealth Bank of Australia Annual Report 2011 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. Finance Leases Minimum lease payments receivable: Not later than one year Later than one year but not later than five years Later than five years Total finance leases 2011 $M 1,389 2,516 967 4,872 Group 2010 $M 1,360 2,803 1,064 5,227 Gross investment in 2011 Present value Gross of minimum investment in 2011 $M 830 1,574 329 2,733 Bank 2010 $M 637 1,357 268 2,262 Group 2010 Present value of minimum finance lease Unearned lease payment finance lease Unearned lease payment receivable income receivable receivable income receivable Not later than one year One year to five years Over five years $M 1,389 2,516 967 4,872 $M (259) (541) (184) (984) $M 1,130 1,975 783 3,888 2011 $M 1,360 2,803 1,064 5,227 $M (298) (688) (183) (1,169) $M 1,062 2,115 881 4,058 Bank 2010 Gross investment in Present value Gross of minimum investment in Present value of minimum finance lease Unearned lease payment finance lease Unearned lease payment receivable income receivable receivable income receivable $M 830 1,574 329 2,733 $M (120) (244) (78) (442) $M 710 1,330 251 2,291 $M 637 1,357 268 2,262 $M (104) (247) (44) (395) $M 533 1,110 224 1,867 Not later than one year One year to five years Over five years Commonwealth Bank of Australia Annual Report 2011 143 Notes to the Financial Statements Note 13 Loans, Bills Discounted and Other Receivables (continued) Maturity Period at 30 June 2011 Group Maturing 1 Maturing Maturing Year Between After or Less 1 & 5 Years 5 Years $M $M $M 2,015 3,009 7,870 6,057 1,547 4,332 3,004 62,815 90,649 2,636 1,944 2,619 7,630 166 540 258 1,261 17,054 107,703 76,178 12,426 88,604 14,471 4,628 19,099 107,703 80 1,087 1,142 17,490 722 10,955 5,134 28,692 65,302 1,470 1,255 1,790 4,283 72 13 659 1,978 11,520 76,822 48,445 8,576 57,021 16,857 2,944 19,801 76,822 Total $M 2,212 5,278 9,986 117 1,182 974 282,703 306,250 608 2,122 190 11,766 299,662 497 1,721 2,579 17,678 84 6 339 250 23,154 322,816 262,556 14,585 277,141 37,106 8,569 45,675 2,877 17,409 8,328 103,273 455,613 4,603 4,920 6,988 29,591 322 559 1,256 3,489 51,728 507,341 387,179 35,587 422,766 68,434 16,141 84,575 322,816 507,341 Industry Australia Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total overseas Gross loans, bills discounted and other receivables Interest rate Australia Overseas Total variable interest rates Australia Overseas Total fixed interest rates Gross loans, bills discounted and other receivables 144 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 13 Loans, Bills Discounted and Other Receivables (continued) Maturity Period at 30 June 2010 Group Industry Australia Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total overseas Gross loans, bills discounted and other receivables Interest rate Australia Overseas Total variable interest rates Australia Overseas Total fixed interest rates Gross loans, bills discounted and other receivables Maturing 1 Year Maturing Between Maturing After or Less 1 & 5 Years 5 Years $M $M $M 96 2,564 6,796 7,522 1,591 3,750 3,057 58,699 84,075 822 2,194 1,997 6,621 226 688 205 3,320 16,073 100,148 68,950 9,121 78,071 15,125 6,952 22,077 100,148 557 1,225 1,635 18,291 1,204 10,161 5,315 35,493 73,881 240 1,444 2,027 4,695 121 127 384 5,049 14,087 87,968 49,268 9,051 58,319 24,613 5,036 29,649 87,968 Total $M 1,571 5,158 9,221 918 1,369 790 266,327 292,140 643 2,068 249 14,626 286,990 151 1,812 2,320 20,117 125 7 179 1,452 26,163 313,153 244,487 10,831 255,318 42,503 15,332 57,835 313,153 3,438 15,979 8,621 108,818 444,946 1,213 5,450 6,344 31,433 472 822 768 9,821 56,323 501,269 362,705 29,003 391,708 82,241 27,320 109,561 501,269 Commonwealth Bank of Australia Annual Report 2011 145 Notes to the Financial Statements Note 14 Provisions for Impairment Provisions for impairment losses Collective provision Opening balance Acquisitions Net collective provision funding Impairment losses written off Impairment losses recovered Fair value and other Closing balance Individually assessed provisions Opening balance Acquisitions Net new and increased individual provisioning Write-back of provisions no longer required Discount unwind to interest income Fair value and other Impairment losses written off Closing balance Total provisions for impairment losses Less: Off balance sheet provisions Total provisions for loan impairment Provision ratios Collective provision as a % of gross loans and acceptances Collective provision as a % of risk weighted assets - Basel II Total provision as a % of credit risk weighted assets - Basel II Individually assessed provisions for impairment as a % of gross impaired assets Total provisions for impairment losses as a % of gross loans and acceptances 2011 $M 2010 $M 3,461 3,225 - 45 (646) 206 (23) 3,043 1,992 - 1,602 (367) (147) 374 (1,329) 2,125 5,168 (21) 5,147 - 901 (734) 77 (8) 3,461 1,729 - 1,862 (384) (169) 293 (1,339) 1,992 5,453 (25) 5,428 2011 2010 % 0. 59 1. 08 2. 09 % 0. 67 1. 19 2. 12 Group 2009 $M 2011 $M Bank 2010 $M 1,466 250 1,176 (472) 73 732 3,225 279 380 1,686 (179) (45) 279 (671) 1,729 4,954 (30) 4,924 Group 2009 % 0. 66 1. 12 1. 92 1,989 2,090 - 305 (529) 176 (15) - 460 (617) 58 (2) 1,926 1,989 978 - 996 (221) (72) 153 (753) 1,081 3,007 (21) 2,986 2011 % 0. 48 n/a (1) n/a (1) 1,020 - 1,003 (270) (86) 161 (850) 978 2,967 (25) 2,942 Bank 2010 % 0. 51 n/a (1) n/a (1) 40. 12 38. 19 41. 07 35. 89 36. 04 1. 00 1. 06 1. 01 0. 75 0. 75 (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. 146 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 14 Provisions for Impairment (continued) Loan impairment expense Net collective provision funding Net new and increased individual provisioning Write-back of individually assessed provisions Total loan impairment expense Available-for-sale debt securities impairment expense Total impairment expense Individually assessed provisions by industry classification Australia Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total overseas Total individually assessed provisions 2011 $M 45 1,602 (367) 1,280 - 1,280 2010 $M 901 1,862 (384) 2,379 - 2,379 Group 2009 $M 1,176 1,686 (179) 2,683 365 3,048 2011 $M 305 996 (221) 1,080 - 1,080 2011 $M 2010 $M 2009 $M 2008 $M - 87 254 202 133 11 37 1,307 2,031 - 11 1 25 - - - 57 94 - 75 254 150 132 21 15 1,268 1,915 - 15 1 12 - - - 49 77 2,125 1,992 - 77 483 82 104 23 31 760 1,560 - 9 68 10 - - - 82 169 1,729 - 4 27 34 1 9 12 161 248 - - 4 7 8 2 2 8 Bank 2010 $M 460 1,003 (270) 1,193 - 1,193 Group 2007 $M - 3 2 23 1 5 13 39 86 - - 1 4 - 1 1 7 31 279 14 100 Commonwealth Bank of Australia Annual Report 2011 147 Notes to the Financial Statements Note 14 Provisions for Impairment (continued) Loans written off by industry classification Australia Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total overseas Gross loans written off Recovery of amounts previously written off Australia Overseas Total amounts recovered Net loans written off Loans recovered by industry classification Australia Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset financing Other commercial and industrial Total overseas Total loans recovered 148 Commonwealth Bank of Australia Annual Report 2011 2011 $M 2010 $M 2009 $M 2008 $M Group 2007 $M - 2 110 36 4 496 58 255 961 - - 86 18 4 14 - 60 - 10 107 84 89 567 26 989 - 10 383 95 72 651 72 604 1,872 1,887 - 17 1 26 1 22 - 36 103 1,975 199 7 206 1,769 - 7 50 25 - 18 - 86 186 2,073 182 1,143 70 7 77 70 3 73 1,996 1,070 - 3 5 23 1 364 49 34 479 - - 4 1 1 13 - 5 24 503 73 4 77 426 - 1 - 20 1 408 49 30 509 - - - - - 7 - 3 10 519 99 4 103 416 2011 $M 2010 $M 2009 $M 2008 $M Group 2007 $M - - 3 43 - 134 2 17 199 - - - - - 7 - - 7 - - - 3 - 59 3 5 70 - - - - - 6 - 1 7 - 1 1 1 - 52 5 10 70 - - - - - 3 - - 3 - - - 1 1 61 5 5 73 - - - - - 3 - 1 4 - 1 1 1 1 77 10 8 99 - - - - - 4 - - 4 206 77 73 77 103 Notes to the Financial Statements Note 15 Property, Plant and Equipment Land At 30 June 2011 valuation At 30 June 2010 valuation Closing balance Buildings At 30 June 2011 valuation At 30 June 2010 valuation Closing balance Total land and buildings Leasehold Improvements At cost Provision for depreciation Closing balance Equipment At cost Provision for depreciation Closing balance Assets Under Lease At cost Provision for depreciation Closing balance Total property, plant and equipment 2011 $M Group 2010 $M 269 - 269 388 - 388 657 1,276 (662) 614 1,385 (1,028) 357 884 (146) 738 2,366 - 275 275 - 429 429 704 1,167 (600) 567 1,380 (990) 390 817 (127) 690 2,351 2011 $M 191 - 191 309 - 309 500 1,019 (518) 501 911 (667) 244 332 (51) 281 Bank 2010 $M - 193 193 - 336 336 529 948 (483) 465 839 (574) 265 297 (50) 247 1,526 1,506 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). Carrying value at cost Land Buildings Total land and buildings at cost 2011 $M 128 325 453 Group 2010 $M 134 332 466 2011 $M 67 253 320 Bank 2010 $M 69 253 322 Commonwealth Bank of Australia Annual Report 2011 149 Notes to the Financial Statements Note 15 Property, Plant and Equipment (continued) Reconciliation of the carrying amounts of Property, Plant and Equipment is set out below: 2011 $M Group 2010 $M 2011 $M Bank 2010 $M 275 (4) (3) 3 (2) 269 429 1 (1) (5) 2 (35) (3) 388 567 138 21 (3) (103) (6) 614 390 161 (30) (160) (4) 357 690 143 - (42) (53) 738 277 (8) (4) 9 1 275 395 45 (24) (5) 47 (30) 1 429 596 78 (8) (2) (98) 1 567 427 147 (19) (165) - 390 777 22 (51) (45) (13) 690 193 (4) (1) 3 - 191 336 1 (1) (4) 4 (27) - 309 465 125 (7) - (81) (1) 501 265 98 (2) (117) - 244 247 53 - (19) - 281 198 (8) (1) 4 - 193 318 34 (24) (3) 37 (26) - 336 485 57 (2) - (75) - 465 271 115 (7) (114) - 265 300 22 (51) (24) - 247 Land Carrying amount at the beginning of the year Transfers to assets held for sale Net disposals / transfers Net revaluations Foreign currency translation adjustment Carrying amount at the end of the year Buildings Carrying amount at the beginning of the year Additions Transfers to assets held for sale Net disposals / transfers Net revaluations Depreciation Foreign currency translation adjustment Carrying amount at the end of the year Leasehold Improvements Carrying amount at the beginning of the year Additions Net disposals / transfers Net revaluations Depreciation Foreign currency translation adjustment Carrying amount at the end of the year Equipment Carrying amount at the beginning of the year Additions Net disposals / transfers Depreciation Foreign currency translation adjustment Carrying amount at the end of the year Assets Under Lease Carrying amount at the beginning of the year Additions Net disposals / transfers Depreciation Foreign currency translation adjustment Carrying amount at the end of the year 150 Commonwealth Bank of Australia Annual Report 2011 Note 16 Intangible Assets Intangible Assets Goodwill Computer software costs Core deposits (1) Management fee rights (2) Brand name (3) Other (4) Total intangible assets Goodwill Purchased goodwill Total goodwill Computer Software Costs Cost Accumulated amortisation Accumulated impairment Total computer software costs Core Deposits (1) Cost Accumulated amortisation Total core deposits Management Fee Rights (2) Cost Total management fee rights Brand Name (3) Cost Total brand name Other (4) Cost Accumulated amortisation Total other Goodwill Opening balance Foreign currency translation adjustments Total goodwill Computer Software Costs Opening balance Additions: From acquisitions From internal development (5) Amortisation Total computer software costs Notes to the Financial Statements 2011 $M 7,399 1,297 317 311 186 93 Group 2010 $M 7,473 950 388 311 186 112 2011 $M 2,522 1,204 - - - - Bank 2010 $M 2,522 860 - - - - 9,603 9,420 3,726 3,382 7,399 7,399 1,895 (598) - 1,297 495 (178) 317 311 311 186 186 203 (110) 93 7,473 (74) 7,399 950 48 482 (183) 1,297 7,473 7,473 1,551 (562) (39) 950 495 (107) 388 311 311 186 186 203 (91) 112 7,473 - 7,473 673 28 427 (178) 950 2,522 2,522 1,563 (359) - 1,204 2,522 2,522 1,241 (342) (39) 860 - - - - - - - - - - 2,522 - 2,522 860 26 461 (143) 1,204 - - - - - - - - - - 2,522 - 2,522 579 3 412 (134) 860 (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 was acquired on 19 December 2008 with a useful life of seven years based on the weighted average attrition rates of the Bankwest deposit portfolio. (2) Management fee rights associated with the Wealth Management CGU 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) Other includes 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 assets have 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. Commonwealth Bank of Australia Annual Report 2011 151 Notes to the Financial Statements Note 16 Intangible Assets (continued) Core Deposits Opening balance Amortisation Total core deposits Other Opening balance Amortisation Total other Goodwill allocation to the following cash generating units: Retail Banking Services (1) Business and Private Banking Wealth Management (2) New Zealand Total 2011 $M 388 (71) 317 112 (19) 93 Group 2010 $M 2011 $M Bank 2010 $M 460 (72) 388 142 (30) 112 - - - - - - 2011 $M 4,149 297 2,287 666 7,399 - - - - - - Group 2010 $M 4,149 297 2,358 669 7,473 (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. 152 Commonwealth Bank of Australia Annual Report 2011 Note 17 Other Assets Accrued interest receivable Defined benefit superannuation plan surplus Accrued fees/reimbursements receivable Securities sold not delivered Intragroup current tax receivable Current tax assets Prepayments Other Total other assets Notes to the Financial Statements Note 42 2011 $M 2,354 76 900 2,063 - 105 344 839 6,681 Group 2010 $M 2,130 316 899 1,682 - 64 356 1,035 6,482 2011 $M 2,395 76 250 1,266 281 - 277 372 Bank 2010 $M 2,109 316 287 863 439 - 285 407 4,917 4,706 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 Available-for-sale investments (1) Land and Buildings Total assets held for sale (2) 2011 $M 29 4 33 Group 2010 $M 40 9 49 2011 $M 29 4 33 Bank 2010 $M 40 9 49 (1) The remaining balance relates to FS Media Works Fund I, LP. (2) Impairments were recognised on Assets held for sale of $10 million during the year ended 30 June 2011 (30 June 2010: $11 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 Australia Certificates of deposit Term deposits On demand and short term deposits Deposits not bearing interest Securities sold under agreements to repurchase Total Australia Overseas Certificates of deposit Term deposits On demand and short term deposits Deposits not bearing interest Securities sold under agreements to repurchase Total overseas Total deposits and other public borrowings 2011 $M 45,544 137,192 169,190 7,630 3,696 Group 2010 $M 40,891 122,712 158,874 7,236 5,440 2011 $M 46,522 113,124 151,317 7,628 3,696 Bank 2010 $M 41,695 97,750 143,402 6,848 5,528 363,252 335,153 322,287 295,223 4,700 22,304 8,866 1,658 367 37,895 401,147 7,849 20,119 9,664 1,558 320 39,510 374,663 4,345 6,020 115 92 105 7,442 4,299 640 5 235 10,677 332,964 12,621 307,844 The majority of the amounts are due to be settled within twelve months of the Balance Sheet date. Commonwealth Bank of Australia Annual Report 2011 153 Notes to the Financial Statements Note 19 Deposits and Other Public Borrowings (continued) Maturity Distribution of Certificates of Deposit and Term Deposits Group At 30 June 2011 Maturing Maturing Maturing Maturing Three Between Between Months or Three & Six & Twelve Less Six Months Months $M $M $M after Twelve Months $M Australia Certificates of deposit (1) Term deposits Total Australia Overseas Certificates of deposit (1) Term deposits Total overseas Total certificates of deposits and term deposits 30,153 77,771 107,924 3,349 13,967 17,316 125,240 5,329 22,190 27,519 1,072 4,001 5,073 32,592 1,423 31,598 33,021 223 2,692 2,915 35,936 (1) All certificates of deposit issued by the Group are for amounts greater than $100,000. Note 20 Payables due to Other Financial Institutions Total $M 45,544 137,192 182,736 4,700 22,304 27,004 8,639 5,633 14,272 56 1,644 1,700 15,972 209,740 Australia Overseas Total payables due to other financial institutions 2011 $M 5,967 9,932 15,899 Group 2010 $M 4,285 8,323 12,608 2011 $M 5,868 9,818 Bank 2010 $M 4,265 8,157 15,686 12,422 The majority of the above amounts are due to be settled within twelve months of the Balance Sheet date. Note 21 Liabilities at Fair Value through Income Statement Deposits and other borrowings (1) Debt instruments (1) Trading liabilities Total liabilities at fair value through Income Statement 2011 $M 3,028 3,232 4,231 10,491 Group 2010 $M 3,551 7,838 3,953 15,342 2011 $M - 469 4,231 4,700 Bank 2010 $M - 660 3,953 4,613 (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 due to be settled within twelve months of the Balance Sheet date for the Group and the Bank. The majority of the other amounts are due 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 $6 million loss (2010: $27 million gain) and for the Bank is a $5 million loss (2010: $29 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 a $16 million gain (2010: $18 million) and for the Bank is a $15 million gain (2010: $15 million). 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 $10,463 million (2010: $15,293 million) and for the Bank is $4,678 million (2010: $4,595 million). 154 Commonwealth Bank of Australia Annual Report 2011 Note 22 Tax Liabilities Australia Current tax liability Total Australia Overseas Current tax liability Deferred tax liability (Note 5) Total overseas Total tax liabilities Note 23 Other Provisions Long service leave Annual leave Other employee entitlements Restructuring costs General insurance claims Self insurance/non-lending losses Dividends Other Total other provisions Notes to the Financial Statements 2011 $M 1,108 1,108 114 301 415 Group 2010 $M 1,004 1,004 52 221 273 2011 $M 1,118 1,118 15 - 15 Bank 2010 $M 1,000 1,000 16 - 16 1,523 1,277 1,133 1,016 Note 6 2011 $M 396 255 65 121 193 49 37 161 1,277 Group 2010 $M 355 241 68 96 191 57 29 160 1,197 2011 Bank 2010 $M 362 209 65 56 - 45 37 183 957 $M 318 200 67 73 - 53 29 194 934 Provisions due to be settled within twelve months of the Balance Sheet date for the Group were $989 million (2010: $908 million) and for the Bank were $685 million (2010: $660 million). Reconciliation Restructuring costs: Opening balance Additional provisions Amounts utilised during the year Release of provision Closing balance General insurance claims: Opening balance Additional provisions Amounts utilised during the year Transfer of provision Closing balance Self insurance/non-lending losses: Opening balance Additional provisions Amounts utilised during the year Release of provision Closing balance Other: Opening balance Additional provisions Acquisitions Amounts utilised during the year Release of provision Closing balance 2011 $M Group 2010 $M 96 61 (36) - 121 191 96 (94) - 193 57 11 (10) (9) 49 160 134 - (120) (13) 161 182 10 (94) (2) 96 185 114 (109) 1 191 56 11 (5) (5) 57 149 176 1 (116) (50) 160 2011 $M 73 6 (23) - 56 - - - - - 53 11 (10) (9) 45 194 48 - (39) (20) 183 Bank 2010 $M 148 1 (75) (1) 73 - - - - - 54 9 (5) (5) 53 112 145 1 (16) (48) 194 Commonwealth Bank of Australia Annual Report 2011 155 Notes to the Financial Statements Note 23 Other Provisions (continued) 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 the Balance Sheet date. General Insurance Claims This provision is to cover future claims on general insurance contracts that have been incurred but not reported. Self Insurance and Non-Lending Losses This provision covers certain non-transferred insurance risk and non-lending losses. The self insurance provision is reassessed annually in consultation with actuarial advice. Note 24 Debt Issues Short term debt issues Long term debt issues Total debt issues Short Term Debt Issues AUD commercial paper USD commercial paper EUR commercial paper GBP commercial paper Other currency commercial paper Long term debt issues with less than one year to maturity Total short term debt issues Long Term Debt Issues USD medium term notes AUD medium term notes NZD medium term notes JPY medium term notes GBP medium term notes EUR medium term notes Other currencies medium term notes Offshore loans (all JPY) Total long term debt issues Maturity Distribution of Debt Issues (1) Less than three months Between three and twelve months Between one and five years Greater than five years Total debt issues (1) Represents the contractual maturity of the underlying instrument. 2011 $M 51,463 67,189 118,652 123 28,937 2,005 4,913 143 15,342 51,463 Group 2010 $M 49,757 80,453 130,210 494 20,423 1,981 4,980 88 21,791 49,757 2011 $M 39,246 55,139 94,385 52 25,925 1,077 882 99 11,211 39,246 Bank 2010 $M 39,644 67,395 107,039 312 19,839 36 139 23 19,295 39,644 31,389 41,074 29,727 38,577 9,507 2,384 8,265 1,707 7,973 5,922 42 67,189 27,721 23,742 48,259 18,930 9,796 1,112 8,808 1,558 11,044 6,971 90 80,453 27,939 21,818 61,741 18,712 118,652 130,210 2,678 542 8,207 1,362 7,009 5,572 42 2,820 320 8,550 1,152 9,077 6,809 90 55,139 67,395 20,993 18,253 38,991 16,148 94,385 19,840 19,804 49,831 17,564 107,039 The Bank’s debt issues include a Euro Medium Term Note programme 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 programme under which it may issue notes up to an aggregate amount outstanding of USD 50 billion. Notes issued under debt programmes 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. 156 Commonwealth Bank of Australia Annual Report 2011 Note 24 Debt Issues (continued) Short term borrowings USD Commercial Paper Outstanding at period end (1) Maximum amount outstanding at any month end (2) Average amount outstanding (2) Weighted average interest rate on: Average amount outstanding Outstanding at period end EUR Commercial Paper Outstanding at period end (1) Maximum amount outstanding at any month end (2) Average amount outstanding (2) Weighted average interest rate on: Average amount outstanding Outstanding at period end AUD Commercial Paper Outstanding at period end (1) Maximum amount outstanding at any month end (2) Average amount outstanding (2) Weighted average interest rate on: Average amount outstanding Outstanding at period end GBP Commercial Paper Outstanding at period end (1) Maximum amount outstanding at any month end (2) Average amount outstanding (2) Weighted average interest rate on: Average amount outstanding Outstanding at period end Other Currency Commercial Paper Outstanding at period end (1) Maximum amount outstanding at any month end (2) Average amount outstanding (2) Weighted average interest rate on: Average amount outstanding Outstanding at period end Notes to the Financial Statements 2011 2010 Group 2009 $M (except where indicated) 28,937 29,023 22,362 20,423 23,319 20,707 20,419 23,428 15,995 0.4% 0.3% 2,005 3,001 1,498 0.8% 1.2% 123 424 178 4.9% 5.6% 4,913 5,588 3,776 0.8% 0.9% 143 247 91 0.3% 0.8% 0.3% 0.5% 1,981 2,930 1,751 0.5% 0.4% 494 658 446 4.0% 4.7% 4,980 5,208 3,110 0.6% 0.7% 88 253 136 0.6% 1.3% 1.6% 0.4% 566 692 536 0.7% 0.6% 258 1,059 395 6.7% 3.2% 609 1,257 907 0.8% 0.7% - - - - - (1) The amount outstanding at period end is measured at amortised cost. (2) The maximum and average amounts over the period are reported on a face value basis because the carrying values of these amounts are not available. Any differences between face value and carrying value would not be material given the short term nature of the borrowings. Exchange rates utilised (End of day, Sydney time) AUD 1.00 = As At As At 30 June 30 June Currency USD EUR GBP JPY NZD 2011 1.0740 0.7410 0.6677 86.3984 1.2944 2010 0.8559 0.6996 0.5686 75.9067 1.2318 Commonwealth Bank of Australia Annual Report 2011 157 Notes to the Financial Statements 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 programmes 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 and other jurisdictions. text of the Guarantee Scheme documents can be The 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. found at Existing guaranteed debt issued by the Bank remains guaranteed until maturity. Separate arrangements apply for accounts with the Bank for deposit balances per depositor totalling up to and including $1 million (until 12 October 2011) under the Financial Claim Scheme (FCS). Such deposits are guaranteed without charge. The Australian Government is in the process of reviewing the FCS, issuing a consultation paper in May 2011 detailing potential changes to the FCS which include lowering the $1 million cap. The operation of the current FCS is expected to be reviewed during the next financial year. 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 sale of 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. Demand deposits are no longer guaranteed by the 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 (Transfers of Business) Act 1999. The NSW Government guarantee of the liabilities and products as described above continues unchanged by the succession. Note 25 Bills Payable and Other Liabilities Bills payable Accrued interest payable Accrued fees and other items payable Defined benefit superannuation plan deficit Securities purchased not delivered Other Total bills payable and other liabilities Note 42 2011 $M 867 3,709 1,807 83 2,600 1,586 Group 2010 $M 805 3,233 1,906 82 1,754 2,245 10,652 10,025 2011 $M 733 2,917 1,172 83 1,813 2,630 9,348 Bank 2010 $M 691 2,452 1,301 82 918 5,289 10,733 Other than the defined benefit superannuation plan deficit, the above amounts are expected to be settled within twelve months of the Balance Sheet date. 158 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Currency Amount (M) Footnotes 2011 $M FRN FRN FRN TPS USD 38 USD 64 USD 100 USD 550 PERLS III AUD 1,166 PERLS IV AUD 1,465 PERLS V AUD 2,000 TPS USD 700 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (13) (13) 35 - 93 512 1,156 1,458 1,978 - 5,232 1,499 1,396 843 224 556 1,343 288 6,149 180 Group 2010 $M 44 75 117 642 1,154 1,456 1,963 - 5,451 1,799 1,819 1,103 262 747 1,422 666 7,818 244 2011 $M 35 - 93 512 1,156 1,458 1,971 647 5,872 1,499 1,396 750 224 270 1,343 288 5,770 166 Bank 2010 $M 44 75 117 642 1,154 1,456 1,953 813 6,254 1,799 1,819 985 262 284 1,422 666 7,237 84 Note 26 Loan Capital Tier One Loan Capital Exchangeable Exchangeable Undated Undated Undated Undated Undated Undated Total Tier One loan capital Tier Two Loan Capital AUD demoninated USD demoninated JPY denominated GBP denominated NZD denominated EUR denominated CAD denominated Total Tier Two loan capital Fair value hedge adjustments Total loan capital (1) USD 300 million undated Floating Rate Notes (FRNs) issued 11 July 1988 exchangeable into dated FRNs. Outstanding notes at 30 June 2011 were undated USD 38 million. (2) USD 400 million undated FRNs issued 22 February 1989 exchangeable into dated FRNs. All of the outstanding notes (USD 64 million) were redeemed in February 2011. (3) USD 100 million undated capital notes issued on 15 October 1986. the above to each of The Bank has entered into agreements with the Commonwealth of Australia relating issues (the “Agreements”) which provide that, if certain events occur, the Bank may issue either fully paid ordinary shares to the Commonwealth of Australia or (with the consent of the Commonwealth of Australia) a renounceable rights issue for fully paid ordinary shares to all shareholders, at the prevailing market price for the Bank’s shares, up to an amount equal to the outstanding principal value of the relevant note issue or issues plus any accrued interest which is declared due and payable. The capital so raised must be used to pay the amounts due and payable. 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 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); or The Bank does not declare a dividend in respect of its ordinary shares 11,561 13,513 11,808 13,575 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. (4) TPS 2003 On 6 August 2003 a wholly owned entity of the Bank (CBA Capital Trust) issued USD 550 million of perpetual trust preferred securities which can be redeemed after the first 12 years. The securities were issued into the US capital markets and are subject to Delaware and New York law. Each trust preferred security represents a beneficial ownership interest in the assets of CBA Capital Trust, a statutory trust established under Delaware law. 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 convertible notes from the Bank’s New Zealand branch. the The trust preferred securities provide for a semi-annual cash distribution in arrears at the annual rate of 5.805%. The distributions on 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. Commonwealth Bank of Australia Annual Report 2011 159 Notes to the Financial Statements Note 26 Loan Capital (continued) 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 the trust preferred securities for American Depository Shares (ADS). Automatic conversion into CBA preference shares will also occur on the occurrence of certain other events, including a number of events specified by APRA. No later than 35 business days prior 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 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. The Bank’s New Zealand branch may redeem the convertible notes for cash: (a) 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 (b) 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: • 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; the 160 Commonwealth Bank of Australia Annual Report 2011 • • • • • • • • 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 ADS to CBA Capital Trust by CBA Funding Trust if CBA Funding Trust is obligated to redeem the funding preferred securities for ADS and to the extent that CBA Funding Trust has ADS available for that redemption; The delivery of ADS by CBA Capital Trust if CBA Capital Trust is obligated to redeem the trust preferred securities for ADS and to the extent that CBA Capital Trust has ADS 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; The Bank’s New Zealand branch does not deliver ADS 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. PERLS III were issued into the Australian capital markets and are subject to Australian law. They qualify as innovative residual Tier One capital of the Bank. Note 26 Loan Capital (continued) 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 (1 – 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: 10 Business Days before the Conversion Date. • On a failure by PCL to pay a Dividend; • At any time at the Bank’s discretion; or • 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: A Change of Control Event occurs. An APRA Event occurs; A Default Event occurs; or • • • 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. PERLS IV were issued into the Australian capital markets and are subject to Australian law. They qualify as non-innovative residual Tier One capital of the Bank. Notes to the Financial Statements 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; 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: Non-Operating Holding Company (NOHC) Event. Tax Event; Regulatory Event; and • • • 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. Commonwealth Bank of Australia Annual Report 2011 161 Notes to the Financial Statements Note 26 Loan Capital (continued) 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. PERLS V were issued into the Australian capital markets and are subject to Australian law. They 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. 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; 162 Commonwealth Bank of Australia Annual Report 2011 • • 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 possible outcomes will apply to each subsequent 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: Non-Operating Holding Company (NOHC) Event. Tax Event; Regulatory Event; and • • • 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. • (8) TPS 2006 On 15 March 2006 a wholly owned entity of the Bank (CBA Capital Trust II) issued USD 700 million ($942 million) of perpetual trust preferred securities which can be redeemed after the first 10 years. The securities were issued into the US capital markets and are subject to Delaware and New York law. Each trust preferred security represents a preferred beneficial ownership interest in the assets of CBA Capital Trust II, a statutory trust established under Delaware law. The sole assets of the CBA Capital Trust II are USD subordinated notes issued by a New Zealand subsidiary of the Bank, preference shares issued by the Bank, and a limited guarantee by the Bank’s New Zealand branch. Each subordinated note held by CBA Capital Trust II forms a unit with a Bank preference share held by CBA Capital Trust II. The trust preferred securities form part of the Bank’s innovative residual Tier One capital. The Bank’s New Zealand subsidiary applied the proceeds of its subordinated note issue to CBA Capital Trust II to purchase USD notes from the Bank’s New Zealand branch. Cash distributions on the trust preferred securities are at the fixed rate of 6.024% are payable semi-annually to 15 March 2016. After that date, cash distributions on the trust preferred securities will accrue at the rate of LIBOR plus 1.740% per annum payable quarterly in arrears. Note 26 Loan Capital (continued) Cash distributions on the trust preferred securities will be limited to the interest the Bank’s New Zealand subsidiary pays on the subordinated notes, payments in respect of interest on the subordinated notes by the Bank’s New Zealand 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 the 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, the Bank’s New Zealand branch’s ability to make payments on the Bank’s New Zealand 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. • 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 New Zealand branch or the Bank if the Bank’s New Zealand branch does not perform its obligations under the subordinated notes guarantee or under the Bank’s New Zealand branch notes. Notes to the Financial Statements 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. trust guarantee does not cover The to pay distributions or make other payments or distributions on the trust preferred securities to the extent that CBA Capital Trust II does not have sufficient funds available to pay distributions or make other payments or deliveries on the trust preferred securities. failure the Upon the occurrence of an Assignment Event, with respect to the subordinated notes comprising a part of the units CBA Capital Trust II holds to which such Assignment Event applies: • • The subordinated notes will detach from the 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 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 15 March 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. Commonwealth Bank of Australia Annual Report 2011 163 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 New Zealand branch notes or the Bank preference shares for payment of interest, dividends or similar amounts unless and until: • • • • to 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 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 New Zealand subsidiary or the Bank’s New Zealand branch, as guarantor, has paid in full to the holders of the subordinated notes any interest and other amounts owing in respect of that interest payment date (excluding defaulted note interest) through the date of actual payment in full or (ii) with the prior approval of APRA, 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; then there are restrictions on the Bank paying any interest on equal ranking or junior securities. Notes to the Financial Statements Note 26 Loan Capital (continued) 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 the Bank’s New Zealand subsidiary or the Bank’s New Zealand 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. 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 New Zealand subsidiary may not make payments on the subordinated notes, the Bank’s New Zealand branch may not make payments on the subordinated notes guarantee or the Bank’s New Zealand 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 New Zealand subsidiary, the Bank’s New Zealand branch or the Bank, as the case may be, is prohibited from making such a payment by instruments or other obligations of the Bank. 164 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 26 Loan Capital (continued) (9) AUD denominated Tier Two Loan Capital issuances (13) Other currencies Tier Two Loan Capital issuances • $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 provides that, if certain events occur, the Bank may issue either fully paid ordinary shares to the Commonwealth of Australia or (with the consent of the Commonwealth of Australia) a renounceable rights issue for fully paid ordinary shares to all shareholders, at the prevailing market price for the Bank’s shares, up to an amount equal to the outstanding principal value of the note issue plus any accrued interest declared due and payable. The capital so raised must be used to pay the amounts due and payable. Events that will trigger the issue of shares include a failure to pay interest due within 7 business days of the due date. Other outstanding notes at 30 June 2011 were: • • • • $25 million subordinated FRN, issued April 1999, due April 2029; $200 million subordinated floating rate notes, issued September 2006, due September 2016; $500 million subordinated notes, issued May 2007, due May 2017; split into $150 million fixed rate notes and $350 million floating rate notes; and $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 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 notes, issued November 2005, due November 2035; 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. • • • EUR 1,000 million subordinated notes, issued August 2009, due August 2019; CAD 300 million subordinated notes, issued October 2007, due October 2017; NZD 350 million subordinated notes, issued May 2005, due April 2015. • On 18 May 2005 a wholly owned entity of the Bank (CBA issued NZD 350 million Capital Australia Limited) redeemable preference shares. Each redeemable preference share is a fixed term obligation of CBA Capital Australia Limited paying quarterly cumulative dividends until maturity. The redeemable preference shares: • • • are not guaranteed by the Bank; were issued into the New Zealand capital markets; are subject to New Zealand and New South Wales law; and form part of the Bank’s Lower Tier Two capital. • • • • CBA Capital Australia applied all of the proceeds from the sale of the redeemable preference shares to invest in redeemable preference shares issued by CBA Capital Australia (No 2) Pty Ltd, which in turn invested the proceeds in NZD subordinated notes issued by the Bank’s New Zealand branch. The Dividend Rate is calculated for each Dividend Period as the sum of the Margin per annum plus the Market Rate per annum multiplied by (1 – Tax Rate). The Margin is 0.75% per annum. The Market Rate is the New Zealand 1 year swap rate. CBA Capital Australia’s ability to pay dividends is ultimately dependent upon the ability of the Bank’s New Zealand branch to make payments on the NZD subordinated notes, and subject to the directors discretion not to pay or to defer the payment. The redeemable preference shares are to be redeemed or repurchased by CBA Capital Australia on 15 April 2015. Subject to APRA approval and the requisite notice, CBA Capital Australia is also entitled to redeem or repurchase the redeemable preference shares earlier on each 15 April until maturity, or if a regulatory or tax event occurs. • NZD 370 million subordinated notes, issued November 2007, due November 2017. Commonwealth Bank of Australia Annual Report 2011 165 Notes to the Financial Statements Note 27 Shareholders’ Equity Ordinary Share Capital (1) Opening balance Dividend reinvestment plan (net of issue costs) (3) Exercise of executive options under employee share ownership schemes Sale/(purchase) and vesting of treasury shares(2) Closing balance Other Equity Instruments (1) Opening balance Closing balance Retained Profits Opening balance Actuarial losses from defined benefit superannuation plans Realised gains and dividend income on treasury shares (1) Operating profit attributable to Equity holders of the Bank Total available for appropriation Transfers from/(to) general reserve Transfers from employee compensation reserve Interim dividend - cash component Interim dividend - dividend reinvestment plan (3) Final dividend - cash component Final dividend - dividend reinvestment plan (4) Other dividends Closing balance (1) Refer Note 28. 2011 $M 23,081 511 6 4 Group 2010 $M 21,642 1,457 2 (20) 2011 $M 23,379 511 6 - Bank 2010 $M 21,825 1,457 2 95 23,602 23,081 23,896 23,379 939 939 939 939 1,895 1,895 1,895 1,895 9,938 7,825 7,880 6,009 (89) 20 (64) 30 (89) - (64) - 6,394 5,664 6,480 5,615 16,263 13,455 14,271 11,560 270 - (1,532) (513) (2,633) - (29) 11,826 197 (93) (1,067) (774) (1,058) (688) (34) 9,938 - - (1,532) (513) (2,633) - - 9,593 - (93) (1,067) (774) (1,058) (688) - 7,880 (2) Relates to movement in treasury shares held within life insurance statutory funds and the employee share scheme trust. (3) The declared dividend includes an amount attributable to the DRP of $513 million (Interim 2010/2011), with $511 million issued in ordinary shares due to rounding under the plan rules. The rounding amount will be included in the next DRP allocations. (4) The DRP in respect of the 2010 final dividend was satisfied in full by an on market purchase and transfer of shares to participating shareholders. 166 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 27 Shareholders’ Equity (continued) Reserves General Reserve Opening balance Appropriation (to)/from retained profits Closing balance Capital Reserve Opening balance Revaluation surplus on sale of property Closing balance Asset Revaluation Reserve Opening balance Revaluation of properties Transfers on sale of properties Tax on revaluation of properties Closing balance Foreign Currency Translation Reserve Opening balance Currency translation adjustments of foreign operations Currency translation on net investment hedge Transfer to Income Statement on disposal of foreign operations Tax on translation adjustments Tax on net investment hedge movement Closing balance Cash Flow Hedge Reserve Opening balance Gains and losses on cash flow hedging instruments: Recognised in equity Transferred to Income Statement Interest income Interest expense Tax on cash flow hedging instruments Closing balance Employee Compensation Reserve Opening balance Current period movement Closing balance Available-for-Sale Investments Reserve Opening balance Net gains and losses on revaluation of available-for-sale investments Net gains and losses on available-for-sale investments transferred to Income Statement on disposal Net gains and losses on available-for-sale investments transferred to Income Statement for impairment Tax on available-for-sale investments Closing balance Total reserves Shareholders' equity attributable to Equity holders of the Bank Shareholders' equity attributable to non-controlling interests Total shareholders' equity 2011 $M 1,248 (270) 978 319 9 328 194 6 (9) - 191 (553) (559) 13 - 16 - (1,083) (417) (754) (41) 810 - (402) 125 10 135 173 124 (24) - (28) 245 392 36,759 528 37,287 Group 2010 $M 1,445 (197) 1,248 299 20 319 173 50 (20) (9) 194 (533) (41) (4) 26 (2) 1 (553) (813) (239) (864) 1,692 (193) (417) - 125 125 (55) 327 (24) 2 (77) 173 1,089 35,047 523 35,570 2011 $M 570 - 570 1,567 9 1,576 163 9 (9) - 163 (136) (216) 12 - 10 - (330) (312) (748) 24 626 23 (387) 125 10 135 70 264 (24) - (73) 237 Bank 2010 $M 570 - 570 1,550 17 1,567 148 39 (17) (7) 163 (70) (63) (4) - - 1 (136) (460) 11 (683) 891 (71) (312) - 125 125 (41) 160 (16) - (33) 70 1,964 2,047 37,348 35,201 - - 37,348 35,201 Commonwealth Bank of Australia Annual Report 2011 167 Notes to the Financial Statements Note 28 Share Capital Issued and paid up ordinary capital Ordinary Share Capital Opening balance (excluding Treasury Shares deduction) Dividend reinvestment plan: Final dividend prior year (1) Dividend reinvestment plan: Interim dividend (2) Exercise of executive options under employee share ownership Closing balance (excluding Treasury Shares deduction) Less: Treasury Shares (3) Closing balance 2011 $M Group 2010 $M 2011 $M Bank 2010 $M 23,379 21,920 23,379 21,920 - 511 6 23,896 (294) 23,602 685 772 2 23,379 (298) 23,081 - 511 6 23,896 - 23,896 685 772 2 23,379 - 23,379 (1) The DRP in respect of the 2010 final dividend was satisfied in full by an on market purchase and transfer of shares to participating shareholders. (2) The declared dividend includes an amount attributable to the DRP of $513 million (interim 2010/2011), with $511 million issued in ordinary shares due to rounding under the plan rules. The rounding amounts will be included in the next DRP allocations. (3) Relates to treasury shares held within life insurance statutory funds and the employee share scheme trust. Number of shares on issue 2011 Shares Group 2010 Shares 2011 Shares Bank 2010 Shares Opening balance (excluding Treasury Shares deduction) 1,548,737,374 1,518,801,069 1,548,737,374 1,518,801,069 Dividend reinvestment plan issues: 2008/2009 Final dividend fully paid ordinary shares $44.48 2009/2010 Interim dividend fully paid ordinary shares $53.56 2009/2010 Final dividend fully paid ordinary shares $51.75 (1) 2010/2011 Interim dividend fully paid ordinary shares $52.92 Exercise of executive options under employee share ownership schemes Closing balance (excluding Treasury Shares deduction) Less: Treasury Shares Closing balance - - - 9,682,670 15,412,513 14,421,452 - - - - - 9,682,670 15,412,513 14,421,452 - - 217,200 102,340 217,200 102,340 1,558,637,244 1,548,737,374 1,558,637,244 1,548,737,374 (6,363,549) (6,647,087) - - 1,552,273,695 1,542,090,287 1,558,637,244 1,548,737,374 (1) The DRP in respect of the 2010 final dividend was satisfied in full by an on market purchase and transfer of shares to participating shareholders. 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. Other equity instruments Issued and paid up Number of shares Trust Preferred Securities 2006 2011 $M 939 Shares 700,000 Group 2010 $M 939 Shares 700,000 2011 $M 1,895 Bank 2010 $M 1,895 Shares 1,400,000 Shares 1,400,000 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 2011 Notes to the Financial Statements Note 28 Share Capital (continued) Dividends The Directors have declared a fully franked final dividend of 188 cents per share amounting to $2,930 million. The dividend will be payable on 6 October 2011 to shareholders on the register at 5pm EST on 19 August 2011. The Board determines the dividends 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 to support business development; Competitors comparison and market expectation; and Earnings per share growth. Dividends paid since the end of the previous financial year • • A fully franked final dividend of 170 cent per share amounting to $2,633 million was paid on 1 October 2010. This was satisfied by cash disbursements of $2,633 million including the on market purchase and transfer of $679 million of shares to participating shareholders under the DRP; and A fully franked interim dividend of 132 cents per share amounting to $2,045 million was paid on 1 April 2011. The payment comprised cash disbursements of $1,532 million with $513 million being reinvested by participants through the DRP. Dividend Reinvestment Plan The Bank expects to issue around $733 million of shares in respect of the DRP for the final dividend for the year ended 30 June 2011. Record date The register closes for determination of dividend entitlement and for participation in the DRP at 5pm EST on 19 August 2011 at Link Market Services Limited, Locked Bag A14, Sydney South, 1235. Ex-dividend Date The ex-dividend date is 15 August 2011. Note 29 Share Based Payments The Group operates a number of cash and equity settled share plans as detailed below. Overview of changes for 2011 The Group introduced two new plans during the year: • The Employee Share Plan (ESP), used for the mandatory deferral of a portion of senior employees’ short term incentives (STI), sign-on incentive and retention awards; and The Employee Salary Sacrifice Share Plan (ESSSP), used for voluntary employee equity participation. • These replaced similar previous plans which have been closed to new offers and grandfathered. Awards were made for the first time under the ESP and ESSSP during the 2011 financial year. Employee Share Acquisition Plan Under the Employee Share Acquisition Plan (ESAP), eligible employees have the opportunity to receive up to $1,000 worth of shares each year (at no cost to them) if the Group meets the required performance hurdles. To be eligible for an award each employee must achieve a minimum level of performance and service. The value of the shares an individual receives is determined by the Group’s performance against a hurdle. The performance hurdle is growth in annual profit of the greater of 5% or the consumer price index (CPI) change plus 2%, and is subject to Board discretion. The number of shares a participant receives is calculated by dividing the award amount by the average price paid for Bank shares purchased during the purchase period preceding the grant date. Shares granted are restricted from sale until the earlier of three years or until such time as the participant ceases employment with the Group. Participants receive full dividend entitlements and voting rights attached to those shares. The Group achieved the performance target for 2010 resulting in $1,000 worth of shares being awarded to each eligible employee. The September 2009 award represents a partial grant of approximately $600 worth of shares to each employee. The following table provides details of shares granted under the ESAP during the current and previous financial years ended 30 June. Period Allocation date Participants allocated by participant of shares allocated Issue price $ fair value $ 2011 2010 21 Sep 2010 11 Sep 2009 26,023 24,559 19 13 494,437 319,267 51.75 46.79 25,587,115 14,938,502 Number of shares Total number Total It is estimated that approximately $26.0 million of ordinary shares will be purchased on-market at the prevailing market price for the 2011 grant. Commonwealth Bank of Australia Annual Report 2011 169 Notes to the Financial Statements Note 29 Share Based Payments (continued) International Employee Share Acquisition Plan A limited number of employees receive cash-based versions of ESAP under the International Employee Share Acquisition Plan (IESAP). Like the ESAP, eligible employees can receive an award up to $1,000 determined by the Group’s performance against a hurdle. The performance hurdle is growth in annual profit of the greater of 5% or the CPI change plus 2%, and is subject to Board discretion. To be eligible for an award each employee must achieve a minimum level of performance and service. Under IESAP participants receive grants of performance units, which are monetary units with a value linked to the Bank’s share price. IESAP performance units vest if the participant remains employed by the Group until the vesting date. On meeting the vesting conditions, a cash payment is made to the participant, the value of which is determined based on the Bank’s share price upon vesting. A total of $0.1 million has been expensed during the year (2010: $0.1 million) in respect of this plan Employee Share Plan The Employee Share Plan (ESP) replaced the Equity Participation Plan (EPP) for awards made from 1 July 2010 and facilitates mandatory short term incentive (STI) deferral, sign-on incentives and retention awards. Under the ESP, shares awarded generally vest if the participant remains 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. ESP 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. The following table provides details of outstanding awards of shares under the ESP. Period 2011 Outstanding 1 July - Granted 803,400 Vested (17,679) Forfeited (13,453) Outstanding 30 June 772,268 The weighted average fair value at grant date of shares awarded during the year was $52.64 (2010: $nil). A total of $16.2 million has been expensed during the year (2010: $nil) in respect of this plan. Employee Share (Performance Unit) Plan A limited number of employees receive awards under a cash-based version of ESP through the Employee Share (Performance Unit) Plan (ESPUP). The ESPUP replaced the Equity Participation (Performance Unit) Plan for awards made from 1 July 2010 and facilitates mandatory STI deferral, sign-on incentives and retention awards. Under ESPUP participants receive grants of performance units, which are monetary units with a value linked to the Bank’s share price. Performance units vest if the participant remains employed by the Group until the vesting date. On meeting the vesting conditions, a cash payment is made to the participant, the value of which is determined based on the Bank’s share price upon vesting plus an accrued dividend value. The following table provides details of outstanding awards of performance units granted under the ESPUP. Period 2011 Outstanding 1 July - Granted 101,548 Vested (4,116) Forfeited (1,789) Outstanding 30 June 95,643 The weighted average fair value at grant date of performance units issued during the year was $51.72 (2010: $nil). A total of $1.0 million has been expensed during the year (2010: $nil) in respect of this plan. Group Employee Rights Plan The Group Employee Rights Plan (GERP) facilitates the mandatory deferral of STI payments for executives of selected subsidiary companies. Under the GERP, participants receive a right to a share which is subject to vesting conditions. The following table provides details of rights granted under GERP during the current and previous financial years ended 30 June. Allocation period July 2009 - June 2010 July 2010 - June 2011 2011 2010 Outstanding 1 July 11,542 - 11,542 - Granted - 21,946 21,946 12,112 Vested (1,521) (878) (2,399) (570) Forfeited - - - - Outstanding 30 June 10,021 21,068 31,089 11,542 The weighted average fair value at grant date of rights issued during the year was $52.62 (2010: $52.38). A total of $0.6 million has been expensed during the year (2010: $0.2 million) in respect of this plan. 170 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 29 Share Based Payments (continued) Employee Salary Sacrifice Share Plan Under the Employee Salary Sacrifice Share Plan (ESSSP) Australian-based employees can elect to receive between $2,000 and $5,000 of their fixed remuneration and/or annual STI as Bank shares. The ESSSP replaced the voluntary component of the Equity Participation Plan (EPP) from 1 July 2010. Shares are purchased on-market at the current market price and are restricted from sale for a minimum of two years and a maximum of seven years or earlier, if the employee ceases employment with the Group. Shares receive full dividend entitlements and voting rights. The following table provides details of shares granted under the ESSSP. Period 2011 Participants Number of shares purchased Average share price $ Total purchase consideration $ 132 8,114 51.98 421,766 Equity Participation Plan The Equity Participation Plan (EPP), which comprised a voluntary and a mandatory component, was replaced in 2010 by two new plans, the Employee Share Plan and Employee Salary Sacrifice Share Plan. The EPP is now closed to new offers. The voluntary component allowed for the voluntary sacrifice of both fixed remuneration and annual STI. Under this plan shares were purchased on-market at the current market price and restricted for sale for two years or until such time as the employee ceases employment with the Group. No new awards were made under the voluntary component of the EPP in 2011. The following table provides details of shares granted under the voluntary component of the EPP in the prior year. Period 2010 Participants Number of shares purchased Average share price $ Total purchase consideration $ 93 8,267 49.49 409,134 The mandatory component comprises the partial deferral of executives STI payments, together with sign-on and retention awards. Under the mandatory component, shares only vest to participants if they remain in employment of the Group until the vesting date. The Group purchased 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. The following table provides details of outstanding awards of shares under the mandatory component of EPP. Allocation period July 2001- June 2002 July 2002- June 2003 July 2003- June 2004 July 2004- June 2005 (1) July 2007- June 2008 July 2008- June 2009 July 2009- June 2010 Total 2011 Total 2010 Outstanding 1 July 30,471 37,659 46,388 41,745 417,368 756,440 799,541 2,129,612 1,621,283 Granted - - - - - - - - 842,885 Vested & Released (4,797) (10,658) (11,036) (11,831) (383,568) (143,610) (73,714) (639,214) (246,859) Outstanding Forfeited 30 June - - - - (421) (14,961) (28,710) (44,092) (87,697) 25,674 27,001 35,352 29,914 33,379 597,869 697,117 1,446,306 2,129,612 (1) No awards were allocated from July 2005 to June 2007 The weighted average fair value at grant date of shares awarded during 2010 was $52.63. A total of $23.6 million has been expensed during the year (2010: $35.7 million). Commonwealth Bank of Australia Annual Report 2011 171 Notes to the Financial Statements Note 29 Share Based Payments (continued) Equity Participation (Performance Unit) Plan A limited number of employees received cash-based versions of EPP through the Equity Participation (Performance Unit) Plan (EPPUP). The EPPUP was replaced by the ESPUP in 2010. The EPPUP is now closed to new offers. Under the EPPUP, participants received grants of performance units, which are monetary units with a value linked to the Bank’s share price. The EPPUP performance units vest if the participant remains employed by the Group until the vesting date. On meeting the vesting conditions, a cash payment is made to the participant, the value of which is determined based on the Bank’s share price upon vesting plus an accrued dividend value. The following table provides details of outstanding awards of performance units under the EPPUP: Allocation period July 2007- June 2008 July 2008- June 2009 July 2009 - June 2010 Total 2011 Total 2010 Outstanding 1 July 20,684 28,191 56,875 105,750 52,127 Granted - - - - 57,276 Vested (19,249) (8,530) (10,782) (38,561) (3,653) Outstanding Forfeited 30 June (1,435) (4,071) (2,710) (8,216) - - 15,590 43,383 58,973 105,750 The average fair value at grant date of performance units issued during 2010 was $52.38. A total of $1.2 million (2010: $1.5 million) has been expensed during the year. Group Leadership Reward Plan The Group Leadership Reward Plan (GLRP) is the Group’s long term incentive plan for the CEO and Group Executives. The GLRP aims to motivate the efforts of participants to support customer satisfaction and shareholder returns in order to improve long term value and achieve the Group’s vision. Under the GLRP, participants are awarded a maximum number of Reward Rights that may vest at the end of a performance period of up to four years subject to the satisfaction of performance hurdles. Each Reward Right that vests entitles the participant to receive one ordinary Bank share. The Board has discretion to apply a cash equivalent. Vesting is subject to the satisfaction of certain performance hurdles as follows. For the award made during the 2010 financial year (FY10 award): 50% of the award assessed against Customer Satisfaction compared to a set peer group; and • • For the award made during the 2011 financial year (FY11 award): 50% of the award assessed against Total Shareholder Return (TSR) compared to a set peer group. 75% of the award assessed against TSR compared to a set peer group. 25% of the award assessed against Customer Satisfaction compared to a set peer group; and • • The Customer Satisfaction peer group consists of the ANZ, NAB, St.George (FY10 award only) and Westpac (for the Group’s retail and business banking lines) and other key competitors. The TSR peer group for both the FY10 and FY11 awards comprises the 20 largest companies listed on the ASX (by market capitalisation) at the beginning of each respective performance period, excluding resources companies and CBA. Customer satisfaction is determined by the Board with reference to independent external surveys, and TSR is measured independently. The Board applies a scale when determining the portion of each award to vest at the end of the performance period as follows: • • For the FY10 award, the portion of the award assessed against Customer Satisfaction that will vest is: 100% if CBA is ranked 1st, 75% if CBA is ranked 2nd, and 50% if CBA is ranked 3rd, with no vesting below this level. For the FY11 award, the portion of the award assessed against Customer Satisfaction that will vest is: 100% if CBA is ranked 1st across three surveys, 75% if CBA is ranked 1st across two surveys, and 50% if CBA is ranked 2nd across the three surveys. The Board will exercise discretion where CBA’s Customer Satisfaction has improved over the performance period, but in a different combination. Where the Board determines that our overall performance is worse at the end of the performance period than at the beginning, none of this portion will vest. For the portion of the FY10 and FY11 awards assessed against TSR performance, full vesting applies where CBA is ranked in the top quartile of the peer group at the end of the performance period, 50% will vest if CBA is ranked at the median, with vesting on a sliding scale between the median and 75th percentile. No Reward Rights in this part of the award will vest if the Group’s TSR is ranked below the median of the peer group. The total number of Reward Rights that vest will be the aggregate of rights that vest against the Customer Satisfaction and the TSR hurdles at the end of the performance period. For the introductory year (2009), the awards under the GLRP were split into two tranches, with 50% allocated as a transitional three year performance period and 50% allocated with a four 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 transitional award is subject to the same performance hurdles as the four year award. 172 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 29 Share Based Payments (continued) The following table provides details of outstanding awards of performance rights under the GLRP. Performance Performance Outstanding period start date 1 July 2009 1 July 2009 1 July 2010 Total 2011 Total 2010 test date 30 June 2012 30 June 2013 30 June 2014 1 July 370,297 523,919 - 894,216 - Granted - - 388,412 388,412 894,216 Vested - Forfeited - - - - - - - - - Outstanding 30 June 370,297 523,919 388,412 1,282,628 894,216 The weighted average fair value at the grant date of all Reward Rights issued during the year was $41.41 per right (2010: $44.12). The fair value of TSR hurdled Reward Rights granted during the period has been independently calculated at grant date using a Monte- Carlo pricing model. The assumptions included in the valuation of the FY11 award includes a risk free interest rate of 5.45%, a nil dividend yield on the Bank’s ordinary shares and a volatility in the Bank share price of 30.0%. The fair value for customer satisfaction hurdled Reward Rights granted during the period is the closing price of Bank shares on the grant date. A total of $11.9 million has been expensed in the current year (2010: $8.0 million) for GLRP. Group Leadership Share Plan The Group Leadership Share Plan (GLSP) was the Group’s previous long term incentive plan for the CEO and Group Executives for 2008 and 2009, after which it was replaced by the GLRP. Under the GLSP, participants share a pool that vests at the end of a three year performance period subject to satisfaction of performance conditions. The pool for the 2008 financial year award (FY08 award) was 2.2% of the growth in the Group’s Profit after Capital Charge (PACC), capped at a maximum pool of $34 million. The pool for 2009 financial year award (FY09 award) was 3.5% of the growth in the Group’s PACC, capped at a maximum pool of $36.1 million. Vesting for each award was subject to the following performance hurdles: Customer satisfaction ranking relative to ANZ, NAB, St George and Westpac. NPAT growth over the three year performance period being above the average NPAT growth of ANZ, NAB, and Westpac; and • • Independent external surveys are used to determine the Group’s level of achievement against the customer satisfaction performance hurdle. A ranking is determined by the Board and a vesting scale applied. The FY08 award reached the end of its performance period on 1 July 2010 and the Board determined that 50% of the FY08 award maximum pool would vest. Bank shares were provided to participants in relation to the vested awards. 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. A total of $6.6 million has been expensed in the current year (2010: $13.2 million) for GLSP. Equity Reward Plan The Equity Reward Plan (ERP) was the Group’s long term incentive plan for executives until it was closed to new offers in July 2006. Under the ERP executives could receive awards of shares or options. The final ERP award reached the end of its performance period during the 2010 financial year. Vested awards may remain in the ERP for up to 10 years from the date they are granted, and are subject to holding locks during that period. The following table provides details of outstanding awards of shares under the ERP. Allocation period July 2001 - June 2002 July 2002 - June 2003 July 2003 - June 2004 July 2004 - June 2005 July 2005 - June 2006 July 2006 - June 2007 Total 2011 Total 2010 Outstanding Outstanding 1 July 5,500 1,650 16,750 15,700 145,858 142,210 327,668 935,290 Granted Released Forfeited 30 June - - - - - - - - - - - (2,200) (113,078) (2,800) (118,078) (607,622) - - - - - - - - 5,500 1,650 16,750 13,500 32,780 139,410 209,590 327,668 No amount has been expensed in the current year (2010: $6.8 million) for ERP. Commonwealth Bank of Australia Annual Report 2011 173 Notes to the Financial Statements Note 29 Share Based Payments (continued) Details of movements in ERP options are as follows: Year of grant exercise date price $ 1 July Granted Exercised Lapsed exercisable 30 June Latest Exercise Outstanding Outstanding and 13 Sep 2010 3 Sep 2011 26.97 30.12 2000 2001 Total 2011 Weighted average exercise price ($) Total 2010 Weighted average exercise price ($) 65,000 224,100 289,100 29.41 381,600 29.42 - - - - - - (65,000) (138,000) (203,000) 29.11 (92,500) 29.44 - - - - - - - 86,100 86,100 30.12 289,100 29.41 The weighted average remaining contractual life of outstanding options at 30 June 2011 was 64 days (2010: 349 days). Non-Executive Directors Share Plan The Non-Executive Directors Share Plan (NEDSP) facilitates the Non-Executive Directors’: acquisition of shares using 20% of their post-tax fees, and further voluntary fee sacrifice of between $2,000 and $5,000 p.a. on a pre-tax basis. • • Shares acquired using after tax fees are restricted for sale for ten years or until such time as the Non-Executive Director retires from the Board if earlier. Shares acquired voluntarily are restricted from sale for a minimum of two years and a maximum of seven years, or earlier if the Non-Executive Director retires from the Board. Shares are purchased on-market at the prevailing market price at that time, and rank equally for dividends with other Bank ordinary shares. For the current year, $0.3 million (2010: $0.3 million) was expensed reflecting shares purchased and allocated under the NEDSP. Period 2011 2010 Total fees applied Number of shares Average purchase price $ 289,606 290,326 Participants purchased 9 10 5,404 5,982 $ 53.59 48.53 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 Group 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 were 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. The participant could exercise their entitlement in whole or part to receive 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. The remaining vested options under the EOP were exercised in August 2010. Details of movements in EOP options during the period were as follows: Year of grant 2000 Total 2011 Weighted average exercise price ($) Total 2010 Weighted average exercise price ($) Latest Exercise Outstanding Outstanding and exercise date price $ 1 July Granted Exercised Lapsed exercisable 30 June 13 Sep 2010 26.97 14,200 14,200 26.97 24,400 26.97 - - - - - (14,200) (14,200) 26.97 (10,200) 26.97 - - - - - - - - 14,200 26.97 The weighted average remaining contractual life of outstanding options at 30 June 2011 was nil (2010: 74 days). 174 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 30 Non-Controlling Interests Share capital Total non-controlling interests 2011 $M 528 528 Group 2010 $M 523 523 The share capital above comprises predominantly New Zealand Perpetual Preference Shares (PPS) - $505 million. On 10 December 2002, ASB Capital Limited, a New Zealand subsidiary, issued NZD 200 million ($182 million) of PPS. The PPS were issued into the New Zealand capital markets and are subject to New Zealand law. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly based on the New Zealand one year swap rate plus a margin of 1.3% and are non-cumulative. The payment of dividends are subject to a number of conditions including the satisfaction of solvency tests and the ability of the Board to cancel payments. On 22 December 2004, ASB Capital No.2 Ltd, a New Zealand subsidiary, issued NZD 350 million ($323 million) of PPS. The PPS were issued into the New Zealand capital markets and are subject to New Zealand law. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly on the New Zealand one year swap rate plus a margin of 1.0% and are non-cumulative. The payment of dividends are subject to a number of conditions including the satisfaction of solvency tests and the ability of the Board to cancel payments. ASB Capital Limited and ASB Capital No. 2 Limited have advanced proceeds from the above public issues to ASB Funding Limited, a New Zealand subsidiary. ASB Funding Limited in turn invested the proceeds in perpetual preference shares issued by ASB (ASB PPS), also a New Zealand subsidiary. In relation to ASB Capital No.2 Limited, if an APRA Event occurs, the loan to ASB Funding Limited will be repaid and ASB Capital No. 2 Limited will become the holder of the corresponding ASB PPS. The PPS may be purchased by a Commonwealth Bank subsidiary exercising a buy-out right five years or more after issue, or on the occurrence of regulatory or tax events. Commonwealth Bank of Australia Annual Report 2011 175 Notes to the Financial Statements Note 31 Capital Adequacy Capital Management The Bank is an Authorised Deposit-taking Institution (ADI) and is subject to regulation by the Australian Prudential Regulation Authority (APRA) under the authority of the Banking Act 1959. APRA has set minimum regulatory capital requirements for banks that are consistent with the International Convergence of Capital Measurement and Capital Standards: A Revised Framework (Basel II) issued by the Basel Committee on is Banking Supervision. These requirements define what 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 45 to 51. 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 prudential 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. The Group uses Economic Capital to drive delivery of “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 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 ALCO. 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 2010 and 2011 financial years were in compliance with both APRA minimum capital adequacy requirements and the Board Approved minimums. 176 Commonwealth Bank of Australia Annual Report 2011 Note 32 Financial Reporting by Segments 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. 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”). Management use “cash basis” to assess performance and the determination of the Bank’s dividends. it provides the basis for (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 institutional and government clients, creating corporate, 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 operations in London, Malta, New York, New Zealand, Singapore, Hong Kong, Japan and has regulatory approval for a banking licence in Shanghai. (iv) Wealth Management 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. Notes to the Financial Statements (vii) Other The following parts of the business are included in Other: • • International Financial Services Asia incorporates the Asian retail and SME banking operations (Indonesia, China, Vietnam and India), investments in Chinese and Vietnamese retail banks, the joint venture Chinese life insurance business and the life insurance operations in Indonesia. It does not include the Business and Private Banking, Institutional Banking and Markets and Colonial First State Global Asset Management business in Asia. Corporate Centre includes the results of unallocated Group support functions such as Investor Relations, Group Strategy, Secretariat and Treasury; and • Group wide eliminations/unallocated includes intra-group elimination entries arising on consolidation, centrally raised provisions and other unallocated revenue and expenses. Commonwealth Bank of Australia Annual Report 2011 177 1 1 0 2 M $ l a t o T 8 5 6 , 2 1 3 8 9 , 3 1 4 6 , 6 1 6 5 8 1 4 0 , 2 8 3 5 , 9 1 1 2 1 9 5 6 , 9 1 ) 1 9 8 , 8 ( ) 0 8 2 , 1 ( 8 8 4 , 9 ) 7 3 6 , 2 ( ) 6 1 ( 5 3 8 , 6 ) 5 6 2 ( ) 7 4 1 ( ) 9 2 ( 4 9 3 , 6 ) 3 7 2 ( ) 0 4 3 ( M $ 9 0 2 , 1 ) 1 6 3 ( 8 4 8 ) 1 ( r e h t O 6 2 0 2 4 9 8 7 3 1 3 9 ) 1 5 4 ( 6 2 6 0 5 ) 8 1 1 ( ) 6 1 ( 2 7 3 ) 0 1 ( ) 6 1 2 ( 5 1 5 1 ) 8 5 ( ) 0 0 2 ( M $ 0 2 4 , 1 0 2 2 0 4 6 , 1 - - 0 4 6 , 1 - 0 4 6 , 1 ) 9 6 8 ( ) 9 0 1 ( 2 6 6 ) 9 9 1 ( - ) 3 3 ( 3 6 4 ) 7 3 1 ( - 3 9 2 ) 8 8 ( ) 6 3 ( M $ 0 4 8 6 8 2 6 2 1 , 1 0 4 1 1 2 7 7 3 , 1 1 8 7 3 , 1 ) 4 0 7 ( ) 4 5 ( 0 2 6 ) 0 5 1 ( - 0 7 4 ) 6 1 ( - - 4 5 4 ) 6 2 ( ) 4 2 ( 9 9 8 , 7 6 6 9 6 0 , 5 6 8 2 8 , 6 7 1 9 4 , 0 5 1 9 4 2 1 7 , 1 2 1 6 , 0 3 6 6 3 2 1 3 8 - 5 4 - 6 4 6 0 3 , 7 4 1 5 5 5 , 1 7 3 9 4 , 6 4 t s e w k n a B w e N d n a l a e Z t n e m e g a n a M s t e k r a M h t l a e W d n a g n k n a B i e t a v i r P i g n k n a B i g n k n a B s e c i v r e S l a n o i t u t i t s n I d n a s s e n i s u B l i a t e R ) d e u n i t n o c ( s t n e m g e S y b g n i t r o p e R l i i a c n a n F 2 3 e t o N s t n e m e t a t S l i i a c n a n F e h t o t s e t o N - - - M $ 5 2 6 5 7 9 , 1 0 0 6 , 2 3 8 3 8 6 , 2 ) 1 0 8 , 1 ( - 2 8 8 ) 0 4 2 ( - 2 4 6 - - ) 4 3 ( 8 0 6 ) 3 ( ) 4 ( 2 7 6 , 0 2 4 5 6 7 1 2 9 , 9 1 - - M $ 3 9 2 , 1 4 7 1 , 1 7 6 4 , 2 - 7 6 4 , 2 7 6 4 , 2 ) 8 2 8 ( ) 4 2 3 ( ) 1 1 3 ( 5 1 3 , 1 - 4 0 0 , 1 - - - - - M $ 7 8 6 , 1 5 6 3 , 1 2 5 0 , 3 - 2 5 0 , 3 2 5 0 , 3 ) 5 3 3 , 1 ( ) 1 6 2 ( ) 7 1 4 ( 6 5 4 , 1 - 9 3 0 , 1 - - - - - M $ 9 0 2 , 6 9 9 2 , 1 8 0 5 , 7 - 8 0 5 , 7 8 0 5 , 7 ) 3 0 9 , 2 ( ) 8 5 5 ( 7 4 0 , 4 ) 2 0 2 , 1 ( - 5 4 8 , 2 - - - 4 0 0 , 1 9 3 0 , 1 5 4 8 , 2 ) 1 1 ( ) 3 4 ( 8 3 1 , 7 9 8 3 1 2 1 1 3 6 , 3 6 ) 8 5 ( ) 3 2 ( ) 9 2 ( ) 0 1 ( 8 2 9 , 2 8 3 7 7 , 4 7 2 5 1 3 3 7 1 7 8 8 2 , 3 1 1 8 1 4 , 8 6 1 t n e r r u c - n o n r e h o t ) 4 ( ) " s i s a b h s a c " ( x a t r e t f a t i f o r p t e N x a t e m o c n i e r o f e b t i f o r p t e N s t s e r e t n i g n i l l o r t n o c - n o N e s n e p x e x a t e t a r o p r o C e m o c n i t n e m e g a n a m s d n u F e m o c n i i g n k n a b l a t o T e m o c n i g n i t a r e p o l a t o T ) 2 ( e c n e i r e p x e t n e m t s e v n I e s n e p x e t n e m r i a p m i n a o L ) 3 ( s e s n e p x e g n i t a r e p O e m o c n i l a t o T e m o c n i e c n a r u s n I e m o c n i i g n k n a b r e h O t e m o c n i t s e r e t n i t e N l y t i l i t a o v S R F I d n a g n g d e H i ) " s i s a b y r o t u t a t s " ( x a t r e t f a t i f o r p t e N n o i t a m r o f n i l a n o i t i d d A s m e t i h s a c - n o n t s e w k n a B s m e t i h s a c - n o n r e h O t n o i t a s i t r o m a t e s s a e b g n a n t l i I l d n a s e b g n a n t i i , t i n e m p u q e d n a t l n a p y t r e p o r p f o n o i t i s u q c A i s t e s s a i s e t a c o s s a n i t n e m t s e v n I t e e h S e c n a l a B i n o i t a c e r p e D s t e s s a l a t o T s e i t i l i b a i l l t a o T . n o i l l i m 8 9 4 $ f o g n i t n u o c c a e g d e h r o f y f i l i i a u q t o n o d h c h w s e g d e h c m o n o c e n a t r e c o t d e t a e r e m o c n i l i t s e r e t n i t e n n h t i i w s t s o c p a w s t e n f o n o i t a c i f i s s a c e r l f o t c a p m i e h t s e d u c n I l ) 1 ( i . s s a b x a t - e r p n o d e t n e s e r p s i e c n e i r e p x e t n e m t s e v n I ) 2 ( l . s e s n e p x e d e t a e r e m u o v e d u c n l l i s e s n e p x e g n i t a r e p O ) 3 ( ’ s k n a B e h t f o n o i t i a n m r e e d t e h t r o f i s s a b e h t i s e d v o r p t i d n a e c n a m r o f r e p s s e s s a o t i ” s s a b h s a c “ e s u t n e m e g a n a M . y t i l i t a o v l S R F I d n a i g n g d e h o t d e t a e r l s e s s o l d n a i s n a g d e s i l a e r n u d n a t n e m t s u d a j n o i t a u a v l s e r a h s y r u s a e r t , s t n e m t s e v n i / s e i t i t n e d e l l o r t n o c f o l a s o p s d i n o s s o l / i n a g e h t , s n o i t c a s n a r t e c n a n i f l d e r u t c u r t s d n a a e Z w e N n o x a t e h t , s m e t i t n a c i f i n g s i t s e w k n a B e r o e b s t s e r e t n f i g n i l l o r t n o c - n o n d n a x a t r e t f a t i f o r p t e n s a t n e m e g a n a m y b d e n i f e d s i i h c h w i ) ” s s a b h s a c “ ( x a t e m o c n i r e t f a t i f o r p t e n a n o d e r u s a e m e r a s t n e m g e s s s e n s u B i ) 4 ( a i l a r t s u A f o k n a B h t l a e w n o m m o C 8 7 1 . s d n e d v d i i s t n e m e t a t S l i i a c n a n F e h t o t s e t o N ) d e u n i t n o c ( s t n e m g e S y b g n i t r o p e R l i i a c n a n F 2 3 e t o N 0 1 0 2 M $ l a t o T 2 1 1 , 4 8 6 8 , 1 1 0 8 9 , 5 1 5 4 9 8 9 8 , 1 3 2 8 , 8 1 6 3 2 9 5 0 , 9 1 ) 1 0 6 , 8 ( ) 5 7 0 , 2 ( 3 8 3 , 8 ) 6 6 2 , 2 ( ) 6 1 ( 1 0 1 , 6 7 1 ) 6 1 2 ( ) 1 7 1 ( ) 7 6 ( 4 6 6 , 5 ) 0 8 2 ( ) 8 3 3 ( M $ 3 4 1 , 1 ) 7 3 2 ( 6 0 9 8 2 8 4 2 5 2 8 9 ) 4 4 4 ( 4 3 0 , 1 0 9 0 8 6 ) 6 1 ( ) 6 5 1 ( 8 0 5 9 0 1 ) 3 1 ( - ) 0 3 ( 4 7 5 ) 1 5 ( ) 1 9 1 ( - - M $ 3 3 2 6 3 3 , 1 9 6 5 , 1 9 6 5 , 1 - 9 6 5 , 1 ) 0 8 8 ( ) 4 5 7 ( ) 5 6 ( - 0 2 ) 5 4 ( ) 6 6 ( ) 3 0 2 ( - - ) 4 1 3 ( ) 1 9 ( ) 4 3 ( M $ 6 1 7 8 7 2 4 9 9 6 4 3 1 2 3 5 2 , 1 1 4 5 2 , 1 ) 7 6 6 ( ) 0 0 1 ( ) 9 9 ( 7 8 4 - ) 6 2 ( 8 8 3 - ) 1 7 1 ( 7 8 9 1 ) 7 2 ( ) 9 2 ( - - - M $ 4 8 6 4 2 8 , 1 8 0 5 , 2 3 8 1 1 9 6 , 2 ) 6 0 7 , 1 ( - 5 8 9 ) 7 6 2 ( - 8 1 7 - - - ) 4 4 ( 4 7 6 ) 5 ( ) 4 ( - - M $ 4 3 3 , 1 7 5 2 , 1 1 9 5 , 2 - 1 9 5 , 2 1 9 5 , 2 ) 0 3 8 ( ) 9 4 2 ( ) 9 3 3 ( 2 1 5 , 1 - 3 7 1 , 1 - - - - ) 0 1 ( ) 6 4 ( 3 7 1 , 1 - - M $ 3 4 6 , 1 9 3 2 , 1 2 8 8 , 2 - 2 8 8 , 2 2 8 8 , 2 ) 5 9 2 , 1 ( ) 6 2 3 ( 1 6 2 , 1 ) 3 6 3 ( - 8 9 8 - - - - 8 9 8 ) 1 7 ( ) 4 2 ( - - M $ 6 9 6 , 5 2 4 3 , 1 8 3 0 , 7 - 8 3 0 , 7 8 3 0 , 7 ) 9 7 7 , 2 ( ) 6 3 7 ( 3 2 5 , 3 ) 2 6 0 , 1 ( - 1 6 4 , 2 - - - - ) 5 2 ( ) 0 1 ( 1 6 4 , 2 ) 3 ( ) 2 ( ) 1 ( r e h t O ) 2 ( t s e w k n a B w e N l d n a a e Z h t l a e W d n a g n k n a B i e t a v i r P t n e m e g a n a M ) 1 ( s t e k r a M ) 1 ( i g n k n a B g n i k n a B ) 1 ( s e c i v r e S l a n o i t u t i t s n I d n a s s e n i s u B l i a t e R 0 3 3 , 6 4 6 9 8 5 , 9 5 4 8 6 , 4 7 3 3 4 , 3 5 9 8 6 , 1 2 5 9 4 , 4 9 1 0 8 , 8 7 9 3 6 , 3 6 2 0 2 3 0 9 4 , 1 0 6 7 , 0 1 6 2 8 1 3 0 6 - 3 4 - 2 2 4 3 8 7 9 3 2 4 1 6 2 6 1 6 7 2 2 4 , 4 5 1 8 6 8 , 9 6 1 9 5 , 9 4 9 4 3 , 9 1 8 9 8 , 8 5 8 9 2 , 3 0 1 4 3 3 , 5 5 1 t n e r r u c - n o n r e h t o d n a s e b g n a t n l i ) 6 ( ) " s i s a b h s a c " ( x a t r e t f a t i f o r p t e N x a t e m o c n i e r o f e b t i f o r p t e N s t s e r e t n i g n i l l o r t n o c - n o N e s n e p x e x a t e t a r o p r o C e m o c n i t n e m e g a n a m s d n u F e m o c n i g n i k n a b l a t o T e m o c n i g n i t a r e p o l a t o T ) 4 ( e c n e i r e p x e t n e m t s e v n I e s n e p x e t n e m r i a p m i n a o L ) 5 ( s e s n e p x e g n i t a r e p O e m o c n i l a t o T e m o c n i e c n a r u s n I e m o c n i i g n k n a b r e h O t e m o c n i t s e r e t n i t e N l y t i l i t a o v S R F I d n a g n g d e H i s n o i t c a s n a r t e c n a n i f d e r u t c u r t s Z N n o x a T s m e t i h s a c - n o n t s e w k n a B s m e t i h s a c - n o n r e h O t ) " s i s a b y r o t u t a t s " ( x a t r e t f a t i f o r p t e N n o i t a m r o f n i l a n o i t i d d A n o i t a s i t r o m a t e s s a e b g n a t n I l i i i l , t n e m p u q e d n a t n a p y t r e p o r p f o n o i t i s u q c A i t e e h S e c n a l a B i n o i t a c e r p e D s t e s s a l a t o T . n o i t a t n e m g e s e r s s e n s u b f o t c a p m i i e h t r o f d e t a t s e r n e e b e v a h s t l u s e R ) 1 ( i s e t a c o s s a n i t n e m t s e v n I s e i t i l i b a i l l a t o T s t e s s a . r e h t O n i y l l l l a r t n e c d e h y s u o v e r p e r a h c h w i i t s e w k n a B o t s t s o c l a t i p a c f o n o i t a c o l l a e h t g n w o i l l o f d e t a t s e r n e e b s a h e m o c n i t s e r e t n i t e N ) 2 ( n o s s o l / i n a g e h t , s n o i t c a s n a r t e c n a n i f l d e r u t c u r t s d n a a e Z w e N n o x a t e h t , s m e t i t n a c i f i n g s i t s e w k n a B e r o e b s t s e r e t n f i g n i l l o r t n o c - n o n d n a x a t r e t f a t i f o r p t e n s a t n e m e g a n a m y b d e n i f e d s i i h c h w i ) ” s s a b h s a c “ ( x a t e m o c n i r e t f a t i f o r p t e n a n o d e r u s a e m e r a s t n e m g e s s s e n s u B i ) 6 ( . n o i l l i m 9 5 2 $ f o g n i t n u o c c a e g d e h r o f y f i l i i a u q t o n o d h c h w s e g d e h c m o n o c e n a t r e c o t d e t a e r e m o c n l i i t s e r e t n i t e n n h t i i w s t s o c p a w s t e n f o n o i t a c i f i s s a c e r l f o t c a p m i e h t s e d u c n l I ) 3 ( i . s s a b x a t - e r p a n o d e t n e s e r p s i e c n e i r e p x e t n e m t s e v n I ) 4 ( l . s e s n e p x e d e t a e r e m u o v e d u c n l l i s e s n e p x e g n i t a r e p O ) 5 ( 9 7 1 1 1 0 2 t r o p e R l a u n n A a i l a r t s u A f o k n a B h t l a e w n o m m o C ’ s k n a B e h t f o n o i t i a n m r e e d t e h t r o f i s s a b e h t i s e d v o r p t i d n a e c n a m r o f r e p s s e s s a o t i ” s s a b h s a c “ e s u t n e m e g a n a M . y t i l i t a o v l S R F I d n a i g n g d e h o t d e t a e r l s e s s o l d n a i s n a g d e s i l a e r n u d n a t n e m t s u d a j n o i t a u a v l s e r a h s y r u s a e r t , s t n e m t s e v n i / s e i t i t n e d e l l o r t n o c f o l a s o p s d i . s d n e d v d i i Notes to the Financial Statements Note 32 Financial Reporting by Segments (continued) Geographical Information Financial Performance & Position Revenue Australia New Zealand Other locations (1) Total revenue Non-Current Assets Australia New Zealand Other locations (1) Total non-current assets Group Year Ended 30 June 2011 $M 40,733 3,832 1,650 46,215 12,706 852 123 % 88. 1 8. 3 3. 6 100. 0 92. 9 6. 2 0. 9 13,681 100. 0 2010 $M 35,906 4,208 1,671 41,785 12,654 1,009 315 13,978 2009 $M % 85. 9 10. 1 4. 0 100. 0 90. 5 7. 2 2. 3 100. 0 32,498 4,904 2,031 39,433 11,909 1,005 343 13,257 % 82. 4 12. 4 5. 2 100. 0 89. 8 7. 6 2. 6 100. 0 (1) Other locations include: United Kingdom, United States, Japan, Singapore, Malta, Hong Kong, Indonesia, China and Vietnam. The geographical segment represents the location in which the transaction was recognised. 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 (ff). The insurance segment result is prepared on a business segment basis. Summarised income statement Premium income and related revenue Outward reinsurance premiums expense Claims expense Reinsurance recoveries Investment revenue (excluding investments in subsidiaries): Equity securities Debt securities Property Other (Increase)/decrease in contract liabilities Operating income Acquisition expenses Maintenance expenses Management expenses Other expense Net profit before income tax Income tax expense attributable to operating profit Net profit after income tax Life Insurance Life Investment Contracts Contracts 2011 $M 1,669 (221) (1,086) 222 126 202 53 45 3 2010 $M 1,622 (256) (1,118) 243 118 233 46 101 54 1,013 1,043 (246) (295) (19) - 453 (158) 295 (215) (269) (9) (28) 522 (151) 371 2011 2010 $M 263 - (37) - 494 383 133 69 (980) 325 (10) (82) (22) - 211 (114) 97 $M 313 (3) (214) - 594 530 106 30 (939) 417 (9) (88) (22) (32) 266 (118) 148 2011 $M 1,932 (221) (1,123) 222 620 585 186 114 (977) 1,338 (256) (377) (41) - 664 (272) 392 Group 2010 $M 1,935 (259) (1,332) 243 712 763 152 131 (885) 1,460 (224) (357) (31) (60) 788 (269) 519 180 Commonwealth Bank of Australia Annual Report 2011 Note 33 Life Insurance Business (continued) Sources of life insurance net profit The net profit after income tax is represented by: Emergence of planned profit margins Difference between actual and planned experience Effects of changes to underlying assumptions Reversal of previously recognised losses or loss recognition on groups of related products Investment earnings on assets in excess of policyholder liabilities Other movements Net profit after income tax Notes to the Financial Statements Life Insurance Life Investment Contracts Contracts 2011 2010 2011 2010 2011 Group 2010 $M $M $M $M $M $M 227 (18) 2 (1) 84 1 295 209 26 13 (3) 103 23 371 73 21 - - 3 - 97 697 2,128 84 60 - - 5 (1) 148 961 2,950 300 3 2 (1) 87 1 392 293 86 13 (3) 108 22 519 2,630 3,597 2,585 4,147 Life insurance premiums received and receivable Life insurance claims paid and payable 1,933 1,469 1,624 1,197 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. Reconciliation of movements in policy liabilities Contract policy liabilities Gross policy liabilities opening balance Movement in policy liabilities reflected in the Income Statement Contract contributions recognised in policy liabilities Contract withdrawals recognised in policy liabilities Non-cash movements FX translation adjustment Life Insurance Life Investment Contracts Contracts 2011 $M 2010 $M 2011 $M 2010 $M 2011 $M Group 2010 $M 3,181 3,728 11,411 12,328 14,592 16,056 (23) 262 (242) (18) (23) (86) 2 (281) (181) (1) 980 436 939 656 957 698 853 658 (2,231) (2,536) (2,473) (2,817) - (81) (1) 25 (18) (104) (182) 24 Gross policy liabilities closing balance 3,137 3,181 10,515 11,411 13,652 14,592 Liabilities ceded under reinsurance Opening balance Acquisition of controlled entities Increase in reinsurance assets Closing balance Net policy liabilities Expected to be realised within 12 months Expected to be realised in more than 12 months Total net insurance policy liabilities (189) (219) 3 22 - 30 (164) (189) - - - - - - - - (189) (219) 3 22 - 30 (164) (189) 511 2,462 2,973 408 2,584 2,992 1,768 8,747 10,515 1,696 9,715 11,411 2,279 11,209 13,488 2,104 12,299 14,403 Commonwealth Bank of Australia Annual Report 2011 181 Notes to the Financial Statements Note 34 Remuneration of Auditors During the financial year, the auditor of the Group and the Bank, PricewaterhouseCoopers, and its related practices earned the following remuneration excluding goods and service tax: a) Audit and audit related services Audit services PricewaterhouseCoopers Australian firm Related practices of PricewaterhouseCoopers Australian firm Total remuneration for audit services Audit related services PricewaterhouseCoopers Australian firm Related practices of PricewaterhouseCoopers Australian firm Total remuneration for audit related services Total remuneration for audit and audit related services b) Non-audit services Taxation services PricewaterhouseCoopers Australian firm Related practices of PricewaterhouseCoopers Australian firm Total remuneration for tax related services Other Services PricewaterhouseCoopers Australian firm Related practices of PricewaterhouseCoopers Australian firm Total remuneration for other services Total remuneration for non-audit services (1) Total remuneration for audit and non-audit services (2) 2011 $'000 14,444 3,405 17,849 4,346 247 4,593 22,442 1,420 1,631 3,051 3,602 6 3,608 6,659 29,101 Group 2010 $'000 13,807 3,847 17,654 4,019 248 4,267 21,921 1,535 807 2,342 1,645 21 1,666 4,008 25,929 2011 $'000 9,182 526 9,708 3,968 100 4,068 13,776 1,270 588 1,858 3,517 2 3,519 5,377 19,153 Bank 2010 $'000 8,160 605 8,765 3,439 59 3,498 12,263 1,520 276 1,796 1,524 7 1,531 3,327 15,590 (1) The comparative total remuneration for non-audit services has been restated to remove audit related services. (2) An additional amount of $9,738,612 (2010: $7,867,223) was paid to PricewaterhouseCoopers by way of fees for entities not consolidated into the Financial Statements. Of this amount $8,025,284 (2010: $6,794,440) relates to audit and audit-related services. The Audit Committee has considered the non-audit services provided by PricewaterhouseCoopers and is satisfied that the services and the level of fees are compatible with maintaining auditors’ independence. All such services were approved by the Audit Committee in accordance with pre-approved policies and procedures. Audit related services principally includes assurance and attestation reviews of the Group’s foreign disclosures for overseas investors, services in relation to regulatory requirements, acquisition accounting advice as well as reviews of internal control systems and financial or regulatory information. 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. Note 35 Lease Commitments Lease Commitments - Property, Plant and Equipment Due within one year Due after one year but not later than five years Due after five years Total lease commitments - property, plant and equipment Lease Arrangements 2011 $M 485 1,356 1,288 3,129 Group 2010 $M 478 1,295 1,003 2,776 2011 $M 405 1,116 791 2,312 Bank 2010 $M 359 924 494 1,777 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. Further details on the Groups significant operating leases are included in Note 36. The total expected future sublease payments to be received is $38 million as at 30 June 2011. 182 Commonwealth Bank of Australia Annual Report 2011 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. Credit risk related instruments Guarantees (1) Standby letters of credit (2) Bill endorsements (3) Documentary letters of credit (4) Performance related contingents (5) Commitments to provide credit (6) Other commitments (7) Total credit risk related instruments Credit risk related instruments Guarantees (1) Standby letters of credit (2) Bill endorsements (3) Documentary letters of credit (4) Performance related contingents (5) Commitments to provide credit (6) Other commitments (7) Total credit risk related instruments Face Value Credit Equivalent Group 2011 $M 4,462 931 28 50 1,996 128,007 660 2010 $M 3,658 817 57 71 1,240 109,420 478 2011 $M 4,462 931 28 46 1,910 112,689 465 136,134 115,741 120,531 2010 $M 3,364 809 57 70 1,208 89,920 266 95,694 Bank Face Value Credit Equivalent 2011 $M 3,719 766 28 26 1,893 111,682 80 118,194 2010 $M 2,874 637 57 46 1,233 93,881 39 98,767 2011 $M 3,719 766 28 26 1,859 105,391 80 111,869 2010 $M 2,581 630 57 46 1,204 83,272 39 87,829 (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 2011 183 Notes to the Financial Statements Note 36 Contingent Liabilities, Contingent Assets and Commitments (continued) 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 table on page 183 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 In December 2010 ASIC commenced has been made. proceedings against the Bank in relation to Storm Financial, a Queensland-based financial planning firm that collapsed, and went into liquidation in March 2009. Currently, ASIC is not seeking that the Bank pay compensation to any person as part of these proceedings. Class action proceedings against the Bank in relation to Storm Financial also continued. At present the size of the class action remains undefined and damages sought have not been quantified. The Group has established a resolution scheme for clients of Storm Financial who borrowed money from the Group. The resolution scheme has substantially completed the process of considering individual claims on a case by case basis. The Group believes that appropriate provisions are held to cover the outcomes and costs of the scheme. The Bank is also currently working through recovering losses associated with Storm Financial, and recognises these recoveries once they meet the recognition criteria. 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 Site 6 and 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. 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 programme. 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 The Group is committed for capital expenditure, under contract of $13 million as at 30 June 2011 (2010: $19 million). The Bank is committed for $13 million (2010: $17 million). These commitments are expected to be extinguished within 12 months. Long Term Contracts 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 2011 was $4.2 million (2010: $6.5 million). 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 covers the provision of enterprise processing services and end user computing services until 30 June 2012 and for card services until 1 May 2017. 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 will accommodate over 6,000 of the Group’s employees by early 2012. 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. The term of the agreements expire in December 2012. 184 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 36 Contingent Liabilities, Contingent Assets and Commitments (continued) Collateral accepted 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 Sheet date, the carrying value of collateral accepted is as follows: Cash Assets at fair value through Income Statement Available-for-sale investments Collateral held Assets pledged 2011 $M 1,491 4,114 2,400 8,005 Group 2010 $M 2,411 2,913 540 5,864 2011 $M 1,463 4,115 1,781 7,359 Bank 2010 $M 2,388 2,913 530 5,831 As part of standard terms of transactions with other banks, the Group has provided collateral to secure liabilities. At Balance Sheet date, the carrying value of assets pledged as collateral to secure liabilities is as follows: Cash Assets at fair value through Income Statement (1) Available-for-sale investments (1) (2) Assets pledged Of which can be repledged or resold by counterparty 2011 $M 4,024 8,270 - Group 2010 $M 2,433 7,891 235 12,294 10,559 4,063 5,182 2011 $M 3,762 4,857 - 8,619 3,801 Bank 2010 $M 2,085 5,117 235 7,437 5,100 (1) These balances include assets sold under repurchase agreements. The liabilities related to these repurchase agreements are disclosed in Note 19. (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. 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 Sheet date, the carrying amounts of such securities and their related liabilities are as follows: Group Bank Carrying Amount Related Liability Carrying Amount Related Liability 2011 2010 2011 2010 2011 2010 2011 2010 $M $M $M $M $M $M $M $M Assets at fair value through Income Statement Available-for-sale investments Total 4,063 - 4,063 4,947 235 5,182 4,063 - 4,063 4,899 235 5,134 3,801 - 3,801 4,865 235 5,100 3,801 - 3,801 4,815 235 5,050 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: Funds under administration Funds under management 2011 $M 183,128 151,788 Group 2010 $M 172,784 144,298 Commonwealth Bank of Australia Annual Report 2011 185 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. risk management review of framework is carried out by Group Audit and Assurance. Independent the The Risk Committee of the Board oversees credit, market (including traded, interest rate risk in the banking book (IRRBB), lease residual values, non-traded equity and structural foreign exchange risks), liquidity and funding, operational, regulatory and compliance, 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. 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 integrated risk management The Group has framework to identify, assess, manage and report risks and risk- adjusted returns on a consistent and reliable basis. in place an Accountability for risk management is structured by a “Three Lines of Defence” model as follows: • • • Line 1 – Business Management – Risk is best managed at the place it occurs, therefore business managers are responsible for managing the risks for their business. This includes implementing approaches to proactively manage levels, and using risk their risk within risk appetite management outcomes risk”) and considerations as part of their day-to-day business making processes; (“the costs of Line 2 – Risk Management – Group, Business Unit and Divisional Risk Management units provide risk management expertise and oversight for Business Management risk- taking activities. Risk Management develop specialist policies and procedures for risk management and ensure they are embedded and in use as part of the day-to-day management of the business. Risk Management also establishes and maintains aligned and integrated risk management frameworks and monitors compliance with the frameworks, policies and procedures; and independent assurance Line 3 – Group Audit and Assurance – Group Audit and Assurance provide to key stakeholders regarding the adequacy and effectiveness of the Group’s system of internal controls, risk management procedures and governance processes. It is responsible for reviewing risk management frameworks and Business Unit practices for risk management and internal controls. This framework requires each business to manage the outcome of its risk-taking activities and benefit from the resulting risk adjusted returns. 186 Commonwealth Bank of Australia Annual Report 2011 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 charge over income or 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 people 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. Note 39 Credit Risk (continued) 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 Credit Portfolio 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 $1 million or decisioned outside of the scorecard approach, either a PD calculator or expert judgement is used. judgement is used where the Expert 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. Notes to the Financial Statements Default is usually consistent with one or more of the following criteria: • • • • • 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 without recourse by the Bank to actions such as realising available security. 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 Credit Portfolio Assurance unit, part of Group Audit and Assurance, 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 Credit Portfolio 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 Expected loss is the product of: Loss given default (LGD). Probability of default (PD); Exposure at default (EAD); and • • • 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). Commonwealth Bank of Australia Annual Report 2011 187 Notes to the Financial Statements 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. 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 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. Note 39 Credit Risk (continued) 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. (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 Capital Management section and Note 31, 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 to Note 14). 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 instruments are governed by International Swaps & 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 transaction characteristics and credit-worthiness of the 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. 188 Commonwealth Bank of Australia Annual Report 2011 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. Bank Other Agri- & Other Home Constr- Asset Comm & Sovereign culture Financial Loans uction Personal Financing Indust. Other Total $M $M $M $M $M $M $M $M $M $M Group 2011 Australia Credit risk exposures relating to on balance sheet assets: Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance (1) Other Derivative assets - - 11,129 844 - 143 Available-for-sale investments 14,851 Loans, bills discounted and other receivables (2) Bank acceptances Other assets (3) Total on balance sheet Australia 2,212 4 83 - - - - - 33 - 5,278 3,071 43 6,193 5,203 670 8,802 - 23,055 6,779 - - - 1,069 - - - - - - 109 - 43 - - - - - - - - - - - - - - - - - 3,430 2,559 - 3,669 17,046 9,986 306,250 2,877 17,409 8,328 103,273 213 5,171 - 945 528 46 - 7 - 18 6,918 371 13,443 - - - - - - - - - 6,193 5,203 15,229 13,383 - 26,943 38,676 455,613 10,734 20,127 29,266 8,425 66,072 308,264 3,603 17,416 8,346 137,266 13,443 592,101 Credit risk exposures relating to off balance sheet assets: Guarantees Loan commitments Other commitments Total Australia 90 3,259 41 29 967 20 166 3,489 116 14 54,015 259 32,656 9,441 69,843 362,552 550 2,897 909 7,959 - 17,907 - - - - 3,478 30,139 2,018 - - - 4,327 112,673 3,363 35,323 8,346 172,901 13,443 712,464 Overseas Credit risk exposures relating to on balance sheet assets: Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance (1) Other Derivative assets - - 1,961 - 299 222 Available-for-sale investments 4,793 - - - - 5 - - 7,048 5,190 1,201 1,615 496 2,502 692 - - - - - - - Loans, bills discounted and other receivables (2) Bank acceptances Other assets (3) Total on balance sheet overseas 4,603 4,920 6,988 29,591 - 23 - - - 247 - 1 11,901 4,925 25,979 29,592 Credit risk exposures relating to off balance sheet assets: Guarantees Loan commitments Other commitments Total overseas Total gross credit risk - 4,341 31 16,273 48,929 - 367 1 3 289 - - 3,370 - 5,293 14,734 26,271 96,114 32,962 395,514 - - - - - - - 322 - 1 323 13 154 2 492 8,451 - - - - 3 - - - - - - - - - - - 2,078 - 21 650 1,010 559 1,256 3,489 - - - - - 62 - - - - - - - - - 7,048 5,190 5,240 1,615 824 3,374 6,495 51,728 - 1,234 1,568 562 1,256 7,310 1,234 83,082 - 1,164 - 1,726 37,049 - - - 119 5,649 268 - - - 135 15,334 302 1,256 9,602 13,346 1,234 98,853 186,247 14,677 811,317 (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. (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. Commonwealth Bank of Australia Annual Report 2011 189 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 Bank Other Agri- & Other Home Constr- Asset Comm & Sovereign culture Financial Loans uction Personal Financing Indust. Other Total $M $M $M $M $M $M $M $M $M $M Group At 30 June 2010 - - - - - - - - - 6,343 5,355 16,060 14,277 - 22,679 28,264 444,946 11,569 19,565 Australia Credit risk exposures relating to on balance sheet assets: Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance (1) Other Derivative assets - - 8,618 1,478 - 163 Available-for-sale investments 12,588 - - - - - 35 - 6,343 5,355 4,931 9,148 - 19,269 3,661 - - - 1,393 - - - - - - 101 - 24 - - - - - - - - - - - - - - - - - 2,511 2,157 - 3,188 12,015 1,571 Loans, bills discounted and other receivables (2) Bank acceptances Other assets (3) Total on balance sheet 63,633 Australia Credit risk exposures relating to off balance sheet assets: 24,428 3,090 5,158 8,322 9,221 5,442 263 39 5 5 292,140 3,438 15,979 8,621 108,818 - 4 529 40 - 14 - 13 7,682 378 13,630 293,537 4,132 15,993 8,634 136,749 13,630 569,058 Guarantees Loan commitments Other commitments Total Australia 73 1,187 25 16 992 26 236 3,575 168 24 51,995 11 25,713 9,356 67,612 345,567 370 1,441 357 6,300 - 17,206 - - - - 2,791 22,008 1,713 - - - 3,510 98,404 2,300 33,199 8,634 163,261 13,630 673,272 Overseas Credit risk exposures relating to on balance sheet assets: Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance (1) Other Derivative assets Available-for-sale investments - - 2,900 - - 388 674 - - - - 6 - - 3,776 4,717 1,473 1,663 584 3,814 879 1,213 Loans, bills discounted and other receivables (2) Bank acceptances Other assets (3) Total on balance sheet 23,345 overseas Credit risk exposures relating to off balance sheet assets: 5,456 5,450 5,187 6,344 12 95 - - - - Guarantees Loan commitments Other commitments Total overseas Total gross credit risk 15 247 45 - 469 - 2 233 - 5,494 31,207 5,925 15,281 23,580 91,192 34,964 380,531 - - - - - - - - - - - - - - - - - - 3 - - - - - - - - - - - 2,418 - 61 808 3,098 31,433 472 822 768 9,821 - - - - - 67 - - - - - - - - - 3,776 4,717 6,791 1,663 654 5,010 4,651 56,323 - 1,322 1,497 - 1 31,434 - 3,366 164 - - 472 38 116 1 627 6,927 825 768 16,273 1,322 85,082 - 1,109 - 1,934 35,133 - - - 93 5,476 153 - - - 148 11,016 363 768 21,995 1,322 96,609 9,402 185,256 14,952 769,881 (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. (3) 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. 190 Commonwealth Bank of Australia Annual Report 2011 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 are reported 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): 5% to less than 10% of the Group's capital resources 10% to less than 15% of the Group's capital resources 2011 Number - - Group 2010 Number - - The Group has a good quality and well diversified credit portfolio, with 60% 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 10% of loans and advances. 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. The offsets obtained by applying master netting arrangements reduced the credit risk of the Group by approximately $10.2 billion as at 30 June 2011 (2010: $9.9 billion). 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. On balance sheet netting reduced the credit risk of the Group by approximately $19 billion as at 30 June 2011 (2010: $16 billion). Commonwealth Bank of Australia Annual Report 2011 191 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 Neither past Past due Impaired due nor but not non- Individually assessed impaired impaired performing Restructured Gross provisions Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables: Australia Overseas Bank acceptances Credit related commitments $M 13,241 10,393 20,469 14,998 824 30,248 45,171 439,056 48,808 10,734 136,056 769,998 $M $M $M - - - - - - - - - - - - 69 - 12,060 2,267 - - 4,459 464 - 78 14,327 5,070 - - - - - - - 38 189 - - 227 $M 13,241 10,393 20,469 14,998 824 30,317 45,171 455,613 51,728 10,734 136,134 789,622 Group 2011 Net $M 13,241 10,393 20,469 14,998 824 30,317 45,171 $M - - - - - - - (2,031) (94) - - (2,125) 453,582 51,634 10,734 136,134 787,497 Neither past Past due Impaired due nor but not non- Individually assessed impaired impaired performing Restructured Gross provisions Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables: Australia Overseas Bank acceptances Shares in and loans to controlled entities Credit related commitments $M 10,979 10,123 17,765 - 300 30,663 75,699 371,573 8,410 10,734 47,357 118,143 701,746 $M $M $M - - - - - - - 9,519 9 - - - 9,528 - - - - - 68 - 2,681 171 - - 51 2,971 - - - - - - - 38 3 - - - 41 $M 10,979 10,123 17,765 - 300 30,731 75,699 383,811 8,593 10,734 47,357 118,194 714,286 $M - - - - - - - (1,050) (31) - - - (1,081) Bank 2011 Net $M 10,979 10,123 17,765 - 300 30,731 75,699 382,761 8,562 10,734 47,357 118,194 713,205 192 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 39 Credit Risk (continued) Distribution of Financial Instruments by Credit Quality Neither past Past due Impaired due nor but not non- Individually assessed impaired impaired performing Restructured Gross provisions $M $M $M - - - - - - - - - - - - 86 1 - - - - - - - $M 10,119 10,072 22,851 15,940 654 27,689 32,915 $M - - - - - - - Group 2010 Net $M 10,119 10,072 22,851 15,940 654 27,689 32,915 11,861 2,513 - - 4,543 321 - 18 14,374 4,969 78 169 - - 247 444,946 56,323 11,569 115,741 748,819 (1,915) (77) - - (1,992) 443,031 56,246 11,569 115,741 746,827 Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables: Australia Overseas Bank acceptances Credit related commitments $M 10,119 10,072 22,851 15,940 654 27,603 32,914 428,464 53,320 11,569 115,723 729,229 Neither past Past due Impaired due nor but not non- Individually assessed impaired impaired performing Restructured Gross provisions Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables: Australia Overseas Bank acceptances Shares in and loans to controlled entities Credit related commitments $M 8,711 9,766 18,775 - - 27,278 65,778 359,891 9,786 11,569 49,809 98,749 $M $M $M - - - - - - - 9,346 5 - - - - - - - - 85 1 2,455 39 - - 18 - - - - - - - 78 38 - - - $M 8,711 9,766 18,775 - - 27,363 65,779 371,770 9,868 11,569 49,809 98,767 $M - - - - - - - (950) (28) - - - Bank 2010 Net $M 8,711 9,766 18,775 - - 27,363 65,779 370,820 9,840 11,569 49,809 98,767 660,112 9,351 2,598 116 672,177 (978) 671,199 Commonwealth Bank of Australia Annual Report 2011 193 Notes to the Financial Statements Note 39 Credit Risk (continued) Financial Assets Individually Assessed as Impaired Gross Individually 2011 Net Gross Individually Group 2010 Net Impaired Assessed Impaired Impaired Assessed Impaired Assets Provisions Assets Assets Provisions Assets $M $M 734 10 85 3,811 4,640 177 1 - 479 657 (202) (11) (37) (1,781) (2,031) (25) - - (69) (94) $M 532 (1) 48 2,030 2,609 152 1 - 410 563 $M $M 671 15 81 3,959 4,726 165 4 - 321 490 (150) (21) (15) (1,729) (1,915) (12) - - (65) (77) $M 521 (6) 66 2,230 2,811 153 4 - 256 413 5,297 (2,125) 3,172 5,216 (1,992) 3,224 Gross Individually 2011 Net Gross Individually Bank 2010 Net Impaired Assessed Impaired Impaired Assessed Impaired Assets Provisions Assets Assets Provisions Assets $M 639 7 54 2,135 2,835 - - - 177 177 $M (157) (9) (34) (850) (1,050) - - - (31) (31) $M 482 (2) 20 1,285 1,785 - - - 146 146 $M 559 11 47 2,020 2,637 14 - - 63 77 $M (107) (18) (6) (819) (950) - - - (28) (28) $M 452 (7) 41 1,201 1,687 14 - - 35 49 3,012 (1,081) 1,931 2,714 (978) 1,736 Australia Home loans Other personal Asset financing Other commercial and industrial Financial assets individually assessed as impaired - Australia Overseas Home loans Personal Asset financing Other commercial and industrial Financial assets individually assessed as impaired - overseas Total financial assets individually assessed as impaired Australia Home loans Other personal Asset financing Other commercial and industrial Financial assets individually assessed as impaired - Australia Overseas Home loans Personal Asset financing Other commercial and industrial Financial assets individually assessed as impaired - overseas Total financial assets individually assessed as impaired 194 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 39 Credit Risk (continued) Distribution of Loans, Bills Discounted and Other Receivables by Impairment Status The table below segregates 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. Distribution of loans by credit quality Gross loans Australia Neither past due nor impaired Past due but not impaired Impaired Total Australia Overseas Neither past due nor impaired Past due but not impaired Impaired Total overseas Total gross loans 2011 $M Group 2010 $M 2011 $M Bank 2010 $M 439,056 12,060 4,497 455,613 48,808 2,267 653 51,728 507,341 428,464 11,861 4,621 444,946 53,320 2,513 490 56,323 501,269 371,573 359,891 9,519 2,719 9,346 2,533 383,811 371,770 8,410 9 174 8,593 392,404 9,786 5 77 9,868 381,638 Commonwealth Bank of Australia Annual Report 2011 195 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 Credit grading Australia Investment Pass Weak Total Australia Overseas (1) Investment Pass Weak Total overseas Total loans which were neither past due nor impaired Credit grading Australia Investment Pass Weak Total Australia Overseas (1) Investment Pass Weak Total overseas Total loans which were neither past due nor impaired Group 2011 Other Home Asset Commercial Loans Personal Financing and Industrial Total $M $M $M $M $M 193,991 90,989 11,730 296,710 3,266 23,914 428 27,608 324,318 2,991 11,539 1,798 16,328 63 268 11 342 16,670 499 7,462 155 8,116 282 911 15 1,208 9,324 70,012 42,826 5,064 117,902 13,546 5,728 376 19,650 137,552 Other Home Asset Commercial Loans Personal Financing and Industrial $M $M $M $M 179,505 96,543 7,312 283,360 23,194 4,821 1,272 29,287 312,647 2,211 10,081 2,440 14,732 86 488 - 574 592 7,541 241 8,374 386 345 - 731 15,306 9,105 63,390 51,279 7,329 121,998 12,692 8,847 1,189 22,728 144,726 267,493 152,816 18,747 439,056 17,157 30,821 830 48,808 487,864 Group 2010 Total $M 245,698 165,444 17,322 428,464 36,358 14,501 2,461 53,320 481,784 (1) For New Zealand Housing Loans, PDs reflect Reserve Bank of New Zealand requirements resulting in higher PDs on average and lower grading. 196 Commonwealth Bank of Australia Annual Report 2011 Note 39 Credit Risk (continued) Loans which were neither past due nor impaired Credit grading Australia Investment Pass Weak Total Australia Overseas Investment Pass Weak Total overseas Total loans which were neither past due nor impaired Credit grading Australia Investment Pass Weak Total Australia Overseas Investment Pass Weak Total overseas Total loans which were neither past due nor impaired Notes to the Financial Statements Home Asset Commercial Loans Personal Financing and Industrial $M $M $M $M Other 160,399 80,944 10,272 251,615 2,611 10,608 1,479 14,698 - 365 - 365 - 19 - 19 251,980 14,717 385 6,811 143 7,339 282 62 2 346 7,685 67,222 28,536 2,163 97,921 7,008 672 - 7,680 105,601 Other Home Asset Commercial Loans Personal Financing and Industrial $M $M $M $M 151,753 83,687 5,994 1,967 9,098 2,092 241,434 13,157 - 348 25 373 - 141 - 141 241,807 13,298 407 6,377 201 6,985 372 34 - 406 7,391 60,975 35,162 2,178 98,315 7,280 1,514 72 8,866 Bank 2011 Total $M 230,617 126,899 14,057 371,573 7,290 1,118 2 8,410 379,983 Bank 2010 Total $M 215,102 134,324 10,465 359,891 7,652 2,037 97 9,786 107,181 369,677 Commonwealth Bank of Australia Annual Report 2011 197 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 the process of renegotiation and remain otherwise performing. It has not been practicable to determine the fair value of collateral held against these assets. Loans which were past due but not impaired (1) Australia Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total Australia Overseas Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total overseas Total loans which were past due but not impaired Loans which were past due but not impaired (1) Australia Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total Australia Overseas Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total overseas Total loans which were past due but not impaired Group 2011 Other Asset Commercial Personal (2) Financing and Industrial Total $M $M $M $M 586 171 110 191 23 1,081 163 22 11 13 5 214 1,295 50 21 16 23 17 127 37 8 2 2 - 49 176 1,276 218 152 177 215 5,221 2,118 1,229 1,764 1,728 2,038 12,060 143 8 3 16 29 199 2,237 1,609 282 110 152 114 2,267 14,327 Group 2010 Other Asset Commercial Personal (2) Financing and Industrial Total $M $M $M $M 708 188 111 189 33 1,229 187 26 10 13 10 246 1,475 94 36 18 12 12 172 24 7 2 3 1 37 209 1,404 232 172 206 169 5,660 2,090 1,073 1,559 1,479 2,183 11,861 169 17 29 20 15 250 2,433 1,740 297 164 168 144 2,513 14,374 Home Loans $M 3,309 1,708 951 1,373 1,473 8,814 1,266 244 94 121 80 1,805 10,619 Home Loans $M 3,454 1,634 772 1,152 1,265 8,277 1,360 247 123 132 118 1,980 10,257 (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. 198 Commonwealth Bank of Australia Annual Report 2011 Note 39 Credit Risk (continued) Loans which were past due but not impaired (1) Australia Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total Australia Overseas Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total overseas Total loans which were past due but not impaired Loans which were past due but not impaired (1) Australia Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total Australia Overseas Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total overseas Total loans which were past due but not impaired Notes to the Financial Statements Bank 2011 Other Home Asset Commercial Loans Personal (2) Financing and Industrial Total $M $M $M $M $M 2,668 1,449 796 1,195 1,324 7,432 7 1 - 1 - 9 510 149 99 172 23 953 - - - - - - 36 16 13 19 16 100 - - - - - - 621 132 84 93 104 1,034 - - - - - - 3,835 1,746 992 1,479 1,467 9,519 7 1 - 1 - 9 7,441 953 100 1,034 9,528 Bank 2010 Other Home Asset Commercial Loans Personal (2) Financing and Industrial Total $M $M $M $M $M 2,945 1,433 648 978 1,141 7,145 4 1 - - - 5 623 166 99 172 33 1,093 - - - - - - 51 20 12 3 10 96 - - - - - - 597 154 70 118 73 1,012 - - - - - - 4,216 1,773 829 1,271 1,257 9,346 4 1 - - - 5 7,150 1,093 96 1,012 9,351 (1) Collateral held against past due Housing Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown. Other personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and Other Commercial/ Industrial receivables. (2) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made with the debtor. Commonwealth Bank of Australia Annual Report 2011 199 Notes to the Financial Statements 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 • • • Non-performing facilities are facilities against which an individually assessed provision for impairment has been raised and facilities where loss of principal or interest is anticipated. Assets Acquired Through Security Enforcement. 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. 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. 2011 $M 2010 $M 2009 $M Group 2008 2007 $M $M 4,602 (2,031) 2,571 4,648 (1,915) 2,733 3,514 (1,560) 1,954 620 (248) 372 398 (86) 312 38 - 38 - - - 78 - 78 - - - 119 - 119 - - - - - - - - - - - - - - - 2,609 2,811 2,073 372 312 468 (94) 374 189 - 189 - - - 563 3,172 321 (77) 244 169 - 169 - - - 413 3,224 407 (169) 238 170 - 170 - - - 408 2,481 63 (31) 32 23 (14) 9 - - - - - - - - - - - - 32 404 9 321 Australia Non-Performing assets: Gross balances Less provisions for impairment Net non-performing assets Restructured assets: Gross balances Less provisions for impairment Net restructured assets Assets Acquired Through Security Enforcement: Gross balances Less provisions for impairment Net assets acquired through security enforcement Net Australia impaired assets Overseas Non-Performing assets: Gross balances Less provisions for impairment Net non-performing assets Restructured assets: Gross balances Less provisions for impairment Net restructured assets Assets Acquired Through Security Enforcement: Gross balances Less provisions for impairment Net assets acquired through security enforcement Net overseas impaired assets Total net impaired assets 200 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 39 Credit Risk (continued) Australia Overseas Total Australia Overseas 2011 2011 2011 2010 2010 Impaired assets by size Less than $1 million $1 million to $10 million Greater than $10 million Total $M 747 1,415 2,478 4,640 Movement in gross impaired assets Gross impaired assets - opening balance Acquisitions New and increased Balances written off Returned to performing or repaid Gross impaired assets - closing balance $M 41 129 487 657 2011 $M 5,216 - 4,619 (1,798) (2,740) 5,297 $M 788 1,544 2,965 5,297 2010 $M 4,210 - 5,455 (1,904) (2,545) 5,216 $M 692 1,425 2,609 4,726 $M 40 148 302 490 2009 2008 $M 683 770 4,374 (1,056) (561) 4,210 $M 421 - 1,104 (470) (372) 683 Group Total 2010 $M 732 1,573 2,911 5,216 Group 2007 $M 326 - 928 (482) (351) 421 Commonwealth Bank of Australia Annual Report 2011 201 Notes to the Financial Statements Note 39 Credit Risk (continued) Impaired Loans by Industry and Status Gross Individually Net Impaired Assessed Impaired Group 2011 Net Loans Loans Provisions Loans Write-offs Recoveries Write-offs $M $M $M 2,212 5,278 9,986 306,250 2,877 17,409 8,328 103,273 455,613 4,603 4,920 6,988 29,591 322 559 1,256 3,489 51,728 507,341 - 191 387 734 233 10 85 2,857 4,497 - 123 59 177 - 1 - 293 653 5,150 - (87) (254) (202) (133) (11) (37) (1,307) (2,031) - (11) (1) (25) - - - (57) (94) (2,125) $M - 104 133 532 100 (1) 48 1,550 2,466 - 112 58 152 - 1 - 236 559 3,025 Gross Individually Net Impaired Assessed Impaired $M $M $M - 10 107 84 89 567 26 989 1,872 - 17 1 26 1 22 - 36 103 1,975 - - (3) (43) - (134) (2) (17) (199) - - - - - (7) - - (7) (206) - 10 104 41 89 433 24 972 1,673 - 17 1 26 1 15 - 36 96 1,769 Group 2010 Net Loans Loans Provisions Loans Write-offs Recoveries Write-offs $M $M $M 1,571 5,158 9,221 292,140 3,438 15,979 8,621 108,818 444,946 1,213 5,450 6,344 31,433 472 822 768 9,821 56,323 501,269 - 222 414 671 271 15 81 2,947 4,621 - 193 4 165 - 4 - 124 490 5,111 - (75) (254) (150) (132) (21) (15) (1,268) (1,915) - (15) (1) (12) - - - (49) (77) (1,992) $M - 147 160 521 139 (6) 66 1,679 2,706 - 178 3 153 - 4 - 75 413 3,119 $M $M $M - 10 383 95 72 651 72 604 1,887 - 7 50 25 - 18 - 86 186 2,073 - - - (3) - (59) (3) (5) (70) - - - - - (6) - (1) (7) (77) - 10 383 92 72 592 69 599 1,817 - 7 50 25 - 12 - 85 179 1,996 Industry Australia Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset Financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Personal Asset Financing Other commercial and industrial Total overseas Gross balances Industry Australia Sovereign Agriculture Bank and other financial Home Loans Construction Personal Asset Financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home Loans Construction Personal Asset Financing Other commercial and industrial Total overseas Gross balances 202 Commonwealth Bank of Australia Annual Report 2011 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 principally arise from the Group’s trading book activities within the Institutional Banking and Markets business, ASB and Bankwest. The predominant Non-Traded Market Risk is Interest Rate Risk in the Banking Book (IRRBB). Other Non-Traded Market Risks are liquidity risk, funding risk, structural foreign exchange risk arising from capital investments in offshore operations, Non- Traded Equity Risk, market risk arising from the insurance business and lease residual value risk. Total Market Risk VaR (1 day 97.5% confidence) Traded Market Risk Non-Traded Interest Rate Risk (1) Non-Traded Equity Risk (1) Non-Traded Insurance Market Risk (1) Average (2) June 2011 $M As at Average June June (2) 2011 $M 12.0 10.2 2010 $M 12.2 As at June 2010 $M 13.7 28.3 32.6 22.0 40.8 23.0 15.0 34.8 31.5 10.3 9.6 7.1 8.5 (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’s assessment of regulatory capital required under the new Basel II framework is discussed in Note 31. Liquidity and funding risks are discussed in Note 41. The Group trades and distributes financial markets products and provides risk management services to customers on a global basis. 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 GFC. 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. It should be noted that because VaR is driven by actual historical observations, it is not an estimate of the maximum loss that the Group could experience from an extreme market event. As a result of this limitation, management also uses stress testing to measure the potential for economic loss at significantly higher confidence levels than 97.5%. Management then uses the results in decisions made to manage the economic impact of market risk positions. The following table provides a summary of VaR, across the Group, for those market risk types where it is appropriate to use this measure. The objectives of the Group’s financial markets activities are to: • • • Provide risk management capital market products and services to customers; Efficiently assist in managing the Group’s own market risks; and Conduct profitable trading within a controlled framework, leveraging off the Group’s market presence and expertise. The Group maintains access to markets by quoting bid and offer prices with other market makers and carries an inventory of treasury, capital market and risk management instruments, including a broad range of securities and derivatives. interest The Group is a participant in all major markets across foreign exchange and rate products, debt, equity and commodities products as required to provide treasury, capital markets and institutional, risk management services corporate, middle market and retail customers. to Income is earned from spreads achieved through market making and from taking market risk. 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. The Group measures and manages Traded Market Risk through a combination of VaR and stress test limits, together with other key controls including permitted instruments, sensitivity limits and term restrictions. Thus 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. Commonwealth Bank of Australia Annual Report 2011 203 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. Traded Market Risk Average (1) June As at Average June June June (1) As at VaR (1 day 97.5% 2011 2011 2010 2010 confidence) Interest rate risk Exchange rate risk Implied volatility risk Equities risk Commodities risk Credit spread risk $M $M $M $M 5.5 1.9 2.0 1.3 1.2 3.3 2.8 1.7 1.0 1.9 1.3 2.8 4.3 1.6 1.5 1.6 0.8 4.3 5.6 3.1 1.9 1.5 0.7 3.6 Diversification benefit (8.1) (6.9) (7.3) (8.3) Total general market risk Undiversified risk ASB Bank Bankwest Total 7.1 3.3 1.5 0.1 4.6 4.3 1.2 0.1 6.8 3.6 1.6 0.2 8.1 3.6 1.9 0.1 12.0 10.2 12.2 13.7 (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. The Group market risk framework governs all the activities performed in relation to Non-Traded Market Risk. Implementation of the policy, procedures and limits for the Group is the responsibility of the Group Executive undertaking activities with Non-Traded risk Market Risk. The Group’s Risk division performs measurement and monitoring activities of Non-Traded Market Risk. Ownership and management responsibility for CBA domestic operations are assumed by Group Treasury. Management actions conventionally include hedging activities using a range of policy approved derivative instruments. Independent management of the Non-Traded Market Risk activities of offshore banking subsidiaries is delegated to the CEO of each entity, with oversight by the local ALCO. Senior management oversight is provided by the Group’s ALCO. Interest Rate Risk in the Banking Book Interest rate risk is the current and prospective impact to the Group’s financial condition due to adverse changes in interest rates to which the Group’s Balance Sheet is exposed. Maturity transformation activities of the Group result in mismatched assets and liabilities positions which direct that the propensity, timing and quantum of interest rate movements have undesired outcomes over both the short term and long term. The Group’s objective is to manage interest rate risk to achieve stable and sustainable net interest income in the long term. The Group measures and manages the impact of interest rate risk in two ways: (a) Next 12 months’ earnings Interest rate risk from an earnings perspective is the impact based on changes to the net interest income over the next 12 months. The risk to net interest income over the next 12 months from changes in interest rates is measured on a monthly basis. Earnings risk is measured through sensitivity analysis, which applies an instantaneous 100 basis point parallel shock (increase) in interest rates across the yield curve. 204 Commonwealth Bank of Australia Annual Report 2011 The prospective change to the net interest income is measured by using an Asset/Liability Management simulation model which incorporates both existing and anticipated new business in its assessment. The change in the balance sheet product mix, growth, funding and pricing strategies is incorporated. Assets and liabilities that reprice directly from observable market rates are measured based on the full extent of the rate shock that is applied. Products that are priced based on Group administered or discretionary interest rates and that are impacted by customer behaviour are measured by taking into consideration the historic repricing strategy of the Bank and repricing behaviours of customers. In addition to considering how the products have repriced in the past the expected change in price based on both the current and anticipated competitive market forces are also considered in the sensitivity analyses. 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 (decrease). Net Interest Earnings at Risk Average monthly exposure High monthly exposure Low monthly exposure As at balance date June 2011 $M 162.9 9.3 241.2 26.1 74.3 1.1 175.6 26.1 June 2010 $M 186.6 5.6 299.9 12.6 72.1 1.5 162.9 12.6 AUD NZD AUD NZD AUD NZD AUD NZD (b) Economic Value Interest rate risk from the economic value perspective is based on a 20 day 97.5% VaR measure. 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 VaR 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. Non-Traded Interest Rate VaR (20 day 97.5% confidence) AUD Interest rate risk NZD Interest rate risk (3) (2) Average (1) Average (1) June 2011 $M 126.7 1.7 June 2010 $M 74.4 2.5 (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. Note 40 Market Risk (continued) Non-Traded Equity Risk The Group retains Non-Traded Equity Risk through strategic investments and business development activities in divisions including IB&M, 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 (MRM) function. An indicative VaR measure is as follows: Non-Traded Equity VaR (20 day 97.5% confidence) VaR As at June 2011 $M 67.0 As at June 2010 $M 140.0 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: (i) market risk arising from guarantees made to policyholders; and (ii) 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. Guarantees (to Policyholders) life insurance or All financial assets within the Life Insurance Statutory Funds directly support either life the Group's 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. Shareholders’ funds in the Australian Life Insurance businesses are invested 81% in income assets (cash and fixed interest) and 19% in growth assets (shares and property) as at 30 June 2011. Notes to the Financial Statements A 20 day 97.5% VaR measure is used to capture the Non- Traded Market Risk exposures. Non-Traded VaR in Australian Life Insurance Business (20 day 97.5% confidence) Shareholder funds (2) Guarantees (to Policyholders) (3) Average (1) Average (1) June 2011 $M 27.3 43.7 June 2010 $M 25.3 23.6 (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. Structural Foreign Exchange Risk Structural Foreign Exchange Risk is the risk that movements in foreign exchange rates may have an adverse effect on the Group’s Australian dollar earnings and economic value when the Group’s foreign currency denominated earnings and capital are translated into Australian dollars. The Group’s only material exposure to this risk arises from its New Zealand banking and insurance subsidiaries. This risk is managed in accordance with the following Risk Committee of the Board approved principles: • • Permanently deployed capital in a foreign jurisdiction is not hedged; and Forecast earnings from the Group’s New Zealand banking and insurance subsidiaries are hedged. The management of structural foreign exchange risk is regularly reported to the Group’s ALCO. Lease Residual Value Risk The Group takes Lease Residual Value Risk on assets such as industrial, mining, 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. Supporting this framework is an internal Market Risk Standard document which has a risk limit framework which includes asset, geographic and maturity concentration limits and stress testing which is performed by the MRM function. Officer Superannuation Fund is (OSF) The Officers Superannuation Fund the staff superannuation fund for the Group’s Australian employees and former employees. Wealth Risk Management and Human Resources manage the risks of the OSF on behalf of the Group. Regular reporting is provided to senior management via the CBA Asset and Liability Committee and the Board Risk Committee on the status of the surplus, risk sensitivities and risk management options. For further information on the OSF, refer to Note 42. Commonwealth Bank of Australia Annual Report 2011 205 Notes to the Financial Statements Liquidity and Funding Policies and Management The Group’s liquidity and funding policies provide that: • • • • • • long funding term wholesale Balance sheet assets that cannot be liquidated quickly are funded with deposits or term borrowings that meet minimum maturity requirements with appropriate liquidity buffers; Short and limits are established and reviewed regularly based on surveys and analysis of market capacity; A minimum level of assets are retained in highly liquid form; The level of liquid assets: complies with crisis scenario assumptions related to “worst case” wholesale and retail market conditions; is adequate to meet known funding obligations over certain timeframes; and are allocated across Australian dollar and foreign currency denominated securities in accordance with specific calculations; Certain levels of liquid assets are held to provide for the risk of the Group’s committed but undrawn lending obligations being drawn by customers, as calculated based on draw down estimates and forecasts; levels of The Group maintains certain liquid asset 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 RBA at any time. The second category is AAA and A- 1+ rated Australian residential mortgage backed securities that meet certain minimum requirements; and • Offshore branches and subsidiaries adhere to liquidity policies and hold appropriate foreign currency liquid assets as required. All securities are eligible for repurchase by the relevant local central bank at any time. The Group’s key liquidity tools include: • • • • A liquidity management model similar to a “cash flow ladder” or “maturity gap analysis”, that allows forecasting of liquidity needs on a daily basis; An additional liquidity management model that implements the agreed prudential liquidity policies. This model is calibrated with a series of “worst case” liquidity crisis scenarios, incorporating both systemic and “name” crisis assumptions, such that the Group will have sufficient liquid assets available to ensure it meets all of its obligations as and when they fall due; The RBA’s repurchase agreement facilities provide the Group with the ability to borrow funds on a secured basis, even when normal funding markets are unavailable; and The Group’s various short term funding programmes are supplemented by 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 Note 41 Liquidity and Funding Risk Overview The Group’s liquidity and funding policies are designed to ensure it will meet its obligations as and when they fall due, by ensuring it is able to borrow funds on an unsecured basis, or has sufficient quality assets to borrow against on a secured basis, or has sufficient quality liquid assets to sell to raise immediate funds without adversely affecting the Group’s net asset value. The Group’s funding policies and risk management framework are designed to complement the Group’s liquidity policies by providing for 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 across its Retail Banking Services, Business and Private Banking, Institutional Banking and Markets, Wealth Management, Bankwest, and Asian businesses, during periods of unfavourable market conditions. The Group’s funding policies are designed to achieve diversified sources of funding by product, term, maturity date, investor type, investor location, jurisdiction, currency and concentration, on a cost effective basis. This objective applies to the Group’s wholesale and retail funding activities. The Risk Management Framework for Liquidity and Funding The Group’s liquidity and funding policies are approved by the Board and agreed with APRA. The Group has an Asset and Liability Committee whose charter includes reviewing the management of assets and liabilities, reviewing liquidity and funding policies and strategies, as well as regularly monitoring compliance with those policies across the Group. The Group Treasury division manages the Group’s liquidity and funding positions in accordance with the Group’s liquidity policy, including monitoring and satisfying the liquidity needs of the Group and its subsidiaries. Larger domestic subsidiaries, such as Bankwest 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, 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 RBNZ. The Group also has a relatively small banking subsidiary in Indonesia that manages its own 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. 206 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 41 Liquidity and Funding Risk (continued) The Group’s key funding tools include: • • • Its consumer retail funding base includes a wide range of retail transaction accounts, investment accounts, term deposits and retirement style accounts for individual consumers; Its customer small business and institutional deposit base; and international and domestic funding Its wholesale programmes which include it’s Australian dollar Negotiable Certificates of Deposit; Australian dollar bank bills; Asian Transferable Certificates programme; Australian, U.S. and Euro Commercial Paper programmes; Bankwest Euro Commercial Paper programme; U.S. Extendible Notes programmes; Australian dollar Domestic Debt Programme; U.S. Medium Term Note Programme; Euro Medium Term Note Programme; and its Medallion and Swan securitisation programmes. of Deposit At 30 June 2011 virtually all of the Group’s Australian dollar liquid assets qualified for repurchase by the RBA at any time. Recent Market Environment The incremental cost of wholesale funding has been generally stable over the last financial year but remains high. The Group has managed its debt portfolio to avoid concentrations such as dependence on single sources of funding, by type or by investor, and has continued to maintain a diversified funding base and the domestic and global in significant unsecured and secured debt markets. funding capacity 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. Commonwealth Bank of Australia Annual Report 2011 207 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. Maturity Period as at 30 June 2011 Group 0 to 3 3 to 12 At Call months months $M $M $M 1 to 5 years $M Over 5 Not years Specified Total $M $M $M Monetary liabilities Deposits and other public borrowings (1) Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative liabilities (2) (3) Bank acceptances Insurance policy liabilities Debt issues and loan capital Managed funds units on issue Other monetary liabilities Total monetary liabilities Guarantees (4) Loan commitments (4) Other commitments (4) Total off balance sheet items Total monetary liabilities and off balance sheet items 2,650 - - - - - - 190,378 128,159 70,577 16,821 13,038 5,498 34,984 10,632 - 241 1,032 5,014 102 - 1 3,044 11,030 - - 525 - 1,023 1,549 - - - - - - - 13,652 406,460 15,930 10,597 52,577 10,734 13,652 28,841 27,688 63,446 35,695 - 155,670 - - 95 4,617 1,997 - 371 - - 1,048 284 1,048 7,364 193,123 225,769 106,651 94,713 38,792 14,984 674,032 - - - - 4,462 128,007 3,665 136,134 - - - - - - - - - - - - - - - - 4,462 128,007 3,665 136,134 193,123 361,903 106,651 94,713 38,792 14,984 810,166 (1) Includes 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. Maturity Period as at 30 June 2010 Group 0 to 3 3 to 12 At Call months months $M $M $M 1 to 5 years $M Over 5 Not years Specified Total $M $M $M Monetary liabilities Deposits and other public borrowings (1) Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative liabilities (2) (3) Bank acceptances Insurance policy liabilities Debt issues and loan capital Managed funds units on issue Other monetary liabilities Total monetary liabilities Guarantees (4) Loan commitments (4) Other commitments (4) Total off balance sheet items Total monetary liabilities and off balance sheet items 180,302 123,073 58,414 17,420 3,618 - - - - - - 7,571 6,528 25,906 11,360 - 1,376 4,671 536 209 - 68 3,212 2,426 - - 29,071 25,561 75,895 36,089 - 345 - - 384 - 1,644 3,733 - - - - - - - 14,592 - 880 405 379,593 12,633 16,055 32,601 11,569 14,592 166,616 880 7,074 - 157 3,938 184,077 207,447 - - - - 3,658 109,420 2,663 115,741 - 2,229 92,996 - - - - 99,366 41,850 15,877 641,613 - - - - - - - - - - - - 3,658 109,420 2,663 115,741 184,077 323,188 92,996 99,366 41,850 15,877 757,354 (1) Includes 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 2011 Notes to the Financial Statements Note 41 Liquidity and Funding Risk (continued) Amounts shown in the tables below are based on contractual undiscounted cash flows for the remaining contractual maturities. Maturity Period as at 30 June 2011 Bank 0 to 3 3 to 12 At Call months months $M $M $M 1 to 5 years $M Over 5 Not years Specified Total $M $M $M Monetary liabilities Deposits and other public borrowings (1) Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative liabilities (2) (3) Bank acceptances Debt issues and loan capital Due to controlled entities Other monetary liabilities Total monetary liabilities Guarantees (4) Loan commitments (4) Other commitments (4) Total off balance sheet items Total monetary liabilities and off balance sheet items 161,863 103,335 56,774 15,042 2,453 13,021 - - - - 2,938 62 280 32,822 10,632 21,890 2,834 3,531 241 353 2,174 102 21,517 2,034 3,401 1 2,922 10,331 - 51,364 6,156 71 543 - 1,416 1,388 - 32,350 38,392 - 167,316 188,345 86,596 85,887 74,089 - - - - 3,719 111,682 2,793 118,194 - - - - - - - - - - - - 167,316 306,539 86,596 85,887 74,089 - - - - - - - 2 2 - - - - 2 337,557 15,716 4,971 46,715 10,734 127,121 52,354 7,067 602,235 3,719 111,682 2,793 118,194 720,429 (1) Includes deposits that are contractually at call customer savings and cheque accounts. Historical experience is that such accounts provide a stable source of long term funding for the Bank. (2) Gross payable amounts on cross currency swaps have been reported in derivative liabilities. The Bank 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 Bank 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. Maturity Period as at 30 June 2010 Bank Monetary liabilities Deposits and other public borrowings (1) Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative liabilities (2) (3) Bank acceptances Debt issues and loan capital Due to controlled entities Other monetary liabilities Total monetary liabilities Guarantees (4) Loan commitments (4) Other commitments (4) Total off balance sheet items Total monetary liabilities and off balance sheet items 1 to 5 years $M 16,074 68 2,808 544 - 0 to 3 3 to 12 At Call months months $M $M $M Over 5 Not years Specified Total $M $M $M 45,622 1,376 732 297 209 153,635 3,448 - - - - 3,558 - 96,454 7,555 163 23,689 11,360 20,655 4,979 2,497 22,736 61,535 1,624 3,923 5,205 2,180 376 - 1,797 3,733 - 34,947 37,045 - 160,641 167,352 76,519 88,414 77,898 - - - - 2,874 93,881 2,012 98,767 - - - - - - - - - - - - - - - - - - - 227 227 - - - - 312,161 12,447 5,500 28,263 11,569 139,873 52,411 8,827 571,051 2,874 93,881 2,012 98,767 160,641 266,119 76,519 88,414 77,898 227 669,818 (1) Includes deposits that are contractually at call customer savings and cheque accounts. Historical experience is that such accounts provide a stable source of long term funding for the Bank. (2) Gross payable amounts on cross currency swaps have been reported in derivative liabilities. The Bank 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 Bank 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 2011 209 Notes to the Financial Statements Note 42 Retirement Benefit Obligations Name of Plan Officers’ Superannuation Fund (OSF) Commonwealth Bank of Australia (UK) Staff Benefits Scheme (CBA (UK) SBS) Type Defined Benefits (1) and Accumulation Defined Benefits (1) and Accumulation Form of Benefit Indexed pension and lump sum Indexed pension and lump sum Date of Last Actuarial Assessment of the Fund 30 June 2009 30 June 2010 (1) The defined benefit formulae are generally comprised of final superannuation salary, or final average superannuation salary, and service. 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. The Bank will continue to monitor the need to make contributions to the OSF including the advice provided in the next actuarial assessment of the OSF as at 30 June 2012. An actuarial assessment of the CBA(UK)SBS, as at 30 June 2010 confirmed a deficit of GBP 68 million ($102 million at the 30 June 2011 exchange rate). Following from this assessment, the Bank agreed to contribute at the fund actuary’s recommended contribution rates. These rates included amounts to finance future accruals of defined benefits estimated at $3 million per annum (at the 30 June 2011 exchange rate) and additional contributions of GBP 15 million per annum ($22 million per annum at the 30 June 2011 exchange rate) payable over 5 years to finance the fund deficit. 210 Commonwealth Bank of Australia Annual Report 2011 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: Present value of funded obligations Fair value of plan assets Total pension assets as at 30 June Amounts in the Balance Sheet: Liabilities (Note 25) Assets (Note 17) Net assets/(liabilities) The amounts recognised in the Income Statement are as follows: Current service cost Interest cost Expected return on plan assets Employer financed benefits within accumulation division Total included in defined benefit superannuation plan expense Actual return on plan assets Changes in the present value of the defined benefit obligation are as follows: Opening defined benefit obligation Current service cost Interest cost Member contributions Actuarial (losses)/gains Benefits paid Exchange differences on foreign plans Closing defined benefits obligation Changes in the fair value of plan assets are as follows: Opening fair value of plan assets Expected return Experience gains Total contributions Exchange differences on foreign plans Benefits and expenses paid Employer financed benefits within accumulation division Closing fair value of plan assets 2011 $M (3,493) 3,569 76 - 76 76 (53) (158) 262 (190) (139) 338 OSF 2010 $M (3,332) 3,648 316 - 316 316 (43) (160) 276 (168) (95) 391 CBA(UK)SBS 2011 2010 $M (356) 273 (83) (83) - (83) (2) (13) 17 - 2 30 $M (377) 295 (82) (82) - (82) (3) (20) 15 - (8) 33 2011 $M (3,849) 3,842 (7) (83) 76 (7) (55) (171) 279 (190) (137) 368 Total 2010 $M (3,709) 3,943 234 (82) 316 234 (46) (180) 291 (168) (103) 424 (3,332) (3,118) (377) (394) (3,709) (3,512) (46) (158) (10) (177) 230 - (36) (160) (10) (199) 191 - (2) (13) - (31) 12 55 (3) (20) - (25) 13 52 (48) (171) (10) (208) 242 55 (39) (180) (10) (224) 204 52 (3,493) (3,332) (356) (377) (3,849) (3,709) 3,648 262 76 10 - (237) (190) 3,569 3,613 276 115 10 - (198) (168) 3,648 295 17 13 7 (47) (12) - 273 308 15 18 9 (42) (13) - 295 3,943 279 89 17 (47) (249) (190) 3,842 3,921 291 133 19 (42) (211) (168) 3,943 Commonwealth Bank of Australia Annual Report 2011 211 Notes to the Financial Statements Note 42 Retirement Benefit Obligations (continued) Present value of funded obligations Fair value of plan assets Total assets Experience adjustments on plan liabilities Experience adjustments on plan assets (Losses)/gains from changes in actuarial assumptions Total net actuarial (losses)/gains Present value of funded obligations Fair value of plan assets Total liabilities Experience adjustments on plan liabilities Experience adjustments on plan assets (Losses)/Gains from changes in actuarial assumptions Total net actuarial (losses)/gains Present value of funded obligations Fair value of plan assets Total (liabilities)/assets Experience adjustments on plan liabilities Experience adjustments on plan assets (Losses)/gains from changes in actuarial assumptions Total net actuarial (losses)/gains 2011 $M (3,493) 3,569 76 (6) 76 (171) (101) 2010 $M (3,332) 3,648 316 77 115 (276) (84) OSF 2009 $M (3,118) 3,613 495 (120) (829) (84) (1,033) 2008 $M (2,892) 4,428 1,536 134 (520) 92 (294) 2007 $M (3,094) 4,907 1,813 31 282 259 572 2011 2010 2009 2008 2007 CBA(UK)SBS $M (356) 273 (83) (14) 13 (17) (18) 2011 $M (3,849) 3,842 (7) (20) 89 (188) (119) $M (377) 295 (82) 19 18 (44) (7) 2010 $M (3,709) 3,943 234 96 133 (320) (91) $M (394) 308 (86) 2 (26) - (24) Total 2009 $M (3,512) 3,921 409 (118) (855) (84) (1,057) $M (386) 321 (65) 6 (21) (32) (47) 2008 $M (3,278) 4,749 1,471 140 (541) 60 (341) $M (401) 372 (29) (3) (2) 25 20 2007 $M (3,495) 5,279 1,784 28 280 284 592 Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments arising from changes in actuarial assumptions. Total net actuarial losses recognised in equity from the date of adoption of IFRS to 30 June 2011 were $317 million. Economic assumptions The above calculations were based on the following assumptions: Discount rate at 30 June (gross of tax) Expected return on plan assets at 30 June Expected rate salary increases at 30 June (per annum) (1) 2011 % 5.20 7.70 4.40 OSF 2010 % 5.10 7.60 4.10 CBA(UK)SBS 2011 2010 % % 5.40 5.60 4.80 5.30 5.70 4.40 (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 2011, 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. 212 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 42 Retirement Benefit Obligations (continued) 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 of 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: Expected life expectancies for pensioners Male pensioners currently aged 60 Male pensioners currently aged 65 Female pensioners currently aged 60 Female pensioners currently aged 65 2011 OSF 2010 CBA(UK)SBS 2011 2010 Years Years Years Years 29.0 24.2 34.2 29.0 28.9 24.1 34.0 28.9 28.9 24.1 31.5 26.5 27.9 23.1 30.6 25.6 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 Bank’s major superannuation (pension) plan) is “to maximise the long term rate of return subject to net returns over rolling five year periods exceeding the growth in Average Weekly Ordinary Time Earnings 80% of the time”. 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 2011, the actual asset allocations for the assets backing the defined benefit portion of the OSF are as follows: Asset allocations Australian equities Overseas equities Real estate Fixed interest securities Cash Other (1) Actual Allocation % 25.1 12.0 13.0 30.7 7.0 12.2 (1) These are assets which are not included in the traditional asset classes of equities, fixed interest securities, real estate and cash. They include infrastructure investments as well as high yield and emerging market debt. The value of the OSF’s equity holding in the Group was $102 million as at 30 June 2011 (2010: $96 million). Amounts on deposit with the Bank were $30 million as at 30 June 2011 (2010: $23 million). Other financial instruments with the Group were $63 million as at 30 June 2011 (2010: $73 million). Commonwealth Bank of Australia Annual Report 2011 213 Notes to the Financial Statements Note 43 Investments in Associated Entities and Joint Ventures 2011 2010 2011 2010 Ownership Ownership Principal Country of Balance $M $M Interest % Interest % Activities Incorporation Date Group Acadian Asset Management (Australia) Limited Aegis Correctional Partnership Trust AMTD Group Company Limited Aspire Schools (Qld) Holdings Limited Aussie Home Loans Pty Limited Bank of Hangzhou Co. Ltd. BoCommLife Insurance Company Limited Cardlink Services Limited CFS Retail Property Trust (1) (3) Commonwealth Property Office Fund (2) (3) Equigroup Pty Limited First State Cinda Fund Management Company Limited 2 1 - 6 71 458 27 20 439 139 15 15 2 - 1 2 76 398 28 11 439 139 16 15 First State European Diversified Investment Fund 139 145 International Private Equity Real Estate Fund Pinnacle Education SA Holding Company Pty Ltd (4) Qilu Bank Co., Ltd. Vietnam International Bank 452 Capital Pty Limited Total 3 6 213 158 - 3 - 204 - 11 1,712 1,490 50 50 - 50 33 20 38 25 8 6 50 46 30 33 50 20 15 30 50 50 30 50 33 20 38 44 9 7 50 46 39 33 50 20 - Investment Management Investment Vehicle Australia Australia 30-Jun 30-Jun Financial Services Virgin Islands 31-Dec Investment Vehicle Mortgage Broking Commercial Banking Life Insurance Transaction Services Funds Management Funds Management Leasing Australia Australia China China Australia Australia Australia Australia 30-Jun 30-Jun 31-Dec 31-Dec 30-Jun 30-Jun 30-Jun 30-Jun Funds Management China 31-Dec Funds Management Luxembourg Funds Management Investment Vehicle Commercial Banking Financial Services 30 Investment Management Australia Australia China Vietnam Australia 30-Jun 30-Jun 30-Jun 31-Dec 31-Dec 30-Jun (1) The value for CFS Retail Property Trust based on published quoted prices was $400 million as at 30 June 2011 (2010: $416 million). (2) The value for Commonwealth Property Office Fund based on published quoted prices was $133 million as at 30 June 2011 (2010: $132 million). (3) The consolidated entity has significant influence due to its relationship as Responsible Entity. (4) Formerly known as CIPL SA Schools Pty Limited Share of Associates' and Joint Ventures profits/(losses) Operating profits/(losses) before income tax Income tax expense Operating profits/(losses) after income tax 2011 $M 164 (23) 141 Group 2010 $M 141 (7) 134 Carrying amount of investments in associated entities and joint ventures 1,712 1,490 Group's share of lease commitments of Associates and of Joint Ventures due Not later than one year Later than one year but not later than five years Later than five years Total lease commitments - property, plant and equipment Financial information of Associates and Joint Ventures Current assets Non-current assets Current Liabilities Non-current Liabilities Revenues Expenses 2011 $M 6 13 11 30 2011 $M 30,466 36,420 46,086 8,213 3,722 1,936 Group 2010 $M 5 11 7 23 Group 2010 $M 23,581 35,744 38,796 5,229 2,228 1,199 214 Commonwealth Bank of Australia Annual Report 2011 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 Financial Statements. These remuneration disclosures are provided in the Remuneration Report of the Directors’ Report on pages 72 to 91 and have been audited. Key management personnel compensation Short term benefits Post-employment benefits Share-based payments Long term benefits Total Equity Holdings of Key Management Personnel Shareholdings 2011 $'000 32,494 752 9,931 463 43,640 Group 2010 $'000 33,173 1,584 26,787 1,020 62,564 2011 $'000 32,494 752 9,931 463 43,640 Bank 2010 $'000 33,173 1,584 26,787 1,020 62,564 Details of the 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. Shares held by directors All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Director’s Share Plan. Directors David Turner John Anderson Colin Galbraith Jane Hemstritch Launa Inman (3) Carolyn Kay Brian Long (3) Andrew Mohl Fergus Ryan Harrison Young Class Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Balance 1 July 2010 9,600 15,238 15,895 21,888 1,298 11,501 10,544 9,818 17,976 25,876 Shares (1) Acquired 1,398 497 540 570 - 570 157 532 570 570 Net Change Other Balance (2) 30 June 2011 - 10,998 738 - 3,000 - - - - - - 16,473 16,435 25,458 1,298 12,071 10,701 10,350 18,546 26,446 (1) Non-Executive Directors receive 20% of their total annual fees as Commonwealth Bank shares. These shares are subject to a 10 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) Launa Inman joined the Group on 16 March 2011. Brian Long commenced with the Group on 1 September 2010. Commonwealth Bank of Australia Annual Report 2011 215 Notes to the Financial Statements Note 44 Key Management Personnel (continued) Shares held by the CEO and Group Executives Acquired/ On Deferred Reward/ Balance Granted as Exercise of Shares Net Change 1 July 2010 Remuneration Options Vested (2) other Balance (3) 30 June 2011 Class Managing Director and CEO Ralph Norris Ordinary (1) Reward Shares/Rights Deferred Shares Group Executives Simon Blair Ordinary 201,623 204,626 39,167 - - 85,976 - - Reward Shares/Rights 30,190 22,046 Barbara Chapman Ordinary Deferred Shares Reward Shares/Rights Deferred Shares David Cohen Ordinary Reward Shares/Rights Deferred Shares David Craig Ordinary Reward Shares/Rights Deferred Shares Michael Harte Ordinary Reward Shares/Rights Deferred Shares Ross McEwan Ordinary Ian Narev Reward Shares/Rights Deferred Shares Ordinary Reward Shares/Rights Deferred Shares Grahame Petersen Ordinary Reward Shares/Rights Deferred Shares Ian Saines Ordinary Reward Shares/Rights Deferred Shares Alden Toevs Ordinary Reward Shares/Rights Deferred Shares - - 58,844 13,666 13,781 57,113 7,597 35,113 72,690 19,548 14,318 65,767 17,955 - 83,074 20,814 1,137 58,844 18,284 48,271 76,151 15,096 14,919 89,997 34,193 9,000 96,920 47,914 - - 24,250 - - 23,837 - - 37,202 - - 28,935 - - 34,446 - - 24,801 - - 31,690 - - 36,650 - - 38,579 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (6,610) - - - - - (12,653) - - (37,784) 42,056 - - - - - - - - 24,100 - - 27,543 - - 24,100 - - 9,429 - - 6,610 - - 2,829 - - (13,991) - - 37,784 - - 243,679 290,602 39,167 - 52,236 - - 83,094 13,666 37,881 80,950 7,597 62,656 109,892 19,548 38,418 94,702 17,955 9,429 117,520 20,814 7,747 83,645 11,674 51,100 107,841 15,096 928 126,647 21,540 46,784 135,499 10,130 (1) Reward Shares/Rights represent shares granted under the 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/rights and Deferred shares become ordinary shares upon vesting. (3) "Net Change Other" incorporates changes resulting from purchases, sales and forfeitures during the year. 216 Commonwealth Bank of Australia Annual Report 2011 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 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). Opening Interest Closing Balance Charged Balance Number in $000s $000s $000s Group Directors CEO & Group Executives Total 2011 2010 2011 2010 2011 2010 5 - 9,324 9,999 9,329 9,999 - - 538 579 538 579 5 - 7,153 9,324 7,158 9,324 Loans to Key Management Personnel Exceeding $100,000 in Aggregate Balance 1 July 2010 $000s Interest Charged $000s Interest Not Balance Charged Write-off 30 June 2011 $000s $000s $000s 1 - 11 11 12 11 Highest Balance in Period (2) $000s Managing Director & CEO Ralph Norris (1) Group Executives Simon Blair (1) Barbara Chapman (1) David Cohen Michael Harte Ross McEwan (1) Ian Narev (1) Ian Saines Total 1,839 1,082 1,869 602 2,989 220 381 310 9,292 36 58 102 38 209 33 17 45 538 - - - - - - - - - - - - - - - - - - 28 1,830 668 1,493 596 3,302 573 181 310 7,151 1,082 2,192 604 3,519 1,797 385 2,990 14,399 (1) Some loans for Mr Norris, Mr Blair, Ms Chapman, Mr McEwan and Mr Narev are held in New Zealand Dollars and converted to Australian Dollars for the purpose of this disclosure. The exchange rate at 30 June 2010 has been used for the opening balances, and the exchange rate at 30 June 2011 has been used for calculating interest charged, closing balances and highest balance in period. The highest balance in period for Mr Norris is lower than the opening balance due to the fluctuation in exchange rates during the year. (2) Represents the highest balance of loans outstanding at any period during the year ended 30 June 2011. 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. All such financial instrument transactions that have occurred between entities within the Group and their Key Management Personnel have been trivial or domestic in nature and were in the nature of normal personal banking and deposit transactions. Other Transactions 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 2011 217 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. Interest and dividend income Interest expense Fee and commission income for services provided (1) Fee and commission expense for services received Loans, bills discounted and equity contributions Derivative assets Other assets Deposits Derivative liabilities Other liabilities Interest and dividend income Interest expense Fee and commission income for services provided (1) Fee and commission expense for services received Loans, bills discounted and equity contributions Derivative assets Other assets Deposits Derivative liabilities Other liabilities For the Year Ended and as at 30 June 2011 Group Joint Associates Ventures $000s $000s 92,022 1,756 76,555 32,088 1,259,031 65,577 39,400 18,623 6,338 1,609 - - 31 63 - - 179 - - - Total $000s 92,022 1,756 76,586 32,151 1,259,031 65,577 39,579 18,623 6,338 1,609 Group For the Year Ended and as at 30 June 2010 Associates Ventures Joint $000s 58,169 333 57,121 104,508 424,621 12,400 39,367 18,709 25,818 22,698 $000s 1,000 2,037 2,884 10,118 12,620 6,684 8,383 - - - Total $000s 59,169 2,370 60,005 114,626 437,241 19,084 47,750 18,709 25,818 22,698 (1) Not included above are management services provided for nil consideration to associated Group and Bank companies to the value of $4,352,000 (2010: $7,520,000). 218 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 45 Related Party Disclosures (continued) Interest and dividend income Interest expense Fee and commission income for services provided (1) Fee and commission expense for services received Available-for-sale securities Loans, bills discounted and equity contributions Derivative assets Other assets Deposits Derivative liabilities Debt issues and loan capital Other liabilities Interest and dividend income Interest expense Fee and commission income for services provided (1) Fee and commission expense for services received Available-for-sale securities Loans, bills discounted and equity contributions Derivative assets Other assets Deposits Derivative liabilities Debt issues and loan capital Other liabilities For the Year Ended and as at 30 June 2011 Bank Subsidiaries Associates Ventures Joint $000s 6,313,371 3,365,381 686,572 333,983 39,757,623 47,550,178 297,665 962,751 53,860,369 434,337 2,595,843 1,763,744 $000s 87,767 1,756 2,199 32,193 - 1,223,218 65,577 - 18,623 6,338 - 54 $000s - - 31 63 - - - 179 - - - - Total $000s 6,401,138 3,367,137 688,802 366,239 39,757,623 48,773,396 363,242 962,930 53,878,992 440,675 2,595,843 1,763,798 Bank For the Year Ended and as at 30 June 2010 Joint Subsidiaries Associates Ventures $000s 5,165,042 2,916,015 599,921 601,000 39,821,783 49,901,264 193,959 1,075,058 53,873,671 408,512 2,916,825 3,838,430 $000s 55,678 - 2,650 94,230 - 412,000 12,400 - 8,900 25,818 - 22,698 $000s - - 119 218 - - - - - - - - Total $000s 5,220,720 2,916,015 602,690 695,448 39,821,783 50,313,264 206,359 1,075,058 53,882,571 434,330 2,916,825 3,861,128 (1) Not included above are management services provided for nil consideration to associated Group and Bank companies to the value of $4,352,000 (2010: $7,520,000). 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 provides letters of comfort to other entities within the Group on standard terms. Guarantees include a $5 million bank guarantee provided to Colonial First State Investments Limited and a $25 million guarantee to AFS license holders in respect of excess insurance claims. 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(x). The amount receivable by the Bank under the tax funding agreement with the tax consolidated entities is $281 million as at 30 June 2011 (2010: $439 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 2011 219 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 Net profit after income tax (Increase)/decrease in interest receivable Increase/(decrease) in interest payable Net decrease in assets at fair value through Income Statement (excluding life insurance) Net (gain)/loss on sale of controlled entities and associates Net gain on sale of investments Net increase in derivative assets Net loss on sale of property, plant and equipment Equity accounting profit Gain on acquisition of controlled entities Impairment expense Depreciation and amortisation (including asset write downs) (Decrease)/increase in liabilities at fair value through Income Statement (excluding life insurance) Increase/(decrease) in derivative liabilities Increase in other provisions Increase/(decrease)in income taxes payable Increase/(decrease) in deferred tax liabilities (Increase)/decrease in deferred tax assets (Increase)/decrease in accrued fees/reimbursements receivable (Decrease)/Increase in accrued fees and other items payable Increase/(decrease) in life insurance contract policy liabilities Increase/(decrease) in cash flow hedge reserve (Decrease)/Increase in fair value on hedged items Dividend received from controlled entities Changes in operating assets and liabilities arising from cash flow movements Other Net cash provided by/(used in) operating activities (b) Reconciliation of Cash 2011 $M 6,410 (224) 476 2010 $M 5,680 (551) 889 2,697 3,301 (7) (1) 32 (4) Group 2009 $M 4,753 301 (54) 690 - (1) 2011 $M 6,480 (287) 465 Bank 2010 $M 5,615 (559) 878 1,202 2,383 (6) (1) (2) (4) (4,224) (1,331) (8,358) (4,735) (1,827) 6 (141) - 1,280 613 (4,851) 4,643 80 105 80 (30) (1) (99) 835 15 (427) - 10,590 (158) 17,667 4 (116) - 2,379 618 (1,254) (9,804) 46 (150) 53 383 44 302 853 589 838 - 11 (141) (983) 3,048 519 661 13,361 60 521 (355) (967) 41 178 (1,025) (1,651) 569 - 6 - - 1,080 387 87 4,733 23 117 (1) 131 37 (128) - (98) (410) 4 - - 1,193 373 1,128 (6,126) 104 80 7 1 (73) 524 - 219 810 (2,210) (1,648) (29,592) (19,788) 122 (26,669) 100 (8,510) 7,597 34 14,503 (24,299) 355 (20,864) For the purposes of the Statements of Cash Flows, cash includes cash, money at short call, at call deposits with other financial institutions and settlement account balances with other banks. Notes, coins and cash at banks Other short term liquid assets Receivables due from other financial institutions – at call (1) Payables due to other financial institutions – at call (1) Cash and cash equivalents at end of year 2011 $M 5,424 1,301 7,261 (6,058) 7,928 2010 $M 5,285 1,153 5,012 (6,533) 4,917 Group 2009 $M 3,755 3,128 1,889 (6,586) 2,186 Year Ended 30 June 2011 $M 4,103 977 6,664 (5,853) 5,891 Bank 2010 $M 4,027 979 4,386 (6,346) 3,046 (1) At call includes certain receivables and payables due from and to financial institutions within three months. 220 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 46 Notes to the Statements of Cash Flows (continued) (c) Disposal of Controlled Entities – Fair Value of asset disposal The Group disposed of certain St Andrew operations effective 1 July 2010. During the year ended 30 June 2010, the Group disposed of its banking and insurance operations in Fiji. Net Assets (Loss)/gain on sale (excluding realised foreign exchange losses and other related costs) Cash consideration received Less cash and cash equivalents disposed Net cash inflow/(outflow) on disposal (d) Non-cash Financing and Investing Activities Shares issued under the Dividend Reinvestment Plan (1) 2011 $M 60 (10) 50 (31) 19 2010 $M 77 1 78 (89) (11) 2011 $M 511 2010 $M 1,457 Group 2009 $M - - - - - Group 2009 $M 1,099 (1) The dividend reinvestment plan in respect of the final dividend for 2009/10 was satisfied in full by an on market purchase and transfer of $679 million of shares to participating shareholders. Commonwealth Bank of Australia Annual Report 2011 221 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. Assets Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables Bank acceptances of customers Other assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative liabilities Bank acceptances Insurance policy liabilities Debt issues Managed funds units on issue Bills payable and other liabilities Loan capital 2011 Carrying Fair Carrying Value $M 13,241 10,393 20,469 14,998 824 30,317 45,171 500,057 10,734 7,059 Value $M 13,241 10,393 20,469 14,998 824 30,317 45,171 500,544 10,734 7,059 Value $M 10,119 10,072 22,851 15,940 654 27,689 32,915 493,459 11,569 6,240 Group 2010 Fair Value $M 10,119 10,072 22,851 15,940 654 27,689 32,915 492,951 11,569 6,240 401,147 401,979 374,663 374,508 15,899 10,491 33,976 10,734 13,652 15,899 10,491 33,976 10,734 13,652 12,608 15,342 24,884 11,569 14,592 12,608 15,342 24,884 11,569 14,592 118,652 120,752 130,210 127,874 1,048 8,983 11,561 1,048 8,983 12,105 880 7,698 13,513 880 7,698 13,036 222 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 47 Disclosures about Fair Values of Financial Instruments (continued) 2011 Carrying Fair Carrying Assets Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables Bank acceptances of customers Loans to controlled entities Other assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative liabilities Bank acceptances Due to controlled entities Debt issues Bills payable and other liabilities Loan capital Bank 2010 Fair Value $M 8,711 9,766 Value $M 8,711 9,766 18,775 18,775 - 27,363 65,779 377,195 11,569 31,055 4,492 - 27,363 65,779 376,679 11,569 30,892 4,492 Value $M Value $M 10,979 10,123 17,765 300 30,731 75,699 10,979 10,123 17,765 300 30,731 75,699 387,888 388,187 10,734 28,454 5,283 10,734 28,988 5,283 332,964 333,465 307,844 307,511 15,686 4,700 32,817 10,734 52,353 94,385 6,635 11,808 15,686 4,700 32,817 10,734 52,353 97,080 6,635 12,007 12,422 4,613 23,689 11,569 52,411 107,039 5,362 13,575 12,422 4,613 23,689 11,569 52,411 104,352 5,362 13,044 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 Institutional variable rate loans the fair value is calculated using discounted 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. 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 For all other financial assets and liabilities fair value approximates carrying value due to their short term nature, frequent repricing or high credit rating. Commonwealth Bank of Australia Annual Report 2011 223 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 techniques rely on market observable inputs wherever possible, or in a limited number of instances, rely on inputs which are reasonable assumptions based on market conditions. The tables below categorise 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. Assets Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments (1) Total assets carried at fair value Liabilities Liabilities at fair value through Income Statement Derivative liabilities Life investment contracts Total liabilities carried at fair value Fair Value as at 30 June 2011 Fair Value as at 30 June 2010 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $M $M $M $M $M $M $M $M Group 15,720 5,008 299 36 37,131 58,194 4,096 4 - 4,100 4,686 9,990 525 30,240 8,039 53,480 6,395 33,964 10,515 50,874 63 - - 41 1 20,469 14,998 824 30,317 45,171 105 111,779 17,995 4,775 4,526 11,414 - 654 137 27,538 28,008 50,666 4,752 49,133 - 8 - 8 10,491 33,976 10,515 54,982 3,821 69 - 3,890 11,521 24,808 11,411 47,740 81 - - 14 1 96 - 7 - 7 22,851 15,940 654 27,689 32,761 99,895 15,342 24,884 11,411 51,637 (1) The Group holds investments in unlisted equity instruments with a carrying value of $nil as at 30 June 2011 (2010: $154 million). 224 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 47 Disclosures about Fair Values of Financial Instruments (continued) (b) Valuation Methodology (continued) Assets Assets at fair value through Income Statement: Trading Other Derivative assets Available-for-sale investments (1) Total assets carried at fair value Liabilities Liabilities at fair value through Income Statement Derivative liabilities Total liabilities carried at fair value Fair Value as at 30 June 2011 Fair Value as at 30 June 2010 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $M $M $M $M $M $M $M $M Bank 14,763 2,996 299 42 29,457 44,561 4,116 3 4,119 1 30,660 46,241 79,898 584 32,806 33,390 6 - 29 1 36 - 8 8 17,765 16,423 2,344 300 30,731 75,699 124,495 4,700 32,817 37,517 - 239 19,780 36,442 3,821 69 3,890 - 27,123 45,849 75,316 792 23,613 24,405 8 - 1 1 18,775 - 27,363 65,630 10 111,768 - 7 7 4,613 23,689 28,302 (1) The Bank no longer holds unlisted equity investments (2010: $149 million). Level 3 movement analysis for the year ended 30 June 2011 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. There were no transfers into and out of Level 3. 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. As such the purchases, sales, as well as 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 of the Group’s or the Bank’s results. The movement in Level 3 financial instruments recognised in the Group Income Statement was $11 million for the year ended 30 June 2011 (2010: $3 million) and for the Bank was $13 million (2010: $2 million). Commonwealth Bank of Australia Annual Report 2011 225 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 a breakdown of the assets held by securitisation vehicles and exposures the Bank has to securitisation vehicles that the Group has established. Assets held within Group SPEs Residential mortgages - Group originated mortgages backing securities held for potential repurchase with central banks Residential mortgages - Group originated Other Total securitisation assets of SPEs Exposure to securitisation SPEs Residential mortgage backed securities held for potential repurchase with central banks Other residential mortgage backed securities Other derivatives (1) Liquidity support facilities Other facilities Total 2011 $M 43,662 2,125 1,478 163 898 Funded 2010 $M 45,169 3,567 1,011 916 98 48,326 50,761 Unfunded (2) 2010 $M 2011 $M - - - 809 63 872 - - 37 787 62 886 2011 $M 44,349 11,296 204 55,849 2011 $M 43,662 2,125 1,478 972 961 Group 2010 $M 45,673 9,696 175 55,544 Group Total 2010 $M 45,169 3,567 1,048 1,703 160 49,198 51,647 (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. Note 49 Controlled Entities (a) Shares in and Loans to controlled entities Shares in controlled entities Loans to controlled entities Total shares in and loans to controlled entities 2011 $M 18,903 28,454 47,357 Bank 2010 $M 18,754 31,055 49,809 The above amounts are not expected to be recovered within twelve months of the Balance Sheet date. 226 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 49 Controlled Entities (continued) (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: Entity name Australia (a) Banking Commonwealth Bank of Australia Bank of Western Australia Limited BWA Group Services Pty Limited Swan Trust Series 2007-1E Swan Trust Series 2006-1E Swan Trust Series 2008-1D Swan Trust Series 2010 -1P Swan Trust Series 2010 -2P Medallion Trust Series 2003-1G Medallion Trust Series 2004-1G Medallion Trust Series 2005-1G Medallion Trust Series 2005-2G Medallion Trust Series 2006-1G Medallion Trust Series 2007-1G Medallion Trust Series 2008-1R Medallion Trust Series 2011-1 SHIELD Series 50 MIS Funding No.1 Pty Limited Christmas Break Pty Limited CBA USD Investments Partnership GT Operating No.5 Limited Partnership GT Funding No.6 Limited Partnership PERLS III Trust Commonwealth Investments Pty Limited Commonwealth Securities Limited (b) Insurance and Funds Management Colonial Holding Company Limited Commonwealth Insurance Holdings Limited Commonwealth Insurance Limited Jacques Martin Pty Limited Entity name IWL Limited IWL Broking Solutions Limited JDV Limited Australian Investment Exchange Limited Collateral Leasing Pty Limited CBFC Leasing Pty Limited CBFC Limited CBCL Australia Limited Securitisation Advisory Services Pty Limited Homepath Pty Limited Tankstream Rail (BY-3) Pty Limited Tankstream Rail (BY-4) Pty Limited CBA International Finance Pty Limited GT Operating No.2 Pty Limited GT Operating No.4 Pty Limited Colonial Finance Limited VH-VZH Pty Limited VH-VZG Pty Limited VH-VZF Pty Limited SAFE No1 Pty Limited CBA AIR Pty Limited Reliance Achiever Partnership Tankstream Rail (SW-3) Pty Limited Tankstream Rail (SW-4) Pty Limited Tankstream Rail (BY-2) Pty Limited Colonial First State Capital Management Pty Limited First State Investment Managers (Asia) Limited Capital 121 Pty Limited Commonwealth Financial Planning Limited Jacques Martin Administration and Consulting Pty Limited Financial Wisdom Limited Colonial First State Group Limited CFS Managed Property Limited Whittaker Macnaught Pty Limited Avanteos Pty Limited Colonial First State Asset Management (Australia) Limited Avanteos Investments Limited Commonwealth Managed Investments Limited Colonial First State Investments Limited Colonial First State Property Limited Colonial First State Property Retail Trust St Andrew's Australia Pty Limited Commwealth International Holdings Pty Limited Colonial First State Property Management Limited The Colonial Mutual Life Assurance Society Limited All the above subsidiaries are 100% owned and incorporated in Australia. Commonwealth Bank of Australia Annual Report 2011 227 Notes to the Financial Statements Note 49 Controlled Entities (continued) (b) Principal Subsidiaries (continued) Entity name New Zealand (a) Banking ASB Holdings Limited ASB Bank Limited ASB Funding Limited CBA Funding (NZ) Limited ASB Capital Limited ASB Capital No.2 Limited CBA NZ Holding Limited CBA USD Funding Limited Medallion NZ Series Trust 2009-1R CBA Real Estate Funding (NZ) Limited ASB Group Investments Limited ASB Securities Limited AEGIS Limited (b) Insurance and Funds Management ASB Group (Life) Limited Sovereign Group Limited Sovereign Limited Colonial First State Investments (NZ) Limited Kiwi Income Properties Limited Kiwi Property Management Limited Other Overseas (a) Banking CommBank Management Consulting (Asia) Co Limited CBA Funding Trust I CBA Capital Trust I CBA Capital Trust II PT. Bank Commonwealth CBA (Europe) Finance Limited Burdekin Investments Limited CTB Australia Limited CBA Asia Limited Newport Limited CommBank Europe Limited CommTrading Limited CommInternational Limited CommCapital S.a.r.l (b) Insurance and Funds Management First State Investments (Bermuda) Limited First State (Hong Kong) LLC First State Investment Holdings (Singapore) Limited First State Investments (UK Holdings) Limited PT Commonwealth Life Extent of Beneficial Interest if not 100% Incorporated in New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Hong Kong Delaware USA Delaware USA Delaware USA 97% Indonesia United Kingdom Cayman Islands Hong Kong Singapore Malta Malta Malta Malta Luxembourg Bermuda United States Singapore United Kingdom Indonesia 80% Non-operating and minor operating controlled entities and investment vehicles holding policyholder assets are excluded from the above list. (c) Disposal of Controlled Entities During the year, the Group disposed of certain St Andrew’s operations effective 1 July 2010. For further details refer to Note 46 (c). (d) Acquisition of Controlled Entities There were no acquisitions of controlled entities during the current year. 228 Commonwealth Bank of Australia Annual Report 2011 Notes to the Financial Statements Note 50 Subsequent Events On 22 July 2011, the Board announced the appointment of Ian Narev to the role of Chief Executive Officer of the Bank upon the retirement of Ralph Norris at the end of November 2011. The Bank expects to issue approximately $733 million of ordinary shares in respect of the DRP for the final dividend for the year ended 30 June 2011. 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. Commonwealth Bank of Australia Annual Report 2011 229 Directors’ Declaration In accordance with a resolution of the Directors of the Commonwealth Bank of Australia (Bank), the Directors declare that: (a) the financial statements for the financial year ended 30 June 2011 in relation to the Bank and the consolidated entity (Group) (together the Financial Statements), and the notes to the Financial Statements, are in accordance with the Corporations Act 2001, including: (i) s 296 (which requires the financial report, including the Financial Statements and the notes to the Financial Statements, to comply with the accounting standards); and (ii) s 297 (which requires the Financial Statements, and the notes to the Financial Statements, to give a true and fair view of the financial position and performance of the Group and the Bank); (b) in compliance with the accounting standards, the notes to the Financial Statements include an explicit and unreserved statement of compliance with international financial reporting standards (see Note 1(a)); (c) in the opinion of the Directors, there are reasonable grounds to believe that the Bank will be able to pay its debts as and when they become due and payable; and (d) the Directors have been given the declarations required by s 295A in respect of the financial year ended 30 June 2011. Signed in accordance with a resolution of the Directors. DJ Turner Chairman 10 August 2011 RJ Norris Managing Director and Chief Executive Officer 10 August 2011 230 Commonwealth Bank of Australia Annual Report 2011 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 2011, the income statement, the statement of comprehensive income, statement of changes in equity and the 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 of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. 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. 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. PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 DX 77 Sydney, Australia T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Commonwealth Bank of Australia Annual Report 2011 231 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) giving a true and fair view of the Commonwealth Bank of Australia and consolidated entity’s financial position as at 30 June 2011 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1(a). Report on the Remuneration Report We have audited the remuneration report included in pages 72 to 91 of the directors’ report for the year ended 30 June 2011. 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 2011 complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Rahoul Chowdry Partner Sydney 10 August 2011 232 Commonwealth Bank of Australia Annual Report 2011 Shareholding Information Top 20 Holders of Fully Paid Ordinary Shares as at 5 August 2011 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 AMP Life Limited Australian Foundation Investment Company Limited UBS Wealth Management Australia Nominees Pty Limited Queensland Investment Corporation Bond Street Custodians Limited Australian Reward Investment Alliance Milton Corporation Limited Argo Investments Limited Invia Custodian Pty Limited Perpetual Trustee Co Ltd (Hunter) UBS Nominees Pty Ltd Questor Financial Services Limited Suncorp Custodian Services Pty Ltd ANZ Executors & Trustee Company Limited Number of Shares 199,701,465 166,016,623 131,816,588 67,836,352 29,371,985 26,269,181 12,899,928 8,507,900 7,839,679 5,846,258 4,555,964 3,619,024 3,013,225 2,707,895 2,664,692 2,453,418 2,368,939 2,027,444 1,969,648 1,413,823 % 12.81 10.65 8.46 4.35 1.88 1.69 0.83 0.55 0.50 0.38 0.29 0.23 0.19 0.17 0.17 0.16 0.15 0.13 0.13 0.09 The top 20 shareholders hold 682,900,031 shares which is equal to 43.81% 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): 5 August 2011 Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Less than marketable parcel of $500 Voting Rights Number of Shareholders 587,741 182,880 17,337 7,372 231 795,561 15,873 Percentage of Shareholders 73.88 22.99 2.18 0.92 0.03 100.00 2.00 Number of Shares 196,677,335 378,342,371 118,918,682 139,589,651 725,139,205 1,558,667,244 75,042 Percentage of Issued Capital 12.62 24.27 7.63 8.96 46.52 100.00 0.00 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 2011 233 Shareholding Information Top 20 Holders of Perpetual Exchangeable Repurchaseable Listed Shares III (“PERLS III”) as at 5 August 2011 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 AMP Life Limited UBS Wealth Management Australia Nominees Pty Ltd Mr Walter Lawton and Mrs Jan Rynette Lawton National Nominees Limited Citicorp Nominees Pty Limited Perpetual Trustee Company 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 Truckmate (Australia) Pty Limited M F Custodians Ltd Questor Financial Services Limited Kerlon Pty Ltd UCA Cash Management Fund Limited Cogent Nominees Pty Limited Mifare Pty Limited HSBC Custody Nominees (Australia) Limited Number of Shares 181,173 172,801 155,309 138,662 70,000 64,621 63,694 61,803 53,075 51,282 50,000 49,750 35,000 34,726 30,414 30,000 25,996 25,354 25,000 24,394 % 3.11 2.96 2.66 2.38 1.20 1.11 1.09 1.06 0.91 0.88 0.86 0.85 0.60 0.60 0.52 0.51 0.45 0.43 0.43 0.42 The top 20 PERLS III shareholders hold 1,343,054 shares which is equal to 23.03% 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): 5 August 2011 Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Less than marketable parcel of $500 Voting Rights Number of Shareholders 17,916 531 39 31 4 18,521 21 Percentage of Shareholders 96.73 2.87 0.21 0.17 0.02 100.00 0.11 Number of Shares 3,022,072 1,037,917 301,098 875,360 595,834 5,832,281 40 Percentage of Issued Capital 51.81 17.80 5.16 15.01 10.22 100.00 0.00 PERLS III do not confer any voting rights in the Bank but if they are exchanged for or convert into ordinary shares or preference shares of the Bank in accordance with their terms of issue, the voting rights of the ordinary or preference shares (as the case may be) will be as set out on page 233 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; • 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. 234 Commonwealth Bank of Australia Annual Report 2011 Top 20 Holders of Perpetual Exchangeable Resaleable Listed Securities IV (“PERLS IV”) as at 5 August 2011 Shareholding Information Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Name of Holder J P Morgan Nominees Australia Limited AMP Life Limited UBS Wealth Management Australia Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Citicorp Nominees Pty Limited Questor Financial Services Limited HSBC Custody Nominees (Australia) Limited Avanteos Investments Limited UCA Cash Management Fund Limited Invia Custodian Pty Limited National Nominees Limited Eastcote Pty Ltd Cogent Nominees Pty Limited The Australian National University Investment Section Australian Executor Trustees Limited Perpetual Trustee Co Ltd (Hunter) Bond Street Custodians Limited Catholic Education Office Diocese of Parramatta Bournda Downs Pty Limited Mutual Trust Pty Ltd Number of Shares 303,841 236,578 154,502 153,024 149,498 120,144 82,435 75,229 71,567 66,686 54,250 50,000 35,268 31,082 29,496 28,584 26,416 25,000 24,500 18,891 % 4.15 3.23 2.11 2.09 2.04 1.64 1.13 1.03 0.98 0.91 0.74 0.68 0.48 0.42 0.40 0.39 0.36 0.34 0.33 0.26 The top 20 PERLS IV shareholders hold 1,736,991 shares which is equal to 23.71% 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): 5 August 2011 Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Less than marketable parcel of $500 Voting Rights Number of Shareholders 16,579 759 49 38 5 17,430 1 Percentage of Shareholders 95.12 4.35 0.28 0.22 0.03 100.00 0.01 Number of Shares 3,553,657 1,568,561 377,961 941,313 883,508 7,325,000 2 Percentage of Issued Capital 48.52 21.41 5.16 12.85 12.06 100.00 0.00 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 • Furthermore 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 233. During the winding-up of the Bank. 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. Commonwealth Bank of Australia Annual Report 2011 235 Shareholding Information Top 20 Holders of Perpetual Exchangeable Resaleable Listed Securities V (“PERLS V”) as at 5 August 2011 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 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Questor Financial Services Limited Invia Custodian Pty Limited Australian Executor Trustees Limited Netwealth Investments Limited Avanteos Investments Limited National Nominees Limited Dimbulu Pty Ltd Scenic Tours Pty Ltd Perpetual Trustee Co Ltd (Hunter) ABN AMRO Clearing Sydney Nominees Pty Ltd Bond Street Custodians Limited UBS Nominees Pty Ltd W Mitchell Investments Pty Ltd JMB Pty Ltd Citicorp Nominees Pty Limited Peters (Meat) Export Pty Ltd Number of Shares 283,507 217,922 172,942 142,864 120,237 59,054 58,599 55,705 53,670 50,113 50,000 46,540 46,082 44,753 39,965 38,836 37,500 33,925 32,624 29,050 % 2.84 2.18 1.73 1.43 1.20 0.59 0.59 0.56 0.54 0.50 0.50 0.47 0.46 0.45 0.40 0.39 0.38 0.34 0.33 0.29 The top 20 PERLS V shareholders hold 1,613,888 shares which is equal to 16.14% 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 CBAPA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers. Range of Shares (PERLS V): 5 August 2011 Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Less than marketable parcel of $500 Voting Rights Number of Shareholders 31,992 1,038 59 50 5 33,144 3 Percentage of Shareholders 96.52 3.13 0.18 0.15 0.02 100.00 0.01 Number of Shares 5,466,586 2,067,412 452,441 1,218,386 795,175 10,000,000 3 Percentage of Issued Capital 54.67 20.67 4.53 12.18 7.95 100.00 0.00 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 • Furthermore 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 233. During the winding-up of the Bank. At a general meeting of the Bank, holders of PERLS V 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. 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 233 for the Bank’s ordinary shares and page 234 for the preference shares. 236 Commonwealth Bank of Australia Annual Report 2011 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 Barbara Chapman Sovereign Group Limited Sovereign House, 74 Taharato 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 11F Azia Centre 1233 Lujiazui Ring Road, Pudong Shanghai 200120 Telephone: (86 21) 6058 0100 Facsimile: (8621) 6168 3298 Executive General Manager China Karen Chen CBA Shanghai Branch Office Level 11 Azia Centre 1233 Lujiazui Ring Road Pudong Shanghai 200120 Telephone: (86 21) 6123 8900 Facsimile: (86 21) 6165 0285 Branch Manager Shanghai Stanley Lo First State Cinda Fund Management Co. Ltd. 24th Floor, China Merchants Bank Building 7088, Shen Nan Road, Shenzhen China 518040 Telephone: (86 755) 8317 2666 Facsimile: (86 755) 8319 6151 Regional Managing Director, Asia and Japan Michael Stapleton International Representation Hong Kong CBA Branch Office 1501-5, Chater House 8 Connaught Road, Central Hong Kong Telephone: (852) 2844 7500 Facsimile: (852) 2845 9194 Regional General Manager Asia Stephen Poon First State Investments (Hong Kong) Limited 6th Floor, Three Exchange Square 8 Connaught Place, Central Hong Kong Telephone: (852) 2846 7555 Facsimile: (852) 2868 4742 Regional Managing Director, 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 Level 8, Wisma Metropolitan II JI. Jendral Sudirman Kav. 29-31 Jakarta 12920 Telephone: (62 21) 570 5000 Facsimile: (62 21) 520 5353 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 Branch Head Tokyo Martin Spann Malta CommBank Europe Limited Level 3 Strand Towers 36 The Strand Sliema SLM07 Telephone: (356) 2132 0812 Facsimile: (356) 2132 0811 Director/Chief Financial Officer John Kiddier Singapore CBA Branch Office One Temasek Avenue #17-01 Millenia Tower Singapore 039192 Telephone: (65) 6349 7000 Facsimile: (65) 6224 5812 Country Head Gregory Williams First State Investments (Singapore) One Temasek Avenue #17-01 Millenia Tower Singapore 039192 Singapore Telephone: (65) 6538 0008 Facsimile: (65) 6538 0800 Regional Head Asia Michael Stapleton 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 Director of Investment and Banking 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 Facsimile: (84 8) 3824 2703 General Director Ross Munn Americas United States 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 3999 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 0 20) 7332 6500 Facsimile: (44 0 20) 7332 6501 Chief Executive Officer Gary Withers Edinburgh 23 St Andrew Square Edinburgh EH2 1BB Telephone: (44 0 131) 473 2200 Facsimile: (44 0 131) 473 2222 Managing Partners Stuart Paul and Angus Tulloch Commonwealth Bank of Australia Annual Report 2011 237 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 at www.commbank.com.au/CommBiz Service 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 238 Commonwealth Bank of Australia Annual Report 2011 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 Commonwealth Private offers clients with significant financial resources a comprehensive range of services, advice and opportunities to meet their specific needs. For a confidential discussion about how Commonwealth Private can help you, call 1300 362 081 between 8am to 5:30pm (Sydney time), Monday to Friday or visit www.commonwealthprivate.com.au 132 015 Commonwealth Financial Services For 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: (61 2) 8280 7199 Facsimile: (61 2) 9287 0303 Freecall: 1800 022 440 Internet: www.linkmarketservices.com.au Email: cba@linkmarketservices.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 Securities Exchange Listing CBA Annual Report To request a copy of the Annual Report, please call Link Market Services Limited on 1800 022 440 or by email at cba@linkmarketservices.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 2011 239 This page has been intentionally left blank 240 Commonwealth Bank of Australia Annual Report 2011 

Continue reading text version or see original annual report in PDF format above